Eesti Pank - Bank of Estonia

Eesti Pank as the Central Bank of the Republic of Estonia has to guarantee the domestic and international confidence in the national currency, the stability and integrity of the monetary system. This is the mission slogan of Eesti Pank for Estonia and we pursue it developing and implementing our activities.

The main objectives of Eesti Pank have been and continuously are pursuant to our mission the preservation of the value and integrity of the Estonian kroon as a legal tender, promotion of the security and stability of our banking system, support of the efficiency and development of the financial system, first and foremost, that of payment and settlement systems and meeting the cash demand of the society.

Today we can admit that 1997 was a year of challenges both for Estonia's economy and the Central Bank. Estonia's economy can be described by the rapid economic growth exceeding 10%, decreasing inflation contained within 11%, the improved fiscal position of the government sector and continuing structural economic reforms. Due to successful economic reforms, the results of which were seen in 1997, Estonia was included in the first round of EU accession negotiations.

Estonia's successful economic development is also due to the monetary policy based on the kroon's fixed exchange rate against the German mark and the currency board arrangement chosen during the 1992 monetary reform. Five years after the reintroduction of the Estonian kroon we are pleased to admit that the public confidence in the kroon continues and the foundation for the success of the fixed exchange rate policy and currency board arrangement has strengthened.

The events of the autumn 1997 manifested that the structure of Estonia's monetary system offers an adequate and efficient protection against speculative attacks. The full coverage of the kroon with foreign exchange reserves within the currency board arrangement is a significant guarantee for the continuous maintenance of the fixed exchange rate.

Analysing the year 1997, we have to admit that for the first time signs of danger appeared in Estonia's economy, mainly due to our extremely rapid development. The fast growth of domestic demand revealed itself in the increasing foreign trade deficit. Regardless of the significant growth in exports, the external imbalance of economy went up -- the current account deficit increased up to 13% of the gross domestic product. In the financial sector the loan markets continued expansive development, with loan volume doubling.

Eesti Pank applied first countermeasures in spring, informing early enough of measures applicable in the second half of the year to strengthen the financial sector. Unfortunately market participants responded inadequately and, thus, it was necessary to apply additional economic measures in order to reduce overexpansionist economic development-related risks in financial and fiscal systems and to curb the increasing domestic demand.

Following the adjustments originating from the more stringent external environment over the last few months of the year in the monetary policy environment, the steps taken in the economic and monetary policies by the Government of the Republic of Estonia and Eesti Pank in November-December stabilized the situation and sent an adequate signal to economic agents on Estonia's objective in the economic policy.

A crucial political decision to establish a Stabilization Reserve Fund was taken by the Government of the Republic in late 1997. In order to avoid an additional pressure to promote domestic demand, the resources of the Stabilization Reserve Fund have been placed in high-quality instruments in external markets. The main objective of the Fund, capitalized over the next years by supplementary fiscal revenue accompanying rapid economic growth and privatization proceeds, is to ensure continuous performance of state functions in case of contingency in future.

Eesti Pank would rather support indirect measures considering market mechanisms when shaping economic policy, and adhering to open market principles. Continuously analysing and evaluating economy we would like to establish with our monetary policy a favourable environment for the private sector for adequate decision-making.

The economy cannot function successfully without a reliable and well capitalized banking system. Eesti Pank increased banks' capital adequacy requirement from 8 to 10% in 1997. Only reliable banking sector ensures a capability of the financial sector to resist the changeability of the ever integrating international money market of which Estonia has become an integral part as well. In autumn Eesti Pank introduced additional measures to ensure banks' liquidity in kroons and decrease their operational risks. Strengthening of prudential ratios and implementation of these consolidated principles will continue in 1998 as well.

Eesti Pank complies with EU standards in adjusting the legal framework of the financial system. The new draft of Credit Institutions Act and a draft of Saving and Loan Associations Act were completed in 1997. Riigikogu (the Parliament) is currently processing the draft of Deposit Insurance Fund Act. The regulation of the legislative base is an important landmark for enhancing public confidence in banks and excluding a potential danger of a crisis in the banking system.

The increasing participation of international investors among bank owners and the expansion of the activity of banks and their subsidiaries in external markets witnesses the increasing competitiveness of Estonian commercial banks. In 1997, the rapid development of banks and other financial intermediaries as well as the capital market had a favourable impact on the internal competition and performance efficiency in the financial sector.

Any financial intermediation would involve inevitable risks which can be minimised although not ruled out by efficient supervision. Arranging supervision of credit institutions Eesti Pank applies a system based on equal opportunities and clear rules in which inter-bank competition serves as a guarantee for the system reliability and confidence.

Investment grades assigned to Estonia by internationally recognised rating agencies in 1997 are a recognition of Estonia's liberal economic policy. Ratings assigned to Estonia are among the highest in Central and Eastern European countries. It is a sign of international recognition of efficient performance of the founding principles of Estonian economy as well as the continuing economic reforms and prudent economic policy. At the same time, the implementation of acts and decisions adopted is of great importance. The high country rating obliges Estonia to ensure the continuity and transparency of its economic and monetary policy.

In 1998, Estonia has to make decisions on several options in the economic policy requiring public agreement. The adoption of pension reform acts, privatization of infrastructure, continuous provident fiscal policy as well as education and health insurance reforms require bold agreements without which rapid development would be more and more difficult.

If we firmly continue reforms and prefer long-term guidance to momentous problem solving in economy, we will maintain sustainable economic growth. Determined co-operation-oriented work for the benefit of the society combined with international experience provides a feeling of security that development in Estonia will continue and results of continuous economic reforms will become rooted.

THE YEAR OF RAPID ECONOMIC GROWTH AND SUCCESSFUL TEST OF CURRENCY BOARD