Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Basic data
Estonia represents a stable, open and export-oriented economy. Estonia’s economic freedom score is 80.0, making the Estonian economy the seventh freest in the 2022 index. Estonia ranks 4th among 45 countries in the Europe region, and its overall score is above the regional and world average. The economy grew by 7.6% in 2021 and public debt to GDP remained exceptionally low compared to the euro area average. Economic growth will moderate to around 3.5% in 2022 and 2023, it will continue to be driven by the development of sectors with high added value (electronics, ICT), the continued digitization of the public and private spheres, and especially the accelerated transformation of energy and industry towards more environmentally friendly operations. Domestic consumption is growing thanks to savings accumulated during the pandemic (49% of GDP in 2020). Public investment in 2022-2025 will increase by €969 million under the Next Generation EU stimulus package and the Recovery and Resilience Instrument. The energy, transport, chemical and healthcare industries will benefit in particular. To increase its own defense capability, Estonia allocated an additional 900 million euros for defense investments. On the other hand, electricity prices, which rose about 75% year-on-year in 2021, have pushed inflation to a record 6.6% and are expected to remain high in 2022. Firms are reporting labor shortages. Sanctions imposed on Russia will cause material shortages in the construction, woodworking and metalworking industries, but will have a negligible effect on the Estonian economy as a whole. Check ebizdir for economical facts of Estonia.
Economic growth predictions in 2022 are still mostly positive (see table below), but there are early warnings of a possible recession – for example, the Estonian Central Bank predicts that the economy will shrink by 0.4% this year. A combination of factors is likely to push Estonia into an economic downturn: Estonia’s economy has almost reached its production capacity limit in 2021 (data published in January 2022 shows a year-on-year increase in industrial output of 6.3%, most in energy production, wood processing and electronics manufacturing ), further growth in 2022 is therefore unlikely. The changed geopolitical conditions and their economic impacts further dampen the outlook, inflation is also growing dangerously.
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 5 | -3.8 | 7.6 | 3.8 | 3.1 |
| GDP/population (USD/PPP) | 38,964.00 | 37,985.70 | 42,310.00 | 45,240.00 | 48,070.0 |
| Inflation (%) | 2.3 | -0.4 | 4.4 | 6 | 3 |
| Unemployment (%) | 4.5 | 6.8 | 6.5 | 5.2 | 4.7 |
| Export of goods (billion USD) | 16.1 | 15.9 | 20.7 | 22 | 22.6 |
| Import of goods (billion USD) | 18 | 17.1 | 22 | 22.3 | 23.1 |
| Trade Balance (Billion USD) | -1 | -0.2 | -1 | -0.3 | -0.8 |
| Industrial production (% change) | -0.1 | -16.3 | 6.4 | 4 | 3.5 |
| Population (millions) | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 |
| Competitiveness | 35/63 | 28/63 | 26/64 | ON | ON |
| OECD export risk | ON | ON | ON | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | -3.4 |
| Public debt (% of GDP) | 20.3 |
| Current account balance (billion USD) | -1.4 |
| Taxes | 2022 |
| AFTER | 20% |
| F.O | 20% |
| VAT | 20% (9%) |
Estonia’s economy faces unfavorable growth prospects in 2022 due to increased inflation and weak external demand. Recession risks are high, especially due to the risk of stopping Russian gas imports, for which there is no short-term alternative. In 2022, most analysts expect real GDP to grow by just 1%, a sharp slowdown from 8.2% in 2021 and a deep drop below the country’s five-year average. There are also the first warnings of a possible recession – for example, the Estonian central bank predicts that the economy will shrink by 0.4% this year.
The economy will suffer from increased inflation, slower export growth, weaker consumer and business confidence and a lack of production inputs. Inflation is likely to rise to an average of 9.8% in 2022 from 4.7% in 2021. Food and fuel prices will drive most of the inflationary pressures, but other components of the inflation basket will also support increased inflation. Consumer spending will be hit as prices rise faster than wages. Real wages may fall by up to 2% this year, but the consumer basket will become more expensive by up to 10%, with energy costs accounting for a large part of the increase. Estonia is in danger of overheating the housing market (in the fourth quarter of 2021, prices increased by 20% year-on-year) with a subsequent correction. Estonia’s economy has almost reached its production capacity limit in 2021 (data published in January 2022 speak of a year-on-year increase in industrial production of 6.3%,
Public debt in relation to GDP remained exceptionally low at 20.3% compared to the euro area average. The public deficit is expected to decrease further in 2022. In 2022, a current account deficit of 1.8% of GDP is expected. The trade deficit widens slightly as import costs rise faster than export earnings.
