Contacts: In Warsaw: Malgorzata Dworzynska
mdworzynska@worldbank.org
In Washington: Kristyn Schrader
Kschrader@worldbank.org
In Zagreb: Vanja Frajtic
vfrajtic@worldbank.org Latest World Bank EU10 Regular Economic Report encourages improving targeting of social assistance to protect the most vulnerable ZAGREB, October 30, 2008—The 10 New Member States of the European Union (EU10) are affected by the ongoing global financial crisis, and growth will be slower this year and next due to weak external demand and tight credit conditions, says the latest World Bank EU10 Regular Economic Report (including a special supplement on Croatia). The Report, published three times a year to cover economic developments in the new member states of the EU, including a special supplement on Croatia, follows the news this week of an agreement reached between Hungary and the International Monetary Fund (IMF) on a policy package for Hungary to address economic and financial vulnerabilities in the wake of the global economic crisis, with the World Bank ready to provide one billion Euros as part of a program supported by the IMF and European Union. According to the EU10 Regular Economic Report, the international financial crisis intensified since early October and resulted in an acute tightening of interbank markets, bank consolidation and takeovers in developed economies, and a sharp drop in global equity prices. These developments have been accompanied by a dramatic increase in volatility for equities, commodities, and currencies. The financial turmoil has spread quickly to reach to EU10 countries, including Croatia and credit default swaps have widened. Also, some countries in the region are experiencing a shortage of liquidity reflected in sharp increases in interbank rates. Weakness in external demand and tightening credit conditions will likely result in a decline in exports and investment growth. While further moderate slowdown appears likely in Bulgaria, the Czech Republic, Poland, Slovenia and Croatia; other countries (such as Romania and Slovakia) are likely to face a larger slowdown, but also from higher rates of economic growth. The Baltic countries and Hungary may face a more prolonged downturn, says the Report. Inflation has peaked in most of these countries but remains elevated. Declining energy import prices since midyear and an abundant harvest make it likely that inflation will ease further, but uncertainty remains. “Weak growth will put pressure on living standards, especially in the poorer EU10 countries,” says Ivailo Izvorski, the principal author of the Report. “The importance of properly funding and improving the targeting of social protection systems in these circumstances is becoming increasingly important.” The current account deficits in Estonia and Latvia have narrowed markedly this year, but the Baltic countries, Bulgaria, and Romania still have large external shortfalls.
Croatia has faced the initial impact of the global financial crisis comparatively well prepared. Appropriate policies (both monetary and prudential ones) taken well in advance to create the adequate liquidity reserves in the banking system helped withstand financial market disturbances. A government measure to increase guaranteed deposits’ amount to EUR 56,000 as well as the establishment of the Stability Fund by non-bank financial institutions are equally important in these volatile times to secure depositors’ trust and confidence in the financial system.
The uncertainties surrounding the outlook, induced by global developments will make external imbalances more difficult to finance, cost-wise and access-wise. For Croatia, it is essential to maintain frontloaded expenditure-led fiscal adjustment, to address external vulnerabilities as well as inflation. At the same time, it is important to properly fund and target social protection programs for the most vulnerable. It is recommended that Croatia also prepares for the time when financial conditions return to normal not to allow for protracted growth convergence. This would require deepening structural reforms to reduce vulnerabilities, improve the investment climate and increase total factor productivity, and closely follow future developments in monetary conditions as volatility declines, intensifying banking supervision. Commenting on the Report, World Bank Country Director Orsalia Kalatzapoulos said that “The World Bank stands ready to continue working with countries in the region to support their policies and reform programs through lending or analytical and advisory service.” For example, in Hungary, “Proposed World Bank assistance,” said Kalantzapoulos, “would support the design and implementation of reforms in key areas, such as the financial sector, fiscal management, and social sector reforms. These measures would support the country’s longer-term stabilization and economic restructuring."
The new EU10 Regular Economic Report, including a special supplement on Croatia is published three times a year. It monitors macroeconomic and reform developments in the new member states of the EU and provides an up-to-date summary of economic developments and in-depth analyses of key current economic policy issues.
For more information, please see:
http://www.worldbank.org/eca/eu10rer
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