Eesti Pank - Bank of Estonia

When making plans for Eesti Pank in 1998, we were convinced that the changes starting in the previous year in the world as well as Estonia’s economy were not yet behind. Both the central bank and the state were anticipated to be successful and efficient and respond rapidly to the changing environment. The year 1998, easy for neither the real economy nor the banking sector provided new experience and useful lessons for the central bank as well.

Summarising we can say that Eesti Pank was able to carry successfully out its mission in difficult times, implementing all measures at the disposal of the central bank to strengthen both domestic and international confidence in the stability and integrity of the Estonian currency and monetary system. Macroeconomic indicators are the best proof here.

Evaluating the development of Estonia’s economy in 1998, we can admit that the too quick non-sound growth was replaced by central-bank-favoured moderate, more sustainable growth, remaining on 4 per cent of GDP. The inflation continued a downward trend and for the first time in Estonia we had a single-digit figure by the end of the year -- prices increased by 8.2 per cent. The balance of payments revealed some improvement as well. The current account deficit decreased to 8.6 per cent of GDP, ie by nearly a quarter, compared to 1997. Nevertheless, we are far from being satisfied with this result as the current account deficit is still too big by international standards.

The understandable and transparent economic and monetary policy pursued by the Government of the Republic and Eesti Pank prepared a painless adjustment of our economic space with new circumstances although the economic environment had completely changed. Most of the companies, being for the first time exposed to such a complicated situation, have survived well and responded adequately to changes. Thus, we can conclude that the structure of the Estonian economy is strong and flexible enough to survive external shocks. The success of the current policy is properly recognised, as international rating agencies have not changed the investment grade credit ratings awarded to Estonia in 1997.

The further development of the Estonian economy will largely depend on our capacity to maintain external confidence in Estonia as a reform country. Thereby the sustainability of the current economic and monetary policy, especially that of the conservative and tight fiscal policy would be significant. It is important to handle in depth both the fiscal policy and other economic policy alternatives. This becomes possible in the mid-term national economic programme prepared in co-operation with the European Union. The central bank’s stance in developing the economic policy has not changed and is unambiguous: we will adhere to open market principles and use rather indirect market-aware mechanisms.

The currency board arrangement and fixed exchange rate which have been the foundation of Estonia’s monetary policy framework for the last six and a half years proved once again that there is no better-suited scheme available for small open economies. In the autumn of 1997, the viability of the monetary policy was successfully tested against the anti-kroon speculative attacks. In 1998, the monetary system survived equally well rapid changes in the local banking sector and the externalities-inspired negative pressure, which affected Estonia’s real sector.

Significant changes in Europe, mostly the introduction of the euro, will bring along positive implications for Estonia’s economic agents as well. The euro will reduce foreign exchange risks, lower currency exchange costs and promote access to international capital markets in long-term. On 31 December, Eesti Pank established the exchange rate of the kroon against the euro 1 EUR = 15.6466 EEK, equivalent to the official exchange rate of the Estonian kroon against the German mark 1 DEM = 8 EEK. Thus, the kroon is de facto fixed to the euro and its derivatives. Only technical legislative amendments remain to be implemented.

Estonia’s negotiations with the European Union were launched in full swing on 31 March 1998. Several representatives of Eesti Pank participate on the working-group-level in the negotiations and intra-Estonian eurointegration process.

Last year we took a significant step forward in updating the legislative framework of the banking system. In 1998, the Deposits Insurance Fund Act was adopted and entered into force, providing necessary guarantees for private and small depositors. The new Credit Institutions Act, upgraded with the global experience and EU requirements was adopted in early 1999, entering into force on 1 July. Riigikogu (the Parliament) has approved of the Savings and Loan Association Act and the Prevention of Money Laundering Act.

On the threshold of 1999 Estonia’s banking system was quite different from that of twelve months earlier. Key words of the change could be bank mergers, foreign capital inflow and insolvency of a few banks. The essential changes in the banking sector initiated in spring were mostly due to the timely intervention of Eesti Pank as a supervisory body both in spring and autumn, helping to raise the reliability and credibility of the banking system.

Among positive developments in 1998 the recoilless banking consolidation process and the significant entrance of strategic foreign investors into Estonia’s commercial banking should be mentioned. The competition in the banking market is still tough, with smaller local banks and foreign banks having access as well.

The ever deepening integration in the Estonian financial sector underlines the need to join all financial supervision bodies, including the banking supervision, into one supervision structure. Eesti Pank has made a decision in principle on the merger but our understanding is that it should be conducted without even for a minute reducing the efficiency of supervision. On the other hand we realise that it is a long process and the legislative framework setting the respective foundation is of utmost importance.

Throughout decades Eesti Pank has not been a fossilised but a continuously changing and developing organisation in order to perform its tasks successfully. Changes in the structure and organisation of the central bank continued last year and will continue this year as well. I believe that we have been able to create in our premises on Estonia Avenue a working environment and atmosphere, motivating the daily performance of the staff of Eesti Pank. Without conscientious and motivated personnel the central bank could not be successful.

This year Eesti Pank celebrates its eightieth anniversary. This is both a long and a short period of time - time to reflect and time to move forward. Wishing you a pleasant time reading our Annual Report, I would like to conclude my brief introduction with the words my predecessor Jüri Jaakson said seventy years ago: "Eesti Pank as the custodian of our kroon’s rate has a tremendous and highly responsible function to fulfil. It should continuously be attentive in following our economic developments and most careful in its activity." This is the guideline for Eesti Pank today as well.

FOLLOWING THE PATH OF CHANGES