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Economy: IMF Forecasts Output Growth For Transition Nations

  • Robert Lyle

Washington, 13 April 1998 (RFE/RL) -- The International Monetary Fund (IMF) forecasts that the economies of the nations in transition will record output growth of 3.4% this year, a significant improvement over 1997's average growth of 2.9%.

However, the IMF says in its semi-annual World Economic Outlook report released today that this is 1.25% lower than had been forecast last October. The fund said the downward revision is accounted for by Bulgaria, Russia, Turkmenistan, Ukraine and Uzbekistan.

Inflation for the region as a whole is forecast to average 17% per year during 1998.

Globally, the IMF reduced its world output growth projection for this year to 3.1%, mostly because of the negative effects of the Asian financial crisis.

Among the nations in transition, the report says that spillovers from Asia were felt most in Russia, Ukraine and Estonia.

Russia successfully defended its exchange rate by raising interest rates sharply, said the report. But the high interest rates are hurting growth and Moscow's failure to move ahead swiftly on tax reform is contributing to the problem of wage and payments arrears as well as a climate of non-payment of debts.

In Ukraine, said the IMF, structural weaknesses in the banking system have combined with financial market pressures arising from fiscal imbalances to increase the economy's vulnerability. For both countries, the fund says it shows that structural reforms remain "a crucial part" of the process of transition.

The IMF said Estonia suffered from the Asian crisis partly because it is where international financial integration has progressed the furthest. It was hit also because rapidly rising interest rates and a drop in the stock market helped further destabilize an economy already vulnerable because of a burgeoning current account deficit. However, the fund said Estonian authorities have been stabilizing markets and interest rates have started to fall.

Other transition economies have experienced little impact from the Asian crisis, says the fund, in some cases because they remain relatively closed to the global economy, but in other cases in spite of their openness to international capital markets. In fact, it says, the Czech Republic, Hungary and Poland have experienced upward pressure on their currencies, suggesting that some capital flows have been redirected there after being pulled from Asia.

The critical role of adjustment and reform policies was demonstrated "especially clearly in 1997 in Albania and Bulgaria" said the IMF report. After virtual collapses, both countries implemented strong reforms and as a result saw their imbalances narrow, inflation decline, and growth resume.

By contrast, said the report, Romania not only delayed its reforms, which contributed to a drop in output last year, but also loosened its monetary policies and that has led to a resurgence of inflation early this year.

Once again, says the IMF report, experience is showing that the main reason the growth is lower in Russia and the other 11 countries of the former Soviet Union -- excluding the Baltic countries -- "is the slower pace of market-oriented structural reform."

It said the countries lagging behind in growth have the most still to do to establish the legal and institutional frameworks needed for the effective functioning of a market economy.

Generally, reforms have not gone far enough yet in transforming the role of government and in establishing an environment conducive to private sector development, says the IMF. In most cases, countries need to strengthen banking regulation, further privatization and enterprise reform, put legal and institutional reforms in place to make it easier to exercise property right and enforce contracts, and improve tax systems.

Net capital flows, especially from the private sector, are forecast to grow to $35.4 billion this year, jumping to $39.2 billion next year into all the nations in transition, said the IMF report. Net official flows are up sharply this year compared to 1997, but even then the total from World Bank, IMF and other similar sources will account for less than 10% of the total capital inflow. By next year, repayment of loans will increase to $4.4 billion more than new loan drawings.