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A. Draft
resolution
(open)
2.2. The effects of
the crisis on eastern European economies
Report | Doc. 12349 | 21 July 2010
The activities of the European Bank for Reconstruction and Development (EBRD) in 2009: facilitating economic integration in Europe
(Former) Committee on Economic Affairs and Development
Summary
After nearly twenty years of steady growth in economic prosperity and improvements to democratic processes across central and eastern Europe, the year 2009 put to test progress in development achieved so far and solidarity among European states. With the global financial crisis in full swing, many countries have experienced a sharp economic downturn leading to soaring unemployment, shrinking state revenue and household income, an erosion of budget discipline and questions about the solidity of macroeconomic fundamentals. It is reassuring that the response of the population has so far been moderate and that domestic political stability and structural reform efforts have not been adversely affected.
The year 2009 represented a serious challenge to European development institutions – including the European Bank for Reconstruction and Development (EBRD) – as they responded to the crisis. If, in earlier years, some of the EBRD’s shareholders believed that the Bank’s mission of supporting transition to open and democratic market economies had been largely accomplished, the turn of events thereafter proved the contrary. The EBRD acted swiftly and effectively despite major uncertainties over the state of affairs in central and eastern Europe. The Bank’s investments in 2009 were unprecedented in scale and were targeted at the countries suffering most from the crisis, thus helping to stabilise the macroeconomic situation and reassure both domestic and international investors.
This report examines the causes and effects of the crisis in the eastern parts of the continent, the lessons learnt and the implications for future action at European level, in particular through institutions such as the EBRD. It urges Council of Europe member states to embrace the broad policy conclusions drawn from the crisis with a view to tackling inherent economic vulnerabilities and imbalances to achieve balanced and sustainable growth.
A. Draft
resolution 
(open)1. In 2009, the global financial and economic crisis
was in full swing across Europe, leading to an exceptionally deep
downturn for most Council of Europe member states in central, eastern
and south-eastern parts of the continent, which put to test the
solidity of economic fundamentals, social peace, governance and institutions,
as well as the direction of structural reforms. Timely and concerted
action at national and international levels was crucial in mobilising
resources to stabilise the macroeconomic situation and preserve confidence
of all stakeholders in development prospects.
2. Parliamentary scrutiny over the prioritisation of expenditure
by states and international institutions, such as the European Bank
for Reconstruction and Development (EBRD), is particularly relevant
with a view to ensuring fair allocation and good use of resources.
Building on the Agreement of Co-operation between the Council of
Europe and the EBRD, the Parliamentary Assembly appreciates the
opportunity to contribute its views on the action of the EBRD in
the light of the ongoing economic crisis.
3. In keeping with its mandate, the EBRD actively responded to
the region’s needs for financial resources in order to mitigate
the impact of the crisis. The Bank’s investments over 2009 were
unprecedented in scale and were targeted at countries that suffered
most from the crisis: two thirds of the operations concerned the category
of “anti-crisis measures” and were implemented in collaboration
with other international financial institutions and governments
of the region. The collective approach to tackling financial problems
enabled the region’s countries to preserve macroeconomic stability
and economic growth potential. However, the major problems revealed
by the crisis still require appropriate solutions. The task and
the challenge for the international community is to rehabilitate
the current economic model, to enhance the sustainability of the financial
system and to stimulate employment.
4. The Assembly welcomes a substantial increase in the EBRD’s
volume of operations over 2009 – with commitments up from €5.1 billion
in 2008 to €7.9 billion in 2009 and disbursements amounting to a
record €5.5 billion – even as the Bank’s own accounts incurred a
net loss of €746 million in 2009 after a loss of €602 million in
2008. It notes that these losses, the first since the effects of
the Russian crisis in 1998, were largely unavoidable due to the
shrinking value of the Bank’s equity operations and higher provisions
for the potential underperformance of loans. The Assembly is aware
of the likely prolonged demand for the EBRD’s financing at similarly
high levels for the period 2010-2015 and fully supports the decision
to approve a corresponding temporary 50% increase in the Bank’s
capital from €20 billion to €30 billion.
5. In this context, the Assembly underscores a major catalytic
role of EBRD lending for the realisation of investment projects
through co-financing arrangements. The Bank has thus mobilised funds
several times larger than its own and has, together with its partners,
achieved a significant multiplier effect in its operations. This
effect is all the more relevant for spreading high standards of
corporate ethics and the concept of corporate social responsibility.
6. The Assembly appreciates the EBRD’s contribution to the establishment
of the Vienna Initiative (more formally known as the European Bank
Co-ordination Initiative), which not only bolstered investor confidence
in the banking sector of central, eastern and south-eastern Europe
at a critical moment, but also helped avert a systemic banking crisis
in some parts of the region. Early in 2009, the EBRD, together with
the International Monetary Fund and the European Union, rallied
a gathering of foreign banks, their subsidiaries, governments and
regulators with the aim of reaffirming multilateral commitment to
the region and devising an action plan underpinned by solid funding
support.
7. Eastern European economies experienced an overall contraction
of 6.1% of GDP in 2009 (ranging from 18% in Latvia, 8.7% in Russia
to modest growth in Poland and Albania, at, respectively, 1.6% and
2.2%), the largest of any emerging market region. The spread of
the crisis into the EBRD client countries can be linked to persisting
global imbalances, deficient international regulatory frameworks
for financial markets and institutional failures to correctly assess
complex financial products. However, the countries in the region
that were most seriously affected generally had inherent structural
weaknesses, including heavy dependence on foreign capital, a rapid
growth of the private sector and household debt spurring property
and construction bubbles and a consumption boom, budget deficits,
regulatory flaws and in some cases excessive reliance on remittances
and external demand.
8. The Assembly is concerned that the deteriorating macroeconomic
situation and the implementation of anti-crisis or stabilisation
measures have resulted in a slowdown or a reversal of improvements
in living conditions throughout the EBRD’s countries of operations.
Household incomes decreased and poverty levels increased as wages
were cut, unemployment soared and social benefits were curtailed.
It is reassuring that the response of the population has so far
been moderate and that domestic political stability has not been seriously
affected throughout the region. Furthermore, recent turbulences
in the euro zone have not hurt the EBRD client countries which remain
on a steady, though fragile, recovery path with average growth forecast
at 3.7% in 2010.
9. Moreover, even though progress with structural reforms inevitably
slowed down in 2009 when governments focused on the immediate problems
caused by the crisis, in no country did the leadership adopt an
anti-reform policy stance. This is a sign of growing political consensus
over the ultimate goal and the necessity of socio-economic reforms
with a view to building lasting prosperity and securing long-term
benefits in the context of globalisation. Policy dialogue and co-operation
with international development institutions, such as the EBRD, remain
a highly valuable tool for these countries to identify appropriate
national reform-oriented options and solutions.
10. The Assembly notes that despite a large increase in the volume
of EBRD financing, the number of projects supported in 2009 increased
only slightly compared to the year before (respectively 311 and
302 projects). This corresponded to a massive support to major banking
groups and enterprises and a welcome sharper focus on lending to
the real economy, in particular through enhanced participation in
trade facilitation, energy and infrastructure projects (including
participation in important public sector undertakings) and stronger commitment
to micro, small and medium-sized enterprises with a strong job-creation
potential. The Assembly is concerned that the latter commitment
is not sufficiently covered and should further be expanded.
11. The Assembly welcomes the start of EBRD projects in the newest
country of operations – Turkey – and the resumption of commitments
to the countries of central Europe and the Baltic states against
the background of their evolving needs and changing circumstances.
