World Bank warns of 'slow recovery' in emerging Europe

World Bank warns of 'slow recovery' in emerging Europe

The Emerging Europe and Central Asia (ECA) Region will face a slow recovery from the global economic crisis in the year ahead and countries facing tight fiscal pressures should take care to target social spending on the most needy and vulnerable, the World Bank said on April 23 2010 at a news conference at the World Bank/IMF Spring Meetings.  "Countries of Emerging Europe and Central Asia were hit the hardest by the global economic crisis and are likely to be the slowest to resume economic growth," according to Philippe Le Houérou, World Bank Vice President for the Europe and Central Asia Region."Growth in the region, which had peaked at about seven per cent in 2007, fell to a negative six per cent in 2009. 2010 is going to be a tough year for the region with growth projected at around three per cent. The prospects for 2011-2013 are only slightly better. Rising joblessness is pushing households into poverty and making things even harder for those already poor." Emerging Europe and Central Asia is a diverse region, the World Bank said.Differentiation among countries resulted in varying degrees of impact that the crisis has had on individual countries and will also define their prospects for recovery. Twenty out of 30 countries in the region experienced a decline in GDP in 2009, with GDP growth ranging from a negative 18 per cent in Latvia to a positive 9.3 per cent in Azerbaijan. Overall, countries in the Emerging Europe and Central Asia Region will recover from the crisis more slowly than in other regions, according to the World Bank.The bank said that current growth projections for 2011-2013 show the region growing between three and four per cent, as compared to about five per cent in the Middle East and about eight per cent in developing Asia.The year 2010 is expected to be particularly difficult for Europe and Central Asia, with GDP growth forecasts about half of the forecast for the rest of the developing world. The World Bank says that the region has faced the greatest fiscal pressures among all the world's regions during the global economic crisis.Average fiscal deficits amounted to six per cent of GDP in Emerging Europe and Central Asia between 2008 and 2009, compared with one per cent in the Middle East, three per cent in Latin America, and about four per cent in developing Asia and Africa. "The impact of the crisis, as well as longer-term demographic, economic, and political forces, call for policies that deliver equitable access to services and inclusive growth," Le Houérousaid."Social spending reform, which has been lagging in many countries of the region, is now becoming more urgent. Before the crisis, inefficiencies in social spending - which makes up more than half of government expenditures in some countries - may have been affordable for some. Now it is clear that they are not." The World Bank said that the global economic crisis had taken a heavy toll on the region's poverty reduction accomplishments of the past decade.The number of poor and vulnerable has risen by about 13 million in 2009, instead of falling by 15 million as expected before the crisis, with Armenia, Georgia, the Kyrgyz Republic, and Moldova particularly hard hit.As a result, 40 million people in Emerging Europe and Central Asia live below $2.50 a day, and about 160 million below $5 a day.Also, joblessness has been rising across the region, with middle-income countries seeing greater increases in unemployment. According to the World Bank, the unemployment rate in 2009 exceeded 10 percent in Estonia, Hungary, Latvia, Lithuania, the Slovak Republic, and Turkey."The drivers of pre-crisis growth and improved government finances - rapid export growth, large capital inflows, high commodity prices, and domestic consumption and construction booms - are unlikely to return soon," according to Indermit Gill, World Bank Chief Economist for the Europe and Central Asia Region."At the same time, governments in Emerging Europe and Central Asia across the income spectrum spend more than their developing country counterparts in other regions," Gill said."General government spending in the Region's middle income countries such as Poland, Russia, Ukraine, and Turkey is now higher than 40 per cent of GDP in contrast with the 30 per cent for middle income countries in other regions. According to projections, in 2010, the fiscal deficit in Emerging Europe and Central Asian countries will exceed 4.5 percent of GDP. Ensuring that governments can strengthen inclusion will become more difficult with tighter budgets, unless government spending is made more efficient.""We are now seeing a growing divergence in the fiscal health of governments in the Region," Gill said."Before the crisis, buoyant revenues allowed governments to both increase spending and reduce fiscal deficits. Annual revenues in the Region grew by about $500 billion between 2000 and 2007, and governments spent more than three quarters of this."During the crisis, fiscal responses started to diverge: most countries had to rely on automatic stabilisers like unemployment benefits to steady spending, but some had saved enough to implement sizeable fiscal stimulus programs. After the crisis, fiscal reform priorities will be even more differentiated. In 2010, countries should accelerate fiscal reforms."Priorities include a varying mix of reforming social security, resizing school systems, restructuring healthcare finance, reducing energy subsidies, investing in infrastructure, and scaling down stimulus programs. Done well, these reforms can help societies be more inclusive, economies more competitive, and nations decidedly more prosperous," Gill said.The World Bank more than doubled lending to countries in the region from an average of $3.9 billion in fiscal 2000-08 to $9 billion in fiscal 2009.In fiscal 2010, lending is projected to be $11 billion - $10.5 billion IBRD and $0.5 billion IDA.Much of the new lending came in the form of Development Policy Loans (DPLs) to help countries restore growth and employment (e.g., $1.3 billion for Turkey), rehabilitate the financial sector (e.g., $400 million for Ukraine), address the social impact of the crisis (e.g., $144 million for Latvia), and improve the efficiency of social spending ($1.4 billion for Poland, $200 million for Belarus, and $100 million for Serbia).In addition, in February 2009, the World Bank Group, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank (EIB) launched the Joint International Financial Institutions Action Plan, which supports banking systems and lending to the real economy in Central and Eastern Europe, the World Bank said.As of end-2009, the institutions have provided more than 19 billion euro in crisis-related support for financial sectors in the region.The Bank also participated in the European Bank Coordination Initiative (the Vienna Initiative), a forum for deepening the dialogue between home and host country banking supervisors, private banks, the European Commission, and international financial institutions, the bank's statement said.

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