Eastern Europe Faces Deep Slowdown-World Bank

Economies in the region have been particularly hard hit by the financial crisis, especially the former Soviet-bloc states.

The Eastern Europe and Central Asia region is likely to face a deep and prolonged economic slowdown as the global financial crisis cuts into investment and private capital flows, a senior World Bank official said.

In a recent interview with Reuters, Shigeo Katsu, World Bank regional vice president for Europe and South Asia, said the Bank could double funding to the region to around $8 billion in 2009 from $4.2 billion in 2008.

"We see signs that it is going to be quite deep and prolonged," Katsu said of the slowdown. "It will be very much a setback."

"Countries that are used to growing 9 percent or so have to suddenly face growth rates half that, so it is going to be tough," he added.

Economies in the region have been particularly hard hit by the financial crisis, especially the former Soviet-bloc states that built up large current account deficits as they moved to market economies.

A massive expansion of international banks into the region has made banking systems especially vulnerable to liquidity problems in the United States and Western Europe.

Since last month four countries in the region, including EU member Hungary, Ukraine, Serbia and Latvia have turned to the International Monetary Fund for rescue packages.

As the global crisis has engulfed the region, Katsu said countries would benefit from increased World Bank assistance. The $25 billion aid package for Hungary, once an economic leader in the region, included $1.3 billion from the World Bank.

As many of the region's economies prospered over the years, the World Bank's role evolved to advisor from financier.

But as the global crisis hurts the region, Katsu said countries would benefit from increased World Bank aid.

A World Bank's 2009 Global Economic Prospects report, released on Tuesday, forecast growth in the region would drop to 2.7 percent in 2009 from 5.3 percent this year, sharply down from 7.1 percent in 2007.

It projected economic contraction next year in Latvia, currently negotiating an aid package with the IMF, and in Ukraine.

The crisis had eroded economic buffers, including international currency reserves, while a banking equity crisis has shaken Turkey, Russia and Kazakhstan.

Meanwhile, poorer states like Kyrgyzstan, Tajikistan and Moldova have been affected by high food prices.

The World Bank report said the downturn in the region was driven mainly by a fall-off in investment tied to difficult financing conditions and a sharp weakening in export market demand.

FALLING OIL PRICES

It said economic growth in Russia should fall to 3 percent in 2009, from 6 percent this year and 8.1 percent in 2007 as it feels the full impact of the global banking crisis and oil prices drop.

Katsu said no-one could have foreseen such a dramatic drop in oil prices. "If oil prices go down further obviously we will have to evaluate Russia," he said, adding that Russian growth could fall more sharply if oil prices fell much more.

In Turkey, which could also see a new IMF loan program, growth is expected to tumble to 1.7 percent next year, from 3.0 percent in 2008.

The region is no newcomer to tough economic times in the years that followed the collapse of the Soviet Union.

"The citizens (of these transition countries) went through the 1990's already once experiencing a wipe-out of their savings, and everybody is concerned with making sure it doesn't happen again," Katsu said.

Although it may be tempting for governments, Katsu said countries should avoid slowing the pace of economic reforms.

"It will be tempting to slow down reforms, but while coping with immediate distress and challenges, countries also should look ahead to the medium term and position themselves for when growth resumes," he said.

He said reforms should focus on creating a more investor-friendly environment, improving the banking sector and corporate governance, overhauling social safety nets to cope with a rapidly aging population, and building better roads, bridges and power supplies.

"We are in a fragile period," Katsu said, adding, "We have to do everything possible so the financial crisis doesn't become a human crisis." He said governments should eliminate wasteful spending and better target the most vulnerable groups.