Diverging Results in the Transition Countries

The Central and East European economies closed the year well behind 1995, with an average GDP growth of 3.5 percent. High investment helped to maintain high GDP growth in Poland and Slovakia. The banking crisis in Bulgaria resulted in strong GDP decline and very high inflation. Russia and Ukraine achieved remarkable success in disinflation, at the cost of further GDP decline. Moderate disinflation continues in all of the more advanced CEE economies, although the low budget deficits and recent restrictive monetary policies have not brought about the rapid disinflation authorities had hoped for. Real appreciation of the domestic currencies, as well as rising competition, seem to have been important in the continuing reduction of inflation rates. In Croatia and FYR Macedonia, deflationary tendencies previously at work now seem to have been overcome. Current account deficits have been growing in Poland, Slovakia and the Czech Republic. In 1996, none of these countries had a problem achieving the necessary inflow of capital needed to compensate. Forces underlying recent performance will continue to be at work in 1997 and 1998. GDP growth in more advanced CEE countries will continue to be moderate, and lower still in the less advanced economies. Assuming only marginal improvement in the West European business climate, there will be little opportunity to boost exports. The advanced CEE countries will probably try to prevent excessive increases in imports through additional devaluation's, but short of the drastic restrictions on domestic consumption and investment that seem likely in Romania and Bulgaria. The Czech Republic is fighting foreign trade imbalances by newly introduced import deposits and slowing down wage increases, without however devaluating the national currency. In Slovakia, import levels could be cooled by slowing down the pace of government investments in infrastructure. Hungary and Slovenia will be less likely to need restrictions. In both Russia and Ukraine maintaining relatively stable prices will undoubtedly remain a priority. Economic stabilization is at least a possibility in these two countries.