Finance

Finance

EBRD: Azerbaijan, Kazakhstan, Russia and Turkmenistan â€œpunishedâ€ for failing to diversify away from energy reliance

05 November 2009 08:29 (UTC +04:00)

Baku. Nijat Mustafayev â€“ APA-Economics. The global financial crisis, which pushed some emerging European economies to the brink of collapse, revealed risky imbalances two decades after communism fell, the European Bank for Reconstruction and Development said.

The nations that joined the European Union, along with the southern Balkans, were driven into recession by the worldwide credit squeeze and lost investment. Commodity-rich nations including as Azerbaijan, Kazakhstan, Russia and Turkmenistan, were punished for failing to diversify away from energy reliance, the EBRD said in its annual Transition Report.

The 30 emerging European and central Asian nations in which the EBRD invests are struggling to escape the deepest recession since they adopted free-market policies. The bank, which helped limit the impact of the financial crisis by persuading western European banks to stay in the region, has said the recovery from the regionâ€™s worst recession since the early 1990s will be â€œpatchyâ€ and â€œfragile.â€

The benefits of the integration of eastern Europeâ€™s financial systems into the world economy outweigh the costs that have been highlighted during the global economic crisis, according to the report.

The report also says that the global crisis has disrupted the pace of economic reform in eastern Europe, but there have been no significant reversals. Governments remain committed to the process of economic reform.

These findings appear in the EBRDâ€™s Transition Report 2009 which addresses the implications of the crisis both for the transition region â€“ the countries from central Europe to central Asia in which the EBRD invests - and for the whole transition process of economic transformation.

Entitled â€œTransition in Crisis?â€, the 2009 report concludes that while the economies of the transition region have been dealt a severe blow, the transition process itself will survive the onslaught of the worst global economic downturn in generations.

The report raises questions specifically about the growth model both for countries in central and southeastern Europe, where rapid expansion was fuelled by financial integration, and for commodity rich countries further east whose growth has depended on income from natural resources.

In the first instance, the EBRD economists concede that financial integration has brought disadvantages, by encouraging credit booms, over-borrowing and a trend toward foreign currency borrowing.

On the other hand, this region has benefited from high economic growth. More importantly, when the crisis was finally in full flow the presence of foreign banks and the resultant depth of the financial systems played a crucial stabilising role.

Nevertheless, the report stresses that the crisis has shown the need urgent steps to help reduce dependency on foreign exchange lending and to manage more effectively the demand for credit.

Looking at the challenges to resource rich countries in the EBRD region, the EBRD report notes that they also face vulnerabilities, with policy management in such countries as Azerbaijan, Kazakhstan, Russia and Turkmenistan complicated by foreign currency inflows that fluctuate according to the price of commodities.

Some countries have successfully built up funds that help mitigate the impact of economic setbacks but the longer-term goal of economic diversification remains elusive.
This is partly because dependence on wealth from such resources and the very lack of diversification itself stands in the way of the development of the sort of institutional framework that would support the creation of a more diverse industrial base.

Nevertheless, the report concludes that: â€œInstitution building in resource-rich countries is likely to be difficult and protracted, but by no means hopeless.â€

Looking ahead to the impact of the crisis on further market reform in the transition region, the report says any new surge in reforms generally is unlikely, even though the financial sector will probably see both institutional change and policy adjustments, including initiatives to increase both the quality and the extent of government regulation.