It believes that the EBRD is well placed to promote further economic
integration in Europe, not least through support to projects in
the priority areas (including energy security and efficiency, good
environmental governance and development of small and medium-sized enterprises)
under the European Union’s Eastern Partnership in favour of Armenia,
Azerbaijan, Belarus, Georgia, Moldova and Ukraine, and more generally
under the European Union Neighbourhood Investment Facility.
12. The Assembly calls on the EBRD to:
12.1. use its network of partner institutions in order to stimulate
a debate on macroeconomic policy prescriptions and the longer-term
implications of the financial-economic crisis in terms of good governance,
including more effective regulation and oversight of cross-border
lending and further institutional development, in both private and
public sectors;
12.2. assist its countries of operations in respect of pension
system reform, notably as regards the setting up and governance
of private pension schemes and funds, and to take part in the process
of institutional reform;
12.3. expand its contacts with the Council of Europe Development
Bank with a view to identifying possible joint activities;
12.4. maintain its increased volume of lending to support economic
recovery in its countries of operations and to co-operate more closely
with regional development institutions;
12.5. foster, together with other international financial institutions,
investment in companies with good management but facing temporary
financial difficulties and to help such companies restructure their
debt obligations and carry out structural adjustments through technical
assistance programmes;
12.6. tighten its control over the indirect loans, in particular
the financing conditions applied and the risk premiums charged by
the intermediaries to the final borrowers;
12.7. contribute to the harmonisation of lending standards,
in particular with a view to cutting the administrative hurdles
in the lending process;
12.8. extend the investment programme under its Sustainable
Energy Initiative into new sectors, such as buildings, transport
and renewable energy, and to increase the range of instruments to
channel such investment;
12.9. increase lending to the Early Transition Countries and
the European Union candidate countries in south-eastern Europe,
based on the analysis of their medium-term needs, taking into account
the impact of the crisis, and to reduce consultancy while increasing
more tangible enterprise support services;
12.10. continue to give priority to the financing of projects
in the fields of energy security and efficiency, good environmental
governance and development of small and medium-sized enterprises;
12.11. enhance its assistance to the development of local capital
markets and lending in the local currencies of client states in
order to decrease these countries’ dependence on lending in foreign currency
and on external financing;
12.12. assist the elaboration of mechanisms of risk control in
relation to domestic currency lending in order to diminish reliance
on highly leveraged credits through hedge funds;
12.13. continue facilitating the access of women entrepreneurs
to finance and business advisory services, notably through microfinance
institutions.
13. The Assembly also draws the attention of the Council of Europe
member states to the broad policy conclusions drawn from the crisis.
It is convinced that financial institutions are an essential part
of a market economy and that they ought to serve – first and foremost
– the needs of the productive sector. This calls for the strengthening
of regulatory frameworks and oversight mechanisms to ensure responsible
lending and investment practices, adequate capitalisation and deposit
insurance, and a timely and effective regulatory base.
14. The Assembly encourages the executive and parliamentary authorities
of the Council of Europe member states to pursue sound macroeconomic
policies that take better into account the cyclical nature of economic development,
reinforce tax compliance, fiscal discipline and activities for combating
corruption, stimulate improvements in the business climate, foster
productivity gains, and give due consideration to future health
and pension obligations for ageing populations. The Assembly therefore
asks these authorities to give due support to the EBRD’s New Growth
Agenda that seeks to help countries tackle economic vulnerabilities
and imbalances, boost competitiveness and achieve sustainable green
growth.
B. Explanatory memorandum by Ms Naghdalyan, rapporteur
(open)1. Introduction
1. For most transition countries, 2009 was the year
when the full impact of the global financial and economic crisis
took hold. Although the impact differed between countries, many
experienced sharp and sudden falls in output and incomes which only
began to stabilise around mid-year. The year was also the 20th anniversary
of the fall of the Berlin Wall, culminating a period of steady growth
in economic prosperity throughout most of the region. It was marked
by the growth of the private sector from very low levels to over 70%
of the economies of the region over this period.
2. Much progress in development was supported by globalisation
and the prospects of European integration, especially membership
of the European Union (EU) for several countries. The implementation
of democratic principles has also steadily improved, although arguably
the record is more mixed than on the economic side, particularly
in some of the former countries of the Commonwealth of Independent
States (CIS). However, the fact that by early 2010 the economic
crisis had not led to any major political upheavals or any significant
reversals of reform in the region is testament to the progress that
has been made over the years.
3. The year 2009 represented also a major challenge for the EBRD
as it responded to the crisis. If in earlier years some of the EBRD’s
shareholders thought that the Bank’s mission of supporting transition
to open and democratic market economies was largely accomplished,
the turn of circumstances thereafter proved the contrary. The EBRD’s
decision, at the start of 2009, to boost planned commitments to
€7 billion seemed ambitious, given the major uncertainties over
the state of banking sectors, the steep decline in capital inflows and
the more general loss of investor confidence. The EBRD thus mobilised
almost €8 billion, a 50% increase over the amount recorded in 2008,
with particular focus on providing finance for the banking, corporate
and infrastructure sectors. It intends to maintain its activity
at this level over the next few years in recognition that financing
conditions will remain tight and that the pace of recovery will
be slow. To support this higher level of activity, in May 2010 the
EBRD Board approved a temporary 50% capital increase for the Bank.
4. The report looks briefly at the causes of the crisis, and
the main effects of the crisis on the region are then reviewed, followed by the response of the EBRD
to the crisis, including a brief description of the Bank’s main
activities in certain countries. The lessons that can be learnt
from the crisis for the region and some of the implications for
the future activities of the EBRD are then reviewed.
followed by the response of the EBRD
to the crisis, including a brief description of the Bank’s main
activities in certain countries. The lessons that can be learnt
from the crisis for the region and some of the implications for
the future activities of the EBRD are then reviewed.2. The effects of the financial and economic crisis on eastern European economies
2.1. The causes of the financial and economic crisis
5. The crisis stemmed from a period of low interest
rates in major Western economies, which contributed to an unsustainable
credit and housing boom, especially in the United States. This was
accentuated by the development of complex financial products based
on the assets which were then traded among many major Western banks.
In retrospect, it was apparent that neither the regulatory framework
nor the ratings assigned to these products were sufficiently robust
to reflect all the risks. Strains began to show in financial markets during
the summer of 2007 as asset prices weakened and finally took full
effect following the collapse of Lehman Brothers in September 2008.
Uncertainties over the extent of individual bank holdings of these impaired
assets led to a sharp rise in inter-bank lending rates as confidence
in the main banking sectors declined, resulting in a drying up of
credit.
6. Underlying these problems was the persistence of global imbalances.
In a number of countries, such as the United States, where consumption
was the main source of growth, both the trade and fiscal deficits widened;
in other countries, including China, Germany and the major oil producers,
economic growth largely reflected strong export growth. The resulting
external surpluses, especially those earned by Asian countries, were
then invested in United States securities. The resultant financing
of the deficits delayed the need to curtail consumption in the West
and to strengthen domestic demand elsewhere.
7. Initially, the transition countries were not seriously affected
by the onset of the crisis, with the exception of Kazakhstan and
to a lesser extent the Baltic states in 2007. Most countries recorded
positive growth during the first half of 2008, and for many the
main concern was with inflationary pressures as oil and commodity prices
rose. However, once the crisis struck in September 2008, output
fell sharply during the final quarter of 2008 and the first quarter
of 2009 in most countries. The main reasons were the fall in export
growth as demand weakened in major markets, especially within the
European Union, the decline in external financial flows to the region
(syndicated lending, bonds and foreign direct investment (FDI))
and a sharp tightening of domestic credit conditions. Countries
most seriously affected were generally those with the worst financial
imbalances, including a rapid growth of private sector debt, usually
the result of excessive credit growth and large fiscal deficits.
