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Central Europe: World Bank Reports Economic Growth In Transition Nations

Washington, 1 October 1998 (RFE/RL) -- The World Bank's Vice President for Eastern Europe and Central Asia, Johannes Linn, says the nations in transition, especially Russia and Ukraine, are facing a difficult year ahead.

After Russia's economic collapse sent shock waves throughout the global economy, there remains strong concern about the continuing financial turmoil world wide and how it will impact the countries in Central and Eastern Europe and Central Asia.

But says Linn there is actually more good news than bad overall from the region.

Speaking to reporters gathering in Washington for next week's annual World Bank and International Monetary Fund (IMF) annual meetings, Linn said the eight leading European Union candidate countries -- Estonia, Latvia, Lithuania, Poland, the Czech and Slovak Republics, Hungary and Slovenia -- are maintaining strong economic growth, keeping inflation under control and recording very strong foreign direct investment.

While they have been hit by high bond interest rates, their financial and fiscal situations remain stable, said Linn, and they should continue to grow between four and five percent next year. What they show, he said is the increasing integration of Central Europe with Western Europe.

Romania and Bulgaria, the other two EU candidates, have had greater difficulties because of stop-and-go and partial reforms, says Linn, although Bulgaria is doing better now. But these two countries clearly show that sound reforms are critical to success, and that those who don't follow that route tend to fail and fail badly.

Linn said the Central Asia and Caucasus countries are expected to do well in 1998 with average economic growth. Over the past three years, growth in Armenia, Georgia, Kazakhstan, Kyrgyz Republic and Azerbaijan has topped five percent on average.

A group Linn calls post-conflict countries - Bosnia, Albania and Tajikistan - have made significant improvements in their economic situations and have shown some hope for political stability, although Albania is a reminder, he says, that it can be short lived.

Ukraine's crisis is similar to, but somewhat less dramatic than, Russia's, says Linn, but Kyiv has been doing something right. In the last few weeks, he said, Ukraine has "actually engaged in rather sound crisis management, especially on exchange rate management and debt restructuring," which means they have so far avoided the very significant financial collapse experienced by Russia.

Still Ukraine is not out of the woods yet, says Linn, and a major fiscal adjustment, as well as continued structural reforms, will be necessary under a very difficult political environment.

In Russia, says the World Bank official, it is important to understand the cause of what happened, starting with external factors, such as falling oil and metal prices and the spreading turmoil from East Asia, which helped to shake investors confidence.

But much of what happened was Russia's own fault, he said, because it had an intractable fiscal deficit which piled up public debt that proved unsustainable. At the same time, reforms never were fully implemented and there was a lack of consistent government action in putting a reform program into place.

This was a major factor because there was a lack of popular political support for the reforms and that, coupled with banks running up huge amounts of short-term foreign debts, unnoticed by Russian authorities, triggered the collapse in market confidence.

Russian authorities know what they must do, says Linn, but so far there has been no indication that they're ready to address the problems squarely. The World Bank is waiting and ready to help, says Linn. But the $6 billion in new and expanded loans the bank offered as it's part of the July IMF-led rescue package is effectively on hold for now until the new Russian government is fully in place and has worked out its economic plans.

Of the $6 billion, the bank was to release a total of 1,700 million dollars this year. So far, only $300 million of that has been released and Linn says that until Russia has a leadership team in place that can sit down and discuss the programs, the bank will not release any more of the money.

While it is too early to make any predictions, he says, Russia's circumstances have changed so radically from mid-summer that some parts of the loan projects -- such as a planned credit line for medium size Russian banks to lend to small businesses -- will probably be dropped as no longer applicable.