Based on a 2000 Report on the Observance of Standards and Codes on Estonia by the International Monetary Fund and a 2002 update, Estonia's monetary policy practices exhibit no weaknesses. The 2000 report found transparency practices in the conduct of monetary policy to be "very good," concluding that the Bank of Estonia's (BoE) objectives, institutional framework, and the relationship with the government are clearly defined. The report added that the conduct of monetary policy by the BoE is highly transparent. Balance sheet data are released monthly and annually and financial statements are reported and audited according to international standards. In the IMF's 2007 Article IV Consultation, concerns were raised as to Estonia's ability to meet Maastricht inflation criteria in time to adopt the euro on schedule.

General Overview

In 2000, an International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) assessed Estonia's observance of international standards in the area of monetary policy transparency, finding that "there were no significant weaknesses with respect to monetary policy" and that Estonia's monetary policy transparency practices were "very good." Estonia's accession to the European Union (EU) in May 2004 meant that the environment in which its monetary policy was formulated and conducted was now strongly influenced by the European Central Bank (ECB) and economic developments of the Euro area. According to the Bank of Estonia's (BoE) 2004 Annual Report, "implications of ECB monetary policy decisions transmit rapidly into Estonia's economy, into deposit and loan interest rates as well as into the exchange rate of the Estonian Kroon against other currencies, having, in turn, an impact on non-financial sector performance and price stability in Estonia" (p. 47). The BoE went on to report that the Currency Board Arrangement (CBA) imposes limits to the number of monetary policy instruments available to the bank, but that "the BoE can draw public and government attention to emerging macro risks, exert moral pressure on the financial sector, and implement a conservative required reserve policy and supervisory measures" (p. 49) Estonia has been a subscriber to the IMF's Special Data Dissemination Standards since 1998 and has complied with its specifications since 2000 (IMF SDDS website).

The BoE's 2005 Annual Report enumerated the variety of means at its disposal to produce and publish information regarding the development of monetary policy, including information on the procedures employed in analysis. These include internal research and surveys of regional developments impacting upon monetary policy. The results of this research and these surveys are published quarterly on the BoE website. Biannual economic forecasts are also available on the website, along with explanations of the methodology used in producing them, as is research geared to the development of a more sensitive monetary simulation model for use in the policy-making process. Results of this research are presented in a series of working papers on the BoE website, as well. According to the BoE's 2005 Annual Report, the accountability of the BoE for monetary policy is set forth in various pieces of legislation, from the Estonian Constitution to the Law on the Security of the Estonian Kroon, the Law on the Bank of Estonia, and the Official Statistics Act. The law also mandates that the BoE produce a number of additional publications, including monetary, financial, and balance of payments statistics (on the bank's website); quarterly bulletins; the Annual Report; and the Eesti Pank Yearbook. The BoE delivers the Annual Report to parliament each year, but also consults with members of parliament as needed to answer questions or provide explanations regarding policy.

The 2005 Annual Report also directly addresses the question of broader public dissemination of monetary policy information. "The central bank's reliability for the public and the transparency of its activities are the preconditions for the smooth operation of a monetary system" (p. 17). To that end, the bank is legally mandated to provide "regular, profound, and high-quality information on [the] economy" (p. 17) that is both accessible and affordable by all interested parties. Thus, the bank's regularly issued documents are made available in public libraries as well as on the website. Information is also available on request from the bank itself.

In its 2004 Article IV Consultation, and again in 2006, the IMF noted the desirability of Estonia's early adoption of the euro. In the IMF's 2004 report, it was stressed that meeting Maastricht criteria was of singular importance, and that membership in the European Exchange Rate Mechanism (ERM II) was a core element of Estonia's general policy framework. According to its 2004 Annual Report, the BoE joined ERM II, with the goal of strengthening Estonia's monetary policy and moving a step further into participation in the European Monetary Union (EMU). According to the BoE's 2004 Annual Report, "joining ERM II did not involve any changes for Estonian monetary policy framework, which has been successfully in use for more than twelve years" (p. 51).

