Tallinn - There was mixed news on the Estonian economy Wednesday with the release of figures showing GDP contracted sharply at the end of 2008 mollified by a positive appraisal by the International Monetary Fund (IMF).

Following the conclusion of an IMF visit to the Baltic state earlier this month, the organization released its findings Tuesday in Washington, prompting a satisfied response in the Estonian capital, Tallinn.

"Directors commended the Estonian authorities for the progress made in recent years in achieving economic convergence and deepening real and financial ties with the European Union," said the IMF.

"Estonia has entered a severe recession that will test the flexibility and resilience of its economy ... Recovery will require a revival of foreign and domestic demand, continued financial stability, and prudent macroeconomic management," it concluded.

Andres Lipstok, governor of the Estonian central bank said the IMF report showed the policy of pegging the national currency, the kroon, to the euro was paying off. Estonia hopes to adopt the euro in 2011.

"One of the most significant points of the report is that the IMF reaffirmed once again our currency board arrangement and the fixed exchange rate of the kroon serve as the pillars of the country's monetary policy and financial stability. This system will be maintained until Estonia joins the euro area," said Lipstock.

According to data released by Statistics Estonia on Wednesday, during 2008 Estonian GDP decreased by 3.6 per cent compared to the previous year.

But in the fourth quarter, GDP decreased by a colossal 9.7 per cent compared to the same quarter of the previous year as the global economic downturn made itself felt.

"In the fourth quarter, GDP was substantially influenced by the decrease in domestic demand by 14.8 per cent," said Statistics Estonia.

Total GDP amounted to 248 billion kroons (21 billion dollars) for the year. (dpa)