IFIs are renewing their focus on Central and Eastern European states. This comes amidst fears that growth in the region needs to be rekindled. The World Bank has promised more funding for countries at risk of instability, however, IMF loans being negotiated with Hungary and Romania have met with controversy.
In a November Joint IFI Action Plan the World Bank Group, European Investment Bank (EIB) and European Bank for Reconstruction and Development (EBRD) pledged up to €30 billion ($39 billion) in joint commitments during 2013-14 to support economic recovery and growth in Central and South Eastern Europe due to a crisis “largely not of their making” according to EBRD president Suma Chakrabarti. He explained “while the world’s eyes are fixed on the problems in Western Europe, the legitimate requirements of emerging Europe, which has staked so much in the name of economic and financial integration, must not be neglected.” The Joint IFI Action Plan builds on the Vienna Initiative of 2009-2010 (see Update 74); the original 2009-2010 Joint IFI Action Plan initially pledged a contribution over two years of €24.5 billion.
The World Bank is pledging €6.5 billion under the plan, €4.5 from the International Bank for Reconstruction and Development (IBRD, its middle-income country lending arm), and the International Development Association (IDA, its concessional grants and lending arm). The remainder will come from the Bank’s private sector arm, the International Finance Corporation. Questioned over how much of this funding would be new finance, a spokesperson said “of the €4.5 billion IBRD/IDA funding… for FY2013 $2.3 billion (€1.77 billion) is new.”. World Bank president Jim Yong Kim explained the motivation as “the on-going economic and financial instability in Europe [which] continues to threaten growth and jobs, particularly in Central and South Eastern Europe.” Support will encompass policy-based lending, technical assistance, private sector investments and advisory services (in particular in the banking, manufacturing, agribusiness and services and trade sectors), plus political risk insurance to attract investment.
Mark Fodor, of NGO network CEE Bankwatch, said “I am sceptical as to the role of the World Bank, given IFIs’ investment track record in the region. Their support did not contribute to the creation of resilient economies; it exacerbated vulnerability to international volatility. They built a house of cards, promoting policies so that economies appeared strong but were actually left more exposed to global economic instability.”
In 2008 Hungary secured an IMF-EU loan worth €20 billion (see Update 72, 66). Prime minister Victor Orbán’s government came to power in 2010 vowing not to return to the IMF. In January, while credit downgrades reduced Hungary’s sovereign debt to junk status and the Hungarian currency, the forint, depreciated sharply, talks with the IMF and EU resumed to establish a credit line worth between €12 and €15 billion.
In October the Hungarian government launched a public advertising campaign that rejected Fund demands for austerity, including rejection of requirements to reduce family subsidies and introduce a real estate tax. The advertising campaign asserted that “we won’t give up Hungary’s independence.” The defiance was described to the Wall Street Journal by financial analyst Zoltan Arokszallasi as “choreography.” He added “the government is trying to assure a favourable way out for itself, even if there is a deal with the IMF.” In early November the government changed direction and indicated a willingness to agree a deal, with Orbán saying “we made huge strides towards an IMF-EU agreement.” He added later that month that “hard times are coming in Europe and Hungary will need a safety net.”
Ukraine and the Fund are negotiating resumption of a 2010 Standby Agreement worth $15.6 billion that has been frozen by the Fund since early 2011, when the government refused to raise energy prices. Following October parliamentary elections, an IMF technical mission arrived in the capital to discuss a resumption of lending. The government wants the IMF to unfreeze and extend the existing loan. However, political uncertainty following the elections has placed Ukraine under further financial pressure, with central bank reserves plunging by 8.4 per cent in October. Yury Urbansky of the National Ecological Center of Ukraine said “increased energy tariffs will have a negative impact on socially vulnerable citizens. the existing subsidy mechanisms must instead be re-designed and focused on support of energy conservation measures.”
Romania’s president Traian Basescu announced in November that the government is seeking a new standby agreement for when its current package expires in spring 2013. The 2009 $24.7 billion loan agreement, obtained from the IMF, EU and World Bank, required sharp spending cuts. Nevertheless Romania sought and secured a credit line from the IMF and EU in March 2011 worth €5 billion, to be drawn upon in case of an emergency. Widespread street protests earlier this year opposed the policies of the centre-right government, which subsequently lost elections. The government had originally implemented the spending cuts and reforms which the IMF had lauded as successful, referring specifically to “spending constraints of the wage bill and public pensions.” Privatisation required under the loan agreement, targeting €3.5 billion in revenue, has almost entirely stalled. Aside from one 15 per cent stake in an electricity transmission firm sold for $50 million, no sales have been realised despite stakes in multiple companies being offered.
The Fund had also advocated labour market reforms though admitted unemployment remained “high” after implementation. Sharan Burrow, the general secretary of the International Trades Union Confederation, branded the IMF-endorsed labour reforms as “shameful”, policies advocated by the Fund and EU would require “measures that are inconsistent with core labour standards”, including the suggestion that “national collective labour agreements do not contain elements related to wages.” Petru Danea, of trade union Cartel Alfa, said that the “idea of the labour reforms agreed by the conservative government was to reduce the relationship between employers and employees to an individual labour agreement. The number of collective labour agreements in Romania subsequently collapsed from over 8,000 to less than 5,000 since the law entered force in 2011.”