Eastern Europe and the former Soviet Union will see growth increase in 2006 driven mainly by domestic demand, but risks of rising inflation and slipping foreign direct investment pose challenges, the EBRD said on Monday.
The European Bank for Reconstruction and Development, the development bank for the region, said growth in the 29 transition countries it tracks would grow, on average, 6.2 percent in 2006 versus 5.7 percent in 2005.
That falls short of the record 6.7 percent GDP growth rate of 2004. This latest transition report sees economic growth of about 6 percent in 2007. The EBRD was established in 1991 to aid the transition of Communist bloc countries to capitalism.
"The growth is increasing very fast. It is stronger in the eastern part of the region, the former Soviet Union, than in central eastern Europe. Also growth is very strong in south-east Europe, driven primarily by consumption, but also by high fuel and raw material prices," EBRD chief economist Erik Berglof told Reuters in an interview.
Increasingly, the EBRD said, transition is being driven by markets rather than by governments. Robust growth has been driven mostly by domestic demand, which in turn has been spurred by growth in credit and rising wages, the EBRD said.
"Strong demand and high energy prices are, however, contributing to inflationary pressures throughout the transition region," the report said. Foreign direct investment is expected to fall to 5.5 percent of GDP for the region in 2006 from 5.9 percent in 2005. Berglof said progress on institutional reforms has been uneven, with great strides made in finance and telecommunications, while public administration lagged.
"It is a mixed picture, in some sectors reform is going faster, in the financial sector in particular. In some other parts. which are important as well, reforms are not going as fast. The reform of the public administration, that area of competition policy, is not moving as fast and is a cause for some concern," Berglof said.