Europe and Central Asia Economic Update Office of the Chief Economist Spring 2019 WORLD BANK ECA ECONOMIC UPDATE SPRING 2019 Financial Inclusion Office of the Chief Economist © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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ISBN (electronic): 978-1-4648-1409-9 DOI: 10.1596/978-1-4648-1409-9 Cover design: Lauren Kaley Johnson Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Regional Classification Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi PART I: Economic Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 The Global Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overall Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Europe and Central Asia: Recent Developments and Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Annex: Data and Forecast Conventions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2 Financial Inclusion in Europe and Central Asia . . . . . . . . . . . . . . . . . . . 17 Why Does Financial Inclusion Matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Growth in Account Ownership Is Uneven in Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . 18 Inequality in Account Ownership Is High in Parts of the Region. . . . . . . . . . . . . . . . . . . . . . . . . . 20 Who Remains Unbanked in Europe and Central Asia? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Lack of Trust in Banks Is a Major Barrier to Account Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Use of Accounts for Payments Is Increasing in the Region’s Developing Economies. . . . . . . . . . 27 Use of Digitalized Accounts Is Also Rising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Informal Saving and Borrowing Is Prevalent in Developing Economies of ECA. . . . . . . . . . . . . . 32 Digital Technology Provides Opportunities to Enhance Financial Inclusion . . . . . . . . . . . . . . . . . 39 Policy Makers Can Increase Account Ownership and Use in Various Ways. . . . . . . . . . . . . . . . . . 40 Future Directions of Our Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Annex: Survey Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Part II: Selected Country Pages Albania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Armenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Azerbaijan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Belarus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Bosnia and Herzegovina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Bulgaria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Croatia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Kazakhstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Kosovo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Kyrgyz Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Moldova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Montenegro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 North Macedonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Romania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 iii iv  ●   World Bank ECA Economic Update Spring 2019 Russian Federation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Serbia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Tajikistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Turkmenistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Uzbekistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Boxes 2.1 Financial inclusion in Turkey: Insights from the 2017 Global Findex Survey. . . . . . . . . . . 26 2.2 Financial inclusion in the European Union: Insights from the 2017 Global Findex Survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Map 2.1 Account ownership varies significantly across the world. . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figures 1.1 Global economic outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Long-term economic challenges facing Europe and Central Asia. . . . . . . . . . . . . . . . . . . 12 2.1 Account ownership in Europe and Central Asia varies widely by subregion. . . . . . . . . . . 20 2.2 The gender gap in account ownership persists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.3 The gender gap in account ownership varies widely within Europe and Central Asia . . . 22 2.4 Inequality in account ownership remains high in Turkey. . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.5 The income gap in account ownership remains large in some countries in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.6 The share of adults making or receiving digital payments ranges from 25 to 83 percent in Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.7 Use of a mobile phone or the Internet to access an account varies widely within Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.8 Percent of online buyers paying in cash and online in total population. . . . . . . . . . . . . . 33 2.9 Formal saving is more common in high-income economies than in developing economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.10 The share of adults who saved formally savings was low in most developing economies in Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.11 People in high-income countries rely on formal sources for borrowing, whereas people in developing countries tend to rely on family or friends . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.12 Informal borrowing is prevalent in most developing economies in the region. . . . . . . . . 37 2.13 Financial resilience is much higher in high-income countries than in developing economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.14 People in developing economies of Europe and Central Asia tend to rely on family and friends for emergency funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.15 More than 80 percent of the unbanked in Europe and Central Asia owned mobile phones in 2017, creating opportunities for financial inclusion . . . . . . . . . . . . . . . 41 Tables E.1 Regional classification used in this report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1.1 Real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.2 Europe and Central Asia forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3 Europe and Central Asia country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1 Account ownership in Europe and Central Asia grew between 2011 and 2017. . . . . . . . 21 2.2 Gender gap in account ownership varies by country . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.3 The share of adults who made or received a digital payment the previous year rose in most countries in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Acknowledgments This Europe and Central Asia (ECA) Economic Update is a product of ECA’s Of- fice of the Chief Economist led by Asli Demirgüç-Kunt, in collaboration with the Macroeconomics, Trade and Investment and the Poverty and Inequality Global Practices. In Part I, Chapter I was prepared by the Prospects Group in the Macroeconom- ics, Trade and Investment Global Practice, comprising Carlos Arteta, Patrick Al- exander Kirby, Julia Renee Roseman, and Collette Mari Wheeler. Chapter I was closely coordinated with contributions from Part II authors. Chapter II was pre-pared by the ECA Chief Economist’s team including Bingjie Hu and Yue Zhou with contributions from Leora Klapper, Jake Hess and the Global Findex team of the Development Research Group, and inputs from Marialisa Motta, Mario Gua-damillas and Rolf Behrndt of the Finance, Competitiveness and Innovation Global Practice. Maurizio Bussolo and David Michael Gould of the ECA Chief Economist’s office provided valuable comments all across Part I. Part II was prepared by teams from the Macroeconomics, Trade and Invest- ment Global Practice (led by Andrew Burns, Sandeep Mahajan, Lalita M. Moorty, and Gallina Andronova Vincelette) and the Poverty Global Practice (led by Car- los Silva-Jauregui). These teams included the following staff: Azamat Agaidarov, Sarah Nankya Babirye, Reena Badiani-Magnusson, Cesar Cancho, Alexandru Cojocaru, Marcel Chistruga, Pablo Facundo Cuevas, Agim Demukaj, Mariam Dolidze, Andrei Dospinescu, Donato De Rosa, Bakyt Dubashov, Olga Emely- anova, Samuel Freije-Rodriguez, Josip Funda, Mismake D. Galatis, Anastasia Golovach, Claudia Gutierrez, Gohar Gyulumyan, Kiryl Haiduk, Sandra Hlivn- jak, Saida Ismailakhunova, Jonathan George Karver, Edith Kikoni, Milan La- kicevic, Sanja Madzarevic-Sujster, Mikhail Matytsin, Kristina Cathrine Mercado, Rose Mungai, Evgenij Najdov, Metin Nebiler, Minh Cong Nguyen, Trang Van Nguyen, David Night, Ana Maria Oviedo, Catalin Pauna, Alisher Rajabov, Nadir Ramazanov, Julio E. Revilla, Monica Robayo, Paul Andres Corral Rodas, Natasha Rovo, Armineh Manookian Salmasi, Apurva Sanghi, Marc Schiffbauer William Hutchins Seitz, Asli Senkal, Lazar Sestovic, Hilda Shijaku, Bojan Shimbov, Maryna Sidarenka, Emilia Skrok, Karlis Smits, David Andrew Stephan, Alan Fuchs Tarlovsky, Thi Thanh Thanh Bui, Eskender Trushin, Vincent De Paul Tsoungui Belinga, Michal Tulwin, Christoph Ungerer, Ekaterina Vostroknutova, and Bakhrom Ziyaev. Sandra Gain and Barbara Karni provided the editorial support, and Michael Alwan typeset the report. Paul Anthony Clare, Carl Patrick Hanlon, Artem Kole- snikov, and Kym Louise Smithies provided communications and outreach sup- port. Ekaterina Ushakova oversaw the layout and production of the report. v Abbreviations BHAS BIH Agency for Statistics BYN Belarusian Ruble CAD Current account deficit CBA Central Bank of Armenia CIT Corporate income tax CPI Consumer price inflation CROSTAT Croatian Bureau of Statistics ECA Europe and Central Asia ECAPOV ECAPOV (ECA Poverty) database of standardized household surveys EEU Euroasian Economic Union EMDE Emerging markets and developing economies FDI Foreign direct investment FIFA Fédération Internationale de Football Association GDP Gross domestic product NBK National Bank of Kazakhstan HPP Hydro-power plant HUS Hold utility subsidy ICT Information and communication technology IFI International financial institution IMF International Monetary Fund IT Information technology LCU Local currency unit LMIC Low and middle income countries NBG National Bank of Georgia NBR National Bank of Romania NBS National Bank of Serbia NPL Non-performing loans OPEC Organization of the Petroleum Exporting Countries PIT Personal income tax PMI Purchasing Managers’ Index PPA Power purchasing agreements PPG Public and publicly guaranteed PPP Public-private partnership SAR Special administrative region SBA Stand-By Arrangement (IMF) vii viii  ●   World Bank ECA Economic Update Spring 2019 SOE State-owned enterprise TFP Total factor productivity TSA Targeted social assistance URKSTAT Ukranian Bureau of Statistics VAT Value added tax WB World Bank WDI World Development Institute Regional Classification Used in this Report This report covers 47 countries referred to as Europe and Central Asia (ECA) coun- tries. These are divided into 10 groups: Western Europe, Southern Europe, Central Europe and Baltic Countries, Northern Europe, Western Balkans, South Caucasus, Central Asia, Russia, Turkey, and Eastern Europe. TABLE E.1 Regional classification used in this report European Union Western Balkans Central Europe Western Southern and Baltic Northern Europe Europe Countries Europe Austria Cyprus Bulgaria Denmark Albania European Belgium Greece Croatia Finland Bosnia and Herzegovina Union France Italy Czech Republic Sweden Kosovo and Germany Malta Estonia Montenegro Western Ireland Portugal Hungary Republic of North Balkans Luxemburg Spain Latvia Macedonia Europe The Netherlands Lithuania Serbia and United Kingdom Poland Central Romania Asia Slovak Republic Slovenia South Central Eastern Caucasus Asia Russia Turkey Europe Eastern Europe Armenia Kazakhstan Belarus and Azerbaijan Kyrgyz Republic Moldova Central Georgia Tajikistan Ukraine Asia Turkmenistan Uzbekistan ix Executive Summary With slowing global growth and increasing uncertainty clouding the global economic prospects, the Europe and Central Asia region faces a more challenging context than previously envisioned. Growth in the emerging markets and developing economies in the region slowed to 3.1 percent in 2018 and is projected to decline to 2.1 percent in 2019. What challenges does the region face in the coming year? What are some of the risks to the macroeconomic outlook? In the long run, how should policy makers design policies that boost growth and help individuals and firms adjust to the interplay between globalization and technological change? In the global context, this update summarizes the recent developments and outlook for the region. It also focuses on financial inclu- sion, as one of the important policy areas that can promote long-term growth, reduce poverty, and enhance resilience to shocks. The aggregate growth figures mask the diversity of performance across the region. Regional growth was hindered by marked weakness in Turkey amid substantial financial market stress despite strong growth in other parts of the region, such as Central Europe, the Western Balkans, the Russian Federation, and Central Asia. Regional growth is expected to pick up modestly in 2020–21, as a gradual recovery in Turkey offsets moderating activity in Central Europe. Key ex- ternal risks to the region are spillovers from weaker-than-expected activity in the euro area, as well as the escalation of global policy uncertainty, particularly in trade. Renewal of financial pres- sures in Turkey, combined with possible contagion to the rest of the region, could also disrupt growth in the region. The possibility of sharp declines in energy prices presents a downside risk to the region’s energy exporters, such as Azerbaijan, Kazakhstan, and Russia. The region faces many long-run challenges to development, ranging from worsening demo- graphics, to declining productivity and investment, to climate change. This update focuses on one policy – promoting inclusive financial sector development -as a way to promote growth and poverty alleviation. There is great variation in financial inclusion in the region. In the euro area, most adults already own an account. In the developing countries in the region, there has been significant improvement in account ownership, which has increased from 45 to 65 percent since 2011. Tajikistan, Armenia, Moldova, the Kyrgyz Republic, and Georgia are among the countries that have seen the greatest increases globally, despite starting from a very low base. These experi- ences underline the potential role of digital payments in driving financial inclusion. Nevertheless, almost 30 percent of unbanked adults report trust in banks as a barrier, which is nearly double the developing country average. And in some countries, gender gaps in account ownership remain significant. For example, the gap is close to 30 percentage points in Turkey, which is three times the average gap in developing countries. But there are many opportunities to increase account ownership. Over 80 percent of the unbanked have a mobile phone, and simply moving public sector pension payments into accounts would reduce the number of unbanked adults in the re- gion by up to 20 million. Given the heterogeneity of experiences, there are ample opportunities for countries in the region to learn from each other, which lays out a rich research and operational agenda going forward. xi PART I Economic Outlook 1 The Global Context Softening growth and elevated uncertainty are clouding global economic prospects. Global activity and trade decelerated at the end of 2018, and data point to continued weakness into 2019. Growth in emerging markets and developing economies is projected to stall in 2019, with a weak recovery by commodity exporters accompanied by a decelera- tion in commodity importers. A recurrence of financial stress could disrupt activity and lead to contagion effects. Trade disputes could escalate or become more widespread, dent- ing activity in the economies involved and leading to negative global spillovers. Slowing activity in the euro area and a sharper than expected deceleration in China could trigger a deeper slowdown in global activity. Policy uncertainty and geopolitical risks remain high and could negatively affect confidence and investment around the world. Overall Trends Global growth continues to moderate, amid soft trade and manufacturing activ- ity, reflecting slowdowns in most major economies, as well as in emerging mar- kets and developing economies (EMDEs) that experienced substantial financial market pressure, such as Argentina and Turkey. The ongoing weakness is consis- tent with the January 2019 Global Economic Prospects report, which estimated global growth at 3 percent for 2018 (figure 1.1, panel a). Global inflation trended up during most of 2018, peaking at 2.5 percent (year-over-year) in October before moderating. Incoming data indicate that global growth may be softening further going into 2019. Global goods trade has been stagnating, with the euro area experiencing its largest contraction in export volumes since the 2009 global financial crisis (figure 1.1, panel b). Over the course of 2018, the pace of industrial production growth 3 4  ●   World Bank ECA Economic Update Spring 2019 FIGURE 1.1 Global economic outlook b. Changes in volume of global goods a. Global economic growth, 2010–21 trade and new export orders, 2016–19 Global goods trade growth (left-hand axis) 8 World New export orders (right-hand axis) Advanced economies EMDEs 12 56 Annual growth (percent) 10 Annual growth in trade 6 Index of new orders volume (percent) 8 54 6 4 4 52 2 0 2 −2 50 −4 −6 48 0 Ju 6 Ju 8 O 16 Ja 16 Ja 18 O 18 Ju 7 Ap 16 19 Ap 18 Ja 17 O 17 Ap 17 r-1 r-1 r-1 - - l- l- - l- n- n- n- 20 n- ct ct ct 10 19 12 15 16 21 18 13 14 17 11 Ja 20 20 20 20 20 20 20 20 20 20 20 20 c. Monthly changes in oil production d. GDP growth in the euro area, Germany, in selected countries, in 2018 and Italy, 2017–18 0.5 5 Monthly change in production euro area Germany Percentage change in GDP growth (millions barrels per day) 4 Italy 0 3 −0.5 2 1 −1 0 −1.5 −1 18Q2 18Q3 18Q4 17Q2 17Q3 17Q4 December January 18Q1 17Q1 Saudi Arabia Other OPEC Canada Other non-OPEC 2017 2018 Source: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; International Energy Agency; World Bank. Note: In panel a, the shaded area indicates forecasts. Data for 2018 are estimates. Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP weights. In panel b, new export orders are measured by the Purchasing Managers’ Index (PMI). Readings above 50 indicate ex- pansion; readings below 50 indicate contraction. The last observation is February 2019 for PMI and December 2018 for trade volumes. In panel d, figure shows quarter-on-quarter seasonally-adjusted annualized rates. Data in 2010 chained euro. The last observation is for fourth quarter 2018. EMDEs = emerging markets and developing economies; GDP = gross domestic product; OPEC = Organization of the Petroleum Export- ing Countries. declined by more than two-thirds. Several measures of global sentiment have fallen to their lowest level in years. Uncertainty remains elevated, notwithstand- ing recent optimism that ongoing trade disputes between major economies will be partially resolved. After tightening throughout most of 2018, global financing conditions have eased somewhat as major central banks responded to deteriorating growth pros- pects with a more dovish stance, including the Federal Reserve, the European Central Bank, the Bank of England, the Reserve Bank of India, and the People’s Bank of China. Reassessment of the future path of U.S. policy interest rates and inflation have contributed to U.S. long-term yields declining to 2.4 percent after a seven-year peak of 3.2 percent in November. Global equity markets have recov- Chapter 1: The Global Context ●  5 ered after bottoming out in late December, despite continuing concerns about softening global growth. Many EMDEs faced substantial financial market stress or deteriorating mar- ket sentiment in 2018. So far in 2019, however, external financing conditions have improved and capital inflows to EMDEs have recovered. After yields on EMDE debt issued on international bond markets rose about 150 basis points in 2018— the third-largest annual increase in the past two decades—sovereign bond spreads reversed and narrowed somewhat, although they remain elevated com- pared to 2017 levels. Oil prices have been rising since the beginning of the year, with Brent crude climbing above $65 a barrel in mid-February, driven by a fall in the global oil supply of more than 2 million barrels a day, mainly as a result of planned produc- tion cuts by Saudi Arabia and other members of the Organization of the Petro- leum Exporting Countries (OPEC) (figure 1.1, panel c). Oil prices are forecast to average $67 a barrel in 2019, slightly below the 2018 average. The prices of metals and most agricultural commodities fell in the second half of 2018, following the imposition of new U.S. tariffs on imports from China; they have been slowly drifting back up in 2019. Negotiations between China and the United States may avert further increases or roll back existing tariffs between the two countries, but trade tensions are likely to persist. TABLE 1.1  Real GDP (Percent change from previous year) Real GDP (percent) Category 2016 2017 2018e 2019f 2020f 2021f World 2.5 3.1 2.9 2.9 2.8 2.8 Advanced economies 1.7 2.3 2.1 2.0 1.6 1.5 United States 1.6 2.2 2.9 2.5 1.7 1.6 Euro Area 1.9 2.5 1.8 1.6 1.5 1.3 Japan 0.6 1.9 0.7 0.9 0.7 0.6 China 6.7 6.8 6.6 6.2 6.2 6.0 World trade volumea 2.6 5.4 3.8 3.6 3.5 3.4 Commodity pricesb Oil price −15.6 23.3 30.7 −2.9 0.0 0.0 Non-energy commodity −2.8 5.3 1.7 1.0 1.2 1.2 price index Source: World Bank. Note: Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP weights. World Bank forecasts are frequently updated based on new information. Consequently, the projections presented here may differ from those in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment. Country classifications and lists of emerging markets and developing economies are presented in table 1.2. e = estimate; f = forecast. a. World trade volume of goods and nonfactor services. b. Oil is the simple average of Brent, Dubai, and West Texas Intermediate. The nonenergy index is made up of the weighted average of 39 commodities (7 metals, 5 fertilizers, and 27 agricultural com- modities). For details, see http://www.worldbank.org/en/research/commodity-markets. For additional information, see www.worldbank.org/gep. 6  ●   World Bank ECA Economic Update Spring 2019 Major Economies Growth in the U.S. economy increased to 2.9 percent in 2018, mostly reflecting strong domestic demand bolstered by procyclical fiscal stimulus and accommo- dative monetary policy. Wages and labor productivity are showing signs of pick- ing up. In the coming years, growth is expected to decelerate toward long-term trends, as fiscal stimulus fades and the impact of higher tariffs is felt. Euro area growth slowed in 2018, falling to 1.8 percent, down from 2.4 percent the year before. Exports softened, reflecting the earlier appreciation of the euro and slowing external demand. German activity decelerated especially rapidly at the end of 2018, and Italy entered a recession (figure 1.1, panel d). Incoming data do not point to recovery. Industrial production contracted to its lowest level since 2012, and the Manufacturing Purchasing Managers’ Index (PMI) dipped to a six-year low. The United Kingdom is scheduled to exit the European Union at the end of March, but no plans for an orderly withdrawal have yet been agreed upon as the British Parliament has rejected the draft withdrawal treaty negotiated with the European authorities. The exit deadline may be extended. A no-deal Brexit could TABLE 1.2  Europe and Central Asia forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences Annual GDP growth (percent) from January 2019 projections Region/subregion 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE ECA, GDPa 1.9 4.1 3.1 2.1 2.7 2.9 −0.2 0.0 0.0 EMDE ECA, GDP excl. Turkey 1.5 3.0 3.3 2.5 2.6 2.6 −0.1 0.0 0.1 Commodity exportersb 0.7 2.1 2.7 1.9 2.2 2.3 −0.1 0.0 0.0 Commodity importersc 3.1 6.0 3.6 2.3 3.2 3.5 −0.3 0.0 −0.1 Central Europe and Baltic Statesd 3.3 4.9 4.6 3.6 3.3 3.0 0.0 0.0 0.0 Western Balkanse 3.3 2.6 3.8 3.5 3.8 3.8 0.0 0.0 0.0 Eastern Europef 0.8 2.6 3.2 2.6 3.1 3.3 −0.3 0.0 −0.1 South Caucasusg −1.6 2.0 2.6 3.7 4.0 4.2 −0.3 0.2 0.8 Central Asiah 2.9 4.5 4.7 4.2 4.0 4.1 0.0 0.0 0.0 Russian Federation 0.3 1.6 2.3 1.4 1.8 1.8 −0.1 0.0 0.0 Turkey 3.2 7.4 2.6 1.0 3.0 4.0 −0.6 0.0 −0.2 Poland 3.1 4.8 5.1 4.0 3.6 3.3 0.0 0.0 0.0 Source: World Bank. Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, the projections presented here may differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment. For additional information, see www.worldbank.org/gep. e = estimate; ECA = Europe and Central Asia; EMDE = emerging market and developing economy; f = forecast; GDP = gross domestic product. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. b. Includes Albania, Armenia, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Kosovo, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. c. Includes Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, the Republic of North Macedonia, Moldova, Montenegro, Po- land, Romania, Serbia, and Turkey. d. Includes Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, and Romania. e. Includes Albania, Bosnia and Herzegovina, Kosovo, the Republic of North Macedonia, Montenegro, and Serbia. f. Includes Belarus, Moldova, and Ukraine. g. Includes Armenia, Azerbaijan, and Georgia. h. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Chapter 1: The Global Context ●  7 disrupt activity in the short term and exacerbate financial stability risks in the United Kingdom and abroad. Uncertainty remains high, likely hampering activity. Growth in China slowed to 6.1 percent (quarter-over-quarter, seasonally ad- justed annual rate) in the fourth quarter of 2018, bringing the rate for 2018 to 6.6 percent. Export growth decelerated, contributing to a shrinking current account surplus. Recent data point to further deceleration in 2019, amid ongoing rebal- ancing away from manufacturing and exports toward consumption and services. Growth is projected to decelerate to 6.2 percent in 2019 and 6.0 percent by 2021, broadly in line with its long-term pace. Supportive fiscal and monetary policies are expected to offset the negative impact of higher tariffs but may have the un- desirable effect of slowing the deleveraging and derisking process. Global Risks The balance of risks to the global economy is tilted to the downside. The possibil- ity of renewed disorderly financial market developments could further deterio- rate growth prospects and spread through EMDEs. Elevated debt in many econo- mies amplifies this risk. If all new tariffs currently under consideration were implemented, they would affect more than 5 percent of global goods trade. The dampening impact of trade tensions involving major economies could be multi- plied through global value chains, such as those linking Central Europe to Ger- many. A sharper than expected deceleration in activity in the euro area and in China could trigger a deeper slowdown in global activity. Policy uncertainty and geopolitical risks remain high and could erode confidence and investment around the world. In the absence of an approved withdrawal agreement, the exit of the United Kingdom from the European Union could be accompanied by sig- nificant disruptions to domestic activity and become a source of financial stabil- ity risk in other economies. Europe and Central Asia: Recent Developments and Outlook Aggregate growth in EMDEs in Europe and Central Asia (ECA) slowed to an estimated 3.1 percent in 2018, with substantial subregional variations. It is projected to decelerate to 2.1 percent in 2019, mainly as a result of weakness in Turkey, as it experiences the consequences of earlier financial market stress. Regional growth is expected to pick up modestly in 2020–21, as a gradual recovery in Turkey offsets moderating activity in Central Europe. Uneven growth trends underline the regional numbers, reflecting diver- gence across subregions over the forecast horizon. Key external risks to the region include spillovers from weaker than expected activity in the euro area and an additional escalation of global policy uncertainty, particularly in trade. Renewed financial pressures in Turkey, combined with possible contagion to the rest of the region, could also disrupt growth in the region’s EMDEs. The possibility of sharp declines in energy prices presents a down- side risk to the region’s energy exporters, such as Azerbaijan, Kazakhstan, and the Rus- sian Federation. 8  ●   World Bank ECA Economic Update Spring 2019 Recent Developments Growth in the EMDEs of ECA moderated to an average of 3.1 percent in 2018, with wide variation across countries. Upward revisions to gross domestic prod- uct (GDP) data for Russia, the largest economy in the region, contributed strongly to regional growth, alongside accelerating growth in Albania, Hungary, Poland, and Serbia. This was offset by weakness in Turkey due to financial market stress. The modest recovery in commodity exporters continued despite the volatility observed in commodity prices toward the end of the year; aggregate growth in commodity importers, excluding Turkey, eased slightly. In line with general trends among EMDEs, inflation trended up for most of 2018, peaking at 3 percent (year-over-year) in August. It corresponded to the sharp decline in oil prices toward the end of the year. Growth is expected to slide to 2.1 percent in 2019, before recovering to 2.9 percent in 2021. Much of the growth profile reflects developments in Turkey, without which growth is expected to average just 2.6 percent during 2019–21. Turkey entered a technical recession by the end of 2018, triggered by financial market and currency pressures. The contraction in activity represented a substan- tial reversal from the peak growth of 11.5 percent in the third quarter of 2017. Market sentiment deteriorated over concerns about rising private sector debt, much of it denominated in foreign currencies, accumulated through current ac- count deficits financed through volatile portfolio capital flows. Accelerating in- flation and a perceived delay in monetary tightening led to significant capital outflows from Turkey, with the lira undergoing a nearly 30 percent nominal de- preciation against the U.S. dollar. To interrupt the cycle of a depreciating currency contributing to rising inflation and vice versa, the central bank hiked policy inter- est rates by 16 percentage points over the year to 24 percent by September. Turk- ish growth is expected to slow to 1.0 percent in 2019, weighed down by shrinking purchasing power, scarce and expensive credit, and low confidence. It is expected to begin to recover by 2020, through gradual improvement in domestic demand and continued strength in net exports, assuming that fiscal and monetary policy avert further sharp falls in the lira and corporate debt restructurings help prevent serious damage to the financial system. In Russia growth accelerated to a six-year high of 2.3 percent in 2018, despite tightening economic sanctions and financial market pressure. It was supported by the rise in oil prices over most of the year, a solid contribution from net ex- ports, as well as one-off factors, such as energy-related construction projects and the hosting of the World Cup. Throughout most of 2018, consumer price inflation accelerated as a result of the depreciation of the ruble, prompting the central bank to hike the policy interest rate twice toward the end of the year. Tighter monetary policy and a value-added tax hike at the beginning of the year are contributing to decelerating momentum in 2019. Growth in Central Europe and the Baltics was 4.6 percent in 2018, supported by upwardly revised numbers for Hungary and Poland. Activity in Hungary ac- celerated to 4.9 percent in 2018, on the back of strong domestic demand from procyclical fiscal stimulus. In Poland, growth reached 5.1 percent in 2018, partly as a result of EU fund transfers and the strongest labor market since the 1990s. In Chapter 1: The Global Context ●  9 contrast, investment in Romania was subdued, reflecting weak absorption of EU funds, which dampened growth. Central Europe, which is composed mainly of net oil importers, experienced rising inflation throughout 2018 that corresponded to increasing oil prices. The pace of inflation has since slowed, given the sharp decline in oil prices toward the end of the year. The deceleration over the forecast horizon is more pronounced in Central Europe and the Baltics than in other ECA subregions, as growth is expected to slow as a result of a shrinking working-age population, domestic capacity constraints (in Hungary, Poland, Romania, and the Baltics, for example) and tight connections with the slowing euro area econ- omy. Private investment growth has been tepid and could diminish further in the absence of sustained progress on structural reforms. TABLE 1.3 Europe and Central Asia country forecasts (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences Annual GDP growth (percent) from January 2019 projections Country 2016 2017 2018e 2019 f 2020 f 2021f 2019 f 2020 f 2021f Albania 3.4 3.8 4.2 3.8 3.6 3.6 0.2 0.1 0.1 Armenia 0.2 7.5 5.2 4.2 4.9 5.2 −0.1 0.3 0.6 Azerbaijan −3.1 0.1 1.4 3.3 3.5 3.7 −0.3 0.2 1.0 Belarus −2.5 2.5 3.0 2.2 2.4 2.1 −0.5 −0.1 −0.4 Bosnia and Herzegovinaa 3.1 3.2 3.0 3.4 3.9 4.0 0.0 0.0 0.0 Bulgaria 3.9 3.8 3.1 3.0 2.8 2.8 −0.1 −0.2 0.0 Croatia 3.5 2.9 2.6 2.5 2.5 2.4 −0.3 −0.3 −0.2 Georgia 2.8 4.8 4.7 4.6 4.8 5.0 −0.4 −0.2 0.0 Hungary 2.3 4.1 4.9 3.5 2.8 2.6 0.3 0.0 0.2 Kazakhstan 1.1 4.0 4.1 3.5 3.2 3.2 0.0 0.0 0.0 Kosovo 4.1 4.2 4.2 4.4 4.5 4.5 −0.1 0.0 0.0 Kyrgyz Republic 4.3 4.7 3.5 4.3 4.0 4.1 0.9 0.1 0.1 Republic of North Macedonia 2.8 0.2 2.7 2.9 3.2 3.6 0.0 0.0 0.3 Moldova 4.4 4.7 3.8 3.6 3.5 3.8 −0.2 0.0 0.6 Montenegro 2.9 4.7 4.4 2.9 2.4 2.3 0.1 −0.1 −0.2 Poland 3.1 4.8 5.1 4.0 3.6 3.3 0.0 0.0 0.0 Romania 4.8 7.0 4.1 3.6 3.3 3.1 0.1 0.2 0.3 Russian Federation 0.3 1.6 2.3 1.4 1.8 1.8 −0.1 0.0 0.0 Serbia 3.3 2.0 4.2 3.5 4.0 4.0 0.0 0.0 0.0 Tajikistan 6.9 7.1 7.3 6.0 6.0 6.0 0.0 0.0 0.0 Turkey 3.2 7.4 2.6 1.0 3.0 4.0 −0.6 0.0 −0.2 Turkmenistan 6.2 6.5 6.2 5.6 5.1 4.9 0.0 0.0 0.0 Ukraine 2.3 2.5 3.3 2.7 3.4 3.8 −0.2 0.0 0.0 Uzbekistan 6.1 4.5 5.1 5.3 5.5 6.0   0.2 0.0 0.0 Source: World Bank. Note: GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars, unless indicated otherwise. World Bank forecasts are frequently updated based new information and changing (global) circumstances. Consequently, the projections presented here may differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any giv- en moment in time. For additional information, see www.worldbank.org/gep. e = estimate; f = forecast. a. GDP growth rate at constant prices is based on the factor costs approach. 10  ●   World Bank ECA Economic Update Spring 2019 Growth in the Western Balkans picked up to 3.8 percent in 2018, up from 2.6 percent the previous year. In Serbia, the economy rebounded from weather-re- lated disruptions in 2018 and benefited from strong job creation. Activity in Al- bania and Montenegro was solid, thanks to robust industrial production growth, as well as a strong tourism season. Growth in the Western Balkans is envisaged to moderate to 3.5 percent in 2019 and grow to 3.8 percent by 2020-21, but the outlook is predicated on political stability and policy uncertainty remaining in check. Infrastructure projects and investment in the subregion will help deliver robust growth in some economies (for example, Kosovo and Serbia), while a de- celeration in public and private investment will taper activity in others (for ex- ample, Albania and Montenegro). In the South Caucasus subregion, growth in 2018 was 2.6 percent, backed by robust mining and manufacturing activity. In Armenia, growth expanded to 5.2 percent, slowing in the second half of the year after copper prices dropped. In Azerbaijan, the recovery in domestic demand was slower than previously antici- pated, as systemic issues in the financial sector continue to weigh on credit, but a new natural gas pipeline coming on stream is expected to support growth in the coming years. Georgia continued to be characterized by robust domestic de- mand, although momentum in the third quarter slowed on the back of contract- ing industrial production growth. Growth in the South Caucasus subregion is projected to strengthen to 4.2 percent by 2021, conditional on continued imple- mentation of domestic reforms. Growth in Central Asia expanded at a robust 4.7 percent in 2018, the strongest subregional growth among the region’s EMDEs. The recovery from the 2014–16 collapse in oil prices in Kazakhstan has been supported by higher than expected production in the Kashagan oil field and strong domestic demand. In the Kyrgyz Republic, growth eased from 4.7 percent in 2017 to 3.5 percent in 2018, partially as a result of slower gold production. Over the forecast period, growth is pro- jected to moderate to a still robust 4.1 percent by 2020-21 in Central Asia, as the gradual slowdown in the euro area is expected to weigh on export growth in Kazakhstan. Risks to the Regional Outlook Although the global economy showed worsening signs of weakness throughout 2018, growth in the region (excluding Turkey) was largely insulated. There are risks that this divergence fades in the face of a sharper than expected deceleration in ECA’s most important trading partner, the euro area. Europe remains the re- gion’s largest trading partner, purchasing the majority of all EMDE ECA exports in 2017. Recent developments point to the predominance of downside risks, with activity weakening sharply in the euro area, especially Germany and Italy, and multiple indicators pointing to continued deceleration going into 2019. The experience of Turkey in 2018 is a stark reminder of the risk of sudden and widespread shifts in investor sentiment, in particular for countries with large current account deficits or reliance on volatile capital inflows, high external debt loads, or sizable foreign currency-denominated debt as a share of GDP. Chapter 1: The Global Context ●  11 Increases in policy uncertainty could undermine confidence in the region and slow growth. Policy disagreements between the European Union and some Cen- tral European countries could deter international investors and reduce fiscal transfers. An escalation of international trade restrictions could have a negative impact on the region, given its trade openness and capital linkages. A slowdown or reversal of ongoing structural reforms remains a risk in many countries, espe- cially for Armenia, Azerbaijan, Belarus, Ukraine, and Turkey. Tensions over the Syrian Arab Republic or Ukraine could trigger new sanctions. Long-Term Challenges Over the next decade, promoting growth for the region’s EMDEs is expected to become more challenging. Demographic trends are worsening rapidly, and productivity and in- vestment growth remain subdued. Growth is expected to slow further in most ECA coun- tries over the next decade (World Bank 2018a). Tighter financing conditions and dimin- ishing economic prospects are expected to deter investment. Unless new technologies can help unleash a productivity revival, productivity growth is expected to remain lackluster. Meanwhile, climate change may impose significant economic costs, especially for coun- tries that rely heavily on agriculture, such as those in Central Asia. Policymakers can adopt a wide range of policy options to mitigate slowing productivity growth and declin- ing working-age populations. This update focuses on one policy - promoting inclusive financial sector development—as a way to promote growth and poverty alleviation. Aging Populations Working-age population growth among the region’s EMDEs has long been well below the global average for EMDEs. In the late 2000s, it turned negative (figure 1.2, panel a). The shift is attributed to declining fertility rates in the 1990s in the aftermath of the collapse of the Soviet Union, exacerbated by migration to the European Union and Russia. A recent slowing of emigration and rising female labor force participation have only partially mitigated downward trends. The region can be divided into two parts, based on countries’ stage of demo- graphic transition. Turkey and Central Asia have only recently entered the late stage, characterized by falling fertility and mortality at all ages. The higher-in- come parts of the ECA region have already reached an advanced stage of aging, with populations declining (Bussolo, Koettl, and Sinnott 2015). Declining Productivity Annual trend total factor productivity (TFP) growth in ECA slowed to 0.8 percent in 2013–17, about 0.4 percentage point below the long-term average (figure 1.2, panel b) (World Bank 2018a). The deceleration largely reflected slowdowns in foreign direct investment (FDI) inflows, sectoral reallocation, and reform mo- mentum, combined with aging population and declining business dynamism (World Bank 2018b). In the absence of a sudden productivity boost arising from new technologies, many of the drivers of the productivity slowdown in ECA ap- pear likely to persist over the next decade. 12  ●   World Bank ECA Economic Update Spring 2019 FDI flows have fostered technology transfers and productivity gains among the region’s EMDEs, particularly in Central Europe. However, growth in FDI flows to the region plummeted to 1 percent a year in 2013–16, down from 37 percent in 2005–07, likely adversely affecting TFP growth (EBRD 2015). The real- location of labor from the agriculture sector to services and industry has been an important source of economywide productivity gains over the past two decades. In the western part of the region, however, the shift from agricultural to nonagri- cultural employment slowed after the global financial crisis. Improvements in the business climate are associated with increasing produc- tivity (World Bank 2018a). Over the past decade, EMDEs in ECA made strides in improving their business environments. As a result, in Central and Eastern Eu- rope, the Western Balkans, and the South Caucasus, indexes of the business envi- ronment are approaching the levels in advanced EU countries. Reform momen- FIGURE 1.2 Long-term economic challenges facing Europe and Central Asia a. Share of regional GDP accounted for by countries with b. Actual and projected total factor productivity growing working-age populations, 1998–2017 growth in Europe and Central Asia, 2003–27 100 3 Total factor productivity (percent) 1998−2007 average Percent of regional GDP 75 2 50 1 25 0 2003−07 2013−17 2018−27 2003−07 2013−17 2018−27 0 2 7 2 7 7 −0 −1 −2 00 −1 13 08 18 03 −2 20 EMDEs ECA 20 20 20 98 19 c. Private and government debt in Poland, d. Investment growth in the emerging markets and Russia, and Turkey, 2008 and 2018 developing economies of Europe and Central Asia, 2010–18 16 Annual investment growth (percent) 100 2003−08 average Poland Russia Turkey 14 80 12 Percent of GDP 60 10 8 40 6 20 4 2 0 2008 2018 2008 2018 0 Nonfinancial General −2 10 11 12 13 14 15 16 17 18 corporations government 20 20 20 20 20 20 20 20 20 Sources: Institute of International Finance; Penn World Tables; World Bank. Note: In panel a, the working-age population is defined as people 15–64. The sample includes 24 countries. In panel b, values are the GDP- weighted average of total factor productivity growth. In panel c, debt is defined as loans, debt securities, and currency and deposits. Data for 2018 are through the second quarter. Chapter 1: The Global Context ●  13 tum appears to have slowed in the mid-2000s, after Central European countries acceded to the European Union. Business climates in Central Asia continue to lag well behind those elsewhere in the region, notwithstanding improvements in Kazakhstan and Uzbekistan (World Bank 2019). Weakening Investment Investment growth has slowed sharply, from an average of more than 15 percent in the five years before the global financial crisis to an average of 1.6 percent in 2014–18, despite significant increases in debt (figure 1.2, panels c and d). The causes of investment weakness include declining commodity prices, lower FDI inflows, and lower long-term growth expectations. A sudden tightening of finan- cial conditions could further weigh on investment, particularly for countries with high levels of debt that is denominated in foreign currency, short term, or at vari- able rates. In countries where the banking system is weak or has deteriorating asset quality (such as Belarus, Croatia, Kazakhstan, Russia, and Ukraine), a “sov- ereign-bank nexus” could amplify the impact of financial disruptions if bank holdings of government debt combine with government guarantees to the finan- cial system to intertwine the health of banks and sovereigns (World Bank 2018c). Climate Change Climate change is contributing to droughts, floods, more intense and frequent natural disasters, and rising sea levels, with the poorest and most vulnerable people often hit hardest. Changes in rainfall patterns, rising temperatures, droughts, and floods have serious implications for countries with large agricul- ture sectors. Central Asia is especially vulnerable because of its aridity, previous underinvestment in infrastructure, high frequency of natural disasters, reliance on glaciers for water supply, and legacy of Soviet-era environmental mismanage- ment (UNDP 2018). Changes in sea level will affect many countries. Poland’s heavily populated Baltic coast is vulnerable to rising sea levels. The Black Sea has seen a significant rise in sea level, which is threatening the many ports and towns along the coasts of Georgia, Russia, and Ukraine. As a result of increased surface