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Eastern Europe/Former U.S.S.R: Economic Growth Forecasts Encouraging

London, 4 November 1996 (RFE/RL) -- Growth is expected to gradually strengthen in Eastern and Central Europe and the former Soviet Union over the next year, while there will be further falls in inflation, says an authoritative economic report published today.

The progress report, "Transition, 1996" by the London-based European Bank for Reconstruction and Development (EBRD) says the general outlook is "encouraging." It predicts that the economies of most Eastern and Central European countries and the Baltic states will grow by between 3.5 and 5.5 percent by the end of 1997. Growth of their gross domestic product in 1996 is put at an average four percent, just over one percent less than their "impressive" growth rate last year.

This slowdown reflects a downturn in import demand, particularly in Germany, the most important market for countries in transition.

In the Commonwealth of Independent States (CIS) countries, economic recession has now reached its trough, and most forecasters take the encouraging view that most CIS countries will record positive growth next year.

But Russia and Ukraine, the two largest economies, are still stuck in negative growth. Forecasters say the Russian economy shrank by two percent this year but is set to recover with two percent growth next year. They project strong Russian growth for the rest of the decade.

GDP in Ukraine in the first half of 1996 was down eight percent last year and the economy is expected to show negative growth over the full year. The latest estimates predict a modest recovery next year in Ukraine. (In addition to Ukraine, other CIS states expected to record negative growth in 1996 are Azerbaijan, Belarus and Tajikistan).

For most Central and Eastern European countries and the Baltic states, especially those in an advanced state of transition, forecasters predict a continuation of growth of between four and five percent per year for the remainder of the decade with further falls in inflation.

However, consumer demand and, in some cases, strong capital inflows suggest that monetary policy will have to remain tight in order to preserve the gains already made in lowering inflation.

For most Eastern and Central European countries that recorded high rates of growth in 1995, including the Slovak Republic, Romania and Poland, growth will remain strong, though down on last year. Projected Slovak growth is 5.7 percent for 1996 (4.7 in 1997); Romania 4.4 percent (4.3 percent in 1997); and Poland 5.4 percent (5.1 percent in 1997).

Some forecasters predict the Czech economy will grow by over five percent in 1996 and 1997. But growth may be closer to five percent than six percent because of the national bank's steps to contain inflation.

Earlier forecasts said Bulgaria would achieve growth of two to three percent continuing the improvement of 1994 and 1995. But sharp falls in reserves and currency, and a rebound of inflation, prompted analysts now to predict minus 1.3 growth this year, and raise their predictions for inflation. The economy is set to grow by 1.5 percent in 1997.

Forecasters predict that GDP growth in the Baltic states will strengthen gradually throughout 1996/97, although growth rates on average are expected to be below those predicted for Eastern Europe.

Growth in Lithuania is expected to slow as a result of a reduction in liquidity after its banking crisis. Growth this year is forecast at 2.2 percent (3.8 percent in 1997). Only modest growth is predicted in Latvia followed by a stronger performance next year (1.6 percent in 1996, 3.4 percent in 1997). Predictions are that growth in Estonia will grow 3.8 percent in 1996, 4.9 percent in 1997.

But one group of forecasters takes a more positive view of Baltic prospects: they expect the three Baltic states to grow on average by at least 5 percent in 1996 and by 7 percent in 1997.

Performance in the CIS countries has generally lagged behind Eastern and Central Europe. This is a reflection of the greater length of time it has taken to implement successful stabilization policies and the generally slower rate at which reforms have been introduced.

At the end of last year, some forecasters were predicting that Russia would record positive growth in 1996. However political uncertainty, combined with its tight monetary policy, contributed to a further period of negative growth in the first half of this year. Most recent forecasts project an average of minus 2 percent growth this year, to be followed by a recovery of growth of around 2 percent next year.

In Ukraine, the severe winter of 1995/1996 and failure to meet all performance targets of its first IMF standby agreement, are expected to contribute to another year of negative growth (minus 6 percent in 1996). But three of the latest estimates (by the EBRD, PlanEcon and the Vienna Institute), anticipate a return to positive growth next year.

Two economic stars are Armenia and Georgia. They are projected to record growth in 1996 and 1997 that is even stronger (albeit from a low base) than that achieved in some Eastern European nations in 1995.

Armenia is expected to record growth of about 7 percent a year in 1996 and 1997, while a strong rebound of growth in Georgia to over 10 percent a year is also projected. This in part reflects reopening of trading routes and production sites that were closed by armed conflicts.

In Kyrgyzstan and Moldova, growth of output is expected to rise to over 5 percent by 1997 as a result of the implementation of IMF-approved stabilization programs and economic reform measures.

In fact, most CIS countries are expected to see positive growth in 1996 which is projected to average 1 percent for the CIS as a whole. Stronger growth is projected in 1997 -- 4 percent for the CIS as a whole -- which partly reflects a return to positive growth in Russia.