WASHINGTON, July 6, 2010—The World Bank Group responded quickly in fiscal year 2010 (FY10)to requests from countries in Europe and Central Asia (ECA) for help in addressing the global economic crisis, providing record lending of $14.8 billion at a time when the crisis hit the Region harder than any other region in the world.
“The countries of Emerging Europe and Central Asia were hit the hardest by the global economic crisis and are likely to be one of 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 5 percent in 2009. The post-crisis recovery will be slow as growth will reach only about 3 percent in 2010, while the prospects for 2011-2013 are only slightly better.”
Le Houérou added that, “Rising joblessness is pushing households into poverty and making things even harder for those already poor. The World Bank has been and will be there to help the countries of Europe and Central Asia respond to the crisis.”
ECA 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. About half of the Region’s 30 countries 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.
The World Bank Group consists of the International Bank for Reconstruction and Development (IBRD), which provides financing, risk management products, and other financial services to members, as well as analytical services, capacity building, and technical services; the International Development Association (IDA), which provides interest-free loans and grants to the poorest countries; the International Finance Corporation (IFC), which makes equity investments and provides loans, guarantees, and advisory services to private-sector business in developing countries; and the Bank Group’s political risk insurance agency, the Multilateral Investment Guarantee Investment Agency (MIGA).
The IBRD/IDA recipients in ECA are using the $10.8 billion for 57 projects across all sectors in FY10 (July 1, 2009 – June 30, 2010). IDA commitments were $0.6 billion in FY10 – up from $0.4 billion in FY09 – and IBRD commitments totaled $10.2 billion in FY10 – up from $8.9 billion in FY09. The top borrowers in ECA in fiscal year 2010 by volume were Turkey at $2.9 billion, Hungary with $1.4 billion, Poland at $1.3 billion, and Kazakhstan at $1.1 billion.
Much of the new lending –$8 billion – 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), improve the efficiency of social spending (e.g., $1.3 billion for Poland, $200 million for Belarus, $100 million for Serbia, and $111 million for Bosnia and Herzegovina), and enhance energy security and integrate principles of environmental sustainability (e.g., $700 million for Turkey).
Protecting safety net programs is critical to helping families deal with the crisis. In FY10, the Bank worked with governments to protect and expand their safety net programs, including the $15 million Bosnia and Herzegovina Social Safety Nets and Employment Services Project, and additional financing of $5 million for the Armenia Social Protection project and $7 million for the Armenia Social Investment Fund.
World Bank assistance was also provided to mitigate the energy emergencies in the Region. For example, additional financing of $4 million for the Kyrgyz Emergency Energy Project, approved in November 2009, is increasing the volume and reliability of the national energy supply, especially thermal power in the winter season, thereby supporting implementation of the Energy Emergency Mitigation Action Plan. An additional grant of $15 million was approved in March 2010 for the Energy Emergency Recovery Assistance project for Tajikistan to ensure basic access to electricity for about 250,000 people in northern Tajikistan, and increase the heat and power supply to the entire country, without overdrawing or depleting hydro resources in winter.
To help create jobs, the Bank financed labor-intensive infrastructure projects across the Region. The $36.6 million Lifeline Roads Improvement Project in Armenia upgraded selected sections of the road network with an estimated 7,650 people per month involved in community works. In Georgia, a $30 million Kakheti Regional Roads Improvement Project and $147 million for the Third East-West Highway Improvement Project will allow the country to scale up and rehabilitate its roads while creating jobs. The $25 million National Road Rehabilitation Project in the Kyrgyz Republic will improve transport connections for about one million people or about 18 percent of the population while promoting local employment.
The Region held its third annual “Improving the Lives of People in Europe and Central Asia” event in June 2010 to recognize innovative activities that have achieved concrete results on the ground. Included in this year’s 12 winning submissions was this fiscal year’s $143.9 million Safety Net and Social Sector Reform Special Development Policy Loan for Latvia to support the most vulnerable groups of Latvian society and to help them successfully return to the labor market, as well as help to implement reforms in the social, healthcare, and education sectors.
The IFC continued investing in strategic areas in FY10, with a particular focus on existing clients and supporting financial markets. In FY10, IFC committed $2.9 billion for its own account and mobilized an additional $682 million in financing for its clients in the Region. IFC supported 100 projects, of which 46 percent are in IDA countries and in frontier regions of middle-income countries. Advisory services were an integral part of IFC’s activities, delivering training to over 500 stakeholders in the financial sector on crisis-related topics, helping to catalyze the market for investments in energy efficiency and cleaner production, supporting infrastructure development through public private partnerships, developing the agricultural sector, and improving corporate governance.
“As the global economic crisis evolved this year we continued to provide critical support to banks and businesses in Europe and Central Asia through a mix of investments and advice,” said Rashad Kaldany, IFC's Vice President for Asia, Eastern Europe, Middle East and North Africa. “We also focused on regional priorities including addressing climate change and the sustainable development of important sectors such as agribusiness and infrastructure.”
During fiscal year 2010, MIGA provided support for 12 projects with $1.1 billion in political risk insurance coverage in the Region. MIGA continued to support the financial sector by providing political risk insurance to parent banks providing recapitalization support to their subsidiaries in countries that were hit by the global crisis. Such support this past fiscal year went to banks in Croatia, Kazakhstan, Latvia, and Serbia. MIGA also supported manufacturing projects in the Russian Federation.
“Last year, MIGA continued to help countries hit by the financial crisis by supporting lending to the real economy through private banking groups,” said MIGA’s Executive Vice President Izumi Kobayashi. “We have stepped up to assist recovery and growth in developing countries during undeniably challenging times.”
Going Forward – A New and Tougher World for ECA Countries
Countries in the ECA Region will recover from the crisis more slowly than in other regions. Economic growth should reach about 3 percent in ECA in 2010, as compared to 5.5 percent in other developing regions. The recovery will be relatively slow over the next few years as 2011-2013 projections 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.
The Region experienced the largest deterioration in fiscal balances among all of the world’s developing regions during the global economic crisis. Emerging Europe and Central Asia ran a fiscal deficit of over 5 percent in 2009, compared with 1 percent in the Middle East, 3 percent in Latin America, and about 4 percent in developing Asia and Africa. Slower growth after the crisis means that ECA governments will need to enhance spending efficiency in order to live within tighter budgets while promoting inclusive growth.
The ECA Region also faces a big agenda on climate change. The Region has the highest energy intensity of production, more than twice as high as developing Asia and Latin America. According to the Adapting to Climate Change in Europe and Central Asia report issued in June 2009, the impact of climate change will be more significant than expected. This is due to a lingering legacy of environmental mismanagement and the poor state of much of the Region’s infrastructure, leaving the countries ill-prepared to adapt.
To help ECA countries address these challenges in 2010 and beyond, the World Bank programs in the Region will focus on three strategic directions:
- Increasing competitiveness to achieve faster growth;
- Supporting fiscal adjustment and social sector reforms to achieve more inclusive growth; and
- Aiding climate action to achieve more sustainable growth.