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Slow Recovery Ahead for Emerging Europe and Central Asia

April 23, 2010

WASHINGTON, April 23, 2010—The Emerging Europe and Central Asia (ECA) Region will face a slow recovery from the global economic crisis in the year ahead and countries facing tight fiscal pressures should take care to target social spending on the most needy and vulnerable, the World Bank said today at a press briefing at the World Bank/IMF Spring Meetings.

Countries of Emerging Europe and Central Asia were hit the hardest by the global economic crisis and are likely to be the slowest to resume economic growth,” said Philippe Le Houérou, World Bank Vice President for the Europe and Central Asia Region. “Growth in the Region, which had peaked at about 7 percent in 2007, fell to a negative 6 percent in 2009. 2010 is going to be a tough year for the Region with growth projected at around 3 percent. The prospects for 2011-2013 are only slightly better. Rising joblessness is pushing households into poverty and making things even harder for those already poor.”

Emerging Europe and Central Asia is a diverse region. Differentiation among countries resulted in varying degrees of impact that the crisis has had on individual countries and will also define their prospects for recovery. 20 out of 30 countries in the Region experienced a decline in GDP in 2009, with GDP growth ranging from a negative 18 percent in Latvia to a positive 9.3 percent in Azerbaijan.

Overall, countries in the Emerging Europe and Central Asia Region will recover from the crisis more slowly than in other regions. According to the World Bank, current growth projections for 2011-2013 show the Region growing between 3 and 4 percent, as compared to approximately 5 percent in the Middle East and about 8 percent in developing Asia. 2010 is expected to be particularly difficult for Europe and Central Asia, with GDP growth forecasts about half of the forecast for the rest of the developing world.

The World Bank reports that the Region has faced the greatest fiscal pressures among all the world’s regions during the global economic crisis. Average fiscal deficits amounted to 6 percent of GDP in Emerging Europe and Central Asia between 2008 and 2009, compared with 1 percent in the Middle East, 3 percent in Latin America, and about 4 percent in developing Asia and Africa.

The impact of the crisis, as well as longer-term demographic, economic, and political forces, call for policies that deliver equitable access to services and inclusive growth,” Le Houérou said. “Social spending reform, which has been lagging in many countries of the Region, is now becoming more urgent. Before the crisis, inefficiencies in social spending – which makes up more than half of government expenditures in some countries – may have been affordable for some. Now it is clear that they are not.”

The agenda for 2010 – Start strengthening fiscal balances

The global economic crisis has taken a heavy toll on the Region’s poverty reduction accomplishments of the last decade. The number of poor and vulnerable has risen by about 13 million in 2009, instead of falling by 15 million as expected before the crisis, with Armenia, Georgia, the Kyrgyz Republic, and Moldova particularly hard hit. As a result, 40 million people in Emerging Europe and Central Asia live below $2.50 per day, and about 160 million below $5 per day. Also, joblessness has been rising across the Region, with middle-income countries seeing greater increases in unemployment. According to the World Bank, the unemployment rate in 2009 exceeded 10 percent in Estonia, Hungary, Latvia, Lithuania, the Slovak Republic, and Turkey.

The drivers of pre-crisis growth and improved government finances – rapid export growth, large capital inflows, high commodity prices, and domestic consumption and construction booms – are unlikely to return soon,” said Indermit Gill, World Bank Chief Economist for the Europe and Central Asia Region. “At the same time, governments in Emerging Europe and Central Asia across the income spectrum spend more than their developing country counterparts in other regions,” said Gill. “General government spending in the Region’s middle income countries such as Poland, Russia, Ukraine, and Turkey is now higher than 40 percent of GDP in contrast with the 30 percent for middle income countries in other regions. According to projections, in 2010, the fiscal deficit in Emerging Europe and Central Asian countries will exceed 4.5 percent of GDP. Ensuring that governments can strengthen inclusion will become more difficult with tighter budgets, unless government spending is made more efficient.”

We are now seeing a growing divergence in the fiscal health of governments in the Region,” said Gill. “Before the crisis, buoyant revenues allowed governments to both increase spending and reduce fiscal deficits. Annual revenues in the Region grew by about $500 billion between 2000 and 2007, and governments spent more than three quarters of this. During the crisis, fiscal responses started to diverge: most countries had to rely on automatic stabilizers like unemployment benefits to steady spending, but some had saved enough to implement sizeable fiscal stimulus programs. After the crisis, fiscal reform priorities will be even more differentiated. In 2010, countries should accelerate fiscal reforms. Priorities include a varying mix of reforming social security, resizing school systems, restructuring healthcare finance, reducing energy subsidies, investing in infrastructure, and scaling down stimulus programs. Done well, these reforms can help societies be more inclusive, economies more competitive, and nations decidedly more prosperous.”

World Bank Assistance in Time of Crisis

Responding quickly to requests from countries in the Region for help in addressing the crisis, the World Bank more than doubled lending from an average of $3.9 billion in fiscal 2000-08 to $9 billion in fiscal 2009. In fiscal 2010, lending is projected to be $11 billion - $10.5 billion IBRD and $0.5 billion IDA. Much of the new lending came in the form of Development Policy Loans (DPLs) to help countries restore growth and employment (e.g., $1.3 billion for Turkey), rehabilitate the financial sector (e.g., $400 million for Ukraine), address the social impact of the crisis (e.g., $144 million for Latvia), and improve the efficiency of social spending ($1.4 billion for Poland, $200 million for Belarus, and $100 million for Serbia).

In addition, in February 2009, the World Bank Group, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank (EIB) launched the Joint International Financial Institutions Action Plan, which supports banking systems and lending to the real economy in Central and Eastern Europe. As of end-2009, the institutions have provided more than €19 billion in crisis-related support for financial sectors in the Region. The Bank also participated in the European Bank Coordination Initiative (the Vienna Initiative), a forum for deepening the dialogue between home and host country banking supervisors, private banks, the European Commission, and international financial institutions.

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