evaporation, water levels in the Caspian Sea are projected to drop by approxi- mately 6 meters by the end of the 21st century, imperiling fish stocks and coastal infrastructure (Fay, Block, and Ebinger 2010). Policy Options for Responding to Long-Term Challenges A wide range of policy options is available to help address the region’s long-term challenges. Filling the region’s investment gaps—estimated to be equivalent to 1.3 percent of GDP—could boost productivity (EBRD 2015). Public firms tend to be less efficient than private firms in ECA; privatization therefore presents an opportunity to raise economywide productivity, especially if it is accompanied by improved management and corporate governance. Promoting FDI and other forms of connectivity could accelerate technology absorption and speed convergence with advanced economies (Gould 2018). Greater participation in global value chains is associated with faster productivity 14  ●   World Bank ECA Economic Update Spring 2019 growth. Some countries have already integrated into the German supply chain. Countries in the South Caucasus and Central Asia could make similar progress through greater East-West connectivity. ECA countries could mitigate the impact of declining populations by increasing labor force participation—by providing better access to childcare services or attracting and retaining skilled labor, for example. Investments in human capital—both health and education—are also key in promoting productivity. Financial Sector Development Finance is central to development. Well-functioning financial systems contribute to growth and poverty alleviation by mobilizing and pooling resources, allocat- ing capital to its most efficient uses, monitoring these investments after they have been made, and diversifying and managing risk. To be able to perform these func- tions, financial systems need to be deep, efficient and stable. For all segments of the society to benefit from these services, they also need to be inclusive. Inclusive financial sector development can contribute to economic develop- ment by promoting individuals’ investments in their health, education, and busi- nesses. Greater financial inclusion can also help allocate the savings of an aging population and increase access to finance. But not all financial services are ap- propriate for everyone, and -especially for credit- there is a risk of overextension. Promoting financial inclusion is a responsible and sustainable way requires strong regulation and supervision to prevent potential crises that can accompany a rapidly-growing financial system (Gould and Melecky 2017; World Bank forth- coming). The feature chapter of this update examines recent trends and identifies many remaining challenges in promoting financial inclusion in ECA countries. Annex: Data and Forecast Conventions The macroeconomic forecasts presented in this report are the result of an iterative process involving World Bank staff from the Macroeconomics, Trade, and Invest- ment Global Practice; regional and country offices; and the Europe and Central Asia Chief Economist’s office. This process incorporates data, macroeconometric models, and judgment. Data The data used to prepare the country forecasts come from a variety of sources. National income accounts, balance of payments, and fiscal data are from Haver Analytics; the World Bank’s World Development Indicators; and the IMF’s World Economic Outlook, Balance of Payments Statistics, and International Financial Statistics. Population data and forecasts are from the United Nations World Popu- lation Prospects. Country and lending group classifications are from the World Bank. In-house databases include commodity prices, data on previous forecast vintages, and country classifications. Other internal databases include high- frequency indicators, such as industrial production, consumer price indexes, housing prices, exchange rates, exports, imports, and stock market indexes, based Chapter 1: The Global Context ●  15 on data from Bloomberg, Haver Analytics, the Organisation for Economic Co-operation and Development analytical housing price indicators, the IMF’s Balance of Payments Statistics, and the IMF’s International Financial Statistics. Aggregations Aggregate growth for the world and all subgroups of countries (such as regions and income groups) is calculated as the GDP-weighted average (at 2010 prices) of country-specific growth rates. Income groups are defined as in the World Bank’s classification of country groups. Forecast Process The process starts with initial assumptions about advanced economy growth and commodity price forecasts. These assumptions are used as conditions for the first set of growth forecasts for EMDEs, which are produced using macroeconometric models, accounting frameworks to ensure national account identities and global consistency, estimates of spillovers from major economies, and high-frequency indicators. These forecasts are then evaluated to ensure consistency of treatment across similar EMDEs. This process is followed by extensive discussions with World Bank country teams, which conduct continuous macroeconomic monitor- ing and dialogue with country authorities. Throughout the forecasting process, staff use macroeconometric models that allow the combination of judgment and consistency with model-based insights. References Bussolo, M., J. Koettl, and E. Sinnott. 2015. Golden Aging: Prospects for Healthy, Active, and Prosperous Aging in Europe and Central Asia. Washington, DC: World Bank. EBRD (European Bank for Reconstruction and Development). 2015. Transition Report 2015–16: Rebalancing Finance. London: EBRD. Fay, M., R. Block, and J. Ebinger, eds. 2010. Adapting to Climate Change in Eastern Eu- rope and Central Asia. Washington, DC: World Bank. Gould, D. 2018. Critical Connections: Promoting Economic Growth and Resilience in Eu- rope and Central Asia. Europe and Central Asia Studies. Washington, DC: World Bank. Gould, D., and M. Melecky. 2017. Risks and Returns: Managing Financial Trade-Offs for Inclusive Growth in Europe and Central Asia. Europe and Central Asia Studies. Wash- ington, DC: World Bank. UNDP (United Nations Development Programme). 2018. Climate Change Adaptation in Europe and Central Asia. Istanbul: UNDP. World Bank. 2018a. Global Economic Prospects: Broad-Based Upturn, but for How Long? Washington, DC: World Bank. ———. 2018b. Europe and Central Asia Economic Update: Cryptocurrencies and Block- chain. Washington, DC: World Bank. ———. 2018c. Macro-Financial Review. October. Washington, DC: World Bank. ———. 2019. Doing Business 2019: Training for Reform. Washington, DC: World Bank. ———. Forthcoming. Global Financial Development Report: Bank Regulation and Super- vision: The Decade after the Financial Crisis. Washington, DC: World Bank. 2 Financial Inclusion in Europe and Central Asia Well-functioning financial systems serve a vital purpose by offering savings, payment, credit, and risk management services and thereby contribute to eco- nomic development. Inclusive financial systems are those with a high share of individuals that have an access to and use financial services (World Bank, 2014; Demirgüç-Kunt, Klapper, and Singer 2017). Such systems provide individuals with greater access to resources to meet their financial needs, such as saving for retirement, investing in education, capitalizing on business opportunities, and confronting shocks. Inability to use these financial services can contribute to per- sistent income inequality and slow economic growth. However, financial systems around the world are far from inclusive. Many poor people around the world lack the financial services that can serve these functions, such as bank accounts and digital payments. They rely on cash, which can be unsafe and difficult to manage. Without access to financial services that enable formal savings and borrowing, these “unbanked” people are also less likely to be able to come up with emergency funds to meet unexpected expendi- ture needs. This chapter focuses on financial inclusion of the individuals, pro- vides an overview of how ECA countries fare in the global context, and identifies opportunities and challenges in promoting financial inclusion. Why Does Financial Inclusion Matter? Development theory provides important clues about the impact of financial in- clusion on economic development. Available models illustrate how financial exclusion and, in particular, lack of access to finance can lead to poverty traps and inequality (Aghion and Bolton, 1997; Banerjee and Newman, 1993; Galor 17 18  ●   World Bank ECA Economic Update Spring 2019 and Zeira 1993). For example, in the model of Galor and Zeira (1993), it is because of financial market frictions that poor people cannot invest in their education, despite their high marginal productivity of investment. In Banerjee and New- man’s model (1993), the occupational choices of individuals (between becoming entrepreneurs or remaining wage earners) are limited by the initial endowments. These occupational choices determine how much individuals can save and what risks they can bear, with long-run implications for growth and income distribu- tion. These models show that lack of access to finance can be critical for generat- ing persistent income inequality or poverty traps, as well as lower growth. There is also a growing body of empirical literature that documents the poten- tial development benefits of financial inclusion, especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology applications. Recent research shows financial inclusion yields a wide range of benefits. Mobile money services, which allow users to store and transfer funds through a mobile phone, can improve people’s income- earning potential and reduce poverty. A study in Kenya finds that among house- holds headed by women, access to mobile money services increased their savings by more than 20 percent and helped reduce extreme poverty by 22 percent (Suri and Jack 2016). Digital financial services can also help people manage financial risks and smooth consumption. When times are tough, mobile money services can make it easier for families to receive money from friends and relatives living far away. Digital payment systems can lower the cost of remittances and save time and travel costs. Financial services also help people accumulate savings and increase spending on necessities. Women-headed households in Nepal, for example, spent 15 percent more on nutritious foods and 20 percent more on education after receiving free savings accounts (Prina 2015). For governments, switching from cash to digital payments can reduce corrup- tion and improve efficiency. In India the leakage of funds for pension payments declined by 47 percent when the payments were made through biometric smart cards rather than cash (Muralidharan, Niehaus, and Sukhtankar 2016). In Niger distributing social transfers through mobile phones rather than in cash reduced the variable cost of administering the benefits by 20 percent (Aker and others 2016). Growth in Account Ownership Is Uneven in Europe and Central Asia Account ownership serves as an entry point into the formal financial sector. A formal account makes it easier to transfer wages, remittances, and government payments. It can also encourage saving and open access to credit. Having an account is therefore often used as a marker of financial inclusion. The Global Findex database—which provides systematic indicators of the use of different financial services (see Annex on Survey Methodology)—shows that 515 million adults across the world opened an account at a financial institution or through a mobile money provider between 2014 and 2017. The share of adults with an account increased from 51 percent in 2011 to 62 percent in 2014 and 69 Chapter 2: Financial Inclusion in Europe and Central Asia ●  19 percent in 2017. In developing economies, the share increased from 42 percent in 2011 to 55 percent in 2014 and 63 percent in 2017. Despite overall growth in ac- count ownership around the world, however, wide variation remains across economies (map 2.1). In developing economies in Europe and Central Asia (ECA), the share of adults with an account at a financial institution increased from 45 percent in 2011 to 65 percent in 2017. Compared with the rest of the world, developing economies in ECA had relatively high levels of account ownership as of 2011 and experi- enced moderate growth over time. Within ECA there is considerable variation across countries in the growth of account ownership (figure 2.1). In the high-income euro area, 90 percent of adults already owned an account by 2011. The share increased marginally to 95 percent in 2017. The pattern differs in the rest of the region. All three developing economies in Eastern Europe—Belarus, Moldova, and Ukraine—witnessed an increase in ac- count ownership of more than 20 percentage points between 2011 and 2017 (table 2.1). The Baltic economies experienced an increase in account ownership from a high base level. In 2017 almost all adults in Estonia and Latvia had an account. Financial inclusion levels are lower in Central Europe. A few Central Euro- pean economies, such as Croatia and Czech Republic had stagnant levels of ac- count ownership in the past decade. In Romania, account ownership grew from 45 percent in 2011 but re`mained at around 60 percent since 2014. Countries in the Western Balkans experienced moderate growth in account ownership, from 55 MAP 2.1 Account ownership varies significantly across the world Percent of adults with an account, 2017 0–19 20–39 40–64 65–89 90–100 No data Source: Global Findex database. Note: Data show percent of adults (aged 15 and above) with an account at a financial institution or a mobile money provider. 20  ●   World Bank ECA Economic Update Spring 2019 FIGURE 2.1 Account ownership in Europe and Central Asia varies widely by subregion 2011 2014 2017 100 90 80 Percent of adults with an account 70 60 50 40 30 20 10 0 Central Central Eastern Northern Russian South Southern Turkey Western Western Asia Europe & Europe Europe Federation Caucasus Europe Balkans Europe the Baltics Source: Global Findex database. Note: Data show percent of adults (aged 15 and above) with an account at a financial institution or a mobile money provider. percent in 2011 to 63 percent in 2017. In Central Asia and the South Caucasus, account ownership doubled from about 20 percent in 2011 to roughly 40 percent in 2017. Armenia, Georgia, the Kyrgyz Republic, and Tajikistan saw significant increases in account ownership of 15 to more than 20 percentage points between 2014 and 2017. Inequality in Account Ownership Is High in Parts of the Region Globally, inequality in account ownership along gender, income, and other di- mensions persists, despite continued growth in account ownership. Gender in- equality is especially persistent. While 72 percent of men around the world have an account, just 65 percent of women do. The gender gap of 7 percentage points was also present in 2014 and 2011. In developing economies, the gender gap re- mained constant at 9 percentage points (figure 2.2). The gap between richer and poorer households also failed to narrow. Among adults in the richest 60 percent of households within economies, 74 percent have an account. Among the poorest 40 percent, only 61 percent have an account. The global average gap between richer and poorer households stood at 13 percentage points in 2014 and 2017. Account ownership is also lower among young adults, the less educated, and people who are out of the labor force. Chapter 2: Financial Inclusion in Europe and Central Asia ●  21 TABLE 2.1  Account ownership in Europe and Central Asia grew between 2011 and 2017 (Percent) Subregion/country 2011 2014 2017 Central Asia 22 39 44 Kazakhstan 42 54 59 Kyrgyz Republic 04 18 40 Tajikistan 03 11 47 Turkmenistan 0 .. 41 Uzbekistan 23 41 37 Central Europe and the Baltics 68 75 79 Bulgaria 53 63 72 Croatia 88 86 86 Czech Republic 81 82 81 Estonia 97 98 98 Hungary 73 72 75 Latvia 90 90 93 Lithuania 74 78 83 Poland 70 78 87 Romania 45 61 58 Slovak Republic 80 77 84 Slovenia 97 97 98 Eastern Europe 43 54 65 Belarus 59 72 81 Moldova 18 18 44 Ukraine 41 53 63 Northern Europe 99 100 100 Denmark 100 100 100 Finland 100 100 100 Sweden 99 100 100 Russian Federation 48 67 76 South Caucasus 20 30 40 Armenia 17 18 48 Azerbaijan 15 29 29 Georgia 33 40 61 Southern Europe 81 91 93 Cyprus 85 90 89 Greece 78 88 85 Italy 71 87 94 Malta 95 96 97 Portugal 81 87 92 Spain 93 98 94 Turkey 58 57 69 Western Balkans 55 65 63 Albania 28 38 40 Bosnia and Herzegovina 56 53 59 Kosovo 44 48 52 Republic of North Macedonia 74 72 77 Montenegro 50 60 68 Serbia 62 83 71 Western Europe 97 98 97 Austria 97 97 98 Belgium 96 98 99 France 97 97 94 Germany 98 99 99 Ireland 94 95 95 Luxembourg 95 96 99 Netherlands 99 99 100 United Kingdom 97 99 96 Total 69 77 81 Source: Global Findex database. Note: Table shows percentage of adults 15 years and older who own an account at a financial institu- tion or a mobile money provider. 22  ●   World Bank ECA Economic Update Spring 2019 FIGURE 2.2 The gender gap in account ownership persists 100 High-income economies Percent of adults with an account 80 60 Developing economies 40 20 0 2011 2014 2017 Men Women Source: Global Findex database. Note: Data show percent of adults (aged 15 and above) with an account at a financial institution or a mobile money provider. In some ECA countries, the gender gap is much larger than the developing country average of 9 percentage points (table 2.2 and figure 2.3). The largest gap is in Turkey, where 83 percent of men but just 54 percent of women have accounts (figure 2.4). The gender gap is about three times as large as the average gap in developing countries. The income gap in account ownership is about 21 FIGURE 2.3 The gender gap in account ownership varies widely within Europe and Central Asia 100 90 80 Percent of adults with account 70 60 50 40 30 20 10 0 Men Men Men Men Men Men Men Men Men Men Women Women Women Women Women Women Women Women Women Women Central Central Eastern Northern Russian South Southern Turkey Western Western Asia Europe & Europe Europe Federation Caucasus Europe Balkans Europe the Baltics 2011 2017 Source: Global Findex database. Note: Figures show percent of population 15 years and older with an account at a financial institution or a mobile money provider. Chapter 2: Financial Inclusion in Europe and Central Asia ●  23 TABLE 2.2  Gender gap in account ownership varies by country 2011 2014 2017 Country Men Women Men Women Men Women Central Asia 22 22 39 39 46 43 Kazakhstan 40 44 52 56 57 60 Kyrgyz Republic 4 4 18 19 41 39 Tajikistan 3 2 14 09 52 42 Turkmenistan 0 1 .. .. 46 36 Uzbekistan 24 21 42 39 38 36 Central Europe and the Baltics 69 67 77 72 80 78 Bulgaria 50 55 63 63 71 74 Croatia 90 87 84 88 90 83 Czech Republic 81 81 85 79 84 79 Estonia 96 97 98 97 98 98 Hungary 72 73 72 72 78 72 Latvia 87 92 90 90 94 93 Lithuania 71 76 78 78 85 81 Poland 72 68 83 73 85 88 Romania 49 41 65 57 62 54 Slovak Republic 80 79 74 80 85 83 Slovenia 96 98 98 97 98 97 Eastern Europe 45 41 55 53 66 64 Belarus 59 58 72 72 81 81 Moldova 19 17 16 19 43 45 Ukraine 44 39 54 52 65 61 Northern Europe 99 99 100 100 100 100 Denmark 100 99 100 100 100 100 Finland 99 100 100 100 100 100 Sweden 99 99 100 100 99 100 Russian Federation 49 48 64 70 75 76 South Caucasus 20 20 32 27 41 39 Armenia 17 18 21 15 56 41 Azerbaijan 16 14 33 26 29 28 Georgia 31 35 40 40 58 64 Southern Europe 86 77 93 89 95 91 Cyprus 88 83 90 90 87 90 Greece 80 76 88 87 86 85 Italy 79 64 92 83 96 92 Malta 97 94 97 96 98 97 Portugal 85 78 89 86 94 91 Spain 95 92 98 98 96 92 Turkey 82 33 69 44 83 54 Western Balkans 60 51 69 61 66 60 Albania 34 23 43 34 42 38 Bosnia and Herzegovina 67 48 59 47 63 55 Kosovo 57 31 59 36 61 44 Republic of North Macedonia 76 72 80 64 80 73 Montenegro 52 49 62 58 69 68 Serbia 62 62 83 83 73 70 Western Europe 97 98 98 98 98 96 Austria 98 97 96 97 98 98 Belgium 95 97 97 100 98 99 France 97 97 98 95 97 91 Germany 98 99 98 99 99 99 Ireland 96 92 95 95 95 95 Luxembourg 94 95 96 97 99 98 Netherlands 99 98 99 99 99 100 United Kingdom 97 98 99 99 97 96 Total 72 66 79 76 83 79 Source: Global Findex database. Note: Figures show percent of male or female population aged 15 and older with an account at a financial institution or a mobile money provider. 