2.2. The effects of
the crisis on eastern European economies
8. The transition region experienced a significant fall
in output in 2009 – a decline of 6.1% of GDP, the largest of any
emerging market region. Nevertheless, and in contrast to earlier
crises in emerging markets, there were no systemic bank failures,
no major currency crises and only a few countries experienced capital outflows.
This partly reflected the responsible nature of the policy measures
taken in most countries, supported where necessary by prompt and
substantial financial assistance from the international financial
institutions (IFIs) and the European Union.
9. Although virtually all countries experienced a decline in
external demand, the extent of the fall in output varied considerably.
Among the most seriously affected were Ukraine, the three Baltic
states and Armenia, which all recorded double digit declines in
GDP. In the Baltic states and Ukraine, the large declines reflected the
adjustment to earlier economic imbalances, in particular rapid credit
growth, much of it to property and construction, as well as the
growth of private external debt. Ukraine was also affected by adverse
movements in the terms of trade. In Latvia, the fall in GDP also
reflected the authorities’ decision to maintain the currency peg
to the euro and limit the increase in the fiscal deficit with tax
rises, spending cuts and public sector wage falls. Consequently,
GDP fell by almost 18%, although the adjustment was supported by
a €7.5 billion loan package financed primarily by the European Union
and the International Monetary Fund (IMF). In Armenia, the fall
in GDP was mainly the result of weaker external demand and lower
remittances which affected construction activity.
10. By contrast, many of the oil and commodity producers continued
to record positive growth. In Russia, however, output fell by 8%
– the result of lower oil prices, weaker domestic and external demand
and tighter credit conditions, accentuated by some capital outflows.
Most of the commodity producers were able to draw on financial resources
accumulated in stabilisation funds during earlier periods of strong
export growth to offset some of the effects of the crisis.
11. In between these two groups of countries, there were many
countries, especially in central Europe, where, although the fundamentals
were generally sound, output fell as demand in the European Union, especially
Germany, weakened. In the Czech Republic, for example, despite prudent
macroeconomic policies and a generally conservative approach to
banking, output fell by over 4% as exports slowed. Nevertheless,
the IMF, in its most recent report on the Czech economy (March 2010),
was confident that growth would recover this year, albeit at a slower
pace than before the crisis. Output fell by some 7% in both Romania
and Slovenia, mainly because of weaker external demand. In Romania,
this necessitated a standby agreement with the IMF as part of a
larger package of external assistance. The main exception in this
group was Poland and the only country in the European Union to record
positive growth (of 1.7%) in 2009. This largely reflected the responsible
macroeconomic policies that had been pursued in earlier years, which
enabled the government to provide a temporary fiscal stimulus, supported
by a Flexible Credit Line from the IMF.
12. The effects of the fall in output spread quickly to the banking
sectors of most countries. There was a sharp fall in the rate of
credit growth reflecting the virtual cessation of syndicated lending,
initial concerns over the intentions of foreign banks towards their
subsidiaries and in some cases runs on deposits as confidence fell.
The extent of the problems within the banking sectors varied. Latvia
and Ukraine were among the worst affected, resulting in the nationalisation
of a majority stake in the main bank in Latvia and a major bank restructuring
programme in Ukraine, supported by the IFIs. In the case of Ukraine,
the amount of capital in some large banks was seriously affected
by a sharp fall in the exchange rate. In countries such as Russia
and Poland, the authorities supported capital and liquidity in the
sector with a range of measures. In other countries, including the
Czech Republic and Estonia, banks were generally well capitalised
and, with support from foreign parent banks, were able to withstand
the shocks. Although there were a number of failures of local banks, mainly
in Russia and Ukraine, overall the banking sectors proved resilient
to the crisis, although this partly reflected the strength of IFI
support in particular cases.
13. The impact of weaker demand on inflation and current accounts
was largely as expected. For the region as a whole, inflation (as
measured by the annual consumer price index (CPI)) is estimated
to have fallen from an average of 11.9% in 2008 to 5.1% in 2009
as the rate of inflation fell in all but one of the countries (Uzbekistan).
Most countries also recorded an improvement in their trade and current
accounts as imports fell more quickly than exports, leading to a
narrowing of the overall current account deficit for the region
as a whole – from 7.6% of GDP in 2008 to 4.9% of GDP in 2009. In
some cases, the extent of the adjustment was dramatic. In the Baltic
states, for example, the large current account deficits of earlier
years were turned into surpluses in 2009.
14. Flows of foreign direct investment (FDI) also fell sharply
in 2009, mainly the result of a general loss of investor confidence,
but in some countries reflecting the postponement of privatisation
plans. Flows of FDI to the region as a whole had grown steadily
to 2007 and remained at US$108.3 billion in 2008. These flows then fell
sharply to US$50.2 billion in 2009, according to EBRD estimates,
with most countries recording a decline. The steepest fall was in
Russia, where FDI fell from US$20.4 billion in 2008 to an estimated
US$0.7 billion in 2009, although the 2008 figure was exceptionally
high compared with earlier years.
15. The most immediate impact of these macroeconomic numbers will
be to slow and in some cases reverse the steady improvement in living
conditions throughout the region. Unfortunately, there are no data
yet available showing the impact of the crisis on household incomes
and poverty. The unemployment data that is available for some countries
(mainly central Europe) shows a gradual increase throughout 2009
to levels of around 8% to 9% by February 2010 in countries such
as the Czech Republic and Poland. However, the rate was appreciably
higher in some other countries, notably Latvia (21.7%), Lithuania
(15.8%), Estonia (15.5%), the Slovak Republic (14.2%) and Hungary
(11%). Unemployment
is in any event a lagging indicator of current conditions and could
increase in some countries as more companies either close or restructure.
Unemployment
is in any event a lagging indicator of current conditions and could
increase in some countries as more companies either close or restructure. 16. One of the clearest indications that further adjustment will
be required is the growth of non-performing loans in several countries.
This is the result of weak profitability in the real sector, but
will also affect bank profitability in the future. Between mid-2008
and September 2009, non-performing loans had risen sharply in a
number of countries. They amounted to an average of some 7% of loans
in the SEE and CEB countries (including 12% in Latvia) and 10% in
Ukraine.
17. The authorities in most countries in the region took steps
to ease monetary policy to mitigate the effects of the fall in output
on living standards. They used a combination of lower interest rates,
lower reserve requirements and followed an appropriate exchange
rate policy. With the exception of Slovenia and the Slovak Republic,
which have adopted the euro, and those countries with currency boards
(such as Estonia and Lithuania) or fixed pegs (Latvia), most countries
used their foreign exchange reserves to permit a nominal depreciation
of their currencies, while generally attempting to maintain broadly
stable conditions in exchange markets. Thus Poland, Hungary and
the Czech Republic continued to let their currencies float, Russia
and Georgia implemented step devaluations while others, including
Ukraine, allowed their currencies to depreciate initially, followed
by a managed floating (and supported by currency controls in Ukraine).
18. The ability to use fiscal policy to boost activity was, however,
constrained in most countries by concerns over the risks of crowding
out the private sector and the limited means of financing higher
deficits from domestic sources. The fall in economic activity meant
that fiscal deficits rose, a combination of lower tax revenues and some
automatic stabilisers taking effect. However, with general government
balances projected at 6% of GDP or above in several countries in
2009 (especially Latvia, Lithuania, Georgia and Romania), the emphasis
is mainly one of constraining fiscal policy. In early 2010, the
IMF confirmed that the aggregate public sector deficit (including
the costs of bank recapitalisation) in Ukraine was 11.4% of GDP
in 2009. The main exceptions were the oil and commodity producers
in the region. Russia, for example, introduced a fiscal stimulus
equivalent to 5% of GDP.
