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EBRD's Chief Economist Assesses Conditions In Central, Eastern Europe

Erik Berglof, the chief economist of the European Bank for Reconstruction and Development, joined other officials from international financial institutions at meetings of the World Bank and International Monetary Fund (IMF) this week in Istanbul, where one of the central topics was the global financial crisis.

In an exclusive interview with RFE/RL correspondent Ron Synovitz, he discusses how Central and Eastern European countries are faring amid the crisis. Berglof also discusses the conditions that the IMF is attaching to loans that it is giving to governments in the region.

RFE/RL: As the chief economist of the European Bank for Reconstruction and Development (EBRD), what is your assessment of the economies of Central and Eastern Europe amid the global financial crisis?

Erik Berglof:
What we are seeing now globally is a return to growth in many parts of the world. The great worry we have is that Central and Eastern Europe, and much of the rest of the EBRD region, has been affected more than other parts of the world in the crisis.

What we see now is a much slower recovery in our region. And that is consistent with the IMF assessment as well. What we are worried about is that the programs that have been helpful in stabilizing the situation -- particularly the large fiscal programs in Western Europe and the United States and the support for the banking systems in Western Europe -- we are worried that they will be prematurely withdrawn. All of these things could be particularly challenging for Eastern and Central Europe.

RFE/RL: The EBRD, the World Bank, and the European Investment Bank have teamed together on a joint action plan that complements IMF loans in Central and Eastern Europe. Where do you see the most positive results from these efforts?

The good example is Hungary, where the IMF program played a very important role and the support from the "Joint International Financial Institute Action Plan" created an environment -- together with decisive measures by the government -- to deal with the fiscal problem, the measures that started some time back.

And now we are seeing a clear turnaround in Hungary. That is something that shows these programs can be very helpful.

RFE/RL: What about areas where the future prospects are not so bright?

The Baltic states are facing several years of very difficult growth prospects. You have also Southeastern Europe, which is facing many challenges in dealing with the scars of the crisis.

RFE/RL: The IMF is no longer insisting on structural economic reforms as a condition for governments in Central and Eastern Europe to receive IMF funds. Instead, with the global financial crisis, their conditionality seems to have become more focused. What are your thoughts about these changes to the IMF's conditionality?

I think the IMF has learned from the past and has been, on the whole, very flexible in the region in terms of the needs of specific countries. Some countries had all the right institutions in place and the right political environment. And there, it was just a matter of resources.

In other countries, there was a need to be more firm on conditions. And they have done this. In Ukraine, for example, I think there is a fair amount of conditions in the [IMF] program to try to steer the policy in the right direction. And then, on the other extreme, you have Poland -- where the program was creating confidence in the Polish currency in particular.

Confusion In Ukraine

RFE/RL: On the subject of Ukraine, some commentators say that a divisive political situation in Kyiv has made it more difficult the country to meet the IMF's conditions for its stand-by arrangement. Is that a fair assessment?

It is a fair characterization that there is much political in-fighting and a lack of decision making [in Ukraine]. Some key institutions, like the Central Bank, are not functioning very well.

It's been very difficult to implement the conditionalities of the IMF program. You can argue whether they should have withheld the money [from the last tranche] or not. But I think, in the end, it was very difficult not to proceed because the situation is so serious in the country. But Ukraine is clearly a country that we worry a lot about at the moment.

RFE/RL: Russian Finance Minister Aleksei Kudrin announced in Istanbul this week that the Kremlin will not disburse the last $500 million tranche of a bilateral stabilization loan to Belarus and that it will not grant a proposed $5 billion loan to Ukraine. What is your reaction to this development? Could this have any adverse impact on loan disbursements to Ukraine by international financial institutions like the IMF and the EBRD?

I don't know the details of these Russian programs. But what I think is that no one can be very confident about the political decision-making process in Ukraine at the moment. I think that is probably also reflected in the Russian reluctance to provide support.

But certainly for the international institutions, we are trying to stay engaged -- even though it is a very difficult period. We are trying to work with the financial sector, trying to make sure that funding flows to small and medium-sized enterprises in the economy.

It is a very difficult period now before their presidential elections. It's going to be several months of difficult time for Ukrainian companies and Ukrainian households. It's difficult to disburse money into this political environment right now, where you can't get any credible commitments from their policymakers.

RFE/RL: What can you tell us about the situation in Belarus and its relations with international financial institutions?

Belarus is a different type of country, of course, with different conditions. There has been support from Russia [in the past]. And now Belarus has asked for support from the IMF. That has been very good for the Belarusian government's engagement with Western Europe and the rest of the world. And that is something that should be very much welcome.

But there is not a lot of conditionality. It's basically a program that broadly supports these efforts of the government to take the first steps in terms of reforming the economy.

War's Effects On Georgia

RFE/RL: What is your assessment of how Georgia has been affected by the global financial crisis?

Georgia had double hits -- first the war with Russia and then the global financial crisis. Some of their banks were quite aggressive and relied a lot on the type of funding that was cut off as a result of the global financial crisis. They now seem to have stabilized. But there are still many concerns about Georgia.

RFE/RL: Did last year's war between Georgia and Russia affect the conditions for loans to Georgia from international financial institutions?

In Georgia, the main problem clearly is not conditionality because it has been a country that, for many years now, has been on the right track in terms of reforms. More or less, there was traction for the reform process. Now, of course, the war and the [global] crisis have put this a bit on the back burner. But I think because of the support [from international institutions], now there is a possibility for Georgia to resume its reform process.

Eastern Vulnerability

RFE/RL: What are the difficulties in Romania, and how has that situation been affected by help from international institutions?

For Romania, the [IMF] program has had a stabilizing effect. It has also been combined with this "Joint IFI Action Plan." The problem in many of the countries [of Central and Eastern Europe], and also in Romania, was that a lot of the problems were in the private sector. And that is where it is hard for the IMF to work -- with the private sector. So that is where the other institutions can step in.

If we look at the results, it has been more or less successful. Of course, as we know now, there is a difficult political situation in Romania with the change in government. So we have to see how this plays out. But in terms of the efforts of the international institutions, I think they have been successful. And most of the private Western European banks have stayed in Romania. That's very helpful.

RFE/RL: How has Armenia been affected by the global economic downturn?

In Armenia, the impact of the crisis has been very significant. That reflects a lot the dependence on remittance flows from Armenians abroad -- both in Russia and in Western Europe. So the problems in the global economy hit Armenia through a different route.

RFE/RL: What are the prospects for Moldova to receive support from the IMF and other international financial institutions?

Moldova is in a very precarious situation. There is, as far as I know, not an [IMF] program in place. Or at least, there are elements of it still being negotiated.

The encouraging thing is the new government in Moldova. There seems to be strong determination to address the problems. Moldova is in a very difficult situation and is very much deserving support from the international institutions. There are discussions and there will be, most likely, some kind of program.
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