24  ●   World Bank ECA Economic Update Spring 2019 FIGURE 2.4 Inequality in 90 account ownership remains high in Turkey 80 70 Percent of adults with an account 60 50 40 30 20 10 0 Men Women Richest Poorest People People 60% 40% 15–24 25 and older Source: Global Findex database. Note: The height of the bars shows the percentage of adults aged 15 and above with an account at a financial institution or a mobile money provider. percentage points in Turkey, much higher than the global average. Younger adults are also less likely to own an account than older adults (see box 2.1). Such countries include Armenia (15 percentage points), Kosovo (17 percentage points), Tajikistan (10 percentage points), and Turkmenistan (10 percentage points). Who Remains Unbanked in Europe and Central Asia? Globally, about 1.7 billion adults remain unbanked. Account ownership is almost universal in high-income economies; nearly all unbanked adults live in the devel- oping world. Nearly half of them live in populous developing countries such as Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. In 2017 there were 116 million unbanked adults in ECA. The majority live in Romania, the Russian Federation, Turkey, Uzbekistan, and Ukraine. These people share various characteristics. First, women represent 58 percent of all unbanked adults in ECA. In some economies, such as Armenia, Kosovo, and Turkey, their share is even higher. Second, poor people account for a disproportionate share of the unbanked in ECA (figure 2.5). Half of all unbanked adults are from the poorest 40 percent of households in the region. In Romania, for instance, nearly 60 percent of the un- banked are from the poorest 40 percent of households. Seventy-one percent of the richest 60 percent of adults in Romania have an account, while only 38 percent of the bottom 40 percent do. Such income gaps in account ownership are prevalent in ECA countries, with a handful of exceptions, including Croatia, the Kyrgyz Republic, Turkmenistan, and Russia, in all of which the gap is less than 10 per- centage points. Chapter 2: Financial Inclusion in Europe and Central Asia ●  25 FIGURE 2.5 The income gap in account ownership remains large in some countries in Europe and Central Asia 100 90 80 Percent of adults with an account 70 60 50 40 30 20 10 0 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 B40 T60 Central Central Eastern Northern Russian South Southern Turkey Western Western Asia Europe & Europe Europe Federation Caucasus Europe Balkans Europe the Baltics 2011 2017 Source: Global Findex database. Note: The gap is between adults (15 years and older) with an account at a financial institution or a mobile money provider living in the wealthiest 60 percent (T60) and poorest 40 percent of households (B40) within economies. Unbanked adults are more likely than people with accounts to have low levels of education. In the developing world, about half of all adults have no more than a primary school education; among unbanked adults, the share is close to two- thirds. In developing economies in ECA, 34 percent of unbanked adults have no more than a primary school education. However, there is wide variation. In Al- bania and Kosovo, 67 percent of the unbanked have no more than a primary school education. By contrast, in Armenia this share was only 12 percent in 2017, thanks to the huge increase in account ownership among low-education adults, which rose from 7 percent in 2011 to 50 percent in 2017. Being unbanked in ECA is also associated with lack of labor force participa- tion. About 60 percent of unbanked adults in developing ECA are out of the labor force. The share of account ownership among people out of the labor force was 12–16 percentage points lower than the average for ECA in 2011, 2014, and 2017. There are a few exceptions. In Azerbaijan and Uzbekistan, where overall account ownership is low (30–40 percent), the share of unbanked adults who are out of the labor force was lower than the ECA average. Lack of Trust in Banks Is a Major Barrier to Account Ownership To help understand why people may remain unbanked, the 2017 Global Findex survey asked adults without a financial institution account why they did not have one. Globally, the most common reason offered was having too little money 26  ●   World Bank ECA Economic Update Spring 2019 BOX 2.1 Financial inclusion in Turkey: Insights from the 2017 Global Findex Survey • 69 percent of adults in Turkey have an account, • 89 percent of unbanked women (and 65 percent up from 57 percent in 2014. of unbanked men) are out of the labor force. • 83 percent of men but only 54 percent of • 5 percent of unbanked women are wage- women have an account, a gender gap that is employed and 6 percent are self-employed. roughly three times the average in developing • Roughly 15 million unbanked adults in Turkey economies. have mobile phones—including 88 percent • 64 percent of adults make or receive digital of unbanked women—suggesting possible payments, up from 48 percent in 2014. Part of opportunities to increase financial inclusion by the increase may reflect the increased use of moving routine cash payments into accounts. debit cards, which 39 percent of adults use, up • About 1 in 10 unbanked women in Turkey—1.3 from 24 percent in 2014. million women—send or receive domestic • 23 percent of adults save at a formal financial remittances in cash or through an over-the- institution, up from 9 percent in 2014. On aver- counter service. Expanding the reach of mobile age, men are 9 percentage points more likely remittances could have benefits that go beyond than women to save. convenience. Research shows that mobile trans- • 19 percent of unbanked adults cite reli- fers help people survive financial shocks by gious concerns as a reason for not having an making it easier to collect money from faraway account—the same percentage that cites high relatives when times are tough. costs. Just 1 percent of adults report religious • Roughly one in six unbanked women in Turkey saves concerns as their sole reason for not having an using semi-formal methods. If those savings were account. moved into accounts, up to 2 million unbanked • 72 percent of unbanked women (and 51 percent women could join the formal financial system. of unbanked men) indicate that one reason they • 30 percent of women who have an account do not have an account is that one of their fam- still pay utility bills in cash, including 5 million ily members already has one. In the developing women who have mobile phones. Getting these world overall, a quarter of the unbanked cite financially included adults to use their accounts this reason, with no difference between men more often would help expand access to finan- and women. cial services. to use an account. Two-thirds of unbanked adults across the world cited this as a reason for not having an account, and about one-fifth cited it as the only reason. About a quarter of respondents cited cost and distance; a similar share said that they did not have an account because a family member already had one. About 20 percent of respondents cited lack of documentation and trust in the financial system, and 6 percent cited religious concerns as the reason they did not have an account. In ECA only 7 percent of unbanked adults reported insufficient funds as the sole reason for not having an account. Thirty percent cited lack of trust in finan- cial institutions. These figures were particularly high in Azerbaijan (42 percent) and Ukraine (50 percent). Other factors underlying the lack of account ownership include cost, lack of documentation, and distance. For the region as a whole, 27 percent of unbanked Chapter 2: Financial Inclusion in Europe and Central Asia ●  27 adults reported cost as a barrier. This figure was higher in Albania (40 percent), Azerbaijan (39 percent), Bulgaria (39 percent), Kosovo (42 percent), Moldova (35 percent), Russia (34 percent), and Ukraine (40 percent). On average, only 14 percent of unbanked adults in ECA cited lack of docu- mentation as a barrier. The figure was about 40 percent in Azerbaijan, Georgia, and Turkmenistan. In the Republic of North Macedonia and Turkey, more than half of unbanked adults (54 and 65 percent, respectively) reported that they did not have an ac- count because a member of the family already had one. This pattern may be as- sociated with the fact that male household members are more likely to own an account than their spouses. Use of Accounts for Payments Is Increasing in the Region’s Developing Economies Most people in ECA make or receive payments, pay bills, send money to rela- tives, or receive wages or government transfers. The 2017 Global Findex survey asked people what kinds of payments they made and received and whether they did so via an account or in cash. Government Transfer Payments Except in the poorest economies in the world, most people who get government payments receive them into an account. In the developing economies of ECA, more than 70 percent of government transfer recipients receive the payments into an account. This share remained stable in 2014 and 2017. It is larger than in devel- oping countries in other regions. In the euro area, 86 percent of adults getting government transfers received the money via an account in 2014. This share de- clined to 75 percent in 2017. Wage Payments Globally, 28 percent of adults receive private sector wages—46 percent of adults in high-income economies and 24 percent in developing ones. In high-income economies, most people receive wage payments into an account. Only half of wage recipients do so in developing economies. In ECA more than 80 percent of private sector wage recipients and more than 90 percent of public sector wage recipients receive payments via an account. These shares increased moderately between 2014 and 2017. Payments for Agricultural Product Sales About 15 percent of adults in developing economies receive payments for agri- cultural product sales. Almost all receive them in cash. In some African countries, such as Ghana, Kenya, and Zambia, about 40 percent of people getting agricultural payments receive them into an account, in most cases a mobile money account. 28  ●   World Bank ECA Economic Update Spring 2019 In the developing economies of ECA, only about 10 percent of adults received payments for agricultural sales the year before the 2014 and 2017 Findex surveys. In 2014 only 5 percent of the agricultural product sellers reported having received payments via an account, and none reported receiving payment through a mo- bile phone. In 2017 these figures rose to 20 percent and 8 percent, respectively. Domestic Remittance Payments Domestic remittances play an important role in many developing economies. In the developing economies of ECA, the share of adults sending or receiving do- mestic remittances increased from 22 percent in 2014 to 29 percent in 2017. Forty- eight percent of these senders or recipients used a financial institution account in 2017, up from 33 percent in 2014. The share of senders or recipients using mobile phones increased from 4 percent in 2014 to 24 percent in 2017, and the share using cash or making transfers in person declined from 51 percent to 26 percent. A few countries stood out in this trend. In Russia, for example, the share of domestic remittance senders or recipients using mobile phones soared from 8 percent in 2014 to 38 percent in 2017. The share using financial institution ac- counts increased by 10 percentage points, to 48 percent, over the same period. The proportion using cash fell from 36 percent to 14 percent. In Turkey the increase in the use of accounts and mobile phones for remit- tances has been remarkable, rising from 35 percent in 2014 to 56 percent in 2017. Over the same period, the share of remittance senders or recipients using mobile phones skyrocketed, from 2 percent to 24 percent, and the share sending or re- ceiving cash or in person dropped from 60 percent to 23 percent. Use of Digitalized Accounts Is Also Rising Account ownership is key to financial inclusion. But secure and convenient ways to use accounts are essential if users are to reap the full benefits of account owner- ship. The Global Findex database also sheds light on whether and how people use their accounts for payments. Digital Payments Globally, 52 percent of adults (more than three-quarters of account owners) re- ported having made or received at least one digital payment using their account the previous year. In high-income economies, the share of account owners using their accounts for digital payments was 97 percent. In the euro area the share of adults who made or received digital payments increased from 87 percent in 2014 to 92 percent in 2017, and the share making digital payments increased from 92 percent to 97 percent. In developing ECA economies, the share of adults making or receiving digital payments rose from 46 percent to 60 percent between 2014 and 2017, suggesting that the share of account owners doing so increased from 80 percent to 92 percent. Chapter 2: Financial Inclusion in Europe and Central Asia ●  29 ECA countries with significant growth in the use digital payments include Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, the Republic of North Macedonia, Montenegro, Russia, Turkey, and Ukraine (figure 2.6). Several countries witnessed an increase of more than 15 percentage points in the share of adults using digital payments during 2014–17. Uzbekistan, where fewer people used digital payments in 2017 than in 2014, seems to be an outlier (table 2.3). Use of Mobile Phones or the Internet for Financial Services Along with advancements in digital technologies, mobile phones and the Inter- net increasingly offer an alternative to debit and credit cards for making direct payments from an account. Globally, in high-income economies, 51 percent of adults (55 percent of account owners) reported making at least one financial transaction the previous year using a mobile phone or the Internet. In developing economies, the average share was much lower, at 19 percent of adults (30 percent of account owners). There is wide variation among the developing economies in ECA in the use of mobile phones or the Internet to access accounts (figure 2.7). In the South Cauca- sus, more than 20 percent of adults in Armenia reported having used a mobile phone or the Internet to make payments; the share is much lower in Azerbaijan and Georgia. In Central Asia, more than 30 percent of adults reported doing so in FIGURE 2.6 The share of adults making or receiving digital payments ranges from 25 to 83 percent in Europe and Central Asia 100 Percent of adults with an account 80 60 40 20 0 Made or received digital payments Did not make or receive digital payments Source: Global Findex database. Note: The height of the bars represents the share of adults (aged 15 and above) with an account at a financial institution or a mobile money provider. 30  ●   World Bank ECA Economic Update Spring 2019 TABLE 2.3 The share of adults who made or received a digital payment the previous year rose in most countries in Europe and Central Asia Subregion/country 2014 2017 Central Asia 33 41 Kazakhstan 40 54 Kyrgyz Republic 14 36 Tajikistan 8 44 Turkmenistan .. 34 Uzbekistan 38 34 Central Europe and the Baltics 61 73 Bulgaria 48 65 Croatia 72 83 Czech Republic 78 80 Estonia 95 97 Hungary 64 71 Latvia 84 91 Lithuania 66 78 Poland 63 82 Romania 41 47 Slovak Republic 72 82 Slovenia 86 96 Eastern Europe 45 62 Belarus 61 79 Moldova 15 40 Ukraine 44 61 Northern Europe 99 99 Denmark 99 99 Finland 98 98 Sweden 99 98 Russian Federation 53 71 South Caucasus 17 34 Armenia 12 42 Azerbaijan 18 25 Georgia 21 53 Southern Europe 77 88 Cyprus 67 80 Greece 39 74 Italy 73 90 Malta 74 89 Portugal 73 86 Spain 93 90 Turkey 48 64 Western Balkans 44 54 Albania 20 29 Bosnia and Herzegovina 32 50 Kosovo 28 39 Republic of North Macedonia 52 66 Montenegro 40 60 Serbia 60 66 Western Europe 95 96 Austria 92 96 Belgium 96 97 France 92 92 Germany 96 98 Ireland 87 94 Luxembourg 93 98 Netherlands 98 98 United Kingdom 97 96 Total 68 78 Source: Global Findex database. Note: Data show percent of adults (aged 15 and above) with an account at a financial institution or a mobile money provider. Chapter 2: Financial Inclusion in Europe and Central Asia ●  31 FIGURE 2.7 Use of a mobile phone or the Internet to access an account varies widely within Europe and Central Asia Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Georgia Kazakhstan Kosovo Kyrgyz Republic Republic of North Macedonia Moldova Montenegro Romania Russian Federation Serbia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan 0 5 10 15 20 25 30 35 40 45 50 Percent of adults with an account using mobile phone or the Internet to access their account Source: Global Findex database. Note: Length of the bars represents percentage of adults (aged 15 and above) with an account who used mobile phone or Internet to access their account at a financial institution or a mobile money provider. Kazakhstan; the share is much lower in other Central Asian countries. In Eastern Europe, 40 percent in Belarus of adults use mobile or online payments, a larger share than in Moldova or Ukraine. In Central Europe, Croatia stands out with 38 percent. The use of mobile and online payment is also high in Turkey (40 percent) and Russia (44 percent). Use of mobile phones for financial services In some regions of the world—such as Sub-Saharan Africa—use of mobile money is wide-spread and a significant share of adults have a mobile money account only rather than a financial institution account. In the ECA region, where owner- ship of financial institution accounts is higher than in other developing regions, 32  ●   World Bank ECA Economic Update Spring 2019 using mobile phones only instead of bank accounts is not common. Account owners are more likely to use online payments from their bank accounts than mobile accounts only. Mobile phones can be used for financial services in at least two ways (Demir- güç-Kunt and others 2018), for which China and Kenya serve as examples. In China mobile financial services are provided mainly through third-party pay- ment service providers, such as Alipay and WeChat, using smartphone apps linked to a bank account or other type of financial institution account. By con- trast, in some African countries, such as Kenya, mobile financial services are of- fered primarily by mobile network operators, and mobile money accounts do not need to be linked to an account at a financial institution. In ECA, despite the in- creasing use of mobile phones for financial services, the share of adults with mobile money accounts is very low, having risen from zero in 2014 to 3 percent in 2017. Use of the Internet for financial services Globally, 29 percent of adults use the Internet to pay bills or make purchases online. The share ranges from 68 percent of adults in high-income economies to 49 percent in China and an average of 11 percent in developing economies ex- cluding China. In the developing economies of ECA, the share grew from 14 percent in 2014 to 31 percent in 2017. In the euro area, the percentage increased from 48 percent to 69 percent. Buying something online does not necessarily mean making the payment on- line. In all developing economies except China, 53 percent of adults who made a purchase online paid for it in cash on delivery. In China, by contrast, 85 percent of adults who made a purchase on the Internet paid for it online. Within the ECA region, many people in Central Europe and the Baltic coun- tries, Eastern Europe, Russia, Turkey, and the Western Balkans pay cash on deliv- ery for online purchases (figure 2.8). For the region, 44 percent of Internet pur- chasers made their payment in cash on delivery in 2017. In some economies, such as Bosnia and Herzegovina, Bulgaria, Kosovo, and Serbia, more than two-thirds of online buyers paid in cash on delivery (figure 2.9). Countries in which rela- tively few people make their payment online when shopping on the Internet might learn from China’s experience expanding the coverage of online payment services and benefit from greater efficiency and convenience. Informal Saving and Borrowing Is Prevalent in Developing Economies of ECA Formal Saving People save for future expenses and to be prepared to respond to uncertainties. They may save for a large purchase, investment in education or a business, finan- cial needs in old age, or emergency expenses. To meet immediate expenses, they Chapter 2: Financial Inclusion in Europe and Central Asia ●  33 FIGURE 2.8 Percent of online buyers paying in cash and online in total population a. By subregion  70 Percent of adults who reported buying 60 online and paid online/in cash 50 40 30 20 10 0 Central Central Eastern Russian Southern Turkey Western Asia Europe & Europe Federation Europe Balkans the Baltics Pay online Pay in cash b. By country  Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Georgia Kazakhstan Kosovo Kyrgyz Republic North Macedonia Moldova Montenegro Romania Russian Federation Serbia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan 0 5 10 15 20 25 30 35 Percent of adults who reported buying online and paid online/in cash Pay online Pay in cash when order is delivered Source: Global Findex database. Note: Panel (a): Data for Northern Europe, the South Caucasus, and Western Europe are not available. Panel (b): The length of the bars represents the percentage of adults aged 15 and above who report buying online. 34  ●   World Bank ECA Economic Update Spring 2019 FIGURE 2.9 Formal saving is more common in 80 Percentage of adults saving any money in 2016 high-income economies than in developing economies 60 40 20 0 High-income economies Developing economies Saved formally Saved semi-formally Saved using other methods only Source: Global Findex database. Note: People may save in multiple ways, but the categories here are constructed to be mutually exclusive. “Saved formally” includes all adults (aged 15 and above) who saved any money formally. “Saved semi-formally” includes all adults (aged 15 and above) who saved any money semi- formally but not formally. Data on semi-formal saving are not collected in most high-income economies. Semi-formal methods may include saving money with a savings club or a person outside the family. may borrow. Global Findex data show how and why people save and borrow and shed light on their financial resilience to unexpected expenses. Formal saving is more common in high-income economies than in developing economies (figure 2.9). In 2017, 48 percent of the world’s adults reported having saved or set aside money in the previous 12 months. The figure was 72 percent in high-income economies and 43 percent in developing economies. In high-income economies, more than 75 percent of savers (55 percent of all adults) save formally at a financial institution. In developing economies, slightly less than half of sav- ers (21 percent of all adults) save formally. By contrast, in the developing econo- mies of ECA, less than 40 percent of adults report having saved the previous year. Only 38 percent of savers (14 percent of all adults) saved formally at a financial institution. The share of adults who saved formally was only 7 percent in 2011 and 11 percent in 2014. Low rates of formal saving are prevalent in most develop- ing economies in ECA. Exceptions include Bulgaria, Croatia, and Turkey, where most savers save formally (figure 2.10). In the euro area, 67 percent of all adults reported having saved in the past year. Seventy-three percent of savers (about half of all adults) saved formally. These shares are slightly lower than in an average high-income economy. Globally, saving patterns vary by gender and income level. In developing economies, men are more likely than women to save formally. The average gen- der gap in the share of adults who saved formally was 6 percentage points in 2017. In the developing economies of ECA, the gender gap widened slightly, from 2 percentage points in 2014 to 3 percentage points in 2017. In the euro area, it remained stable, at about 6–9 percentage points, between 2011 and 2017. Wealthier adults are more likely than poorer adults to save formally. Globally, the income gap between the top 60 percent and the bottom 40 percent was 23 Chapter 2: Financial Inclusion in Europe and Central Asia ●  35 FIGURE 2.10 The share of adults who saved formally savings was low in most developing economies in Europe and Central Asia Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Georgia Kazakhstan Kosovo Kyrgyz Republic Moldova Montenegro Republic of North Macedonia Romania Russian Federation Serbia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan 0 10 20 30 40 50 60 Percent of adults saving any money in 2016 Formal savings Semi-formal savings Other Source: Global Findex database. Note: The length of the bars represents the percentage of adults (aged 15 and above) who reported saving in any way in the previous 12 months. percentage points in high-income economies and 15 percentage points in devel- oping economies in 2017. In the developing economies of ECA, the income gap widened, from 7 percentage points in 2014 to 9 percentage points in 2017. In the euro area, the gap stayed at about 20 percentage points between 2011 and 2017. People save for different purposes. Nearly half of adults in high-income econ- omies report saving for old age. In 2017, 16 percent of adults in developing econo- mies and 38 percent of adults in the euro area reported doing so. In developing ECA, only 15 percent of adults reported saving for old age. In 2014 only 4 percent of adults in the developing economies of ECA reported saving to start, operate, or expand a farm or business. The share rose to 8 percent in 2017, still lower than the global average of 14 percent. 