Speeches & Transcripts

Press Briefing: Emerging Europe and Central Asia Economic Update

April 15, 2011

Ted Ahlers and Yvonne Tsikata Emerging Europe and Central Asia Economic Update


MR. KIRCHER:  Good afternoon, everyone. Thank you for coming today to this briefing on the Europe and Central Asia Region which we will refer to as the "ECA Region."
In terms of materials, we'll have a press release at the end of the session as well as a copy of this new book on rising food and energy prices in the Region, and that will be at the table over there.
We will also have the transcript as soon we can get it out to you in the Press Room.
For those of you who would like to listen to the Russian translation, it is on Channel 2. Let me introduce the speakers.
Ted Ahlers to my right is Director of Operations and Strategy for the European and Central Asia Region.
To his right is Yvonne Tsikata, who is Director of Poverty Reduction and Economic Management in the ECA Region. Ted and Yvonne will both speak, and then we will open it up to a Q&A session. And just one last reminder—if you can please silence your cell phones.
Thank you.
MR. AHLERS:  Thank you.
First, thank you all again for being with us today, and before I hand over the floor to Yvonne, let me just say a few things about evolving trends in the 30 countries of Emerging Europe and Central Asia.
As you know, this group of countries was the hardest hit during the economic crisis in 2008-2009, and that is illustrated in the slide you see there, where two-thirds of the countries had economic declines during that period and where some of them were very dramatic and where in general, the declines were much larger than those for the countries that did retain some growth.  And that, of course, is not just economic aggregates.  There are 480 million people who live in these countries, and that had a very dramatic impact on those people.  You see it in many forms—unemployment up in almost all countries, particularly for youth, which will be a looming and continuing problem.  Even for people who maintain their jobs, in many cases, smaller paychecks either because wage rates went down or those working hourly were in less demand and had the number of hours that they could work decline, so less take-home pay.
When we met last October at the Annual Meetings, the story was that growth had returned to the Region after these sharp declines, and broadly speaking, this was a jump of 9-1/2 percentage points from a decline of about 5 percent in 2009 to an increase in GDP for this group of countries as a whole in 2010 of about 4-1/2 percent.
At the same time, growth was very uneven across the Region, as you see from the current chart which shows 2010.  A few countries still had economic declines in that period, and in a very large number of countries, the growth in 2010 was not sufficient to offset what had been the decline in 2009.
Today, at these Spring Meetings, the good news is that growth has returned to all the countries of Emerging Europe and Central Asia.  You see that on the current slide.  We project about 4 percent growth for the group as a whole in 2011 and that same order of magnitude in 2012.
The bad news is that this is slower than the rest of the world.  The Region does continue to lag behind that of other Regions.  As a result, the countries of Emerging Europe and Central Asia not only had the biggest hit during the crisis but are the slowest coming out of it.
As was the case during the crisis, the recovery is very country-specific—the issues driving it and the level of the recovery are specific to countries and their particular circumstances.  But one general trend is noticeable, and that is that the growth in the countries of Central and South Eastern Europe is more tepid than that in Central Asia, Russia, The Caucasus, if you will, the European neighborhood countries.  That is driven largely by commodity prices which have led to big gains in the net exporters and increasing migrant remittances in some of the neighbors and a general increase in private consumption.
You see that there—the light blue bars are those of the countries of Ukraine and its neighbors, Russia, The Caucasus, Central Asia; and the red ones are those of European member states, candidate countries and potential candidates.  Back in 2009, those were scattered all over the place, and today there is a clear indication that there is a predominance of those light blue bars on the right-hand side of this chart.
Everything I have said so far is really confirming essentially what we were projecting when we met six months ago.  The news now concerns energy and food prices.  While we do see steady growth projected this year and next in the Region, there are certainly big risks associated from the sharp rise in global food and energy prices.
On the one hand, the rising global food and energy prices are an opportunity for the commodity exporters, most notably the large oil exporters.  Azerbaijan, Kazakhstan, Russia, which together account for about 15 percent of world production, see big growth spurts and government revenue increases as a result of higher prices.
