EBRD supports credit growth

By Anthony Williams

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 IMF, EBRD and National Bank of Georgia conference seeks to kick-start credit expansion in Caucasus, Central Asia, and EU’s eastern neighbours.

The conference hosted today in Tbilisi by the International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD) and the National Bank of Georgia (NBG) sought ways to revive sustainable growth of credit in the Caucasus, Central Asia, and eastern European countries that neighbour the EU.

The participants looked at the impact of the credit crunch in these countries, and assessed the effectiveness of measures that have been introduced to revive credit growth. It also explored policies to develop local currency lending and financial sector reforms to reduce countries’ vulnerability to boom-bust credit cycles.

 This event brought together private and public sector representatives from Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Tajikistan, Turkey, Turkmenistan, and Ukraine, as well as international financial institutions and academia.

 Giorgi Kadagidze, President, National Bank of Georgia said, “I am pleased to have hosted many regional partners and colleagues. We have had rich discussions on the issue of credit growth, which is most timely for many countries in the region. As signs of an economic recovery take hold here in Georgia and throughout the region, we face the challenges of reviving credit to sustain economic growth, reversing dollarization, while ensuring that credit is extended on a sound and prudent basis to avoid future credit crises. The exchange of views among bankers, policy makers, as well as academics and representatives of IMF, EBRD and World Bank have generated some insights into how best to manage these challenges.”

The main findings of the conference were:

•   Following an unsustainable credit boom in many countries, credit in the Caucasus and Central Asia regions declined sharply. A recent EBRD survey of banks found that the decline in credit reflected shifts in both supply and demand. Banks tightened credit standards, particularly in 2009, but there was also lower demand for loans because companies were not making capital investments. As recently as February, banks were continuing to tighten credit, although not as much as last year. Looking forward, most banks expect a pickup in credit demand, but relatively few expect to ease credit standards.

•   Conference participants explored a range of options to revive credit in the short term, including new central bank liquidity facilities and risk-sharing through credit guarantees. There was agreement that it was important to deal with non-performing loans in bank balance sheets and to recapitalize banks if needed. Participants also agreed that better use of credit bureaus and improved risk management capabilities in banks could help improve the financing for small and medium-sized enterprises (SME).

•   In addition, many participants advocated deepening local currency markets to provide a more stable funding base for credit and to foster de-dollarization. Development of local currency capital markets requires supportive policies, including stable low inflation, flexible exchange rates, and a shift of public debt into local currency.

“This successful conference has deepened our understanding of what happened during the recent boom-bust credit cycle in this region and will strengthen IMF policy advice on macroeconomic and financial sector policies. The beginning of an improvement in credit conditions is welcome. The IMF will continue to support countries in the region to reduce financial sector vulnerabilities and pave the way to strong and durable growth.” said Ratna Sahay, Deputy Director of the IMF’s Middle East and Central Asia Department.

"As credit expansion in the region resumes, it must be both growth-enhancing and sustainable. Enhancing information flows, improving bank credit underwriting and risk management techniques can support better provision of credit, including to SMEs. Developing local currency markets will help reduce pre-crisis vulnerabilities of weak domestic funding of credit and excessive reliance on foreign exchange borrowing. The EBRD and the IMF can support this process, along with other IFIs." said Piroska M. Nagy, Senior Advisor, EBRD.

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