19. Progress with structural reform inevitably slowed in 2009
as governments focused on the immediate problems caused by the crisis,
especially in their banking sectors. Thus, only eight countries
received upgrades of their main transition indicators in the EBRD’s
annual review of the progress in transition. These included Croatia and Latvia
for improvements in competition policy and Ukraine for the passage
of a law on joint stock companies which should improve corporate
governance. However, four countries received downgrades (including
both Latvia and Ukraine) as some reforms were reversed. Nevertheless,
measures such as the bank nationalisation in Latvia and the imposition
of currency controls in Ukraine can be seen as a necessary response
to the crisis. The number of downgrades was substantially less than
the EBRD made in 1999 following the impact of the Russian crisis
the year before.
These included Croatia and Latvia
for improvements in competition policy and Ukraine for the passage
of a law on joint stock companies which should improve corporate
governance. However, four countries received downgrades (including
both Latvia and Ukraine) as some reforms were reversed. Nevertheless,
measures such as the bank nationalisation in Latvia and the imposition
of currency controls in Ukraine can be seen as a necessary response
to the crisis. The number of downgrades was substantially less than
the EBRD made in 1999 following the impact of the Russian crisis
the year before.20. The response of the population in transition countries to
the crisis has been moderate to date, so domestic political stability
has not been seriously affected throughout the region, with the
exception of Kyrgyzstan. Under Article 1 of the agreement establishing
the Bank, the EBRD can only operate in countries which are not only
making progress with transition, but are also applying the principles
of multiparty democracy and pluralism. The populations in some countries
will have inevitably been dissatisfied with lower incomes and poorer
prospects as a result of the crisis. The EBRD notes that between
January 2008 and September 2009 there were either elections or leadership
changes in 25 countries in the region. However, in only eight
of these did the opposition take over power while in no cases did
the new leadership adopt a more anti-reform policy stance. In the
country arguably the most severely affected by the crisis – Ukraine
– the presidential elections in early 2010 led to both a change
of president and government with no suggestion that reform will
be reversed.
The populations in some countries
will have inevitably been dissatisfied with lower incomes and poorer
prospects as a result of the crisis. The EBRD notes that between
January 2008 and September 2009 there were either elections or leadership
changes in 25 countries in the region. However, in only eight
of these did the opposition take over power while in no cases did
the new leadership adopt a more anti-reform policy stance. In the
country arguably the most severely affected by the crisis – Ukraine
– the presidential elections in early 2010 led to both a change
of president and government with no suggestion that reform will
be reversed.2.3. The response of the EBRD to the crisis
21. The EBRD responded to the acute shortage of liquidity
in the region with a substantial increase in the volume of its operations.
In 2009, the Bank committed €7.9 billion in 311 projects in all
29 countries of operation (the comparable figures for 2008 were
€5.1 billion and 302 projects). Disbursements amounted to a record
€5.5 billion. The volume of activity with the private sector was
70% or more in all but two of the countries under review by the
end of 2009. Russia accounted for almost a third of the activity
with over €2.5 billion committed to 70 projects. The EBRD was also
able to commence projects in its newest country of operations –
Turkey – with commitments of €150 million. Perhaps the most significant
change was the decision to substantially increase commitments to
countries in the CEB region, arguably the sub-region most severely
hit by the crisis. In recent years, the volume of new EBRD operations
in these countries had declined, in some cases to very low levels,
as a result of the policy of graduation. However, the EBRD responded
rapidly to the changed circumstances in 2009 and provided €1.6 billion
in response to the requests for additional funding from these countries.
However, the EBRD responded
rapidly to the changed circumstances in 2009 and provided €1.6 billion
in response to the requests for additional funding from these countries. 22. The region’s banking sector was in the most urgent need of
support and it accounted for some 40% of the EBRD’s total commitments
during the year. This included support, usually recapitalisation
or additional liquidity, for nearly 70 banks, which were either
local banks or subsidiaries of EU-based parent banks. This included
the Bank’s participation in the Joint IFI Action Plan with the European
Investment Bank (EIB) and the World Bank group whereby the IFIs
agreed to commit a total of €24.5 billion (of which €6 billion from
the EBRD) to provide additional capital and liquidity to the subsidiaries
of Western banks in the region. By the end of 2009, €15 billion
had been signed (€3.2 billion from the EBRD) with some of the EBRD
funding channelled to small and medium-size enterprises (SMEs) through
the partner banks. Funding under the action plan involved close collaboration
with both the IMF and the EU to maximise the impact of policy dialogue.
23. The EBRD has also sharpened its focus in respect of lending
to the real economy, including an internal reorganisation to bring
all activities for the corporate sector under one department. Activity
in 2009 included an increase in working capital to existing borrowers
and an expansion of the Trade Facilitation Programme to €1.5 billion
to help companies overcome the shortage of trade finance. In view
of the limited capacity of governments to invest in energy and infrastructure
projects, the Bank participated in several important public sector
projects, including motorway development in the Slovak Republic
and improving energy efficiency in Romania.
24. Commercial bank lending to the medium, small and micro enterprise
(MSME) sector fell in most countries in 2009 as credit conditions
tightened and banks became more risk averse, although it is probable that
demand for funding also fell somewhat. Since the EBRD normally lends
to the SME sector via credit lines to domestic banks, the need to
maintain lending to these companies was an important factor in the
extent of the EBRD’s support for the banking sector.
25. In 2009, the EBRD increased its lending for the MSME sector
as a whole by €1.2 billion (of which €279 million was for micro
enterprises), according to provisional data. By the end of the year,
the EBRD’s portfolio had increased to €3 billion (from €2.5 billion
in 2008). The EBRD’s outstanding portfolio to micro enterprises (normally
not covered by the formal banking sector) rose, amounting to €767
million by the end of 2009. Micro enterprises in Russia and the
eastern Europe and Caucasus countries (EEC) accounted for almost
two thirds of this portfolio. Given the importance of this sector
as a source of employment, the EBRD’s contribution here was significant
as survey evidence points to a sharp decline in the lending activities
of micro-finance institutions in the region since the onset of the
crisis. The EBRD’s operations were supported by further growth in
the technical support provided by the TAM/BAS programmes funded
by donors and the Shareholders Support Fund.
26. The EBRD has also established a reputation for achieving practical
results through its lending under the Sustainable Energy Initiative
(SEI). The
targets for the first three years of the programme were exceeded
and in mid-2009, the EBRD launched a second phase of the SEI for
the period 2009-2011. By the end of 2009, it is estimated that the
Bank had invested a total of €4 billion in projects since the SEI
was launched, two thirds of which were with the private sector.
The main focus in these years has been on increasing the energy efficiency
of electricity production and the industrial sector. It is also
estimated that by 2009 the annual reduction in carbon emissions
from the projects was some 25 million tonnes.
The
targets for the first three years of the programme were exceeded
and in mid-2009, the EBRD launched a second phase of the SEI for
the period 2009-2011. By the end of 2009, it is estimated that the
Bank had invested a total of €4 billion in projects since the SEI
was launched, two thirds of which were with the private sector.