In light of Estonia's desire for expeditious adoption of the euro, the 2004 IMF report noted a number of issues arising from the technical aspects of joining the EMU. Among these is the problem of maintaining adequate central bank reserves. Statutorily, these were set at a level of 13 percent, but the reserve base had to be recalculated in order to bring it into line with the requirements of the ECB. In addition, the IMF reported that "the authorities are planning the adoption of the intraday liquidity instrument to increase the efficiency of the banks liquidity management" (p. 3). In its 2006 Consultation, the IMF cited Estonia's sustained performance under the terms of the CBA as a sign of the country's readiness to adopt the euro, but recognized the possibility of delay. Whereas the IMF held that early euro adoption was preferable, in order to "lock in the benefits of the CBA and eliminate balance sheet risks associated with a separate currency" (p. 20), it noted that a short delay need not be too great a problem. However, a delay exceeding two or three years, or one that is left open-ended, could cause disruption in the markets. The 2006 Consultation suggested that Estonia would likely not meet Maastricht inflation criteria prior to 2008. To avoid negative market perceptions arising from delays, the IMF called for Estonia to articulate its strategy for euro adoption. This, the Fund believed, would send a welcome signal that Estonia remained committed to financial stability. In the IMF's 2007 Article IV Consultation, concerns were raised as to Estonia's ability to meet Maastricht inflation criteria in time to adopt the euro on schedule.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

According to the IMF's 2000 ROSC, the objectives, institutional framework, the relationship between the BoE and the government, and agency roles are all clearly defined. The Law of the BoE establishes the central bank's independence and stipulates the rules according to which the BoE may interact with government officials and agencies. The law requires that the BoE report directly to the Parliament. Central bank autonomy is further strengthened by the Law of the BoE in the procedures established for the selection of the bank's president and chairman of the board. Selection of the BoE president is through nomination (by the president of the republic), with confirmation and appointment at the discretion of the Parliament. The president of the BoE serves a five-year term.

The 2000 IMF ROSC reports that the BoE's primary responsibility is to maintain the stability of the Estonian Kroon and to uphold the integrity of the currency and monetary system both internally and internationally. This mandate is laid out in the Estonian Constitution (1992), and the BoE's goals are clearly disclosed, as required by law, in the BoE's Annual Reports. The BoE's accountability for its conduct of monetary policy is also specified in law. There are requirements for reporting to parliament as well as for the regular publication of information covering the broad range of monetary policy related issues and data. The BoE is specifically protected from liability for the financial obligations of the government. In addition, the 2000 ROSC noted that the BoE "is prohibited from, directly or indirectly, granting credits to the state budget or budgets of local authorities, and from buying securities issued by government executive bodies. The law also specifies the minimum percentages of the annual profit of the BoE to be added to the statutory capital and reserve capital before the remaining profit is transferred to the state budget." The ROSC added that legislation establishes the BoE's responsibilities regarding foreign exchange policy, which is specified in the Law on the Security of the Estonian Kroon, which disallows the BoE from any attempt to devalue the currency once its official rate has been fixed against the Euro. Devaluation must be done at the order of parliament. In its annual reports, the Bank of Estonia discloses the range of monetary instruments at its disposal with regard to policy implementation, and offers details as to their appropriate use

Open process for formulating and reporting monetary policy decisions.

FC

According to the IMF's 2000 ROSC, the conduct of monetary policies by the BOE was highly transparent. According to the report, "Instruments, targets [and] changes in policy instruments are actively disclosed [and] reports on progress in achieving objectives are published and extensive consultation is favored." The report noted that the Law of the BoE clearly identifies and defines the framework, instruments, and goals of monetary policy, with additional legislative support from the Law on the Security of the Estonian Kroon and the Statute of the BoE. The terms and definitions are also disclosed on the Bank of Estonia's website and in its quarterly and annual reports. Regular disclosure of monetary policy instruments, along with their explanations, is also made through the media. In addition, data reporting is governed by decrees issues by the BoE president, which are published and explained on the BoE website.