On the other hand, the food and energy price inflation is a real problem for the net importers, and there, we see Armenia, Georgia, the Kyrgyz Republic, Moldova and Tajikistan being the hardest hit.
Again, this is not just a problem about financing gaps and current account deficits.  It is about people, that if there isn't a stronger recovery, these price increases could push another 5.3 million people in the Region into poverty.  And of course, this is a big concern for all of the governments in the Region and for us.
To give you more detail on that story, which is the news of today, I would like to pass the floor to my colleague Yvonne Tsikata who can give you some more depth on the implications of the food and energy price increases both for the people in the Region and broadly for the economies.
Thank you.
MS. TSIKATA:  Thank you, Ted.
I should mention t hat the points that I am going to make are based on our recent publication, which is hot off the presses, "Rising Food and Energy Prices in Europe and Central Asia," and we do have copies for you after this briefing is over.
As you can see from the chart—let's start with the global story—globally, we see that food prices have climbed to near record levels and are essentially near the 2008 peak.  Energy prices, while not at their peak levels, have also risen for seven straight months.
Emerging Europe and Central Asia is no exception to this trend.  In the short run, there are a number of facts that are explaining these trends.  In the short run, there are temporary factors such as volatile weather conditions, so whether you are talking about Russia's drought or Australia's floods, these have contributed to higher prices of wheat, for example.
There are also policy changes by major exporters and importers that have contributed to prices being above their long run trends.
From the more permanent side, rising incomes and emerging economies and developing economies have increased demand for food and fuel, and this has also pushed up prices.  In addition, there are supply factors related to fuel supply constraints and inventories, and these have contributed to higher fuel prices.
Finally, policies that encourage or support biofuel production have diverted food crops from traditional export markets into ethanol production or biodiesel, and this has affected grain prices.
Now, to the extent that foods substitute for each other—for example, corn for rice or wheat—increases in the price of one commodity have an impact on increases in the prices of other food commodities.
So all of these factors lie behind the generalized increase in the price of food and fuel commodities.
Now, in Emerging Europe and Central Asia, we see that food price inflation varies quite significantly across countries, but the general trend is that the poorer countries, as you can see from these charts, tend to experience higher inflation rates.  For one-third of the people living in the Region, spending on food eats about half of their family budget, so clearly, any increase in food prices has a very hard-hitting impact on families.
As the left-hand-side chart shows, food price inflation was over 20 percent in two countries--the Kyrgyz Republic, where it was 27 percent, and Georgia, where it was 23 percent.  In addition, there are another 10 countries where food price inflation exceeded 10 percent last year.
On the energy side, the right-hand-side chart shows that energy price inflation was highest in Uzbekistan, very high at 32 percent, and Moldova, where it was 25 percent.
Overall, if we look at the group of low and lower-middle-income countries in the Region, food price inflation averaged 13 percent, and energy price inflation averaged 13 percent, so quite some significant jumps.
An important consideration for us is why rising food and energy prices pose a more difficult policy and economic challenge this time around compared to the pre-2008 boom years.  To begin with, many of these countries are emerging from a prolonged recessionary period, and specifically, the economic recovery that Ted alluded to has created jobs only slowly, so we find that many families are experiencing higher unemployment and lower wages, and this clearly makes it more difficult.
Another reason why the price increases are more challenging this time around is that the countries are coming out from quite unsustainably high current account deficits, and therefore, any increase in the price of imports has a difficult impact on their current account deficits precisely at the time when they are trying to climb back.
And then, finally, fiscal deficits deteriorated quite significantly during the crisis, and therefore, the move back to its fiscal balance becomes more challenging in this environment where governments may be looking at some transfers to help the poor.