The main focus in these years has been on increasing the energy efficiency
of electricity production and the industrial sector. It is also
estimated that by 2009 the annual reduction in carbon emissions
from the projects was some 25 million tonnes. 27. In addition to its project operations, the EBRD was also instrumental
in the establishment of the Vienna Initiative (more formally known
as the European Bank Co-ordination Initiative (EBCI)), which not
only bolstered confidence in the region’s banking sector at a critical
juncture, but also helped to avoid a systemic banking crisis in
parts of the region. As the financial crisis intensified, there
were concerns that some foreign banks might take measures, perhaps
in response to measures from home country supervisors, which would
have restricted the lending activities of their subsidiaries in
the region. A decision by just one or two banks to reduce their operations
could have easily spread to other foreign banks, resulting in an
acute shortage of liquidity in the region. This applied particularly
to the CEB and SEE countries where the degree of foreign ownership
in the banking sector is large.
28. In the absence of any existing institutional arrangements,
the IMF, the EBRD and the European Union quickly established a forum
whereby foreign banks, their subsidiaries, governments and regulators
could meet to discuss the issues. The first meeting was in January
2009 and provided an opportunity for foreign banks to reaffirm their
commitment to the region. Subsequent meetings enabled the participants
to share information on a country basis once an IMF programme had
been agreed and funding was supported by the Joint IFI Action Plan.
Towards the end of 2009, 15 foreign banks had made commitments regarding
their support for several countries which had received support from
the IMF, including Hungary, Latvia and Romania. By the time of the second
“Full Forum” meeting of the EBCI in March 2010 it was evident that
the EBCI had contributed to banking stability in the region and
could move on to discuss other issues related to cross-border lending.
29. The crisis inevitably had an adverse impact on the EBRD’s
financial performance. The Bank recorded a net loss on its operations
in 2009 of €746 million, after a loss of €602 million in 2008. These
losses, the first since the effects of the Russian crisis in 1998,
were largely unavoidable in view of the decline in the value of the
Bank’s equity operations and the need to increase provisions to
cover future potential loan losses. The Bank remains well capitalised.
However, the strength of demand for EBRD financing led the EBRD’s management
to conclude that to maintain annual activity at €8-9 billion a year
over the period of the forthcoming Capital Resources Review 2011-2115,
the Bank needed a capital increase. In February 2010, the Board
of Directors approved a temporary 50% increase in the EBRD’s capital
from €20 billion to €30 billion (one billion euro of which will
be from the Bank’s reserves and the remainder callable), subject
to ratification by the Governors.
2.4. Examples of the EBRD response in specific countries in 2009
30. The EBRD increased its commitments to the Russian
Federation, the largest country of operations, by €2.5 billion in
2009, with substantial loans to the banking sector to help restore
stability, as well as lending to the real sector. The crisis also
emphasised the importance of funding for development of the infrastructure, especially
the transport network, which is a necessary condition to achieve
the broader policy goal of increasing the diversification of the
economy. To this end, the EBRD signed a €500 million loan to assist
with the modernisation of the railway sector. Loans to the infrastructure
sector, as well as projects to promote greater energy efficiency,
are likely to remain key areas of activity for the Bank.
31. The need to support the banking sector in Ukraine, the second
largest country of operations, contributed to commitments amounting
to €1.1 billion. Because of the urgent need to replenish banks’
capital, a large proportion of the EBRD’s support was either equity
or subordinated debt. The EBRD signed a Sustainable Energy Action
Plan with the government in June 2009 to improve energy efficiency.
The EBRD also participated in the discussions with the government
and other IFIs as to how best to prepare for reform in the gas sector.
32. There was a substantial increase in activity in the CEB area,
as noted above. Hungary was the largest recipient, with most of
the EBRD funding provided to support the banking sector as well
as to modernise the gas sector. In Poland, commitments rose to some
€400 million, with loans for the banking and non-bank financial
sector accounting for more than half. In the Slovak Republic, the banks were generally well
supported by their foreign parents so the EBRD was able to provide
lines of credit to promote energy efficiency as well as to contribute
to some large public-private partnership projects for motorway development.
The EBRD’s main project in the Baltic states was the purchase of
a share in the main bank, Parex Bank. Although Slovenia was affected
by the crisis, the EBRD’s contribution was limited, mainly because
of the government’s earlier decision not to proceed with the privatisation
of a major bank.
33. The EBRD more than doubled its annual commitments in Romania
from €318 million in 2008 to €720 million in 2009. This reflected
its decision to provide €1 billion of funding in 2009 and 2010 as
part of the IMF/EU aid package for the country which had been agreed
earlier in 2009. Most of the Bank’s funding was for the energy,
SME and corporate sectors.
34. Much of the EBRD’s activity in the Caucasus was to support
local banks, although total activity fell by about 10% in 2009.
Georgia was the most severely affected of the three countries owing
to the extent of the fall in external demand and FDI flows and because
its main banks were reasonably well integrated with global financial
markets. The EBRD provided subordinated debt and liquidity to two
local banks to help maintain banking stability. In Armenia, the
EBRD provided funding for banks and for the power sector. Azerbaijan
was the least affected of the three countries, but EBRD operations
continue to be constrained by the difficult business environment.
3. Drawing lessons from the crisis
3.1. Lessons for the region
35. Most countries in the region benefited from greater
integration over the years. This took several forms including closer
integration with European institutional structures, stronger trading
links with western markets, especially for those countries which
are members of the World Trade Organization (WTO) and much greater integration
with the world’s financial markets. However, the crisis also revealed
that the extent to which the trade and financial links that had
been developed could become channels of contagion for a crisis which
started outside the region.
3.1.1. Strengthening the financial sector
36. Development of the banking sectors in the region
was undoubtedly strengthened by the growth of foreign ownership
of domestic banks, particularly in countries in the CEB and SEE
regions. In these countries, the pace of financial intermediation
was accelerated as domestic banks were able to strengthen their
capital base and benefit from the financial expertise available
from the parent bank, permitting an expansion in the range of products
that could be marketed.
37. In retrospect, however, it was apparent that too much of the
lending was in the currency of the parent bank – mainly dollar lending
in the major CIS countries and euro lending elsewhere, as these
currencies were cheaper and more accessible than the local currencies.
This contributed to the rapid growth of domestic credit in many
countries, much of it in foreign currency, while the associated
increase in the external debt of the private sector left both the
corporate and household sectors vulnerable to exchange rate risks.
Nevertheless, during the crisis the foreign parent banks played
an important role in stabilising the situation and limiting the extent
of capital outflows. This was mainly through their support for their
subsidiaries, backed by the Vienna Initiative. In this crisis, where
the share of foreign ownership of banks in emerging Europe was higher
than that of other emerging market regions, direct lending through
subsidiaries proved to be more stable than cross-border lending.
38. The crisis suggested at least three broad policy conclusions.
Firstly, while financial institutions are an essential part of a
market economy, they exist to serve the real sector. Thus both the
regulatory framework and the implementation of supervision need
to be strengthened to ensure that banks have adequate capital, that responsible
lending and investment practices are followed and that no institution
becomes “too big to fail”. Secondly, for many banks in the region
retail deposits remain an important source of funding. During the
crisis, many authorities moved swiftly to increase the level of
deposit insurance to bolster confidence. Continued confidence in
these schemes will depend on ensuring that the enhanced levels of
deposit insurance can be funded. Finally, there is a need to increase
the availability of local currency financing.
3.1.2. Maintaining external trade
39. One of the reassuring aspects of the response to
the crisis is that there has been no resort to protectionist trade
measures, although clearly some countries have experienced currency
depreciations. This was a significant outcome, especially as there
was a sharp drop in the volume of world trade by more than 10% in
2009, according to the WTO. Although external demand is likely to
remain weak, reflecting the gradual pace of recovery in the major
markets in Europe, any move to increase protection to protect domestic
markets would almost certainly limit the opportunities for export
growth.