36  ●   World Bank ECA Economic Update Spring 2019 Informal Borrowing In 2017 about half of the world’s adults reported borrowing money the previous year. A larger share (64 percent) did so in high-income economies, where most borrowers rely on formal credit from financial institutions or credit cards. In de- veloping economies, most borrowers rely on family and friends (figure 2.11). The borrowing pattern in ECA looks different from that in the rest of the world. In 2017, 55 percent of adults in the euro area reported having borrowed money the previous year. Forty-six percent reported that they borrowed money from a financial institution or by using a credit card; only 12 percent reported borrowing from friends or family. In contrast, in the developing economies of ECA, 44 percent of adults reported borrowing the previous year, with 24 percent reporting borrowing from friends or family and about 24 percent reporting ob- taining credit from a financial institution or using a credit card. The share of for- mal borrowing increased slightly (by 2 percentage points between 2014 and 2017), while the share of informal borrowing declined by 3 percentage points, though these changes are not statistically significant. Informal borrowing is com- mon in the developing economies of ECA, except in Armenia, Croatia, and Tur- key, where most borrowing is from a financial institution or credit card (figure 2.12). One common purpose of borrowing is to buy land or a home, the largest fi- nancial investment many people make. In 2017, 27 percent of adults in high- income economies reported having an outstanding housing loan from a bank or other type of financial institution. The share was less than 10 percent in develop- ing economies. In the developing economies of ECA, the proportions were 13 percent in 2014 and 12 percent in 2017. In the euro area, the figures were 23 and 25 percent, respectively. FIGURE 2.11 People in 80 Percent of adults who reported borrowing in 2016 high-income countries rely on formal sources for borrowing, whereas 60 people in developing countries tend to rely on family or friends 40 20 0 High-income economies Developing economies Borrowed formally Borrowed semi-formally Borrowed from family or friends Borrowed from other sources only Source: Global Findex database. Note: People may borrow from multiple sources, but the categories here are constructed to be mutually exclusive. “Borrowed formally” includes all adults (aged 15 and above) who borrowed any money from a financial institution or by using a credit card. “Borrowed semi-formally” includes all adults (aged 15 and above) who borrowed any money semi-formally (from a savings club) but not formally. “Borrowed from family or friends” excludes adults who borrowed formally or semi-formally. Chapter 2: Financial Inclusion in Europe and Central Asia ●  37 FIGURE 2.12 Informal borrowing is prevalent in most developing economies in the region 70 Percent of adults who reported borrowing in 2016 60 50 40 30 20 10 0 a ia n s na ia tia ia an vo ic ia va o ia n ia an ey an e an ru ni ija tio in gr bl en ar rg on an rb do oa rk so vi st ist ist st ba ra la ne pu ba lg ra eo Se go m kh ki m ed Tu jik en Be Ko Cr ol Uk Al Bu de be te er Ro Re Ar G za ze M ac Ta m on Az Fe Uz Ka er rk M yz M Tu H n rg th ia d Ky or ss an N Ru ia of sn ic Bo bl pu Re Formal (bank or credit card) Semi-formal Family/friends Other Source: Global Findex database. Note: The height of the bars represents the percentage of adults aged 15 and above who indicated borrowing in any way in the previous 12 months. Financial Resilience The 2017 Global Findex survey provides information on financial resilience by asking respondents whether they would be able to come up with an amount equal to 1/20th of gross national income per capita in local currency within the next month. It also asks what their main source of funding would be. The results show that adults in high-income economies are far more likely (73 percent) to say that they could raise emergency funds than are adults in develop- ing economies (50 percent) (figure 2.13). Most respondents in high-income econo- mies who report that they could come up with the emergency funds say that they would rely on savings, whereas most respondents in developing economies say that they would turn to family or friends or use money from working. About two-thirds of adults in ECA reported that they would be able to come up with emergency funds. In the euro area, the share rose from 70 percent in 2014 to 76 percent in 2017. In the developing economies of the region, the share de- clined from 64 percent to 61 percent, though the decline is not significant. The gender gap in the share is about 6 percentage points, with men more likely to report that they could come up with emergency funds than women. This gap remained constant between 2014 and 2017. When asked about their source of emergency funds, 52 percent of respondents in the euro area who reported that they were able to come up with the funds stated that the main source was their savings. In the developing economies of the region, the share was 18 percent. More than half of the adults in developing ECA who said they could come up with the funds reported that the main source of funding would be family or friends (figure 2.14). 38  ●   World Bank ECA Economic Update Spring 2019 FIGURE 2.13 Financial resilience is much higher in high-income countries than in developing economies High-income economies Developing economies 0 20 40 60 80 Percentage of adults who raised emergency funds Savings Money from working Family or friends Borrowing from a bank, an employer, or a private lender Other Source: Global Findex database. Note: “Other” includes all respondents who chose “selling assets,” “other sources,” “don’t know,” or “refuse” as their response. Data represent the percentage of adults aged 15 and above that report being able to come up with the equivalent of 5 percent of Gross National Income in a month. FIGURE 2.14 People in developing economies of Europe and Central Asia tend to rely on family and friends for emergency funds 80 Percentage of adults who raised emergency funds 60 40 20 0 a ia n us na ia tia ia an Re o ac lic ia a Ro o de a n ia an ey an Uz aine an ni ov i ija tio v r en ar rg on an rb g b ar oa rk so vi st ist ist st ba ne pu ba d lg ra eo Se go m kh ki m r l ed Tu jik en Be Ko Cr ol Uk Al Bu be te er Ar G za ze M Ta m on Az Fe Ka er rk M yz M Tu H n rg th ia d Ky or ss an N Ru a of ni lic s Bo pub Re Savings Money from working Family or friends Borrowing from a bank, an employer, or a private lender Other Source: Global Findex database. Note: The height of the bars represents the percentage of adults aged 15 and above that report being able to come up with the equivalent of 5 percent of Gross National Income in a month. Chapter 2: Financial Inclusion in Europe and Central Asia ●  39 Digital Technology Provides Opportunities to Enhance Financial Inclusion Remarkable progress has been made in expanding financial inclusion in ECA. Account ownership has grown significantly in many countries, and the use of digital payments has picked up. There may be opportunities to enhance financial inclusion and encourage more account owners to use financial services (see box 2.2, on financial inclusion in the European Union). However, the behavior of ac- count owners in ECA differs from that in other economies, because of issues re- lated to culture, history, and trust. BOX 2.2 Financial inclusion in the European Union: Insights from the 2017 Global Findex Survey • Account ownership varies across EU member digital financial transactions is highest in Den- states. In Western European countries, such as mark, Finland, and Sweden (80 percent) and France, Germany, and the Netherlands, account lowest in Greece (18 percent) and in Bulgaria ownership is virtually universal. Account own- and Romania (about 10 percent), among ECA ership is lower in some Eastern and Central countries with available data. European economies. The share is roughly 80 • With the European Union, the share of adults percent in the Czech Republic and the Slovak formally saving is highest in Sweden, at 75 per- Republic and about 75 percent in Bulgaria and cent. About 60 percent of adults formally save Hungary. In Romania just 58 percent of adults in Denmark, Luxembourg, and the Netherlands. have an account, the lowest share in the Euro- In contrast, only about half of adults in France pean Union. and Italy and a quarter of adults in Bulgaria and • Gender gaps are rare in the European Union. Hungary save formally, and the share in Roma- In the Czech Republic, Hungary, and Romania, nia is only 14 percent. men are roughly 6 percentage points more • Digitizing payments could increase account likely than women to have an account, a gap ownership. Many unbanked adults have mobile similar to the average global gender gap. phones, making it easy to adopt digital finan - • Income gaps are evident in some EU countries cial products. In Romania roughly 1 million with relatively low account ownership. Among unbanked adults work in the private sector, get adults in Bulgaria from the poorest 40 percent paid in cash, and have a mobile phone. Increas- of households, 55 percent have an account; for ingly, these workers are employed by multina- adults in the richest 60 percent of households, tionals or in global value chains. In Bulgaria and the share is 84 percent. In Romania 71 percent Hungary, more than 40 percent of unbanked of wealthier adults have an account—nearly adults receive government payments—wages, twice the share among poorer adults. social benefits, or pensions—in cash. In Roma- • Use of digital payments varies widely within the nia about 3 million unbanked adults fall into this European Union. In Denmark and the Nether- category. lands, virtually all adults make or receive digi- • There is also room to increase the use of tal payments. The share is about 80 percent in accounts among adults who are already finan- Croatia, Cyprus, and the Czech Republic; about cially included. In Italy about 9 million adults 70 percent in Greece and Hungary; about two- pay utility bills in cash despite having an thirds in Bulgaria; and about half in Romania. account and owning a mobile phone. The num- Use of mobile phones and the Internet to make ber is about 3 million in Greece and in Germany. 40  ●   World Bank ECA Economic Update Spring 2019 In some ECA countries, such as Russia and Turkey, the application of digital technologies in financial services has increased. In other countries, such applica- tion remains limited. There may be room for growth in the use of digital financial services, such as electronic payments and services associated with e-commerce. Digital technology alone is not sufficient to increase financial inclusion, how- ever. A well-developed payment system, good physical infrastructure, appropri- ate regulations, and strong consumer protection safeguards must be in place. And financial services need to be tailored to the needs of disadvantaged groups, such as women, low-income families, and first-timer users of financial services, who may lack literacy and numeracy skills. Lessons from advanced economies and other emerging and developing econ- omies may be useful for ECA economies. In China, for example, third-party on- line payment systems, such as Alipay or WeChat, linked to bank accounts have enabled consumers to access their accounts efficiently using a mobile device. Mobile money accounts are widely used in Africa. Mobile phone carriers can provide financial services. Digital technologies may lower the cost of financial services and make them more affordable. Globally, about 1.1 billion—or about two-thirds of all unbanked adults—have a mobile phone. In India and Mexico, more than half of the unbanked have one; in China 82 percent do. In the developing economies of ECA, 83 percent of the unbanked—some 95 million adults—have a mobile phone. Providing unbanked mobile phone users with Internet access and digital financial services could be key to expanding financial inclusion. In Central Asia and Albania, about half of mobile phone owners do not use the Internet (figure 2.15). Allowing them online access to financial services could significantly improve financial inclusion. Policy Makers Can Increase Account Ownership and Use in Various Ways Governments and businesses could help dramatically reduce the number of un- banked adults by moving routine cash payments into accounts. Such payments could include public sector wages, public pensions, and government transfers of social benefits. Globally, digitizing such payments could reduce the number of unbanked adults by up to 100 million (Demirgüç-Kunt and others 2018). Many unbanked adults have the basic technology to receive payments digitally. Of the 60 million unbanked adults worldwide who receive government transfers in cash, two-thirds have a mobile phone. Digital payments have played an important role in boosting financial inclu- sion in ECA. About 1 in 6 account owners opened their first account with a finan- cial institution to receive digital government payments. The share of adults in the region receiving government wages, pensions, or social benefits is twice the de- veloping world average—and two-thirds of recipients receive their payments digitally. More can be done. Nearly 25 million unbanked adults in ECA receive govern- ment payments in cash—and 75 percent of them have a mobile phone. Moving public sector pension payments into accounts would reduce the number of un- Chapter 2: Financial Inclusion in Europe and Central Asia ●  41 FIGURE 2.15 More than 80 percent of the unbanked Albania in Europe and Central Asia Armenia owned mobile phones in 2017, Azerbaijan Belarus creating opportunities for Bosnia and Herzegovina financial inclusion Bulgaria Croatia Georgia Kazakhstan Kosovo Kyrgyz Republic Moldova Montenegro Republic of North Macedonia Romania Russian Federation Serbia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan 0 20 40 60 80 100 Percent of adults Owns mobile and uses Internet Owns mobile and does not use Internet Source: Global Findex database. Note: The length of the bars represents the percentage of adults aged 15 and above who report owning a personal mobile phone. banked adults in the region by up to 20 million, including 8 million in Russia alone. In the private sector, about 19 million unbanked adults receive their wages in cash—and more than 90 percent of them have a mobile phone. About 15 mil- lion unbanked adults receive agricultural payments in cash—and more than 90 percent of them have a mobile phone. Although financial inclusion starts with providing the unbanked with an ac- count, the benefits come from actively using the account for saving, managing risk, borrowing, and making or receiving payments. The Global Findex database reveals many opportunities to help account owners make better use of their ac- counts. These benefits are considerable in ECA, given the ample room for pro- moting account use. For example, 80 million adults in ECA are banked but still pay utility bills in cash—and 95 percent of them own mobile phones. Digitizing these payments would improve usage. Future Directions of Our Work Our analysis of financial inclusion across the region reveals many interesting is- sues deserving of future research. 42  ●   World Bank ECA Economic Update Spring 2019 • First, how can the trust issue—which impedes financial inclusion and is as- sociated with low levels of formal savings—be addressed? • Second, what explains the differences across ECA countries in recent advanc- es in financial inclusion? Why, for example, have Armenia, Georgia, the Kyr- gyz Republic, Moldova, and Tajikistan shown significant increases in account ownership over the past three years while their neighbors, Azerbaijan and Uzbekistan, have not? What role do digitalization and technology play in ex- plaining the different experiences? • Third, how can we explain and address the observed disparities in financial inclusion across subregions within countries, such as Romania? Could credit unions and cooperative banks play a role in reaching remote rural areas? Again, what role can technology play? • Fourth, how does financial inclusion and the spread of financial technology affect the development of entrepreneurship and the resilience of micro-, small, and medium-size enterprises to financial shocks? How do fintech regulations influence these developments? • Fifth, what can be done to reduce the gender gaps in account ownerships in some of the region’s countries, particularly Turkey, where the difference is 29 percentage points. How can we promote greater inclusion of Turkish women in the financial sector? • Finally, what role do financial literacy and consumer protection play in ad- dressing these issues? Can we generalize the lessons from our successful en- gagement in countries in the region, for example Russia? This is an exciting agenda and we will continue to address these and other questions and more in the coming years in the Europe and Central Asia region. Annex: Survey Methodology In 2011 the World Bank—with funding from the Bill & Melinda Gates Founda- tion—launched the Global Findex database, the world’s most comprehensive data set on how adults save, borrow, make payments, and manage risk. Drawing on survey data collected in collaboration with Gallup, Inc., the Global Findex database covers almost 150,000 people in 144 economies—representing more than 97 percent of the world’s population.1 The initial survey round was fol- lowed by a second one in 2014 and by a third in 2017. The 2017 survey was carried out over the 2017 calendar year by Gallup, Inc., as part of its Gallup World Poll, which since 2005 has conducted annual surveys of approximately 1,000 people in each of more than 160 economies, in more than 1. For a list of the economies included, see table A.1 in the 2017 Global Findex Database, “Measuring Financial Inclusion and the Fintech Revolution” (Demirgüç-Kunt and others 2018). It shows the data collection period, the number of interviews, the approximate de- sign effect, and the margin of error for each economy as well as sampling details, where relevant. Chapter 2: Financial Inclusion in Europe and Central Asia ●  43 150 languages, using randomly selected, nationally representative samples. The target population is the entire civilian, noninstitutionalized population age 15 and older. Interview Procedure Surveys are conducted face to face in economies where telephone coverage rep- resents less than 80 percent of the population or where doing so the customary methodology. In most economies, fieldwork is completed in two to four weeks. In economies where face-to-face surveys are conducted, the first stage of sam- pling is the identification of the primary sampling units. These units are stratified by population size, geography, or both; clustering is achieved through one or more stages of sampling. Where population information is available, sample se- lection is based on probabilities proportional to population size; otherwise, sim- ple random sampling is used. Random route procedures are used to select sampled households. Unless an outright refusal occurs, interviewers make up to three attempts to survey the sampled household. To increase the probability of contact and completion, at- tempts are made at different times of the day and, where possible, on different days. If an interview cannot be obtained at the initial sampled household, a sim- ple substitution method is used. Respondents are randomly selected within the selected households. Each eli- gible household member is listed, and the handheld survey device randomly selects the household member to be interviewed. For paper surveys, the Kish grid method is used to select the respondent. 2 In economies where cultural re- strictions dictate gender matching, respondents are randomly selected from among all eligible adults of the interviewer’s gender. In economies where telephone interviewing is employed, random digit dial- ing or a nationally representative list of phone numbers is used. In most econo- mies where cell phone penetration is high, a dual sampling frame is used. Ran- dom selection of respondents is achieved by using either the latest birthday or household enumeration method. At least three attempts are made to reach a per- son in each household, spread over different days and times of day. Data Preparation Data weighting is used to ensure a nationally representative sample for each economy. Final weights consist of the base sampling weight, which corrects for the unequal probability of selection based on household size, and the poststrati- fication weight, which corrects for sampling and nonresponse error. Poststratifi- 2. The Kish grid is a table of numbers used to select an interviewee. First, the interviewer lists the name, gender, and age of all permanent household members age 15 and older, whether or not they are present, in order by age. Second, the interviewer finds the column number of the Kish grid that corresponds to the last digit of the questionnaire and the row number for the number of eligible household members. The number in the cell where the column and row intersect is the person selected for the interview. 44  ●   World Bank ECA Economic Update Spring 2019 cation weights use economy-level population statistics on gender and age and, where reliable data are available, education or socioeconomic status. Additional information about the Global Findex data, including the complete database, can be found at http://www.worldbank.org/globalfindex. Additional information about the methodology used in the Gallup World Poll can be found at http://www.gallup.com/178667/gallup-world-poll-work.aspx. References Aghion, Philippe, and Patrick Bolton. 1997. “A Theory of Trickle-Down Growth and Devel- opment.” Review of Economics Studies 64 (2): 151–72. Aker, Jenny C., Rachid Boumnijel, Amanda McClelland, and Niall Tierney. 2016. “Payment Mechanisms and Anti-Poverty Programs: Evidence from a Mobile Money Cash Transfer Experiment in Niger.” Working Paper, Fletcher School and Department of Economics, Tufts University, Medford, MA. Banerjee, Abhijit, and Andrew Newman. 1993. “Occupational Choice and the Process of Development.” Journal of Political Economy 101: 274–98. Demirgüç-Kunt, Asli, Leora Klapper, and Dorothe Singer. 2017. “Financial Inclusion and Inclusive Growth: A Review of Recent Empirical Evidence.” Policy Research Working Paper 8040, World Bank, Washington, DC. Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Rev- olution. Washington, DC: World Bank. Galor, Oded and Joseph Zeira. 