Despite the above-mentioned risks, it is possible to expect that Estonia will maintain its position at the top of the Central and Eastern European countries in the next five years. Public investments, such as investments to modernize and expand rail infrastructure, will benefit from grants of €969 million (about 3.3% of GDP) under the NextGenerationEU stimulus package and the EU Recovery and Resilience Instrument.
Banking system
The Estonian banking sector consists of 14 banks, of which nine are licensed credit institutions in Estonia and five operate as branches of foreign credit institutions. Banking sector assets amount to EUR 30 billion, which corresponds to 110% of Estonia’s GDP. The Estonian banking sector is dominated by foreign capital holding 85% of banking sector assets. The market is mainly divided between Swedbank, SEB Bank, LHV Bank and Luminor Bank. The banks serve two million private and 0.3 million business customers through 77 bank branches. The most important Swedbank is part of the Swedish banking group of the same name and holds a 41% share of the Estonian market, the second SEB a 24% share. In third place is Luminor bank with 13% and LHV with 11% share of the Estonian market. In general, Estonian banks are characterized by massive use of internet banking, which is commonly used by around 98% of the population. The same percentage is given for banking operations carried out via the Internet.
In 2018, Estonia’s banking sector was rocked by the scandal involving the Estonian branch of Danske bank after the discovery of long-term money laundering between 2007-2015 of an estimated EUR 200 billion. The relevant Danish, Estonian and EU authorities are participating in the investigation, and the political representation of the country is also making every effort to restore Estonia’s good name and banking reliability. Danske Bank gradually reduced its activities on the Estonian market and entered into liquidation on 1 October 2019 with the closure of all banking activities in Estonia.
The largest banking houses in Estonia
- SWEDBANK: Liivalaia 8, 15040 Tallinn, email: [email protected]. Share of loans on the Estonian market 40%, share of deposits 47%.
- SEB Bank: Tornimäe 2, 15010 Tallinn, email: [email protected]. The share of loans on the Estonian market is 27%, the share of deposits is 24%.
- Other Estonian banks: LHV, Coop Pank, Eest Krediidipank, AS LHV Pank, AS BIGBANK, AS Citadele Banka Eesti filiaal, Tallinna Äripank.
The banking market is regulated by the Central Bank of Estonia ( Eesti Pank ).
Tax system
The tax system in Estonia is relatively clear and long-term stable. Government taxes include income tax, social security tax, land tax, gambling tax, value added tax, customs duty, excise duty and heavy goods vehicle tax. Local taxes can be set by the local government – for example, for the use of infrastructure or other resources in a certain region. Most taxpayers use pre-filled income tax returns that can be filed electronically through e-MTA.
- Income tax : Profits are not taxed when they are earned, but the point of taxation is deferred until the profits are distributed. Profits are generally subject to 20% corporation tax. Individual income tax for natural persons is set at 20%. All income is subject to a general basic exemption of €6,000 per year, i.e. €500 per month.
- Value Added Tax: The standard VAT rate is 20%, the reduced rate is 9% and in some cases 0%. The VAT rate of 9% applies to books and e-books (with the exception of educational books), medicinal products, contraceptives, hygiene and toilet supplies and medical devices or medical devices intended for the personal use of disabled persons, accommodation services or accommodation services with breakfast, periodical publications.
- Social tax : Employers pay social tax on cash and in-kind payments to individuals. Self-employed people pay tax on their business income. The social tax rate is generally 33%, in special cases 13% of the tax base.
- Other taxes: E.g. land tax , the rate is 0.1 – 2.5% of the taxable value. Land where economic activity is restricted by law is either exempt from tax entirely or at 50% of the standard tax rate, depending on the nature of the restriction. Casinos and lotteries are burdened with gaming tax from 5% to 18% depending on the type of activity. Road tax for trucks of categories N2 (3.5-12 tonnes) and N3 (over 12 tonnes) is calculated according to the time the vehicles spend on public roads and according to weight, number of axles and volume of emissions. The daily rate is EUR 9-12, annual EUR 500-1300, while it is possible to pay a fee for weekly, monthly or quarterly road use. Consumption tax is collected from the sale of tobacco and tobacco products, alcohol, fuel and electricity.
Taxes are assessed and collected, controlled and enforced by the Tax and Customs Board and local governments in the case of local taxes.
