Country brief 2006 Updated April 2008
EU8 Economic Report Estonia is a high income country with a gross national income per capita of $13,330 in 2007 (GNI, Atlas method). A small country of about 1.34 million people, Estonia has few natural resources and is heavily reliant on trade, with telecoms being one of its main exports. Its GDP has grown at an average of over 8.5 percent since 2002, making it and the other Baltic countries, the fastest growing economies in Europe during this period. The country joined the North Atlantic Treaty Organization (NATO) and acceded to the European Union (EU) in the spring of 2004.
Estonia’s strong economic growth has translated into higher living standards. Life expectancy (at birth) for Estonian citizens is 73 years and the infant mortality rate is 4.4 per thousand live births -- indicators substantially better than the averages for the Europe and Central Asia Region.
Since joining the World Bank in June 1992, Bank programs in Estonia have focused on protecting the environment, fostering private sector investment and growth, upgrading the efficiency of essential infrastructure, strengthening human resources, and enhancing the country’s human development services. World Bank commitments to the country have totaled $150.7 million for eight projects.
Estonia graduated from World Bank borrower status to that of donor partner on September 17, 2006.
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Economy
Developments Since Independence
Estonia regained its independence in late 1991 after half a century of central planning and dependence on trade with the countries of the former Soviet Union (FSU). At the outset of the transition, the country had the highest per capita income among any of the FSU states, and its infrastructure and education levels were among the highest. Moreover, as one of the key gateways for trade between the FSU and the West, the country had historically close ties with the Nordic countries, particularly Finland. Driven by EU aspirations, the country has implemented a broad agenda of stabilization and structural reform policies with assistance from the International Monetary Fund, the World Bank, and other international organizations.
Recent Economic Performance
Since the EU accession in 2004 Estonia has experienced a period of rapid economic growth, exceeding 11 percent in 2006. This brought some concerns about mounting macroeconomic imbalances as high growth was driven almost entirely by domestic demand with private consumption and fixed investment rising strongly on the back of solid income and rapid credit expansion. In 2007, following a period of economic overheating, the economy started to slow down and Estonia’s GDP growth rate moderated to 7.1 percent. Against this background, moderation in private consumption and return to more sustainable rates of economic growth are positive developments. However, ongoing adjustment also poses some risks and maintaining economic balance remains a challenge, especially as current account deficit and consumer inflation have been persistently high.
Estonia successfully implemented a fixed exchange rate regime (which has been in place since the introduction of the kroon in 1992) and joined the European Exchange Rate Mechanism-2 (ERM2) in June 2004. Estonia's plans to adopt the Euro in January 2008 have been postponed due to persistently high inflationary pressures.
Challenges Ahead
The main near-term challenge for Estonia is supporting orderly adjustment – a soft landing of the economy – and maintaining economic balance. Important remaining challenges include a sustained reduction of inflation and thus the Government’s priority goal of adopting the Euro; continued streamlining of the tax regime; sustained prudence in financial intermediation; continued flexibility in the labor market; and continuing investment in Estonia’s human capital.
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Program to date
- Landmark Projects
- More projects
While all Bank-financed projects in the country are completed, Estonia continues to benefit from a number of cross-country analytical and advisory activities, including a programmatic study of public finance reform issues in the EU8 group of countries, a social inclusion report and EU8+2 Regular Economic Reports.
Impact On the Ground
About 68 percent of the country’s land area has now been registered in the cadastre.
Read moreSome of the results of cooperation between the World Bank and the Government of Estonia include the following:
Improved road safety and upgraded highways reduced the number of vehicular traffic accidents and improved access to the two major cities in Estonia, as well as some neighboring countries, and thus facilitated economic activity.
Under the Health Sector Development Project, the Government established the Biomedicum, a pre-clinical teaching and research facility for the Tartu University Medical School, replacing a 200-year-old facility. It rationalized hospitals in Tallinn and stregthened the heatlth sector's planning, management and institutional and regulatroy framework. Another important outcome was increased local community involvement in health promotion activities.
A land market was developed and land values have risen. Farmers are paying off debts, and entrepreneurial farmers are acquiring additional land through lease and purchase. Drainage systems were rehabilitated bringing unutilized fertile land into production and increasing farmers incomes. Extension services, including private sector advisors helped strengthen the business acumen and technical skills of Estonian farmers.
Fuel costs were reduced through fuel substitution and energy efficiency was increased by rehabilitating transmission and distribution networks.
An integrated Financial Sector Supervision Agency was established with assistance from the World Bank. Since its inception in 2002, the agency has conducted several on-site inspections and helped oversee the establishment of the country’s second pillar pension system.
An assessment of accounting and auditing practices has provided the basis for strengthening the enforcement of auditing and accounting standards in public entities and in the private sector.
NB: Lending is per fiscal year, July 1-June 30
The Country Aggregate Report provides more lending data for Estonia
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World Bank regional office in Poland:
Ms. Malgorzata Dworzynska
mdworzynska@worldbank.org
Tel: (48 22) 520 8052
Fax: (48 22) 520 80 01
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