Now, how any individual country fares in this environment is very much a function of whether they are a net exporter or importer of food and fuel, and it also depends on how much they are trading in these commodities.  So, if we look at the chart, we can see that some countries in Emerging Europe and Central Asia are quite large net importers of food and energy.  This group includes the Kyrgyz Republic, Georgia, Montenegro, Kosovo, Tajikistan, and Bosnia.  All of these countries have net deficits exceeding 10 percent of GDP, and in the case of the Kyrgyz Republic, it is all the way up to 25 percent.
A number of implications arise from this high dependence on imports for food and energy.  Let me focus on three.
First, the high food and energy prices have a devastating potential impact on poverty, because as we know, the poor tend to spend more of their income on food.
Second, these large food and energy deficits, together with large initial current account deficits, mean that these countries may face additional financing needs.
And third, there are implications for the government budget with respect to, for example, if poverty increases, governments may need to make additional transfers to those families in need.
So despite the nascent economic recovery that Ted outlined for you, many of these countries are still grappling with lower wages and high unemployment resulting from the global crisis, and if no countervailing measures are undertaken, and unemployment doesn't fall fast enough, there is the potential for 5.3 million people to fall into poverty, with most of the increase in poverty due to the higher food prices.
The projected poverty impact across the Region is quite varied, reflecting not only the differences in food and energy prices but also reflecting the differing conditions in individual countries.  The least affected countries are the EU member states and the Western Balkans.  These countries tend to have lower food budget shares, lower initial poverty rates, and fewer people who are very close to the poverty line.
We expect that the negative impacts will be most pronounced in the low-income countries in Central Asia and The Caucasus, which are among the poorest in the Region, with people having high food budget shares and relatively large shares of the population close to the poverty line.  And as I mentioned, this is also the Region that has seen the largest increase in food prices.
This chart shows the potential impact on poverty for the most vulnerable countries if you take into account both distributional impacts as well as macroeconomic impacts.  As you can see, potential increases in poverty could reach 11 percentage points for the Kyrgyz Republic, 9 percentage points for Armenia and Georgia, 8 percentage points for Tajikistan, and around 5 percentage points for Moldova.  These elevated food and energy prices will also potentially put these countries' external balances under strain, along with another smaller group of countries—Albania, Bosnia, Kosovo, and Montenegro.
So, in a nutshell, macroeconomic vulnerability in this environment comes from having a "perfect storm," in a sense, of a series of characteristics—high initial current account deficits, high fiscal deficits, large net imports of food and energy, and a high share of food in consumption baskets.
Having said this, there are some countries that are actually benefiting and could potentially benefit even more from these commodity price increases.  As the chart shows, Azerbaijan, Kazakhstan, Russia, and Uzbekistan are all benefiting from the high energy prices.  Azerbaijan, Kazakhstan, and Russia currently account for 15 percent of the world's oil production, so clearly, these price increases do benefit them.
On the agriculture side, the Region has substantial untapped potential for production.  If you take wheat, for example, 25 percent of the world's supply of wheat is coming from this Region.  So there is clearly a lot of potential in here.
To conclude, looking ahead, how best can countries position themselves to better weather these sorts of price increases in the future?  There are four main sets of actions that our report finds are critical.
First, safety nets.  These can be leveraged into effective and important crisis response mechanisms.  To enhance the effectiveness of these safety nets, it is important that there is good coverage.  That means it is important that the lowest quintile—the bottom 20 percent of the population—is reached.  But in addition to reaching them, it is important that the package that is given them is adequate; that the transfer that is made to them actually accounts for a significant part of the post-transfer consumption in order to be effective.
Second, it is important to avoid trade restrictions and price controls.  These sorts of restrictions distort market signals, and they prevent adjustment by farmers to those market signals, and they can actually worsen price volatility.  So, for example, in the context of some kind of export restriction or export ban, you have a situation where farmers may then start hoarding in terms of trying to wait for those prices to go up, thereby distorting the market and contributing to that volatility.
