The economies of central and eastern Europe and the Commonwealth of Independent States (CIS) outpaced global growth for the fourth year running in 2003, according to the EBRD’s latest transition report update. The improving global environment and convergence to more advanced economies were two key catalysts for growth of an estimated 5.6% last year, up from 3.9% in 2002 and well ahead of the global economy’s 3.2% growth in 2003.
The report, covering the main macroeconomic developments in the EBRD’s 27 countries of operations, says growth was recorded in every part of the region and is set, overall, to dip in 2004 but still remain robust at 4.9%. Inflation remains tame – with some notable exceptions – while foreign direct investment decreased substantially from the record rates of recent years.
Despite the region’s overall positive news, the report warns that the transition countries still face major economic challenges. Countries from central Europe and the Baltic States (CEB), especially the Czech and Slovak Republics, Hungary and Poland, must control fiscal deficits. In southeastern Europe (SEE), Bulgaria and Romania should reduce current account deficits, while the western Balkans must look to attract foreign investment as a substitute for diminishing levels of official aid. The natural resource-based economies of the CIS should make more determined efforts to diversify their economies, while the poorer countries of the region will need to control external debt and secure finance for their poverty-reduction programmes.
Split by region, the strongest performing countries were those in the CIS, where average growth reached 7.6% in 2003, driven mainly by high commodity prices. High oil prices drove growth in Russia – to 7.3% last year from 4.7% in 2002 – as well as in Azerbaijan and Kazakhstan. Higher gold prices helped the Kyrgyz Republic recover from stagnation in 2002, while industry fuelled a near-doubling of growth in Ukraine. In SEE, economic growth was dominated by strong performance in Bulgaria and Romania.
However, average growth fell to 4.2% from 4.6% a year earlier because of lagging growth in some other countries, notably Bosnia and Herzegovina, due to decreasing levels of international presence and foreign aid; and Serbia and Montenegro, due partly to the severe drought, which also affected many other countries in the region. Countries in CEB saw growth increase to 3.7% from 2.5% in each of the previous two years, driven mainly by recovery in Poland. Growth bounced back from the damage done by the 2002 floods in the Czech Republic. Growth in the Slovak Republic was fuelled by an impressive export performance.
In 2004, the report predicts that while growth rates will slow, they will remain relatively robust. Higher forecast growth in CEB at 4.3% is expected to be balanced against a slower expansion in the CIS, forecast at 5.6%. Growth in SEE should remain constant at around 4.3%.
Foreign direct investment to the region receded significantly at US$19bn, from US$28bn a year ago. FDI levels decreased by 60% in CEB, due mainly to a reduction in privatisation inflows, although net portfolio inflows more than doubled. FDI in other regions surged. SEE experienced a 57% rise in 2003, due mainly to several large-scale privatisations and an increase in “greenfield “investments. In the CIS, FDI increased by 27%, with most investment directed towards Azerbaijan, Kazakhstan, Russia and Ukraine. In the rest of the CIS, low levels of FDI generally reflect ongoing concerns about the business climate, high political risks and in some cases growing state intervention.
Average inflation dipped to 2.8% from 3% a year ago, although it remains high in some countries. In the Slovak Republic, for example, levels increased to 8.5% because of significant increases in administered prices for the second year running. In other countries, such as Romania, and Serbia and Montenegro, average inflation remained in double digits, although on a decreasing trend. Interest rates have also fallen in most countries of the region, with Hungary being a notable exception.