Central and eastern Europe and the Commonwealth of Independent States (CIS) remained one of the strongest performing regions in 2005 with economic growth reaching an average 5.6%, according to the EBRD’s recent Transition Report Update.

Fastest growth occurred in the CIS, at 6.6% (2004: 8%), driven mainly by continuing high commodity prices. In Russia, growth fell to 6.4% (2004: 7.1%), despite strong growth in household consumption and a recovery of investment.

Central and Eastern Europe and the Baltic states, fuelled by strong investment and exports, often by foreign-owned companies, reached growth of 4.6% (2004: 5.2%), while in south-eastern Europe, growth reached 4.5% (2004: 6.5%).

While the EBRD region remains economically strong, overall growth in the area slowed from a record 6.7% in 2004. For 2006 the bank expects the region to grow by around 5.3%, with medium-term growth expected to be in the range of 4-5% per year.

Despite booming economies, low labour force participation and high unemployment remain common features of many transition countries. Risks to macroeconomic stability also remain.

As the region integrates into the world economy, it becomes more vulnerable to global economic trends. The update cautions that a further cooling of investor interest in emerging markets may put pressure on countries with wide macroeconomic imbalances and high debt levels.

It also identifies political risks in parts of SEE and the CIS. The resource-rich countries should continue to benefit from high commodity prices. But growth and stability will depend on careful management of resource revenues and a renewed push on structural reforms.

This year’s update highlights the growing importance of remittances – or cash being sent home by migrant workers – for economic stability and growth in many transition countries.

Remittances are becoming an increasingly important source of funding in poorer countries. They are an important source of external capital, particularly in the western Balkans and the poorest countries of the CIS, helping to finance, for example, small and medium-sized enterprises.

One country, Russia, acts as both an important source, as well as a recipient, of remittances. These countries in particular would benefit from more formal structures to manage this flow of funds and to make sure it reaches the wider economy.

The exact magnitude of remittance flows is difficult to measure, as many transfers are made through informal channels. The update estimates that in five countries – Albania, Bosnia and Herzegovina, Moldova, Serbia and Montenegro and Tajikistan – remittances are worth more than 10% of GDP.

In more than a third of the countries of the region remittance flows exceed foreign direct investment (FDI). What is more, remittances fluctuate less, from year to year, than FDI.

Remittance income is primarily used for consumption and is partly responsible for the import boom observed in countries like Albania, Bosnia and Herzegovina and Moldova. However, a survey undertaken for the update in five high-remittance countries shows that a small but important share of remittances is also used to finance investment and enterprise creation.

The survey results suggest that remittances play a more important role in small enterprise development than is commonly assumed. Only about a quarter of the entrepreneurs interviewed receive remittances, but almost half of them have used the funds for business purposes – primarily to finance start-ups, but also for capital expenditure and working capital.

Enterprises with access to remittances typically financed 40% of their start-up costs from this source.

Remittances also help businesses to raise other sources of finance. Firms with access to remittances are able to cover a higher share of their financing needs through bank loans.