RTTNews - Monday, the International Monetary Fund or IMF said it expects Estonia's economy to contract by 13% this year and the recovery to start in late 2010 at the earliest. However, the recovery will depend in part on global developments.

Imbalances built up in the boom years are correcting quickly, with the external current account deficit expected to largely close and inflation to move below the Maastricht reference level already this year, the IMF said in a statement at the conclusion of its staff visit to Estonia.

Further, the IMF said the financial system operating in the environment of Estonia's successful currency board arrangement has proven resilient to the deterioration of global funding conditions.

According to the findings of IMF staff mission to Estonia, led by Christoph Rosenberg, the major policy challenge, for 2009 and beyond, is the budget.

Prudent fiscal policies for most of the decade have allowed for the accumulation of reserves, but these are now eroding quickly as tax revenues suffer from the sharp economic downturn, Rosenberg said.

Spending increases, pension and wage hikes in 2007-08 are proving unsustainable, especially because growth will likely be permanently lower than during the post-EU accession years. This calls for a fundamental rebalancing of fiscal expenditures and revenues.

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