3.1.3. Implementing sound macroeconomic policies
40. One of the main lessons is that countries with sound
macroeconomic policies, especially prudent fiscal policies, were
best placed to respond to the crisis. The importance of implementing
sound macroeconomic policies has been a consistent piece of advice
from IFIs over the years. But it remains crucial for many countries in
the region, where future health and pension obligations for an ageing
population are likely to result in additional large expenditures,
adding to the fiscal burden, despite the expected growth of private
providers of such services.
41. There were also failures in the approach to macroeconomic
policy. Lowering inflation remains a valid and necessary policy
objective, but it is evident that too little attention was paid
to the growth of bubbles in asset markets and how to deal with them.
As some economists at the IMF have suggested, consideration needs
to be given to the use of financial regulatory measures to support
macroeconomic policy, as well as the possible use of capital controls
to limit surges in capital inflows.
42. The problems in the eurozone, especially the concerns as to
whether Greece and possibly certain other countries can meet their
debt obligations, has drawn attention to the role of the exchange
rate, especially for those CEB countries which aspire to join the
euro. As noted above, most countries in the region as a whole had
floating rates and allowed their currencies to depreciate at the
height of the crisis, thus contributing to the necessary adjustment.
For the members of the eurozone (Slovenia and the Slovak Republic)
and those countries which maintained their currency boards or hard
pegs, there was little alternative but to accept domestic deflation
to achieve the necessary adjustment. For many of these countries,
the deterioration in some of the main indicators, including fiscal
deficits and public sector debt levels, means that adoption of the
euro (which some had hoped to achieve in 2010/2011) is likely to
be delayed by a few years. For example, the Czech Government recently
adopted a Convergence Programme intended to improve the fiscal position
to enable it to adopt the euro by 2017. The main exception is perhaps
Estonia which appears to be on course to adopt the euro at a relatively
early stage. However, countries such as the Czech Republic, Poland
and Hungary will have a few years of exchange rate flexibility to
assist the recovery.
3.1.4. The importance of promoting reform
43. Countries which had made substantial progress with
structural reform were generally better equipped to withstand the
shocks, mainly because their institutions were stronger. The crisis
was, however, an important reminder of the role the state has to
play in a market economy, especially its interaction with the private
sector. Even among some of those countries which had made steady
progress with reform, the crisis revealed weaknesses in the quality
and functioning of some institutions, perhaps most notably in the
financial sector. A key factor is that it is not necessarily more
regulation of markets that is required, but that regulation has
to be more effective.
44. In its latest transition report, focusing on the importance
of further institutional development, the EBRD identified some of
the main transition challenges which remain in the corporate, energy
and infrastructure and financial sectors, all of which are important
areas of activity for the EBRD in the region as a whole. In
general, the gaps are smallest for the CEB countries. The progress
made in these countries partly reflected the need to align institutional
frameworks with those of the European Union in the accession process,
although more needs to be done in the difficult areas of finance,
energy and strengthening competition policy. The largest gaps exist in
the countries of central Asia and eastern Europe and the Caucasus,
where progress is often hindered by state interference, difficult
business environments and weak legal frameworks. In these countries,
the gaps are large in energy and infrastructure as restructuring
is at an early stage and sound regulatory frameworks have yet to
be developed.
In
general, the gaps are smallest for the CEB countries. The progress
made in these countries partly reflected the need to align institutional
frameworks with those of the European Union in the accession process,
although more needs to be done in the difficult areas of finance,
energy and strengthening competition policy. The largest gaps exist in
the countries of central Asia and eastern Europe and the Caucasus,
where progress is often hindered by state interference, difficult
business environments and weak legal frameworks. In these countries,
the gaps are large in energy and infrastructure as restructuring
is at an early stage and sound regulatory frameworks have yet to
be developed.45. The depth of the crisis in some countries is likely to make
it more difficult for governments to accelerate the pace of reform.
However, reform remains an important objective. Much of the growth
in the region in earlier years took advantage of low wage costs
and some spare capacity. The strength of future growth is more likely to
reflect the extent to which productivity can be raised and costs
lowered as labour costs rise. This requires additional investment
with further improvements in the business environment to attract
it, supported by sound regulatory and legal frameworks, a strong
competition policy and adequate social safety nets.
3.1.5. The advantages of further integration
46. The advantages of European Union membership or at
least close association with it were demonstrated by the maturity
of the general policy response to the crisis as well as the opportunity
to access the additional finance that the EU (and other IFIs) made
available. The EBRD is well placed to support those countries in
SEE which are either EU candidates or are discussing the possibility
of EU membership.
47. The EU established the Eastern Partnership in May 2009 to
promote political association and economic integration between the
EU and its six eastern neighbours. This initiative largely reflected
the impact of the crisis on the institutions and economies of these
countries. It is hoped that a combination of policy discussions and
financial support will help to strengthen the economies of these
countries and promote integration. Although the details of the Eastern
Partnership are still being discussed, the EBRD is well placed to
support activity in some of the priority areas (see below). This
would build on the Bank’s activities in these countries to date,
some of which have been supported by the funds made available by
the EU through the Neighbourhood Investment Facility (NIF). These
have funded technical assistance related to projects for private
sector development, infrastructure and the environment and for the
EBRD amounted to €53 million in 2009, the largest source of grant
funds for the EBRD.
3.2. Implications of the crisis for the EBRD
3.2.1. The economic background
48. The implications for the EBRD partly reflect how
it can best respond to some of the lessons above, but also the nature
of the economic environment in which it is likely to be working
in the immediate future. By early 2010, the global economy and financial
system were more stable than in 2009 and a gradual economic recovery
was under way. The EBRD projects GDP growth for the transition region
as a whole of 3.7% in 2010, gradually strengthening thereafter.
However, projected growth this year comprises weak growth among
the CEB and SEE countries of around 1%. This is mainly because of
a combination of weak external demand, slower credit growth because
banks will be more risk averse and because of the need to reduce
the fiscal burden over time. The regional average growth rate is
boosted by stronger growth from commodity producers, although this
is highly dependent on commodity prices. In Russia, for example,
GDP growth is projected at 4.4%, which will assist the recovery
of other CIS countries through a combination of a growing market
and higher remittances. GDP growth is projected at 4% in Ukraine
in 2010, although much depends on a new government reaching an early
agreement with the IMF to enable the latter to resume lending.
49. However, a number of risks to recovery remain. These include
the possibility of a very weak recovery among major economies, partly
reflecting the difficult policy judgment as to when to begin withdrawing
the monetary and fiscal stimulus. In addition, the risks of a sovereign
default, which would affect the ability of governments in emerging
markets to borrow, and a resort to protection, cannot be ruled out.
Credit conditions are likely to remain tight as banks seek to restore
their capital and deal with an expected increase in non-performing
loans while some companies in the region will be vulnerable to higher
interest rates. For most countries, other than the main oil and
commodity producers, this points to a period of modest economic
growth as domestic demand remains weak and external demand subdued.
3.2.2. Implications for the EBRD’s operations
50. The immediate challenge for the EBRD is to maintain
its increased volume of lending to support recovery in the region.
This will partly depend on ratification of the capital increase
as well as ensuring that the Bank has sufficient staff to deliver
the planned increase in volumes. As several other IFIs are requesting
additional capital to fund higher activity levels, often from similar
groups of shareholders, it implies the Bank’s management will need
to pay careful attention to administrative costs to ensure that
loans and investments are delivered efficiently.
51. There are also likely to be risks attached to the higher volume
of lending. Much of the increase in lending in 2009 is likely to
have been to major banking groups or corporates where the risks
of lending were relatively moderate. In future years, however, assuming
a gradual recovery in credit markets, and that the EBRD remains an
additional source of lending, then it is possible that risks will
rise as many of these prime borrowers are increasingly able to access
private sources of funding. This is most likely to occur in those
countries where the banking sectors remain weak and where it takes
time for the authorities to implement the necessary stabilisation
measures to correct some of the macroeconomic imbalances.
