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Speeches & Transcripts

Harnessing SME potential in Europe and Central Asia: the contribution of the World Bank Group

June 3, 2014

Laura Tuck, World Bank Vice President for Europe and Central Asia 5th Ministerial Conference of the Centre for Financial Reporting Reform Vienna, Austria

As Prepared for Delivery

Honored Ministers, government officials, and representatives of the European Commission, Distinguished participants! I would like to warmly welcome you to the annual ministerial conference of the Centre for Financial Reporting Reform.

I am very pleased to be in Vienna, which is now hosting several units and programs of the World Bank Group – the Centre for Financial Reporting Reform - CFRR, the Centre for Financial Sector advisory Services - FinSAC, the Danube Water program, the Country Unit for Southeast Europe, the Investment Climate Department, and the Urban Partnership Program.

I would like thank the European Commission and the governments of Austria, Luxembourg, and Switzerland for their generous financial support for the CFRR programs. Thanks to the support of our partners, many of your countries have benefited from the Road to Europe Program of Accounting Reform and Institutional Strengthening or REPARIS, which works with the countries of the Western Balkans. We have also been able to we have been able to expand the technical assistance provided by the CFRR to  the Eastern Partnership countries through the Strengthening Auditing and Reporting in the Countries of the Eastern Partnership program.

The REPARIS and STAREP programs are an important part of the World Bank Group’s support for the efforts of the Balkan countries and Eastern Partnership countries to help improve their competitiveness, accelerate growth, and create more jobs. 

Since the 2009 crisis, the economies of Eastern Partnership countries and the Balkans have seen a slow recovery which has created few jobs. Unemployment remains high in the region, especially in the Balkans where it averages 26% on average, and where youth unemployment rates are the highest in the world. The strategy that guides our work in the region therefore strongly focuses on policies and investments aimed at creating jobs. Our analytical work shows that employment is the most important factor that helps households rise out of poverty and improve their lives.

The World Bank’s Europe and Central Asia region has recently published a report called Back to Work, which looks at the drivers of job creation in the region before and after the crisis. The report finds that a small number of young, innovative firms create most of the new jobs. These firms tend to be SMEs or firms that start as SMEs and grow quickly. Such firms are active in different sectors of the economy, from ICT to more traditional sectors such as manufacturing and construction.

These dynamic firms are more likely to emerge and thrive in economies that have a supportive business environment. For example, advanced reformers such as Poland and Turkey have done much better in terms of firm and job creation than slower or late reformers. The evidence shows that transparent, efficient, and consistently enforced regulations are particularly important to the success of new firms and SMEs - given that startups and SMEs are more affected than larger firms by onerous regulations and administrative barriers. Fair competition, access to high-quality infrastructure, and an efficient judicial system are also key factors associated with the emergence and growth of SMEs. 

The countries of Europe and Central Asia have done well overall in improving their business environment. In the past two years, almost three quarters of ECA economies introduced regulatory reforms in at least one area measured by the World Bank Group’s Doing Business report. 

Still, ECA economies have much scope for further improvement. The average ranking for these countries in the ease of doing business indicator is 68th - out of 189 economies. This is better than other developing regions, but worse than OECD economies where the average ranking is 28. 

Our research has found that countries with a better business environment also have higher rates of entrepreneurship. This means that people who have the idea to  start a new business are more likely to actually set one up and to succeed in countries where the costs of doing business, including starting and closing a business, are low. In the countries of emerging Europe, these costs are still higher than in advanced economies. As a result, many people who would like to start a business are discouraged by the high costs and regulatory barriers.

These factors are why support for reforms aimed at improving the business environment will continue to be a key element of the Bank Group’s programs in ECA countries. At the same time, our programs will also support other critical elements needed for a competitive economy such as energy and transport infrastructure, and reforms that aim to improve the skills and flexibility of the labor force.

I would now like to turn to the role of the financial sector, which we believe is also essential for SMEs and the broader economy to flourish. Unfortunately, the financial sector in emerging European economies has still not fully recovered from the crisis. Since the onset of the crisis in mid-2008, ECA economies have lost almost $300 billion in external financing, equal to 6.6% of GDP. This is due primarily to the withdrawal of mostly West European banks. The outflow continues today, but it is at a slower pace than before. 