The 2000 ROSC further noted that the Law on the Bank of Estonia sets out the guidelines governing the use of monetary policy instruments. According to the ROSC, "the decisions of the Board and the decrees of the President concerning the forms of the instruments and the procedures for their use are published in the annex to the State Gazette and are also available on the BoE's website." Should there be changes in the use of policy instruments, these are announced in press releases, on the BoE website, and in various regular publications of the BoE. The ROSC also noted that the BoE actively engages in public consultation with interested parties when formulating or analyzing monetary policy, particular seeking the input of credit institutions. Any major changes in such procedures are made public also via a press release to the media and on the web site as well as through discussion in the BoE's quarterly review and its annual report.

Public availability of information on monetary policy.

FC

The IMF's 2000 ROSC reported that the BoE published its balance sheet data on a regular monthly and annual schedule. The BoE pursues an active and extensive public information program. According to the ROSC, "financial statements are prepared in accordance with the Law on the BoE, the Statute of the BoE, and International Accounting Standards." Estonia has subscribed to the IMF's SDDS since 1998 and has met its specifications since 2000. The IMF's 2006 Article IV Consultation reports that the BoE website makes available a wide variety of data on key monetary, fiscal, real, and external data and regularly updates the data. According to the 2006 Consultation, "all monetary data are issued by the BoE; the BoE balance sheet is reported monthly and is available on the 8th day of the month following; broad money and its components are available monthly for the BoE on the 13th banking day of the month; and interest rate updates on domestic and foreign currency transactions are available monthly on the 17th banking day of the month" (p. 39)

The 2000 ROSC noted that annual and monthly balance sheets are also disclosed to parliament in written form, published in the Annual Report, and reported in the quarterly gazette. The BoE's publications program also includes irregularly issued special reports, press releases issued whenever new developments in monetary policy occur or if particular aspects of policy need explanation, and monthly statistics. These are available for free on the BoE website, and most are also available in public libraries or on request from central bank headquarters. The quarterly Gazette also provides the text of regulations affecting monetary policy. In a 2002 update to the 2000 ROSC, the IMF reported that the public information system of the BoE had been expanded to include inflation forecasts and figures on GDP growth. In addition, beginning in the spring of 2002, the BoE instituted the practice of holding semi-annual press conferences "to introduce the central bank economic forecasts on the website of the Bank of Estonia" (p. 13). In addition, the BoE introduced a new website feature, entitled "Review of the Monetary Policy Environment," in which recent monetary and credit aggregates developments are reviewed and discussed. The review is available only in the Estonian language.

Accountability and assurances of integrity by the central bank.

FC

The 2000 IMF ROSC noted that the rules governing the accountability of the BoE are established in law. The President and the Chairman of the BoE Board report to the Parliament and make available the BoE's financial statements. These statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are subjected to external auditors prior to presentation. They must include both income and expenditure statements. The procedure followed when the BoE officials submit information to, or respond to official enquiries from, members of the parliament is set forth in the Parliament Procedure Act. The process begins when the BoE president submits the Annual Report to the BoE Board of Directors for review. This submission must also include financial statements, all explanatory notes and appendices, and the statement of the auditors. Once the Board confirms the report, it is brought to parliament for confirmation.

The 2000 IMF ROSC also notes that the external audit procedure is governed by law. The Law on the Bank of Estonia states that independent auditors must be chosen from among the ranks of internationally accepted professionals. They are required to supervise and inspect the BoE's activities, and to certify the accuracy of the Annual Report. The auditors' statement, which is appended to the report when it is submitted to the parliament, must include a description of the accounting principles used in the certification process. The Law on the BoE also requires disclosure of the BoE's internal governance procedures. In conjunction with the Statute of the BoE, this law sets out the internal audit procedures and responsibilities to be followed by the Bank. The law also stipulates the procedures by which internal auditors are appointed or dismissed, enumerates their required professional qualifications, guarantees their independence, and establishes their range of access to information. The law also sets forth the standards required of BoE officials and staff in the conduct of their personal affairs, to avoid the possibility of conflicts of interest. The 2000 ROSC notes, however, that there is no legal instrument that offers protection for BoE officers or staff for actions committed in the line of duty.