East European growth to slow on inflation, EBRD says

Economic growth will slow this year across eastern Europe because of accelerating inflation and the credit crunch, the European Bank for Reconstruction and Development said, Bloomberg reported.

The London-based EBRD estimates overall growth for the region of about 6 percent this year, compared with 7.3 percent in 2007, the bank said on 18 May at its annual meeting in Kiev. That's still higher than the previous EBRD forecast of 5.5 percent, published on Jan. 23.

``Inflation, now in double digits in many countries, is the region's most pressing current problem,'' the EBRD said. ``Protracted stress in western financial markets could lead to a sharper-than-expected downturn in capital flows to the region, which could expose the substantial external financing requirements of some countries.''

Inflation is accelerating in eastern Europe, driven by an increase in global food prices and strong domestic demand. Surging inflation, which reached 17.5 percent in April in Latvia, 11.4 percent in Estonia and 30.2 percent in Ukraine, has crimped consumers' buying power and cut retail-sales growth.

``Prospects are positive'' for the region, said EBRD president Jean Lemierre today at the bank's annual meeting in Kiev. But ``there's a risk, the risk of volatility. Inflation and economies are volatile in some countries.''

``The current rate of inflation is unsustainable'' in Ukraine, the EBRD's chief economist Erik Berglof told reporters in Kiev. ``There's a possibility of a hard landing'' unless the government and the central bank respond with a more flexible currency policy, he said.

The effect of the global credit squeeze on the EBRD region has been ``limited'' so far with the exception of Kazakhstan, where it had ``a real effect on growth,'' Berglof said. The Central Asian country's economic expansion will probably slow to 5.1 percent this year, according to the EBRD. `` Kazakhstan has been hit by the crisis because it's been very dependent on foreign lending,'' Berglof said.

He also said the situation for the people of Tajikistan, a landlocked central Asian nation that's among the poorest former Soviet states, ``will be very difficult,'' partly because of unusual weather conditions. Extreme cold has caused $1 billion of damage, destroyed winter crops and killed almost 70 percent of livestock in Tajikistan, President Emomali Rakhmon said while visiting Russia in February.

The Baltic countries, which have been among the fastest- growing nations in the European Union, are facing a rapid slowdown in growth. Estonia's economy expanded by an annual 0.4 percent in the first quarter, down from 4.8 percent in the previous quarter.

Fast-paced economic growth, fuelled by energy sales, will continue in Azerbaijan, where the economy is set to expand 20 percent this year, according to Berglof. Russian economic growth of an estimated 7 percent in 2008 ``should be supportive of the entire'' former Soviet region, according to the EBRD.

The EBRD, created in 1991 to invest in former communist countries from the Balkans to Asia, has shifted its resources east and into Mongolia as some of its member states have joined the European Union and attracted billions of dollars in investment.

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