52. Some of the EBRD’s activities should focus on ways to mitigate
the worst effects of the crisis. It is inevitable that the region’s
financial sectors will continue to receive strong support from the
EBRD, partly to ensure stability is attained, but also because of
the importance of increasing funding for the MSME sector. The overall
amount of funding is probably unlikely to match the support provided
in 2009, mainly because many banks in the region now seem to have
adequate liquidity so demand will be less. Within the financial
sector there is scope for increasing the amount of local currency
financing and developing local capital markets, as the EBRD has
already noted, especially in those countries with relatively low
interest rates. This would assist in reducing the high dependence
on financing in foreign currencies which emerged in some countries. Ultimately,
however, the health of banking sectors will depend on effective
regulation rather than additional financial support.
53. In the context of the financial sector, the EBRD should have
a role in the ongoing discussions about strengthening stability
with respect to cross-border lending in Europe, building on its
contribution to the Vienna Initiative. Although this may ultimately
be a matter for financial regulators, it appears that more needs
to be done to strengthen the co-ordination between supervisors as
they seek to improve regulation at a national level.
54. Over time, relatively more EBRD funding could be directed
towards the real sector, the ultimate source of growth. The EBRD
may also have to consider providing more equity finance to companies
in recognition of the tight lending conditions that are likely to
prevail in the immediate future. One such example is the recent launch
of a fund by the EBRD, the IFC and a private sector company, CRG
Capital, to provide an initial €36 million to invest in the under-performing
assets of companies with good management. Another example is the announcement
of a fund to provide mezzanine financing. The EBRD will invest up
to €50 million in a fund to be run by another private sector group,
MMCE, to support private equity-backed acquisitions and provide additional
funding to companies with sound business plans. Both funds are likely
to focus mainly on companies in central and eastern Europe.
55. Despite the focus on the effects of the crisis, certain other
programmes remain important. This includes lending to the early
transition countries (ETC). Not all of
these countries were necessarily as severely affected by the crisis
as others, partly because their financial sectors were less integrated.
However, they include some where the reform challenges remain significant.
Although the main oil and commodity producing countries in the region
withstood the crisis fairly well, it is apparent that they remain
highly dependent on the exports of a few major commodities and that
policies to diversify their productive base have had only limited success
to date.
(ETC). Not all of
these countries were necessarily as severely affected by the crisis
as others, partly because their financial sectors were less integrated.
However, they include some where the reform challenges remain significant.
Although the main oil and commodity producing countries in the region
withstood the crisis fairly well, it is apparent that they remain
highly dependent on the exports of a few major commodities and that
policies to diversify their productive base have had only limited success
to date. 56. Projects to improve energy efficiency have assumed even greater
importance in recent years in view of the need to lower carbon emissions
to tackle climate change. Following the launch of the second phase
of the SEI in 2009, the programme will be one of the EBRD’s core
objectives during the next medium-term strategy. The EBRD’s intention
is to at least double the targets achieved under Phase 1, both in
terms of volume of operations and reduction in emissions. This will
include extending the programme into new sectors, such as buildings
and transport, as well as biomass, which is one source of renewable
energy.
57. Despite the lack of agreement at the United Nations Climate
Change Conference in December 2009, some progress is being made.
The Climate Investment Funds are an initiative developed by the
IFIs and certain donor countries to finance projects to tackle climate
change. The EBRD is currently developing projects for Ukraine and
Turkey under one of the two Climate Investment Funds, the Clean
Technology Fund, designed to support the development of clean energy
technologies in some of the world’s major emitting countries. Such measures
represent important examples of how international co-operation could
work in this area. The broader challenge for the EBRD is to increase
the range of instruments it uses to channel these investments so
that funding could be further increased if future international
agreements lead to higher financing targets. The EBRD can also continue
to demonstrate how best to involve the private sector in energy
efficiency projects at a time when investment is likely to be constrained.
58. The crisis also emphasised the importance of effective Policy
Dialogue, not only to help ensure the success of projects, but also
to improve technical co-operation and focus on those areas where
reform may need to be accelerated, particularly for those countries
where the “transition gaps” are relatively large. This applies to
those countries where the EBRD’s involvement in public sector projects
provide it with some leverage to ensure steps are taken to establish
an appropriate regulatory framework for the sector. This could include
the need to develop the institutional and legal framework to promote
greater private sector participation via public/private partnerships
and identify mechanisms that would provide more sources of local
funding. In general, the EBRD would seem well placed to promote
policy dialogue in view of its extensive knowledge of the region
and in particular because of its presence through its regional offices
and hubs.
3.2.3. Related objectives
59. Closer European integration is an objective the EBRD
has always supported in practical terms through its projects. The
EBRD will need to maintain its lending to those countries which
are now European Union members until such time as they are once
again able to access commercial sources of funding on appropriate terms.
As noted earlier, although all the countries which became members
of the EU in 2004 were expected to have graduated by the end of
2010, the EBRD Board agreed to continue operations while the crisis
conditions persist. When global markets return to normal, capital
flows resume and EBRD’s additionality subsides, the EBRD is expected
to end its operations in these countries, taking into account specific
country circumstances.
60. Continued support is also necessary for the EU candidates
in South-Eastern Europe, while the EBRD would seem well placed to
participate in some of the policy discussions as well as funding
platforms that the EU has proposed for the “environmental protection”
countries. This includes energy efficiency, good environmental governance
and development of SMEs. The Bank’s operations will be boosted by
the EU’s decision to allocate up to €50 million to SMEs under the
“environmental protection” programme. Some €30 million will be shared
between the EBRD and the European Investment Bank to support credit
lines for SMEs, while the balance will be used to fund the EBRD’s
TAM/BAS activities.
61. Further collaboration with the other IFIs active in the region
will also be necessary given that they have all also increased their
activities. This includes the IMF through its specific country programmes,
the EIB and the World Bank group (the latter two have increased
their funding for banking and infrastructure in particular), as
well as the EU whose support has included financial assistance for
Serbia under pre-accession programmes.
62. The need for further co-operation with the EIB has been identified
by Michel Camdessus in a report on the EIB which examines how the
EIB’s provision of external financing can be strengthened and European integration
developed. The
report notes the progress made following the signing of the Memorandum
of Understanding between the EBRD and the EIB in 2006 and the more
recent agreement on Turkey, but argues that further co-operation
could maximise the opportunities for co-financing and avoid duplication.
However, Camdessus also argues that more could be achieved by institutional
change over the medium term and proposes two options for consideration.
One of these – to establish a European Bank for Co-operation and Development
– could cover the activities of the EBRD, EIB and the relevant external
funding departments of the European Commission. The EBRD and all its shareholders
will no doubt consider the implications of this proposal for the
EBRD in meeting its own mandate.
The
report notes the progress made following the signing of the Memorandum
of Understanding between the EBRD and the EIB in 2006 and the more
recent agreement on Turkey, but argues that further co-operation
could maximise the opportunities for co-financing and avoid duplication.
However, Camdessus also argues that more could be achieved by institutional
change over the medium term and proposes two options for consideration.
One of these – to establish a European Bank for Co-operation and Development
– could cover the activities of the EBRD, EIB and the relevant external
funding departments of the European Commission. The EBRD and all its shareholders
will no doubt consider the implications of this proposal for the
EBRD in meeting its own mandate. 4. Conclusions
63. The transition region experienced a sharp fall in
activity as a result of the crisis, though the impact differed between
countries. By early 2010, a gradual recovery was under way largely
due to the soundness of the policy response and the speed and extent
of the financial support provided by the EU and the IFIs. As credit conditions
tightened, the EBRD faced a marked increase in demand for funding.
