June 7, 2000

Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

Developments in the Estonian economy have been quite favorable under the program, which is supported by the Fund with a stand-by arrangement, which we intend to treat as precautionary. The economic recovery that started in the second half of last year has gained momentum early this year, and now appears to be broadly based. Both exports and imports have risen rapidly and we believe that developments in the first quarter are consistent with only a slight widening of the current account deficit for 2000 as a whole. We have met all performance criteria in the program underlying the stand-by arrangement with comfortable margins. As expected, tax receipts have rebounded and through vigorous control of government spending we have held the budget deficit well below its program ceiling. Confidence in our currency board also has remained strong and domestic interest rates have declined further to historically low levels. The FSAP exercise found that the banking system appears to be healthy and banking supervision has been strengthened. The government has little domestic or foreign debt and holds significant balances abroad.

We will, however, monitor developments closely and we are committed to act decisively, if warranted. Should faster growth generate an excess of tax revenue over projections, the budget deficit will be reduced below the program limits. We also remain committed to a balanced budget for next year. Moreover, should economic growth exceed current projections, we intend to use any additional revenues to generate a budget surplus in 2001, so as to contain the current account deficit and accumulate resources for the financing of the pension reform. Our structural policies are also progressing as contemplated under the program. Against this background, we are requesting the completion of the first review under the stand-by arrangement.

Sincerely,