1993. “Income Distribution and Macroeconomics.” Review of Economics Studies 60 (1): 35–52. Muralidharan, Karthik, Paul Niehaus, and Sandip Sukhtankar. 2016. “Building State Capac- ity: Evidence from Biometric Smartcards in India.” American Economic Review 106 (10): 2895–2929. Prina, Silvia. 2015. “Banking the Poor via Savings Accounts: Evidence from a Field Experi- ment.” Journal of Development Economics 115 (July): 16–31. Suri, Tavneet, and William Jack. 2016. “The Long-Run Poverty and Gender Impacts of Mobile Money.” Science 354 (6317): 1288–92. World Bank. 2014. Global Financial Development Report: Financial Inclusion. Washington, DC: World Bank. PART II Selected Country Pages Selected Country Pages ●  47 While fiscal consolidation alleviated debt- ALBANIA Recent developments financing risks, risks from public off - balance and contingent liabilities still need attention. Fiscal consolidation continued Growth sped up in 2018 and is estimated in 2018 in the form of contained spending. to have reached 4.2 percent. Favorable Revenues declined to 27.2 percent of GDP Table 1 2018 hydrological conditions more than dou- from 27.7 in 2017, partially due to the P o pulatio n, millio n 2.9 bled energy production in the first nine clearance of VAT refund arrears and the GDP , current US$ billio n 1 5.3 months of the year, making energy ac- currency-appreciation effect on the VAT  9 GDP per capita, current US$ 531 count for nearly half of GDP growth dur- of imported goods. Current spending de- ing the period. Meanwhile, a broad-based clined from 25.3 percent of GDP in 2017 to a Internatio nal po verty rate ($ 1.9) 1.1 Lo wer middle-inco me po verty rate ($ 3.2) a 7.7 economic recovery supported job creation 24.3 percent of GDP in 2018, as wage bill Upper middle-inco me po verty rate ($ 5.5) a 39.1 in all sectors. On the expenditure side, and social benefit growth were contained. Gini index a 29.0 household consumption accounted for 1.9 Meanwhile, capital spending increased to Scho o l enro llment, primary (% gro ss) b 1 09.8 percentage points of GDP growth, while 4.7 percent of GDP with new infrastruc- Life expectancy at birth, years b 78.3 strong exports of energy and services ture projects implemented through rapid boosted the contribution of net exports to increase in PPPs. Though they alleviate Source: WDI, M acro Poverty Outlook, and official data. Notes: 1.3 percentage points of GDP growth. short-term funding constrains, PPPs in- (a) M ost recent value (2012), 2011 PPPs. Public infrastructure investment in- crease contingent liabilities and restrain (b) M ost recent WDI value (2016). creased, contributing 1 percentage point the fiscal space for new policies. While to GDP growth. the stock of public debt and arrears de- Economic growth was accompanied by job clined to 68.6 percent of GDP (mostly due creation and increased labor force partici- to exchange rate appreciation), budgetary Economic growth accelerated to 4.2 percent pation. Employment growth was stronger arrears totaled around 1.5 percent of GDP as favorable hydrological conditions sup- in industry (by 3.9 percent y-o-y) and ser- in 2018. The government successfully vices (2.5 percent). The average unemploy- placed a 7-year, €500 million Eurobond at ported energy production. Higher growth ment rate declined by 1.5 p.p.to 12.3 per- 3.50 percent in October 2018, which was translated to job creation and a steady cent in 2018. Similarly, youth unemploy- used to buy back a portion of higher- decline in unemployment. Contained ment dropped by 2.8 percentage points in priced debt due in 2020. spending and currency appreciation 2018 with respect to the same period in Weak inflationary pressure prompted an helped bring down the public debt, but off 2017. A stronger job market encouraged easing of the monetary policy stance, in job search and labor force participation in line with the price stability framework. -balance risks including from PPPs are the context of shrinking working-age pop- Headline inflation remains below the cen- mounting. Growth is forecasted to moder- ulation. Overall, labor force participation tral bank’s target of 3 percent and reached ate to 3.7 percent in 2019-2021. Growth reached 59.4 percent, but a large gap be- 2 percent at the end of 2018. Inflation dy- will depend on the pace of reform imple- tween male and female participation re- namics during the year reflect the food mains. Despite the recovering labor mar- price dynamics, with additional pass- mentation, including in the area of busi- ket, poverty remains high, as about 35 per- through effects of the appreciation to- ness environment, infrastructure and cent of Albanians still live with under 5.5 wards the second part of the year. The closing the labor force skills gap. dollars per day per capita (in 2011 PPP). policy rate was lowered to a new low of FIGURE 1 Albania / Real GDP growth and contributions to FIGURE 2 Albania / Actual and projected poverty rates and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 5 60 250000 4 50 3 200000 2 40 1 150000 0 30 100000 -1 20 -2 50000 -3 10 -4 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Consumption Net exports International poverty rate Lower middle-income pov. rate Investment GDP growth Upper middle-income pov. rate Real priv. cons. pc Sources: Instat and World Bank. Source: World Bank. Notes: see table 2. MPO 40 Apr 19 48  ●   World Bank ECA Economic Update Spring 2019 1 percent. While the currency appreciated continue to be led by domestic demand, The medium-term growth projections by 6 percent against the euro over 2018, with consumption expected to grow at crucially depend on the pace of structural temporary forex interventions were used around 3.4 percent annually, followed reforms and progress with EU accession. to prevent excessive fluctuations in the by fixed capital formation growth (3 per- Albania needs to continue its path to- exchange market, caused by large one-off cent per year). Net exports are also ex- wards fiscal consolidation and mitigate conversions. Despite monetary easing and pected to support growth, albeit to a risks from off-balance activities. Reform in a reduction in non-performing loans, pri- lesser extent, as imports expand in line the energy sector is needed to safeguard vate sector credit contracted by 2 percent with domestic consumption. As in the the economy and the budget from unex- (y-o-y) as of end-December 2018. past, poverty is expected to react weakly pected financing needs. Improving busi- Strong export performance and lower to economic growth, falling steadily but ness climate addressing infrastructure import growth improved external balanc- slowly to reach about one -third of the gaps and labor force skill gaps is neces- es. The current account deficit narrowed population by 2020. sary to reap the early benefits of EU acces- to 6.3 percent of GDP in 2018, from 7.5 The fiscal deficit is likely to increase sion and make Albania attractive for FDI. percent in 2017. Foreign Direct Investment over 2019-2021 as the government (FDI) grew by 6.4 percent and now fully speeds up the clearance of arrears and covers the current account deficit. Foreign reserves’ coverage stood at 6½ months of implements several fiscal incentives including VAT exemptions, a reduction Risks and challenges imports at the end of 2018, mitigating in the income tax and an increase of the risks posed by high foreign debt at 62.1 high-income tax bracket for the personal Over the medium-term, risks are signifi- percent of GDP. income tax. On the expenditure side, cant. Albania is vulnerable to a slow- current expenditures including public down in Europe, particularly among its sector wages, social transfers and opera- main trading partners. A slowdown in Outlook tions and maintenance are expected to remain stable, while the government these countries could spill over through lower exports, remittances, and FDI. In capital spending is projected to increase addition, the expected tightening of mon- Albanian economic growth is expected to 4.8-4.9 percent of GDP. Additional etary policy in external markets will in- to fall to 3.8 percent in 2019, and to level projects are expected to be financed by crease financing costs for Albania in the off around 3.6 percent on average over PPPs, some of them already signed in context of a high public debt, which is the medium term, as energy production 2018 or in the pipeline; these will in- increasingly being refinanced through returns to normal levels. Growth will crease contingent liabilities. foreign sources. TABLE 2 Albania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.4 3.8 4.2 3.8 3.6 3.6 Private Consumption 2.6 3.1 2.6 3.6 3.6 3.2 Government Consumption 4.7 2.5 1.1 6.3 -0.7 4.1 Gross Fixed Capital Investment 3.2 6.8 3.3 4.1 3.0 3.1 Exports, Goods and Services 11.4 8.5 5.3 5.8 5.8 5.9 Imports, Goods and Services 6.9 8.2 2.5 5.3 4.8 4.7 Real GDP growth, at constant factor prices 3.2 3.8 4.3 3.8 3.6 3.6 Agriculture 1.7 0.6 1.4 2.1 2.2 2.2 Industry 2.1 6.8 8.3 4.2 4.4 4.4 Services 4.8 4.2 3.9 4.6 3.9 4.0 Inflation (Consumer Price Index) 1.3 2.0 2.1 2.5 2.9 3.0 Current Account Balance (% of GDP) -7.6 -7.5 -6.3 -6.4 -6.1 -5.7 Net Foreign Direct Investment (% of GDP) 8.7 8.6 7.8 6.8 6.8 6.9 Fiscal Balance (% of GDP) -2.3 -2.0 -1.8 -2.1 -2.0 -2.1 Debt (% of GDP) 73.2 71.8 68.6 65.8 64.7 62.4 Primary Balance (% of GDP) 0.2 0.0 0.4 0.0 0.1 0.0 International poverty rate ($1.9 in 2011 PPP) a,b 0.9 0.8 0.8 0.7 0.7 0.6 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 6.8 6.5 6.2 5.9 5.6 5.4 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 36.7 35.9 35.2 34.4 33.5 32.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2002-LSM S, 2008-LSM S, and 201 2-LSM S. A ctual data: 201 2. No wcast: 2013-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using average elasticity (2002-2008) with pass-thro ugh = 1based o n private co nsumptio n per capita in co nstant LCU. MPO 41 Apr 19 Selected Country Pages ●  49 target of 2.6 percent, reflecting an 8 per- ARMENIA Recent developments cent increase in revenue collection, sound control over current spending as well as significant underperformance on capital After growing by 7.5 percent in 2017 and expenditures. As a result, the public debt 8.3 percent in the first half of 2018, real to GDP ratio fell from 58.9 percent of GDP Table 1 2018 GDP moderated in the rest of 2018 re- in 2017 to 55.8 percent of GDP (51.4 per- P o pulatio n, millio n 3.0 flecting weakening exports and re- cent excluding the CBA), the first reduc- GDP , current US$ billio n 1 2.4 mittances, lower-than-planned public tion since 2013. GDP per capita, current US$ 4095 capital spending, and slowing invest- The current account deficit is estimated ment. Still, the economy expanded at a to have widened to above 8 percent of a Internatio nal po verty rate ($ 1.9) 1.4 Lo wer middle-inco me po verty rate ($ 3.2) a 1 2.3 robust 5.2 percent rate for the year due to GDP as goods imports grew almost three Upper middle-inco me po verty rate ($ 5.5) a 50.0 higher private consumption and a strong times faster than goods exports. Half of Gini index a 33.6 build-up of inventories. the growth in imports was due to im- Scho o l enro llment, primary (% gro ss) b 94.3 On the supply side, services were once ports of machinery and transport means. Life expectancy at birth, years b 74.6 again the main driver of growth, rising by On the other hand, the main driver of the 9 percent. Industry grew by 3.4 percent, 8 percent export growth in 2018 were Source: WDI, M acro Poverty Outlook, and official data. Notes: below the rate recorded in 2017 and with a textile exports, which rose by 65 percent (a) M ost recent value (2017), 2011 PPPs. significant shift from mining to manufac- year on year reflecting also new invest- (b) M ost recent WDI value (2016). turing. Mining output contracted by 14 ment in the sector. The recovery in re- percent, mostly due to the suspension of mittances stalled in the second half of the operations at one large copper mine since year, mainly due to volatility in the Rus- February 2018. Manufacturing output, sian ruble. Tourism and IT services ex- Armenia’s economy slowed in late-2018 dominated by food and tobacco products, ports increased markedly but were in- expanded by 10 percent. For the third year sufficient to offset the larger goods trade but still grew by 5.2 percent for the year, in a row, output from the agriculture sec- deficit. Foreign direct investment (FDI), reflecting higher private investment and tor (particularly horticulture) contracted, mostly in the mining and energy sectors, consumption. Two years of pro-poor declining by 8.5 percent. remained low (2.3 percent of GDP). growth lowered the poverty rate ($3.2/day With demand pressures moderating in the The exchange rate of the dram against second half of the year and external infla- the U.S. dollar remained broadly stable, at 2011PPP) to 12.3 percent in 2017, tionary pressures low, average annual but modest inflation caused an apprecia- its lowest level since the 2008–09 crisis. inflation was 2.5 percent in 2018, just at tion of the real effective exchange rate in GDP growth is expected to moderate the lower band of the Central Bank of Ar- 2018. Pressures on the dram increased slightly in 2019 and accelerate in the menia's (CBA) inflation target range (4 slightly in early 2019. Foreign exchange medium term, subject to reforms. An in- percent +/- 1.5 percent). In response, in reserves stood at $2.2 billion in December late-January 2019 the CBA cut the refi- 2018, providing a cover of around 3.8 creasingly uncertain external environ- nancing rate by 25 basis point to 5.75 per- months of next year imports. ment and the ability to push through cent, its first correction in two years. The banking sector remains liquid and reforms are significant challenges. The fiscal deficit was 1.6 percent of GDP broadly sound with a capital adequacy in 2018, well below the budget deficit ratio of 17.4 percent in November 2018. FIGURE 1 Armenia / GDP growth, fiscal and current account FIGURE 2 Armenia / Actual and projected poverty rates and balances real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 8 100 2500000 6 4 80 2000000 2 0 60 1500000 -2 -4 40 1000000 -6 20 500000 -8 -10 0 0 2013 2014 2015 2016 2017 2018e 2019f 2020f 2021f 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Real GDP growth (% change) CAB (% of GDP) International poverty rate Lower middle-income pov. rate Fiscal balance (% of GDP) Upper middle-income pov. rate Real GDP pc Sources: National Statistics Service of Armenia; Central Bank of Armenia; World Source: World Bank. Notes: see table 2. Bank staff projections. MPO 42 Apr 19 50  ●   World Bank ECA Economic Update Spring 2019 Still, profitability is low. Non -performing sustainable public finances. The macroe- loans remain below levels registered dur- ing 2015–16 but have edged up in recent conomic foundations are expected to be strengthened further through structural Risks and challenges months. Also, while declining, dollariza- reforms to create a fairer and more com- tion is high (56 percent of lending and 60 petitive business environment. Growth The uncertainties for Armenia ’s outlook percent of deposits at end-2018). is projected to reach 4.2 percent in 2019, are increasing, taking into account Arme- Two consecutive years of solid growth and gradually accelerate to around 5 nia’s limited market and product diversi- and low inflation have contributed to an percent in medium term. Private con- fication and moderating global and re- improvement in living conditions. The sumption will continue to drive growth, gional economic activity. Regional cur- unemployment rate declined from 17.8 followed by further expansion in exports rencies could come under renewed pres- percent in 2017 to 15.3 percent in the third of goods and services. In line with the sure; intensification of trade restrictions quarter of 2018. The absolute poverty rate, fiscal rule, the budget deficit is projected remains possible, while geopolitical risks measured at the $3.2/day PPP 2011 lower- to stay at around 2 percent of GDP over could further escalate. The realization of middle-income poverty line fell to 12.3 the medium term, further lowering the these risks will put the external accounts percent in 2017 and is estimated to have public debt-to-GDP ratio to below 55 under pressure and lower Armenia ’s continued to decline in 2018. In 2017, eco- percent in 2021. Meantime, government economic growth prospects. On the other nomic growth translated into higher con- capital spending is projected to rebound hand, the resumption of copper mine sumption levels for those at the bottom 40 and support efforts to improve the operations could push exports and percent of the distribution, breaking the productivity of the Armenian economy growth rates higher. pattern observed in 2011–16, when growth and push up its potential growth. The Domestically, the new government has an benefited more the upper deciles. current account deficit is envisaged to opportunity to push key governance and decline gradually, subject to structural business environment reforms to facilitate reforms which will stimulate further job creation, better address social issues Outlook exports of goods and tourism. The absolute poverty rate (at $3.2 PPP and attract investment. While some of these reforms will be challenging, they can 2011) is expected to fall below the 10 also help produce the results needed to The baseline scenario for Armenia ’s out- percent mark in 2019, assuming the mitigate social and political tensions and look envisages slower, but still robust, economy continues to grow, incomes thereby lower economic uncertainty. growth, amid a supportive macroeco- from labor markets rise, and social trans- nomic environment of low inflation and fers are sustained. TABLE 2 Armenia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 0.2 7.5 5.2 4.2 4.9 5.2 Private Consumption -1.0 9.4 5.3 5.4 5.5 5.8 Government Consumption -2.4 13.1 -6.4 6.0 6.2 4.5 Gross Fixed Capital Investment -11.4 7.7 5.0 6.5 6.2 6.5 Exports, Goods and Services 19.1 18.7 5.2 6.8 9.6 10.2 Imports, Goods and Services 7.6 24.6 10.9 6.6 9.7 10.0 Real GDP growth, at constant factor prices 0.6 7.2 4.8 4.2 4.9 5.2 Agriculture -5.0 -5.3 -8.5 2.9 2.7 2.5 Industry -0.3 5.4 3.4 5.1 5.2 5.5 Services 3.3 12.5 9.3 4.0 5.3 5.7 Inflation (Consumer Price Index) -1.4 1.0 2.5 4.0 4.0 4.0 Current Account Balance (% of GDP) -2.3 -2.4 -8.2 -7.6 -6.8 -6.2 Net Foreign Direct Investment (% of GDP) 2.6 2.0 2.3 2.6 2.9 3.3 Fiscal Balance (% of GDP) -5.5 -4.8 -1.6 -2.3 -2.0 -2.0 Debt (% of GDP) 56.7 58.9 55.8 56.0 55.3 54.3 Primary Balance (% of GDP) -3.6 -2.6 0.5 0.1 -0.1 -0.1 International poverty rate ($1.9 in 2011 PPP) a,b 1.8 1.4 1.2 1.1 0.9 0.7 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 14.1 12.3 10.8 9.5 8.3 7.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 43.5 50.0 47.1 44.8 42.2 39.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-ILCS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 43 Apr 19 Selected Country Pages ●  51 International reserves rose to $5.6 billion, AZERBAIJAN Recent developments the assets of the State Oil Fund of Azer- baijan reached $38.5 billion (82 percent of GDP), and the manat remained stable Supported by stable oil production and a against the U.S. dollar. In contrast, the modest acceleration in domestic demand, real effective exchange rate appreciated Table 1 2018 real GDP expanded by 1.4 percent in by 5.5 percent. P o pulatio n, millio n 9.9 2018. While oil production plateaued, the Consumer price inflation decelerated GDP , current US$ billio n 46.9 hydrocarbons sector overall posted sharply in 2018, falling to 1.6 percent growth of 1.1 percent thanks to higher from 7.9 percent in 2017, reflecting mod- GDP per capita, current US$ 471 7 a exports of natural gas. The non -energy est domestic demand, low external infla- Scho o l enro llment, primary (% gro ss) 1 06.4 a economy expanded by 1.8 percent, reflect- tionary pressures. In response, the Cen- Life expectancy at birth, years 72.0 ing greater dynamism in most economic tral Bank of Azerbaijan (CBA) gradually Source: WDI, M acro Poverty Outlook, and official data. sectors. The notable exception was con- lowered its policy rate to 9.25 percent by Notes: (a) M ost recent WDI value (2016). struction, which posted a contraction year February 2019 (from 15 percent in De- on year following the completion of a cember 2017). major gas field project. On the demand Higher oil revenues helped boost fiscal side, the expansion was mainly driven by spending in 2018 (up by 29 percent year consumption, as higher oil and gas prices on year), mainly through higher public supported an increase in public spending investment. The consolidated budget and real wages. A modest recovery in recorded a surplus of 5.9 percent of Azerbaijan’s economy expanded at a mod- credit also supported demand. Total in- GDP (compared to a deficit of 1.5 per- erate pace in 2018 aided by stable oil pro- vestment continued to contract in 2018, cent of GDP in 2017), while the non - though at a more moderate pace, while energy deficit widened to 33 percent of duction and a modest pick-up in domestic non-energy sector investment jumped by non-energy GDP. demand, as higher oil earnings boosted 22 percent year on year. The financial sector showed signs of a fiscal spending and real wages rose. Higher oil prices propelled the current fragile recovery. Even though credit As natural gas exports rise, economic account surplus to 15 percent of GDP (a growth turned positive in 2018, non- non-energy deficit of 10 percent of GDP) performing loans remain high, profitabil- growth is forecast to accelerate over the in the third quarter of 2018. Oil exports ity is low (with several banks making loss- medium-term. The uncertain external rose by 44 percent year on year, while non es), and many banks are still vulnerable to environment represents the main risk to -oil sector exports increased by 12 percent. foreign exchange risk. Azerbaijan’s growth prospects, while a Imports also rebounded, rising by 25 per- The State Statistical Committee esti- sporadic approach to structural reform cent, buoyed by increased government mates that the national poverty rate fell consumption and stronger domestic de- from 5.9 percent in 2016 to 5.4 percent in and the absence of policies targeting the mand. Foreign direct investment dropped 2017. The poverty rate is estimated to vulnerable could further hinder poverty substantially owing to the completion of have fallen further in 2018 in response eradication efforts. the gas field project. Moderate capital out- to continued economic expansion, low flows (mostly from deposits and cash) unemployment, rising real wages, and kept the financial account deficit stable. modest inflation. FIGURE 1 Azerbaijan / Non-oil sectors influenced by oil FIGURE 2 Azerbaijan / Poverty headcount rate at the na- price tional poverty line Percent Percent Percent 12 40 30 10 30 25 8 20 6 10 20 4 0 2 -10 15 0 -20 10 -2 -30 -4 -40 5 -6 -50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Non-oil GDP growth, y/y (lhs) Oil price, y/y (rhs) Source: The State Statistical Committee of the Republic of Azerbaijan. Sources: The State Statistical Committee of the Republic of Azerbaijan and World Note: The World Bank has not reviewed the official national poverty rates for Bank staff estimates. 