Third, as I mentioned, there is large untapped potential for some countries in the eastern part of the Region to be a potential breadbasket in the medium term.  Emerging Europe and Central Asia has land that could be brought into production with reasonable infrastructure, and there is a lot of room to improve yields.  Even in areas where land is already cultivated, there is potential to enhance productivity.  By simply intensifying production, the Region could double grain production through improved technologies, use of modern seeds, fertilizers, improved agronomic skills, and so on and so forth.  For example, fertilizer use in Emerging Europe and Central Asia is much lower than in Western Europe.
Fourth, Emerging Europe and Central Asia can gain a lot through energy efficiency improvements.  There is clearly scope to accelerate investments in energy efficiency, to reduce the Region's high energy efficiency, to adopt sustainable energy practices, and to maintain energy infrastructure.
So, together with this set of actions, the Region would be better positioned going forward to weather these kinds of rising prices both in food and on the energy side.
Thank you.
MR. KIRCHER:  Thank you, Yvonne. Thank you, Ted.
Why don't we open it up to questions now, and when I call on you, if you could please identify yourself and your news organization.
QUESTION:  My name is Nikolai Malines, and I am from National Television in Romania.
I have a question, obviously, referring to my country, which is on a very slow rise.  It concluded recently a new agreement, a preventive standby agreement, with the IMF.  My question is how can the continental environment influence this slow but hopefully steady growth of a country like mine.
Thank you, sir.
MR. KIRCHER:  Would you like to take that?
MR. AHLERS:  Broadly speaking, developments in Europe, particularly the Western part of Europe, do have a big impact on the Region, including in particular a country such as Romania.  The Western part of the Region that we call Emerging Europe and Central Asia is relatively small with quite open economies which depend a great deal on demand from the larger economies in Western Europe.  So the slow recovery in the countries that we have been describing is linked to slow recovery in Western Europe.
Secondly, with regard to developments in the euro zone, this is also closely linked.  It is not that the developments in any particular economy have great impact on developments in Romania, but it is clear that developments in the euro zone as a whole do, and one of the important lessons there concerns structural flexibility.  It may be pretty clear for the euro zone - the monetary and, to some extent, the fiscal prerequisites - but it is the economies that have been structurally flexible that have been able to deal with shocks, and that is a very important lesson, if you will, for countries that both have perspectives of joining the euro zone or which depend a great deal on their exports to that part of the world.
MR. KIRCHER:  Thanks, Ted.
The gentleman in the blue shirt.
QUESTION:  Dmitry Apchenko, InterTelevision Channel.
I have a question about one of the projects which is important for all of Europe.  A couple of days ago, the Ukrainian officials announced that the World Bank will participate in financing of the reconstruction of the country's gas transportation system.  I know it is a long story, it is a long story of the negotiations, but could you confirm that the question is decided now, and could you provide a little bit more details about the funding and about this project?
Thank you.
MR. AHLERS:  Given the detail of your question, I am going to refer you after we wind up to Martin Raiser, who is our Country Director there.
Clearly, the issues about the gas sector are longstanding where we have been involved along with the European Union and other partners in discussing those.  There is progress, but I would refer you to Martin after the meeting to give you the details and certainly the most recent developments.  But of course, this is key for Ukraine's future.
MR. KIRCHER:  Are there any other questions?
QUESTION:  Umi Duzakov, Voice of America.
As we saw in the chart, two of the Central Asian countries, Turkmenistan and Uzbekistan, are growing at a remarkable rate, 8 and 9 percent.  Is it also a coincidence that government statistics from these two countries also tend to be very unreliable, and how much do you rely on those numbers in making growth projections?  And is there an easy way for the people of those countries to tell that economic growth is having a positive impact on their lives?  Frankly, they cannot always tell.
Thank you.
MR. AHLERS:  First of all, it is clear that they are growing very fast.  This is obvious, and it is driven by hydrocarbon resources and high prices for those resources now.  This is very clear.  The accuracy of statistics is a question in many places, but that there is strong growth for those reasons I think is very clear.
On benefits to the population, certainly much less about Turkmenistan, but in Uzbekistan, there is documented evidence about reduction in poverty, and there is at least some progress. I think the authorities are moving to make more data available, including through the International Financial Statistics published by the IMF.  But this is an issue on which we have a continuing dialogue with the authorities on making more data public so that both outside partners and the citizens of Uzbekistan have access to that information.