The Bank responded with a substantial and unprecedented increase
in the volume of its operations to assist countries in dealing with
the crisis. Much of this was for the banking sectors in particular
countries, not least for those in the CEB region. But the EBRD’s
qualitative contribution, through helping to formulate the Vienna
Initiative to ensure foreign banks remained committed to the region,
was also very significant.
64. The region had benefited from integration in all its forms
in the years leading up to the crisis. However, the crisis revealed
some downsides to integration, including the vulnerability to sharp
falls in demand, the dangers of excessive foreign currency borrowing
and the risks of inadequate co-ordination between home and host
country financial supervisors of foreign bank groups. Important
lessons must be drawn and these issues must be addressed, including
improving competitiveness, increasing the amount of local currency
financing and strengthening financial supervision. However, the
main lesson is that those countries with sound policies and which
had made most progress in reform were best equipped to respond to
the crisis.
65. The immediate challenge for the EBRD is to maintain the higher
volume of activity as long as there is a demand for this increased
funding, as reflected in the temporary nature of the 50% capital
increase. Although the policy of graduation has been postponed until
crisis conditions recede, as demand for funds from this group of
countries is expected to taper off over time, there must be uncertainty
as to the rate at which funding for Turkey and climate change will
grow. Although both of these activities are necessary, a clarification
of “transition challenges” may be needed. However, perhaps the single
most important aspect of the EBRD’s operations over the years has
been to promote the development of the private sector throughout
the region. Maintaining this focus will not only enable the EBRD
to continue to fulfil its original mandate, but also ensure that
it contributes to further European integration and responds to the
challenges posed by climate change.
Appendix – Macroeconomic indicators and projections for the transition region (EBRD data and forecast of May 2010)
(open)|
Average GDP growth % |
Inflation (average) % |
Fiscal balance % of GDP |
Current account % of GDP |
Net foreign direct investment % of GDP |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 |
2009 |
2010 |
2011 |
2008 |
2009 |
2010 |
2008 |
2009 |
2008 |
2009 |
2008 |
2009 |
|
|
Central Europe and Baltic states |
|||||||||||||
|
Croatia |
2,4 |
–5,8 |
0,3 |
1,8 |
6,1 |
2,5 |
2,5 |
–1,4 |
–3,3 |
–9,2 |
–5,2 |
6,6 |
4,1 |
|
Estonia |
–3,6 |
–4,1 |
–0,4 |
3,3 |
10,4 |
0,0 |
2,4 |
–2,8 |
–1,7 |
–9,4 |
4,6 |
3,7 |
1,3 |
|
Hungary |
0,6 |
–6,3 |
1,0 |
2,3 |
6,1 |
4,2 |
3,0 |
–3,8 |
–4,0 |
–7,0 |
0,2 |
2,6 |
0,2 |
|
Latvia |
–4,6 |
–8,0 |
–3,0 |
3,0 |
15,4 |
3,5 |
–3,0 |
–4,1 |
–9,0 |
–13,0 |
9,4 |
3,2 |
0,3 |
|
Lithuania |
2,8 |
–5,2 |
–1,5 |
3,0 |
11,0 |
4,5 |
–0,2 |
–3,3 |
–8,9 |
–11,9 |
3,8 |
3,2 |
0,3 |
|
Poland |
5,0 |
1,7 |
2,6 |
3,3 |
4,3 |
3,5 |
2,5 |
–3,7 |
–7,1 |
–5,1 |
–1,6 |
2,2 |
2,0 |
|
Slovakia |
6,2 |
–4,7 |
3,4 |
3,4 |
4,6 |
1,5 |
3,0 |
–2,3 |
–6,8 |
–6,6 |
–3,2 |
3,2 |
–0,5 |
|
Slovenia |
3,5 |
–7,8 |
1,3 |
2,2 |
5,7 |
1,0 |
2,0 |
–1,7 |
–5,5 |
–6,2 |
–1,0 |
1,0 |
–2,0 |
|
South-Eastern Europe |
|||||||||||||
|
Albania |
7,0 |
2,8 |
1,4 |
3,1 |
3,4 |
2,2 |
2,5 |
–5,7 |
–6,9 |
–15,7 |
–15,3 |
7,0 |
7,6 |
|
Bosnia and Herzegovina |
5,4 |
–3,4 |
0,3 |
1,7 |
6,5 |
0,0 |
2,0 |
–3,1 |
–4,0 |
–15,0 |
–8,8 |
5,4 |
2,9 |
|
Bulgaria |
6,0 |
–5,0 |
–1,2 |
3,0 |
12,3 |
2,7 |
1,9 |
1,8 |
–3,9 |
–24,0 |
–9,4 |
17,0 |
12,5 |
|
Montenegro |
7,0 |
–5,3 |
0,1 |
2,0 |
7,4 |
3,4 |
1,5 |
1,5 |
–3,0 |
–33,6 |
–18,7 |
16,7 |
14,5 |
|
Romania |
7,1 |
–7,1 |
0,0 |
3,0 |
7,9 |
5,6 |
3,8 |
–5,4 |
–8,3 |
–11,6 |
–4,5 |
4,6 |
2,9 |
|
Serbia |
5,5 |
–3,0 |
2,1 |
3,2 |
11,7 |
8,4 |
6,0 |
–2,4 |
–4,5 |
–17,2 |
–5,5 |
5,3 |
4,2 |
|
“The former Yugoslav Rep. of Macedonia” |
4,8 |
–0,7 |
2,2 |
2,5 |
8,3 |
–0,8 |
2,0 |
–1,0 |
–2,9 |
–12,8 |
–7,0 |
6,3 |
2,5 |
|
Eastern Europe and the Caucasus |
|||||||||||||
|
Armenia |
6,8 |
–4,2 |
10,0 |
3,0 |
9,0 |
3,4 |
7,0 |
–1,7 |
–7,5 |
–11,5 |
–15,2 |
7,8 |
8,0 |
|
Azerbaijan |
10,9 |
9,3 |
6,0 |
5,0 |
20,8 |
2,5 |
5,0 |
25,5 |
9,4 |
35,5 |
14,8 |
–1,2 |
–2,1 |
|
Belarus |
10,0 |
0,2 |
3,5 |
4,0 |
14,9 |
12,8 |
6,9 |
1,4 |
0,4 |
–8,4 |
–13,1 |
3,6 |
3,7 |
|
Georgia |
2,1 |
–3,9 |
3,5 |
4,5 |
10,0 |
1,7 |
5,0 |
–6,4 |
–9,4 |
–22,7 |
–16,1 |
12,2 |
8,3 |
|
Moldova |
7,2 |
–6,7 |
4,0 |
4,2 |
12,8 |
0,1 |
7,5 |
–1,0 |
–6,8 |
–16,7 |
–10,7 |
11,2 |
2,2 |
|
Ukraine |
2,2 |
–5,1 |
4,0 |
4,0 |
25,2 |
15,9 |
11,0 |
–3,2 |
–11,4 |
–7,1 |
–1,7 |
5,5 |
4,0 |
|
Russia |
5,6 |
–7,9 |
4,4 |
4,6 |
14,1 |
11,7 |
6,9 |
4,8 |
–6,2 |
6,1 |
4,0 |
1,2 |
–0,6 |
|
Turkey |
0,9 |
–4,7 |
5,9 |
4,0 |
10,4 |
6,3 |
9,6 |
–2,2 |
–5,5 |
–5,6 |
–2,2 |
2,1 |
1,0 |