2013-17. MPO 44 Apr 19 52  ●   World Bank ECA Economic Update Spring 2019 term. Imports will continue to recover oil prices and hurt Azerbaijan ’ s growth Outlook reflecting trends in domestic demand. Capital outflows are expected to re- prospects. Tensions surrounding Azer- baijan ’s major trade partners (the Rus- main low. sian Federation and Turkey) could Primarily owing to rising natural gas ex- Implementation of a relatively stringent have a contagion effect, spurring re- ports, economic growth in the medium fiscal rule (which caps spending increas- newed capital outflows. Strengthened term is forecasted to average 3.5 percent es to 3 percent per annum) will further macroeconomic buffers, as well as a annually. Non-energy output is projected bolster the fiscal accounts. The surplus more flexible exchange rate regime, to expand at around 3 percent annually, on the consolidated budget is forecasted will help limit the impact of the exter- supported by domestic demand, as real to rise to 7 percent of GDP; the non - nal shocks on the economy. wages and credit to the economy continue energy fiscal deficit should decline over The main risks to Azerbaijan’s economic to improve. In 2019, private consumption the medium-term. prospects are domestic. Because it will will receive a temporary boost from in- Sustained GDP growth, additional social rely almost entirely on rising gas exports, creases in the minimum wage and mini- transfers, and low unemployment levels the projected acceleration in growth in the mum pension. Meanwhile, recent tax re- will translate into further reductions in the medium term will be temporary. Growth forms and ongoing efforts to reform the poverty rate. However, more significant in the non-energy economy will remain customs system—building on Azerbai- poverty reduction may require policies lackluster without reforms to boost pri- jan’s strong business reform performance tailored to the specific segments of the vate sector investment, reduce the state in 2018—could reduce informality and population where the poverty incidence footprint, tackle issues of competitiveness, translate into greater economic activity. remains highest. and develop human capital. The notable The gradual recovery in domestic demand increases in the 2019 budget allocations is expected to lift inflation slightly and for education (up by 13 percent) and CPI inflation will hover at about 3 percent through 2022. Monetary policy may be Risks and challenges health care (by 44.5 percent) are important in terms of improving human capital. But further loosened in the medium term. further efforts are needed to align budget With no major decline in oil prices and Azerbaijan's economy faces both external spending with development needs, in- a boost in gas exports, the current ac- and domestic uncertainties. A global eco- cluding through strengthening medium- count surplus is likely to remain above nomic slowdown or rising geopolitical term budgeting and the Public Investment 12 percent of GDP over the medium risks in major oil suppliers could impact Management system. TABLE 2 Azerbaijan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices -3.1 0.1 1.4 3.3 3.5 3.7 Private Consumption -2.8 2.7 2.8 3.2 3.4 3.7 Government Consumption -8.1 1.8 3.3 3.1 3.2 3.2 Gross Fixed Capital Investment -20.0 -5.2 -0.2 1.1 2.6 3.9 Exports, Goods and Services -2.0 -1.0 1.0 3.6 3.4 3.2 Imports, Goods and Services -10.0 0.2 2.5 2.7 2.9 2.9 Real GDP growth, at constant factor prices -3.0 0.1 1.4 3.4 3.5 3.7 Agriculture 2.6 4.7 4.6 4.6 4.6 4.6 Industry -4.2 -3.7 -1.4 2.3 2.4 2.6 Services -1.9 6.6 5.5 5.1 5.0 5.2 Inflation (Consumer Price Index) 15.6 7.9 1.6 2.8 3.2 3.3 Current Account Balance (% of GDP) -3.6 4.1 12.4 12.5 13.1 13.4 Net Foreign Direct Investment (% of GDP) 3.2 2.8 2.4 2.2 2.1 1.9 Fiscal Balance (% of GDP) 0.3 -1.5 5.9 6.5 6.9 7.3 Primary Balance (% of GDP) 1.0 -0.4 7.1 7.5 7.6 7.9 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 45 Apr 19 Selected Country Pages ●  53 Quantitative targeting framework is keep- BELARUS Recent developments ing inflation at historically low levels—5.6 percent y/y in December 2018, against the target not higher than 6 percent. As the The recovery of the Belarusian economy policy rate remained virtually unchanged continues, with real GDP growth reaching throughout 2018, real interest rates fell, Table 1 2018 3 percent in 2018. Merchandise exports (in stimulating nominal credit growth— P o pulatio n, millio n 9.4 dollar terms) grew by almost 16 percent y/ mainly in national currency—to corpo- GDP , current US$ billio n 52.2 y on the back of higher prices for oil prod- rates (by 7.6 percent) and especially to GDP per capita, current US$ 5549 ucts and potash fertilizers and selected households (by 28.4 percent). Upper middle-inco me po verty rate ($ 5.5) a 0.8 agricultural commodities. Domestic de- The national poverty rate, having peaked Gini index a 25.4 mand was driven by still robust growth in at 5.9 percent in 2017, started improving Scho o l enro llment, primary (% gro ss) b 1 01.9 public investments and household con- in 2018 (5.6 percent in Q3, compared to 5.9 Life expectancy at birth, years b 73.8 sumption, supported by growth of real percent in Q3 of 2017) on account of high- wages (11.6 percent y/y, above productivi- er real wages and incomes, lower infla- Source: WDI, M acro Poverty Outlook, and official data. Notes: ty growth of 3.4 percent) and household tion, and continued economic recovery. (a) M ost recent value (2017), 2011 PPPs. incomes (8.6 percent y/y). On the supply However, significant vulnerabilities re- (b) M ost recent WDI value (2016). side, the recovery remains broad based— main: the share of population below the all main sectors, apart from agriculture, Minimum Consumption Budget—a na- recorded output growth. At the same tional measure of welfare—increased from time, the pace of GDP growth has been 18.9 percent in 2014 to 33.9 percent in decelerating from February 2018 onwards, 2017. The poverty headcount at PPP The recovery continued in 2018, driven by reaching just 0.4 percent y/y in January US$5.5/day remains at below 1 percent. favorable external conditions and domestic 2019, as the base effect has dissipated. demand. The inflation targeting framework The current account deficit has remained kept consumer price inflation low, while mostly flat at 0.4 percent of GDP in Janu- ary-November 2018, but vulnerabilities Outlook lower real interest rates stimulated credit remain significant. Exchange rate flexibil- growth, especially to households. Despite ity has been retained, while the foreign The growth outlook in 2019 and in the accelerated income growth, low income exchange market has been further liberal- medium-term remains weak at about 2 ized by abolishing surrender require- percent p.a. due to a combination of households remain vulnerable. Concerns ments. In the second half of 2018, adjust- structural rigidities in the economy and about external sustainability and growth ment of the Russian ruble led to a slight softening terms of trade, as the econo- come from uncertainty surrounding the weakening of the Belarusian currency vis- mies of main trading partners are stag- terms of economic cooperation with Russia. à-vis US dollar, resulting in 8.7 percent nating. This modest outlook is condition- The growth outlook is undermined by annual nominal depreciation of the BYN. al on partial – at least one half of the full Gross international reserves amounted to amount – compensation for the so-called structural rigidities in the economy, the US$7.2 billion at the beginning of 2019, ‘tax maneuver ’ in Russia, or abolishing projected slowdown in traditional markets, covering approximately two months of export duty on oil and raising mineral and tightening global liquidity. goods and services imports. extraction tax. With no compensation, FIGURE 1 Belarus / Real GDP growth and contributions to FIGURE 2 Belarus / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (LCU constant) 15 45 2500000 40 10 35 2000000 5 30 1500000 0 25 20 -5 1000000 15 -10 10 500000 -15 5 Q1/13 Q4/13 Q3/14 Q2/15 Q1/16 Q4/16 Q3/17 Q2/18 0 0 Statistical discrepancy Net exports 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gross capital formation Total cons. of goods & services GDP growth Upper middle-income pov. rate Real GDP pc Sources: World Bank staff calculations based on Belstat data. Source: World Bank. Notes: see table 2. MPO 46 Apr 19 54  ●   World Bank ECA Economic Update Spring 2019 growth would decelerate to below 2 per- reachable. Low inflation is also instrumen- operations related to SOEs and state - cent, the current account deficit could tal to strengthen confidence in national owned commercial banks, and high tax increase, and additional fiscal consolida- currency and reducing high dollarization. expenditures against weak net borrow- tion would be required. Under the worst - Over the 2019-2020 period, PPP US$5.5/ ing capacity. case scenario of no compensation from day poverty headcount is projected to The main challenge is to take advantage Russia, the economy could slide into re- continue falling slowly from the peak of of the recovery in growth to start imple- cession as the petrochemical sector 2015-16, on account of positive, yet some- menting far-reaching economic changes, would adjust its output, along with the what weaker economic growth, and small including restructuring the state -owned deterioration of fiscal accounts and the increases in real wages. Yet, continued enterprise sector. SOEs produce about a external position. increases in utility tariffs highlight a need half of Belarus’s GDP, and their produc- Growth prospects are also undermined to ensure affordability of basic services for tivity and financial performance directly by structural rigidities and major pend- low-income households. shapes Belarus’s growth prospects. Ac- ing reforms. On the positive side, recent cording to National Bank ’s estimates, measures to liberalize economic activity, liabilities with risks of repayment delays reflected in the improved 2019 ‘Doing Business’ rakings and growing exports Risks and challenges held by the largest SOEs account for 15 percent of GDP in 2018, a 1 percentage of ICT services, should contribute to a point higher than in 2017. Hence, ad- trade surplus. However, inefficiency and Rapidly rising public debt, largely denom- vancing in this crucial area of reform will contingent liabilities in State Owned inated in foreign currency, high dollariza- help to reduce vulnerabilities and raise Enterprises continue to undermine eco- tion, and the uncertainty about negative growth potential over the medium to the nomic activity. SOEs continue to crowd spillovers from Russia’s new energy taxa- long-run. An actionable plan to guide out more productive use of capital and tion pose significant risks to macroeco- SOE restructuring should consider risks - remain a key source of fiscal risks —total nomic stability. The room for policy flexi- based assessment of SOEs’ viability and public sector debt remains high at 56.5 bility is limited, as monetary policy effi- fiscal risks. percent in 2018, as compared to 44.1 per- ciency is compromised by high dollariza- To cushion the impact of restructuring on cent in 2011. tion and weak monetary transmission vulnerable groups, social safety net needs In 2019, household utility tariffs—except mechanism, while exchange rate adjust- to be enhanced by introducing unemploy- for heating—are expected to achieve full ment remains risky due to high share of ment assistance mechanisms and inclu- cost recovery. This may lead to inflation- foreign currency-denominated public sively improving the design of the House- ary pressures. Nevertheless, if current debt. Fiscal policy, as a remaining policy hold Utility Subsidy (HUS) program. prudent monetary policy is continued, the tool, has a limited scope due to high levels 6-percent inflation target goal remains of contingent liabilities and quasi -fiscal TABLE 2 Belarus / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices -2.5 2.5 3.0 2.2 2.4 2.1 Private Consumption -3.2 4.7 4.8 2.5 2.8 1.9 Government Consumption -6.9 1.7 -0.9 0.6 0.4 0.5 Gross Fixed Capital Investment -14.5 9.4 1.2 1.8 4.1 2.9 Exports, Goods and Services 2.6 7.5 2.5 2.8 2.7 3.0 Imports, Goods and Services -1.4 11.1 3.9 3.1 3.9 3.2 Real GDP growth, at constant factor prices -2.5 2.5 3.0 2.2 2.4 2.1 Agriculture 3.9 4.4 -3.4 4.6 3.5 3.8 Industry -4.7 3.6 6.1 4.2 5.2 5.8 Services -1.7 0.8 1.4 -0.8 -1.3 -3.2 Inflation (Consumer Price Index) 11.8 6.0 5.6 5.8 5.0 5.0 Current Account Balance (% of GDP) -3.4 -1.7 -1.0 -1.6 -2.6 -2.4 Net Foreign Direct Investment (% of GDP) 2.7 2.6 2.6 2.5 2.3 2.2 Fiscal Balance (% of GDP) 1.5 3.1 3.4 1.4 1.1 1.0 Debt (% of GDP) 44.4 50.3 52.1 55.2 58.3 54.2 Primary Balance (% of GDP) 3.1 5.6 6.2 3.5 3.9 3.6 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 0.7 0.8 0.7 0.7 0.7 0.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HHS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 47 Apr 19 Selected Country Pages ●  55 mainly as a result of higher spending on BOSNIA AND Recent developments public wages and social benefits. At the same time, while sluggish capital spend- ing in 2017 reflected implementation de- HERZEGOVINA Growth reached an estimated 3 percent in 2018. Domestic demand remains the dom- lays, a pick-up of 2.5 pp is estimated in 2018 mainly due to investments in con- inant driver of growth, with consumption struction and roads infrastructure. The adding 3.5pp, investment 0.5 pp and net current account deficit (CAD) is forecast exports subtracting 1pp. Improved exter- to rise slightly in 2018 as imports experi- Table 1 2018 nal demand has supported exports ence higher growth rate than exports. FDI P o pulatio n, millio n 3.5 growth, but higher growth of imports in remained at low levels covering 2 percent GDP , current US$ billio n 1 9.2 2018 is offsetting this momentum. Unem- of GDP. Total public debt in 2018 is esti- GDP per capita, current US$ 5476 ployment remains high, although some mated at 37.1 percent of GDP, consisting a Life expectancy at birth, years 76.9 improvements are observed in the labor largely of concessional borrowing from Source: WDI, M acro Poverty Outlook, and official data. market. The unemployment rate fell from international financial institutions, while Notes: 20.5 percent in 2017 to 18.4 in 2018, driven the total external debt is estimated at 70.5 (a) M ost recent WDI value (2016). by a reduction in activity rate and a slight percent of GDP. rise in employment (mainly in manufac- The latest available poverty data using the turing and construction). The 15-24 years- national poverty line is for 2015 and was old benefited particularly from this in- estimated at 16 percent, very close to the crease in employment in industry sectors, 15 percent poverty rate estimated for 2011. which drove a substantial decline in youth Rural poverty (19 percent) was higher Economic growth in Bosnia and Herze- unemployment, from 46 to 39 percent. than urban poverty (12 percent). The im- govina (BiH) remained stable at 3 percent Long-term unemployment, however, re- plementation of new labor laws in both mains stubbornly high, as 4 of every 5 BiH entities, and continuation of support in 2018 and is expected to pick-up start- unemployed workers have been looking schemes for first-time job seekers are ex- ing in 2019 with the implementation of for employment for more than a year. pected to improve labor market outcomes infrastructure investment. Translating Prices continued to rise in 2018. The con- in the coming years, hence also support- this growth into improvements in labor sumer price index increased by 1.8 percent ing poverty reduction. The improvement year-on-year (y-o-y) in December 2018. in labor market indicators recorded be- markets will be important for continuing The biggest driver of the increase were tween 2015 and 2018 (after the most recent reducing poverty, which was last recorded transport, tobacco and rental housing. microdata was collected) suggest that at 16 percent in 2015 and is expected to Given that growth in nominal salaries was poverty may have receded more recently. have declined in more recent years on 4.9 percent y-o-y, the effect on real in- Simulations that replicate the fall in unem- account of the decline in unemployment. comes was positive. ployment captured by the Labor Force In 2018, fiscal deficit is expected to be at a Survey show that this impact could ac- Delays in Governments formation after 0.5 percent of GDP, down from a surplus count for a decrease of two percentage the general elections is a downside risk of 2.6 percent in 2017. In 2018, revenues points in poverty. Inequality has remained to the growth outlook. rose mainly due to stronger collection of constant in BiH between 2011 and 2015, indirect taxes, while expenditures rose with a Gini ratio of 33. FIGURE 1 Bosnia and Herzegovina / Real GDP growth and FIGURE 2 Bosnia and Herzegovina / Labor market indica- contributions to real GDP growth tors, 2014-2018 Percent, percentage points Percent 5 50 43.7 2014 2015 2016 45 42.1 4 2017 2018 40 3 34.3 35 31.7 2 30 27.5 23.5 1 25 18.4 20 0 15.1 15 -1 10 -2 5 2015 2016 2017 2018f 2019f 2020f 2021f 0 Private consumption Government consumption Activity rate Employment rate Unemployment Unemployment Gross fixed investment Net exports rate rate over 1 year GDP duration Sources: BIH Agency for Statistics (BHAS), World Bank staff estimate. Sources: LFS 2014 -2018 report, World Bank staff calculations. LFS 2018 prelimi- nary results. MPO 48 Apr 19 56  ●   World Bank ECA Economic Update Spring 2019 With high unemployment and expectations of the reform agenda weigh heavily on Outlook of flat real wages, poverty is projected to decline slowly over the next several years. the government’s ability to speed-up fu- ture growth. Although external deficits Improvements in agricultural productivity continue to be moderate, on the fiscal side Supported primarily by consumption will also be critical, as close to 16 percent of the tax burden is high, and public spend- and to some extent by public investment, employment depends on this sector. ing is inefficient, as evidenced by poorly - economic growth is projected to gradual- In the medium run, with improved pro- targeted benefits. Planned fiscal reforms ly strengthen to about 4 percent by 2021. gress on ongoing structural reforms and aim to strengthen the social contribution As the reform agenda deepens, a moder- higher demand for foreign goods, the system and introduce a progressive in- ate rise in exports is expected, but strong CAD is expected to widen further from 5.6 come tax system. These reforms are a step demand for imported goods implies that percent of GDP in 2018 to 6.4 percent of forward and, in combination with other consumption will continue to drive GDP by 2021. Overall, in the medium reforms, will help build a fairer and more growth. Remittances are likely to remain term both fiscal and external deficits are growth-enhancing tax system. Provision high and stable at 8.3percent of GDP, expected to persist. of an effective safety net will not be effec- and, together with progress on reforms, tive if structural rigidities in spending are will underpin a gradual pickup in con- not addressed—especially the high public sumption. Investments in energy, infra- structure, and tourism will also support Risks and challenges wage bill. However, support from the international partners can help the au- job creation in those sectors. A stronger thorities to deliver on the challenging push on the capital investment program Addressing persistent unemployment reform agenda. and streamlining of current spending, and boosting growth while maintaining There are notable risks, both domestic and including better targeting of social assis- macro-fiscal stability, remain central to external. The main domestic risk is the tance programs, remains a high priority the BiH reform agenda. To this end, pro- challenging political environment, which for the authorities’ medium-term eco- moting private sector employment crea- makes structural reforms difficult espe- nomic programs. tion and improving job -preparedness cially in such areas as infrastructure, tele- As poverty is strongly associated with among new entrants to the labor force communications, energy, and transport. It unemployment and inactivity, economic and the currently unemployed will be also raises risks to the economic outlook. growth and improvements in labor mar- necessary. Otherwise, poverty will see The main external risk for BiH remains ket participation and employment will only modest improvement, continuing slow growth in the EU and rising in devel- remain key, especially in sectors that em- the trend in recent years. oped countries interest rates. ploy the low-skilled. Much of the unem- Pressures on current spending from fre- ployed have secondary education or less. quent elections and slow implementation TABLE 2 Bosnia and Herzegovina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.4 3.5 3.0 3.4 3.9 4.0 Private Consumption 2.2 1.2 3.4 3.3 3.3 3.2 Government Consumption 0.0 1.5 5.0 1.5 3.6 2.6 Gross Fixed Capital Investment 2.5 6.3 2.7 4.3 3.7 5.5 Exports, Goods and Services 9.3 10.1 4.5 4.6 3.5 3.5 Imports, Goods and Services 6.7 6.3 5.0 3.5 2.4 2.4 Real GDP growth, at constant factor prices 3.1 3.2 3.0 3.4 3.9 4.0 Agriculture 7.6 -4.4 0.5 2.9 2.9 2.9 Industry 4.7 3.0 1.5 1.9 2.5 2.5 Services 2.0 4.2 3.9 4.0 4.5 4.7 Inflation (Consumer Price Index) -1.1 1.2 2.5 3.4 4.2 2.0 Current Account Balance (% of GDP) -4.5 -4.6 -5.6 -5.8 -6.3 -6.4 Net Foreign Direct Investment (% of GDP) -1.6 -2.0 2.3 2.7 2.9 2.7 Fiscal Balance (% of GDP) 1.2 0.9 -0.5 0.3 1.2 1.1 Debt (% of GDP) 39.1 38.4 37.1 34.8 36.2 35.9 Primary Balance (% of GDP) 2.0 2.2 0.9 1.2 2.4 2.3 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 49 Apr 19 Selected Country Pages ●  57 bill and additional budget resources allo- BULGARIA Recent developments cated to police and municipalities, the fiscal accounts remained in surplus at 0.8 percent of annual GDP. Robust economic Economic growth remained strong in growth and a tighter labor market led to Table 1 2018 2018, projected at 3.1 percent yoy, albeit a decline in the unemployment rate to 5.2 P o pulatio n, millio n 7.0 expanding at a slower pace compared to percent, as of end 2018, a post -crisis low. 2017. Growth was driven mainly by pri- At 73.5 percent as of Q3 2018, the em- GDP , current US$ billio n 61.7 vate