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Business conditions in eastern Europe improve
Weaknesses in the banking sector increase macroeconomic risks and hinder efficient financial intermediation, reducing economic growth
There are fewer business constraints on companies across central and eastern
Europe and the former Soviet bloc than at any time since the start of the
transition process 15 years ago, says the EBRD in its latest Transition
Report. Economic performance in the region was also strong, with average
growth of 5.3 per cent in 2005.
Moldova has experienced strong growth rates in recent years, however still
remains the poorest country in Europe with an estimated GDP per capita of $903
in 2005. Weaknesses in the financial sector, such as weak bank supervision,
lack of transparency in ownership and poor corporate governance, generate
macroeconomic vulnerabilities and hinder competition and efficient credit
allocation, thus reducing the potential for economic growth.
The findings, highlighted in the report, are from the latest EBRD/World Bank
Business Environment and Enterprise Performance Survey (BEEPS) of over 9,500
firms, measuring the extent to which firms believe obstacles such as poor
regulation, ineffective institutions, corruption or crime impede their growth.
The business environment in Moldova showed improvements in taxation and crime,
and to a lesser extent corruption. But government interference, a weak
judiciary and poor access to finance are still considered to be major
obstacles to business. Overall, the survey shows the business environment in
Moldova has not yet reached the standard of more advanced transition
economies.
These business obstacles hit hardest those firms that can bring the most
benefits to the economy and those most likely to generate growth and new jobs,
such as private firms, exporting companies, those that re-invest profits, and
micro and small businesses. The business environment is also more difficult
for firms located outside capital cities – sharing the benefits of transition
more widely remains a challenge in all transition countries.
One sign of the growing confidence in the transition region, including
Moldova, is the rapid expansion of bank credit to the private sector,
including households. While this is a sign of growing confidence, the report
warns that rapid credit growth – if coupled with weaknesses in individual
banks or financial systems – may increase macroeconomic vulnerabilities.
Opaque bank ownership often concentrated in the hands of a single person (or a
group of persons acting in concert) through a myriad of front companies
effectively prevent banking supervisory authorities from assessing the
suitability and integrity of ultimate owners and verifying the source of
funding used to finance their shareholding. Poor transparency also prevents
the application of related party lending rules. This - combined with weak
corporate governance - increases the risk of banks being run as "pocket banks"
for interest groups and undermines the solvency and soundness of banks. Poor
transparency and concentrated ownership also discourage foreign investment in
the banking sector and typically result in reduced competition. This in turn
generates inefficiencies and higher interest rates for borrowers. A country
with a weak banking sector like Moldova is less likely to weather a
macroeconomic shock than a country with a stronger banking sector, the report
notes. The report highlights a need for effective banking supervision,
including with regard to transparency of ownership and proper corporate
governance in the financial sector, careful credit assessment procedures and
fiscal restraint to make room for private borrowing.
While the business environment has a significant impact on firm performance,
it is not the only factor affecting the growth and productivity of
enterprises, says the report. Competition in the domestic or international
markets, for example, can prompt firms to improve their efficiency.
Foreign-owned firms are more competitive and productive than domestic firms,
suggesting that the promotion of foreign investment can help to boost growth.
Economic growth across the transition countries slowed to 5.3 per cent in 2005
from a record 6.6 per cent in 2004, but nonetheless remains strong,
outperforming many world regions including the eurozone. By sub-region,
highest growth is expected in the Commonwealth of Independent States (CIS) at
6.2 per cent. The macroeconomic performance in Moldova over the past years has
been good and the economy grew in real terms by 7.3 per cent in 2004 and 7.5
per cent in 2005. Rapid expansions in the service sector and agriculture, as
well as high level of worker remittances, were the main drivers of the
economic growth.
In terms of reform, progress in the CIS was confined mainly to a few countries
in the Caucasus and the western CIS, such as Georgia, where political turnover
and/or changes in policy direction added new momentum to democracy and market
reform.
Significant challenges remain for each part of the region and individual
countries. In Moldova sustained growth now depends on reducing government
interference in the economy, building a strong financial sector, strengthening
its regulatory authorities, streamlining its legal framework, intensifying
efforts to tackle corruption and bureaucracy, establishing fair competition
and improving the investment climate. Only by addressing these challenges will
the country step up its progress in reaching the living standards of the more
mature market economies.
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