East Europe's Investment Gap Casts ‘Serious Shadow,’ EBRD Says

  • East Europe, Caucasus deficit is worst in EBRD coverage zone
  • Region needs new funding sources or risks slower GDP growth

Eastern Europe must lure more investment and increase financing to households and businesses to close a gap in living standards with wealthier countries, the European Bank for Reconstruction and Development said.

The 36-country region the EBRD covers needs an extra $75 billion in investment a year to bring the economies back to levels expected at this stage of development, the London-based bank said. The shortfall in eastern Europe and the Caucasus is 6.6 percent of gross domestic product, the widest in the EBRD’s zone of operations. 

“This investment gap is casting a serious shadow over the region’s long-term growth prospects,” Hans Peter Lankes, acting chief economist, said in the EBRD’s annual transition report published Tuesday. “In order to boost investment and close that gap, new funding sources need to be explored.”

While eastern European economies are currently among the continent’s quickest growing, the 2008 crisis inflicted recessions, devaluations and high debt burdens on many, setting back development. The region has a legacy of bad debts that curb credit, with half of the countries grappling with non-performing loans of at least 10 percent, among the highest ratios in the world, according to the the EBRD.

“This shortage of investment is unlikely to be sustainable in the long term without negative implications for growth,” the EBRD said, which was set up in 1991 to assist eastern European nations make the transition from communism to market-based economies.

Governments should make rules governing private equity more favorable to attract additional financing, and promote a switch to local-currency lending to reduce vulnerabilities brought by exchange rate moves, the EBRD said. Requirements for lending to small and medium sized businesses need to be simplified to boost borrowing, it said.

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