The economies of Central and Eastern Europe as well as the Commonwealth of Independent States (CIS) have grown at a slower pace during 2005 from the record previous year, the European Bank for Reconstruction and Development (EBRD) said on Monday, reports Agence France Presse.
The EBRD, founded in 1991 to assist the transition of former communist nations to market economies, said in its Transition Report that the rate of economic growth across its countries would stand at 5.3 percent this year, compared with 6.6 percent in 2004. This compared with euro zone growth of 1.2 percent in 2005, according to International Monetary Fund estimates, from 2.0 percent last year. The EBRD said that economic growth has been reined in this year by a sharp slowdown in former Soviet block countries, particularly Russia and Ukraine. Despite slower growth, there were fewer business constraints across the 27 countries in which the bank invests, the EBRD said.
CIS nation Ukraine saw a slowdown following the election of President Viktor Yushchenko, who assumed power after last year's "orange revolution," and has vowed to steer it toward membership of the EU and the North Atlantic Treaty Organization. Economic growth amongst CIS nations was predicted to slow to 6.2 percent in 2005, compared with 7.9 percent the previous year. Growth was "driven mainly by high commodity prices", the EBRD added. It also cautioned that CIS members must resist pressure to spend extra cash generated by high oil revenues amid soaring crude prices, to maintain and improve their economic competitive edge.
In Central Eastern Europe and the Balkan states, the EBRD forecast that the growth rate of GDP would slow to 4.2 percent this year from 5.1 percent in 2004. Last year eight of the EBRD countries, in central Europe, became members of an expanded EU. And in South Eastern Europe, which includes Bulgaria, Croatia and Romania, growth would falter to 4.8 percent compared with 6.5 percent a year earlier. EBRD president Jean Lemierre had said in May this year that the bank would shift its focus towards southeastern Europe and Russia.
Reuters adds that a number of former Soviet countries could face a full-scale banking crisis if their economies suffer a downswing in the future, the EBRD also said on Monday. But as dollar receipts from exports of oil and other commodities flood in, countries such as Russia and Kazakhstan are building up reserves which may provide a cushion if a financial storm were to force them to shore up their banks. The EBRD found nearly all 12 countries in the CIS had weak banking systems and faced risks ranging from lack of financial transparency to excessive concentration of deposits in the hands of a few customers. Ukraine and Moldova were identified as the two former Soviet countries which were most exposed to a combination of a weak banking system and macroeconomic stress.
However, the EBRD said it was still vital these countries' central banks kept a tight rein on their banking industries. "In these economies, strengthening of banking supervision through prudential regulation and market development measures ... should be the priority," said the bank. The amount of credit lent out by banks in most CIS countries in proportion to the size of their economies is still quite low, compared with matureindustrial countries, which would limit the resources needed for any government to bail out its banks if a risk of systemic failure arose. "The size of the fiscal cost (of any bail-out of the banking sector) may be limited given their still low level of domestic credit," said the EBRD.
Agence France Presse further notes that as part of a three-year survey of businesses across Eastern Europe, conducted with the World Bank, the EBRD also found that the region showed signs of improvements in regulation,
taxation and crime. But the report cautioned: "Arbitrary red tape, weak institutions and poor access to finance are still considered to be major obstacles to business in transition countries."