FINANCE-EUROPE: More Loans but with More Caution

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Marian Chiriac

BUCHAREST, May 21 2002 (IPS) - Former Communist countries are looking at more funds but also more caution in years ahead from the European Bank for Reconstruction and Development (EBRD).

Delegates at a two-day meeting of the EBRD that ended in the Romanian capital Bucharest late Monday expressed tempered optimism over the region’s economic prospects. They showed growing concern over the social costs of restructuring.

About 2,500 delegates attended the eleventh annual meeting of the EBRD. They included government officials, business people and representatives of the bank’s shareholders from 62 countries. The meeting was held at the former palace of the late Romanian dictator Nicolae Ceausescu.

The EBRD was created in 1991 to help countries in Eastern and Central Europe build Western-style economies. The EBRD has since then given billions of dollars in loans to the 27 countries in the region.

“Despite many difficulties the countries in the region have faced in the last decade they have started to become a viable destination for investment,” EBRD chief Jean Lemierre said at the meeting.

The EBRD predicts a sharp increase in foreign direct investment (FDI) this year to more than 33 billion dollars, up from 25.5 billion dollars last year. The bulk will go to countries such as Hungary, Poland, the Czech Republic and Slovenia which are preparing for European Union (EU) entry.

Other countries like Russia, Romania, Bulgaria and Georgia are still rated below investment grade. They are struggling to tap international capital markets and repay debts, but they too expect to have a little more support from the EBRD. “We are taking more risks on the poorest countries to help th em, and for sure there would be a shift of resources from Central Europe towards the East,” said Lemierre.

Helped by growth in Russia, the region as a whole posted a GDP (Gross Domestic Product) increase of 4.3 per cent, one of the world’s largest. But that growth rate is expected to slow down this year.

The bank warned that foreign direct investment in central and eastern Europe is still low compared to what some developing countries get. “One of the main constraints on FDI is the relatively unfavourable investment climate in the region, particularly in south-eastern Europe and in the Commonwealth of Independent States, which worsens the balance between the risk and return to investment,” says a report from the bank.

Officials say corruption is frequently cited as a major factor discouraging foreign investment.

“Eastern Europe must develop more efficient governments that curb corruption to attract the investment needed to complete the transition from communism to a free market,” said U.S. Treasury Secretary Paul O’Neill. He is the highest ranking U.S. official to have attended an EBRD annual meeting in a decade.

Signalling continuing investment in ex-communist countries, the EBRD signed a 150 million dollar loan for Romania’s state oil company Petrom, the largest employer in the Balkans. The loan has been given to upgrade refineries and to modernise Petrom’s retail sector. The EBRD also approved other loans worth 25 million dollars during the conference.

The loan for Petrom came a week after the World Bank postponed a 300 million dollar credit for Romania, citing the government’s unwillingness to sack workers at Petrom. The Romanian government said the delay resulted from a “misunderstanding” and said the matter would be resolved within a few weeks.

“The Romanian government as many others in eastern Europe are in deep need of foreign investment but the privatisation of state-run enterprises is always associated with austerity,” said economist Ionut Popescu. “That’s why they were in many cases reluctant in restructuring loss-making state firms, moves which throw workers out of jobs,” he said. “In my opinion international lenders should start to support more the small and medium enterprises sector.”

There are some signs of a shift in that direction. Officials from the Bank said they will give more loans to start-up companies where capital shortage is most serious.