MR. KIRCHER:  The lady over at the microphone.
QUESTION:  Marina Marsieva, Daily Newspaper Ukraine.
Some developing countries to protect their markets use bans or export limitations, for example, Ukraine's decision to use limitation of grain exports.  What is the impact of such limitations, and are you in dialogue with such governments to stimulate them to refuse or at least reduce the limitations?
MR. AHLERS:  As Yvonne mentioned, one of the things that can be done to reduce the variability in prices and the vulnerability caused by increases is more open trade—more transparent markets and more open trade.  That means that it, in our view, does not make sense to restrict trade and to restrict exports from the countries with that export potential.  As I said, Mr. Raiser is here to talk about the specifics of Ukraine, but in many circumstances, those restrictions on trade create rents for particular parties, can actually increase the variability in prices, and can reduce the amounts available and increase world variability in prices as well.  So we don't think it is in the interest of the countries or certainly for the Region as a whole.
MR. KIRCHER:  Next, in the back, there.
  Georgian TV Company.
I would like to ask you for more details about Georgia, which is the number one reforming country economy.  The World Bank and IMF also called a success story their relationship with Georgia.  So my question is do you think these reforms help the economic environment in Georgia, and if not these reforms, maybe the figures would be worse.
MR. AHLERS:  Again, Mr. Asad Alam, the Country Director for Georgia, is here for more detailed follow-up.
I think with regard to the World Bank, you were referring to the great progress that Georgia has made with regard to the Doing Business Indicators, which are one set of indicators about essentially the ease of doing business in a country.  It is very clear that Georgia has made great strides by that set of indicators, and one does see it in levels of private investment and growth in the country.  Georgia faces many other challenges, but I think they have done well in this regard, and that example is serving well to other countries in the Region.
MR. KIRCHER:  Thanks.
The gentleman there.
QUESTION:  Mathew Leigh, Intercity Press.
I wanted to—maybe you'll be referring these off to Country Directors—but it was said that Serbia would be attending here and attempting to negotiate again, something called a "precautionary agreement."  I wanted to know what either of you think economically and where things stand between the IMF and Serbia and also Kosovo, where it was alleged that the budget somehow violated the agreement.  Where do things stand on those two fronts?  There are also in Kosovo these pretty serious allegations against the Prime Minister; I don't know if there are even some investors looking at it.  But what is your thinking on those two states?
MR. AHLERS:  Well, first of all, we are the World Bank and not the IMF, so with regard to their relations with the IMF, I think you'll have many opportunities today and in the coming days to pose those questions to our colleagues from the Fund.
With regard to Serbia, we are very much involved in looking at the reform program in Serbia via analytic work, via technical assistance, and via financial support.  Serbia is a country which recently got a policy-based guarantee from the World Bank to improve its access to mobilizing financing from the markets.
With regard to Kosovo, the country obviously faces many challenges.  Again, the Country Directors are present for more details.  One of those challenges—well, let me step back.  The big challenge is jobs.  Kosovo has a young population with incredibly high unemployment.  For people's welfare and, frankly, for the stability of the Region, job growth is very important.  That requires many things, but it does require some fiscal stability, and there are big issues about the evolving fiscal stance of the Kosovo Government, and we are in discussion with them as well as other partners to try to get a handle on that, because we do think it is a prerequisite for establishing the conditions under which there would be private investment and job growth, which is one of the key, key challenges for the country.
MR. KIRCHER:  Are there any other questions?
MR. KIRCHER:  Okay.  Thanks again for coming, and like I said, we'll get the transcript out to you as soon as possible.
Please don't forget to pick up a copy of the book and the press release on the way out.
MR. AHLERS:  Thank you again, and my colleagues who are the Country Directors for all of the countries on which you asked specific questions are present, so please take advantage of it if you have follow-up.
[Whereupon, at 12:37 p.m., the Press Briefing was concluded.]