Washington, DC: On August 26, 2026, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Republic of Estonia.
The authorities have consented to the publication of the Staff Report prepared for this consultation. [2]
Economic activity strengthened in early 2026, supported by substantial fiscal stimulus, ahead of the outbreak of the war in the Middle East. Growth reached 2.4 percent year-on-year in the first quarter, exceeding earlier estimates. The expansion was driven mainly by robust private consumption, boosted by the introduction of a universal personal income tax allowance, while public consumption also contributed. In contrast, investment remained subdued despite the scaling up of defense spending, and export growth was modest.
Inflation has picked up, reflecting higher energy prices. After easing to 3.2 percent in April, headline inflation rose to 3.6 percent in May, driven by higher fuel prices. Core and services inflation also increased, alongside firmer wage growth.
Executive Board Assessment [3]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the ongoing recovery, while noting that the sizable fiscal stimulus is supporting activity even as higher energy prices are weighing on growth and fueling inflationary pressures. Against this backdrop, the outlook remains subject to considerable uncertainty, with downside risks to growth and upside risks to inflation, particularly if the energy shock proves persistent. Directors emphasized the importance of preserving fiscal space in the context of mounting aging and energy security spending pressures, and advancing reforms to boost productivity, strengthen competitiveness, and enhance resilience.
Many Directors agreed that the expansionary fiscal stance implied in the 2026 budget is not warranted by current macroeconomic conditions and could exacerbate inflationary pressures. However, a number of Directors considered that Estonia's low public debt provides scope to address security- and energy-related priorities. Directors nonetheless emphasized the need for a credible medium-term fiscal consolidation strategy to preserve fiscal space and ensure debt sustainability. They agreed that fiscal adjustment should be anchored in a balanced mix of spending restraint and revenue measures and recommended that revenue overperformance and spending under-execution be saved to help contain the deficit and rebuild fiscal buffers. Priority measures include containing wage bill growth, improving the efficiency of healthcare and social spending, broadening the tax base, and strengthening the role of recurrent property and corporate income taxation.
Directors welcomed that the financial sector remains resilient, while calling for continued vigilance in light of sustained credit growth, real estate exposures, and funding risks. They agreed that the current tight macroprudential stance remained appropriate and that buffers should only be released in the event of a severe downturn. Noting the planned national credit register, Directors welcomed the steps taken to enhance borrower-level information. They underscored that further efforts to strengthen the AML/CFT system remain important to mitigate financial integrity and reputational risks.
Directors underscored the importance of structural reforms to boost productivity, restore competitiveness, and sustain potential growth. They encouraged continued efforts to improve labor allocation and address skills mismatches to better align skills with labor market needs. Directors also stressed the need to deepen capital markets, including through progress towards the European Savings and Investments Union, ease constraints on firm scale-up, and foster innovation and business dynamism. They emphasized that expanding domestic electricity generation, strengthening regional integration, and improving energy efficiency would help lower energy costs, enhance energy security, and support the energy transition.
Estonia: Selected Economic Indicators, 2025-27 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/Estonia page.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
