EBRD raises eastern Europe growth call

Kiev : The European Bank for Reconstruction and Development (EBRD) on Sunday raised its 2008 growth call for eastern European and former Soviet states to around 6 per cent, citing their surprising resilience to global economic problems, but it warned inflation risks loomed.

"Inflation, now in double digits in many countries, is the region's most pressing current problem," the EBRD said in its economic outlook report, issued at its annual meeting in the Ukrainian capital.

"If left unaddressed, inflation could risk price-wage spirals, exchange rate re-alignments, or could force a belated and sharp response by monetary policy," the report said, highlighting a robust economic performance despite disruptions to the global economy from turmoil in international credit markets.

The bank, launched in 1991 to help the states of the former Soviet Union become fully functioning market economies, said in January it had cut its full year growth forecast for the region to 5.0-5.5 per cent from 6.1 per cent previously.

Although the multilateral lender has hiked its estimate of growth to "around 6 per cent for this year", that still marks a slowdown from the 7.3 per cent growth the commodity-rich regionp in 2007 as the global economy boomed. The EBRD attributed the slowdown to several factors, but put soaring prices first among them.

"The anticipated slowdown reflects very rapid increases in consumer prices, which are likely to impact household incomes and consumption, especially in the CIS," it said, adding that the global credit crunch could start to bite in the region. "A more restrictive international funding environment, together with interest rate rises to combat inflation, could reduce domestic credit growth and limit growth in domestic investment," the EBRD said.

"In addition, slowing global growth is expected to reduce import demand from key trading partners such as the countries in the euro zone."

The EBRD said the international credit crunch had had only a limited impact on the region as banks had little exposure to structured assets linked to US mortgages - the slumping price of which has led to a lock-up in financial market liquidity.

But some countries such as Kazakhstan have suffered because banks have found it difficult to secure funds in international bond markets. "The outlook for growth has deteriorated substantially in Kazakhstan where credit to the private sector is expected to stagnate in real terms this year," the EBRD said.

The Baltic and south-east Europe could also suffer from reduced capital flows amid heavy external fin-ancing needs.