The main goal of this research is to examine the legal frames and management of local government debt activities in Estonia. Estonian government institutional structure and its different levels of fiscal activities are explained. The local governments collect about one fourth of consolidated government sector revenues and deficit financing covers around 2% of their expenditure. The paper gives an overview and evaluates the legal framework for local governments’ fiscal conduct and borrowing activities. The legal acts provide municipalities wide options for debt instruments and set clear norms to avoid debt mismanagement and risk of insolvency.
General trends and structure of municipalities borrowing during the period 2000-2005 are analyzed. Municipalities have increased size of issued new debt instruments about 3 times. Borrowing has expanded due to increased municipalities activities, their better credibility and favorable loan conditions. Municipalities’ access to loans became easier and borrowing cost (interest rates) lower. Most of funds are coming from domestic credit institutions in form of bank loans. Use of additional instruments (debt securities, other instruments) remains moderate.
Municipalities debt-to-revenue and debt-to-cost ratios are analyzed, evaluating two aspects of borrowing activities: municipalities abilities to attract additional funds and risks related with debt management.
In the last section all the major issues considered in the paper are summed up and assessment of the role of the loan finance by sub-national governments and their efficiency in debt management is made.