In the Balkans, banking systems are still fragile. NPLs are the highest in the world: 24% in Albania, and 20% in Romania and Serbia. Banks’ efforts to mend their balance sheets have made them wary of lending to the private sector and SMEs in particular. Credit growth to the private sector remains negative in the Balkans and very low in Eastern Partnership countries. 

Firms - and SMEs in particular - continue to have difficulty getting access to credit. SMEs in ECA rely disproportionately on financing from the banking sector, as -- in most countries --they are not able to raise equity or debt financing by tapping the financial markets directly. Unfortunately, the credit crunch since the crisis has driven many new, dynamic firms out of business and has made it extremely difficult for new firms to emerge and grow. 

To some extent, weak economic growth prospects also dampen firms’ appetite for investment and their demand for financing. Nevertheless, we have reason to believe that firms’ demand for financing currently exceeds the financial sector’s ability or willingness to issue credit. In fact, we are seeing increased demand for financing from the IFC, the private sector arm of the World Bank Group, in a number of countries in the region.

Since the crisis, the World Bank Group has aimed to expand SMEs’ access to finance with credit lines and guarantee instruments in several countries, including Bosnia and Herzegovina, Croatia, Romania, Serbia, and Turkey. Support for SMEs is a significant part of the World Bank Group’s portfolio, averaging around $3 billion a year in lending and investment commitments, expenditures on TA, and gross exposure for MIGA. Since November 2012, the World Bank Group has combined its efforts in this area with those of the EIB and the EBRD under the Second IFI Joint Action Plan, which has so far provided over $34 billion in financing.   

Our work also includes support for systemic reforms to bolster the stability of the financial sector and its ability to provide effective financial intermediation to the private sector as a whole and to SMEs in particular. A lot of the technical work supporting our policy dialogue and policy lending operations in this area is done here in Vienna, by our Center for Financial Sector Advisory Services - FinSAC- thanks to the generous financial support of the Austrian Government. FinSAC provides technical assistance to countries in the region to improve macro-prudential regulation and supervision, and also to facilitate bank recovery and resolution as well as the reduction of NPLs. An example would be the technical assistance for a streamlined legal framework to resolve NPLs in Montenegro. FinSAC’s work also contributes to the coordination efforts among banking sector regulators and banks under the Second Vienna Initiative.

The programs of the CFRR address another essential dimension of firms’ access to debt and equity financing. Accurate financial reporting enables creditors and investors to assess risks and make informed decisions. Accurate financial reporting reduces the costs to the banking sector of obtaining information on SMEs’ finances. It can thereby help expand SMEs’ access to finance and reduce their cost of borrowing. 

Reliable financial information is also a precondition for the development of domestic capital markets, which can help mobilize domestic savings and help SMEs diversify their sources of financing. Reliable and internationally comparable financial information encourages foreign investors to consider Foreign Direct Investment and portfolio investments in SMEs and new firms that they might otherwise have found too risky.

We are pleased that countries participating in REPARIS and STAREP have undertaken many reforms to strengthen their regulatory frameworks, even though much remains to be done. Partner countries have demonstrated a high level of awareness of the importance of reliable financial reporting for business confidence. Restoring business confidence will be critical for stimulating investments in SMEs. 

The CFRR works closely with the EU and national regulators in EU candidate, pre-accession countries, and Eastern Partnership countries to promote regulations based on the EU principle of “think small first”. This approach very much coincides with the World Bank Group’s view of good regulatory practice, which aims to create a level playing field in the market without imposing onerous compliance requirements on firms - and on SMEs in particular.

REPARIS supports the efforts of the countries of the Western Balkans to transpose EU legislation in the area of corporate financial reporting and with the implementation of relevant regulation, which is a key condition for accession. Since October last year, STAREP has been assisting the countries of the Eastern Partnership in applying international financial reporting standards and thereby help firms in these countries improve access to finance and investment.

We look forward to continuing our collaboration with all our partners, including the CFRR donors and beneficiary countries, to ensure that the CFRR programs are effective in supporting the efforts of regulators, accounting and auditing professionals, and firms throughout the Balkans and Eastern Partnership countries.

We believe that, as the European economy recovers, these efforts will help restore investor confidence and boost the financial sector’s ability of the financial sector to provide the financing that firms, especially SMEs, need to grow their business and strengthen the economic and social recovery.

Thank you for your attention.