consumption (up 5.7 percent yoy) ployment rate (20-64) also improved. GDP per capita, current US$ 8792 a supported by rising wages and cheap However, the working age population Internatio nal po verty rate ($ 1.9) 1.5 credit and invigorating investment (up continued to shrink constraining expan- a Lo wer middle-inco me po verty rate ($ 3.2) 3.8 6.5 percent yoy) which benefited from sion of potential growth. Labor and skill the recovery in the EU investment fund- shortages as well as a rising minimum a Upper middle-inco me po verty rate ($ 5.5) 8.7 Gini index a 37.4 ing. On the production side, the greatest wage pushed real wages up, albeit at a Scho o l enro llment, primary (% gro ss) b 94.8 contribution came from real estate (up slower pace than in 2017. Improvements Life expectancy at birth, years b 74.6 9.3 percent yoy); finance (up 6.7 percent in labor market conditions, including low yoy), construction (up 4.0 percent yoy). unemployment and wage and income Source: WDI, M acro Poverty Outlook, and official data. Notes: Industry grew by 0.8 percent yoy, reflect- growth, supported a return in 2015 of (a) M ost recent value (2014), 2011 PPPs. ing a weaker external demand from non - poverty rates to pre -crisis levels. Poverty EU countries, including neighboring Tur- measured using the Upper Middle- (b) M ost recent WDI value (2016) key. Strong domestic demand and weak- Income Class line of $5.5 per day (in 2011 er external demand in the major export PPP terms) is projected to have declined Bulgaria’s economy grew by 3.1 percent in markets contributed to the widening of from 8.5 percent in 2015 to 7.1 percent in 2018 driven by private consumption and the trade deficit. However, the current 2018. Bulgaria has the most unequal dis- investment. Labor capacity constraints led account balance remained positive at 4.6 tribution of disposable income in the EU, percent on the back of strong perfor- and inequality has been increasing since to rising wages and pushed down the un- mance of services and higher inflows of 2013. The high level of inequality reflects employment rate to a post-crisis low. Out- EU grants. Headline inflation accelerated the relatively low redistributive impact put and employment growth contributed to 2.8 percent in 2018 due to higher ener- of Bulgaria ’s fiscal system. When ine- to a reduction in poverty. Further gains gy prices, robust domestic demand and quality is seen through the lens of market in growth, poverty reduction and shared higher unprocessed food prices reflecting income, before taxes and transfers are a disappointing agriculture year. Fiscal paid, Bulgaria’s inequality is close to EU prosperity hinge on the implementation performance remained positive on the averages. However, Bulgaria ’s system of of policies to boost productivity. Renewed back of improved revenue collection. taxes and transfers is relatively less redis- attention should be given to strengthening Fiscal revenues grew by 18.1 percent yoy tributive than in other countries, contrib- institutions to support planned ERM2 in the first nine months of 2018 thanks to uting to Bulgaria’s Gini coefficient of strong economic activity, better compli- disposable income being 40 percent high- accession, enhancing the skills of the labor ance, and higher minimum wages. De- er than the average in the EU-28 in 2016. force, and improving the effectiveness and spite higher public wages resulting in a Unemployment has declined significant- efficiency of public spending. 12.4 percent increase in the public wage ly but regional variations and long -term FIGURE 1 Bulgaria / Real GDP growth and contributions to FIGURE 2 Bulgaria / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points 6 4 2 0 -2 -4 2016 2017 2018e 2019f 2020f 2021f Net exports Private consumption Gross fixed capital formation Public consumption GDP Sources: NSI, World Bank Source: World Bank. Notes: see table 2. MPO 50 Apr 19 58  ●   World Bank ECA Economic Update Spring 2019 and youth unemployment remain high. to 21.1 percent in 2021. However, the lack Further acceleration of real estate prices Inactivity among certain groups of the of improvement in spending efficiency in in large cities could negatively affect the population persists and many citizens – health, public order, and infrastructure quality of bank portfolios. Upside factors including the elderly, those living in ru- could undermine fiscal consolidation and likely to lead to higher -than expected ral areas, and the Roma – are excluded limit the potential of public spending to growth are an enhanced economic senti- from economic opportunities. enhance growth. Poverty reduction is ex- ment in Europe and stronger global eco- pected to continue at a modest pace in the nomic activity. The key challenges for near term. Sustained improvements in Bulgaria are to accelerate convergence Outlook employment and wages, as well as recent increases in the minimum pension, should with the rest of the EU and to build a more inclusive society. Accelerating con- support real incomes and therefore further vergence requires improvements in Growth is expected to remain robust over reductions in poverty. Poverty is projected productivity and labor force participa- the medium-term. GDP will likely expand to fall to 6.9 percent in 2019, as measured tion as the demographic transition is by around 3 percent in 2019. Domestic at $5.5 a day in 2011 PPP, to 6.5 percent in weighing on the size of the working age demand will continue to be the main driv- 2020, and further to 6 percent by 2021. population. Employment rates of those er of growth supported by labor market aged 20-64 remain in the bottom third of tightening and additional public-sector those seen in the EU -28, suggesting sub- wage increases. Investment sentiment might be affected by increasing uncertain- Risks and challenges stantial potential to increase participa- tion. Inclusion can be supported through ty in external markets, but private and reducing inequality of opportunities public investment should remain strong Risks to the outlook remain broadly bal- across groups and regions and ensuring supported by low interest rates and EU anced. Weaker growth momentum in Bul- that the fiscal system plays its role in funding. Strong domestic demand cou- garia’s main EU trading partners and fur- alleviating rather than deepening pov- pled with weaker external demand will ther slowdown in Turkey, mainly acting erty. Enhancing productivity growth put pressure on the trade balance. The through the trade channel, could under- requires addressing governance chal- current account balance is likely to remain mine export growth, while tightening lenges, critical also for planned ERM2 positive, but the surplus will narrow sig- global financial market conditions could accession. Boosting the skills and em- nificantly. The fiscal balance is expected to increase the cost of lending to the private ployability of all Bulgarians, more effec- remain positive in 2019 and beyond sector with negative implications for in- tive and efficient public spending on through a moderate rise in spending on vestment. Continued wage growth at a health, pensions and long -term care are non-wage items and robust revenue col- faster pace than productivity could trans- also needed to ensure inclusiveness and lection. This will further push down pub- late into increasing unit labor costs and sustainability of growth in the face of lic debt from 25.6 percent of GDP in 2017 therefore undermine competitiveness. demographic changes. TABLE 2 Bulgaria / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.9 3.8 3.1 3.0 2.8 2.8 Private Consumption 3.4 4.3 5.7 5.5 3.6 3.5 Government Consumption 2.5 4.4 6.3 4.8 4.2 4.1 Gross Fixed Capital Investment -6.6 3.2 6.5 6.3 6.1 6.1 Exports, Goods and Services 8.1 5.8 -0.8 0.6 2.4 2.5 Imports, Goods and Services 4.5 7.5 3.7 4.5 4.4 4.3 Real GDP growth, at constant factor prices 3.4 4.2 3.0 3.0 2.8 2.8 Agriculture 5.3 8.9 -1.1 1.0 1.0 1.0 Industry 5.9 4.0 0.8 1.4 1.8 2.1 Services 2.2 3.9 4.2 3.8 3.3 3.2 Inflation (Consumer Price Index) -0.8 2.1 2.8 2.9 3.0 3.0 Current Account Balance (% of GDP) 2.6 6.5 4.6 3.7 2.8 2.1 Net Foreign Direct Investment (% of GDP) 2.1 2.7 2.8 3.0 3.0 3.0 Fiscal Balance (% of GDP) 0.2 1.1 0.2 0.0 0.4 0.4 Debt (% of GDP) 29.6 25.6 24.0 22.7 21.9 21.1 Primary Balance (% of GDP) 1.0 1.9 1.0 0.8 1.1 1.1 International poverty rate ($1.9 in 2011 PPP) a,b 1.2 1.0 0.8 0.7 0.6 0.6 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 3.6 3.3 3.2 2.9 2.8 2.7 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 7.9 7.5 7.1 6.9 6.5 6.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 4-EU-SILC. A ctual data: 2014. No wcast: 2015-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2014) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 51 Apr 19 Selected Country Pages ●  59 in 2017 as new direct investments re- CROATIA Recent developments mained weak, mainly directed in real es- tate and trade. External debt declined to 75.7 percent of GDP in 2018 (estimate), 6.1 Croatian economy continued its growth percentage points below the end of 2017 in 2018 at 2.6 percent in 2018, although level and 31.1 percentage points below Table 1 2018 growth lost some of the momentum com- record-high level in 2014. P o pulatio n, millio n 4.1 pared to the 2.9 percent growth in the Economic recovery has led to new em- GDP , current US$ billio n 60.8 2017, mainly as exports of goods and ployment, resulting in an increase in the GDP per capita, current US$ 1 4878 services decelerated. In terms of growth employment rate by 3 percent in 2018. Lo wer middle-inco me po verty rate ($ 3.2) a 1.3 composition, the strongest contribution Together with a significant negative Upper middle-inco me po verty rate ($ 5.5) a 5.5 came from private consumption at 2 per- migration flow this resulted in further Gini index a 31.1 centage points (pp) supported by the rise decline in unemployment below 10 per- b 95.4 of disposable income as favorable labor cent in 2018 (estimate) from 12.4 percent Scho o l enro llment, primary (% gro ss) b market developments continued. On the in 2017. The economic recovery and Life expectancy at birth, years 78.1 other hand, investment recovery is still shortages of labor that are appearing in Source: WDI, M acro Poverty Outlook, and official data. subdued despite solid private investment some sectors increased real net wages Notes: (a) M ost recent value (2015), 2011 PPPs. growth, as government investment by 2.8 percent in 2018. After internation- (b) M ost recent WDI value (2016). plunged due to the weak absorption of al oil and food prices recovery in 2017, EU funds. Finally, both exports and im- prices accelerated to 1.5 percent in 2018 ports of goods and services slowed mainly due to the further rise of interna- down, resulting in a negative net contri- tional oil prices. bution of 1.2 pp to the 2018 growth. From Real per capita disposable income has Growth continued to moderate in 2018 the supply side, market services were the increased and has finally reached its level to 2.6 percent mainly as exports of goods main drivers of growth during 2018 with from 2009. Additionally, after suffering highest contribution coming from retail one of the worst recessions in the EU, real and services decelerated. Yet, economic sales, tourism and construction. On the GDP per capita is now above its pre-crisis recovery supported by the solid domestic other hand, manufacturing had a neutral level. Furthermore, inequality has de- demand increased employment and real impact on growth. creased and micro-data for 2016 shows net wages reducing poverty rate to 4.2 Current account surplus declined to 2.9 that it is at its lowest level since 2009. The percent of GDP in 2018 (estimate), after country’s annualized growth of disposa- percent (at $5.5/day PPP). General gov- reaching 4.0 percent of GDP in 2017, main- ble per capita incomes among the bottom ernment recorded a balanced budget with ly due to the deterioration of the trade 40, between 2010 and 2015, has been close further decline of public debt. However, balance with exports of goods slowing to half percent and above the growth rate weak potential growth and low labor in- down and imports increasing. Despite of the top 60 (-0.26). clusiveness with accelerated outmigra- solid reinvested earnings as banks’ profits General government recorded a balanced fully recovered following conclusion of budget in 2018 (estimate) after surplus of tion call for a broader structural reform settlement agreement of Agrokor Group, 0.9 percent of GDP in 2017. Revenues con- agenda to reinitiate real convergence net FDI moderated to 2.1 percent of GDP tinued to increase as tax collection re- with the EU. in 2018 (estimate) from 2.5 percent of GDP mained buoyant, especially for VAT, FIGURE 1 Croatia / Real GDP growth and contributions to FIGURE 2 Croatia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 4 8 120000 100000 2 6 80000 0 4 60000 -2 40000 2 20000 -4 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f 0 0 Final consumption Gross fixed capital formation 2009 2011 2013 2015 2017 2019 2021 Change in inventories Net exports International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: CROSTAT, World Bank. Source: World Bank. Notes: see table 2. MPO 52 Apr 19 60  ●   World Bank ECA Economic Update Spring 2019 while expenditures increased faster as period due to the slowdown of exports of faster slowdown in external demand current expenditures including wage bill trade and services, while private con- from the EU as Italy, one of Croatia ’s and current transfers are on the rise. In sumption is expected to remain robust as main trading partners, is expecting a addition, there was one-off increase in real wages continue growing and the gov- slowdown of its economy. In addition, expenditures due to the materialization of ernment reduces some of the tax burden. exports of tourist services are expected contingent liabilities for the guarantees The trade balance could further deterio- to slow in the projection period, due to issued for Uljanik shipyard (0.7 percent of rate as foreign demand from main trading the capacity constraints. On the other GDP) which points to the persistent risk partners decelerates and imports remain hand, government debt is still high and of activation of guarantees, which stood solid, while better absorption of EU funds subject to interest rate risk. Also, cyclical above 3 percent of GDP in 2018. Mainly will give a boost to investment spending. upturn and a sounder fiscal position as a result of high primary surplus, public The general government finance is ex- have resulted in a slight fiscal expansion debt continued to decline to 74 percent of pected to be in average surplus of 0.4 per- and reduced reform momentum that will GDP in 2018 (estimate). The Government cent of GDP in 2019-2021 period, leading have an adverse effect on growth over has also introduced tax reform package in to a further decline of public debt below the medium term. the amount of 0.7 percent of GDP to re- 64 percent of GDP by the end of 2021. As such, Croatia ’s current medium-term duce the overall tax burden. The most Continued positive labor market develop- growth outlook is insufficient to acceler- significant changes in 2019 include reduc- ments are expected to support growth of ate the convergence with the EU. Tack- ing the VAT rate for some food products disposable income for all segments of the ling weak potential would include a and medicines, reducing CIT for the high- welfare distribution. The continued recov- broad reform agenda with aim to address est income bracket and a decrease in so- ery of the economy, including a decline of low productivity through raising quality cial contributions. For 2020, the Govern- the share of long-term unemployed and and mobility of human and physical cap- ment is planning to reduce the general NEETs, is expected to contribute to the ital. Then it would require undertaking VAT rate by 1 percentage point, to 24 further decline in the absolute poverty the cumbersome business environment percent, which amounts around 0.5 per- rate measured at the US$5.5 at PPP 2011 to related to an inefficient public sector and cent of GDP. 3.2 percent by 2021. low labor market inclusiveness. This would lead to higher and more inclusive growth, which would further reduce Outlook Risks and challenges poverty rates in Croatia. Growth is expected to remain moderate at Risks are slightly skewed to the downside. an average of 2.5 percent in 2019-2021 Exports of goods is exposed to the risk of TABLE 2 Croatia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.5 2.9 2.6 2.5 2.5 2.4 Private Consumption 3.5 3.6 3.5 3.6 3.4 3.2 Government Consumption 0.7 2.7 2.9 2.2 2.2 2.0 Gross Fixed Capital Investment 6.5 3.8 4.1 6.3 6.4 6.1 Exports, Goods and Services 5.6 6.4 2.8 2.1 1.9 1.7 Imports, Goods and Services 6.2 8.1 5.5 4.7 4.5 4.2 Real GDP growth, at constant factor prices 3.5 2.1 2.6 2.5 2.5 2.4 Agriculture 7.3 -2.1 2.1 2.0 2.0 2.0 Industry 5.0 0.9 0.5 2.4 2.4 2.4 Services 2.8 2.8 3.4 2.5 2.6 2.4 Inflation (Consumer Price Index) -1.0 1.0 1.5 0.9 1.4 1.4 Current Account Balance (% of GDP) 2.7 4.5 2.9 2.1 1.3 0.9 Net Foreign Direct Investment (% of GDP) 4.2 2.5 2.1 2.2 2.2 2.4 Fiscal Balance (% of GDP) -0.9 0.9 0.0 0.3 0.4 0.5 Debt (% of GDP) 80.2 77.5 74.0 70.7 67.3 63.9 Primary Balance (% of GDP) 2.1 3.5 2.4 2.5 2.4 2.6 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 1.3 1.2 1.1 1.0 0.9 0.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 4.9 4.6 4.2 3.9 3.5 3.2 Source: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 53 Apr 19 Selected Country Pages ●  61 imports. With the currencies of key trad- GEORGIA Recent developments ing partners (Russia and Turkey) coming under pressure in 2018, the nominal and real effective exchange rates appreciated The Georgian economy grew by 4.7 per- by 8 percent and 3.4 percent, respectively. cent in 2018, though economic activity Annual inflation dropped to 1.5 percent in Table 1 2018 moderated towards the end of the year. December 2018 as prices of apparel and P o pulatio n, millio n 3.7 Financial and tourism-related sectors communication services declined, over- GDP , current US$ billio n 1 6.2 grew at above 10 percent, compensating coming slight upward pressure from high- GDP per capita, current US$ 4352 for weak performances in agriculture and er food, alcohol, and fuel prices. In re- construction. On the demand side, strong sponse to softer aggregate demand and a Internatio nal po verty rate ($ 1.9) 5.0 Lo wer middle-inco me po verty rate ($ 3.2) a 1 6.3 credit growth and external transfers, and the improved external balance, the NBG Upper middle-inco me po verty rate ($ 5.5) a 43.6 improvement in labor markets, supported loosened monetary policy slightly in Janu- Gini index a 37.9 domestic demand, while a recovery in the ary 2019, cutting its refinancing rate by 25 Scho o l enro llment, primary (% gro ss) b 1 02.6 region supported exports. The contribu- basis points to 6.75 percent. Life expectancy at birth, years b 73.3 tions of public consumption and invest- Credit expanded by 19 percent in 2018 ment remained subdued. with mortgage lending accounting for Source: WDI, M acro Poverty Outlook, and official data. Notes: Strong export earnings and easing de- almost 40 percent of the increase. More (a) M ost recent value (2017), 2011 PPPs. mand in late-2018 narrowed the external stringent loan approval conditions intro- (b) M ost recent WDI value (2016). gap to around 8 percent of GDP in 2018. duced by the NBG have contained growth Goods exports grew by 23 percent but elsewhere in the lending portfolio. Pru- remain concentrated. Imports of goods dential indicators remain healthy; in De- rose by 15 percent. The goods trade deficit cember 2018, the banking system's return widened by 11 percent year on year but on assets stood at 2.5 percent and return was offset by a 15 percent increase in for- on equity at 19.4 percent. Non-performing Georgia’s economy expanded by 4.7 percent eign transfers and improvement in the loans were modest at 2.7 percent of loans. in 2018, driven by strong exports of goods services account as tourism receipts in- While the budget was balanced until No- and tourism services and robust private creased by 18 percent. Transfers from Rus- vember 2018, a surge in spending in De- consumption and investment. Supported sia accounted for 29 percent of total trans- cember brought the annual fiscal deficit to fers, while most tourists arrived from Ar- 2.9 percent of GDP (compared to a target by rising investment and prudent eco- menia, Azerbaijan, Russia and Turkey. deficit of 3.2 percent). The spike in ex- nomic management, the economy is pro- Foreign direct investment (at about 9 per- penditure was driven by public invest- jected to grow by 4.6 percent in 2019. cent of GDP in 2018) more than offset the ment to compensate for spending delays The national poverty rate, at 21.9 percent external financing needs. earlier in the year. Current expenses de- The exchange rate remained flexible in clined slightly, while tax revenue perfor- in 2017, will return to a declining trend 2018, with lari fluctuations driven by sea- mance was strong. Public debt was at 43.5 as economic growth remains robust and sonal factors. The lower current account percent of GDP. translates into higher incomes. deficit in late-2018 allowed the National Due to slow employment growth and a Bank of Georgia to boost reserves to $3.3 pick-up in inflation, the national poverty billion, the equivalent of four months of rate, stagnated at 21.9 percent in 2017. FIGURE 1 Georgia / Real GDP growth and contributions to FIGURE 2 Georgia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 10 70 4000 8 60 6 3000 4 50 2 40 0 2000 30 -2 20 -4 1000 -6 10 -8 0 0 2014 2015 2016 2017 2018e 2019p 2020p 2021p 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gov. consumption Net exports Investments International poverty rate Lower middle-income pov. rate Priv. consumption GDP growth Upper middle-income pov. rate Real GDP pc Sources: Geostat; World Bank staff estimates. Source: World Bank. Notes: see table 2. Note: Calculations based on ECAPOV harmonization using 2015 -HIS. MPO 54 Apr 19 62  ●   World Bank ECA Economic Update Spring 2019 While pensions contributed positively to consumption, they will strengthen the generators. While PPAs present a fiscal poverty reduction, the impact of Targeted resilience of the sector and its ability to risk, consumption growth trends suggest Social Assistance and other social pro- sustainably support the economy. Infla- the need for additional power capacity. grams was negligible. Poverty was esti- tion will remain low, anchored by credible The government will review PPA deci- mated at 16.3 percent using the lower- monetary policy. sions going forward to ensure compliance middle-income poverty line ($3.20/day, Fiscal operations will continue to shift with the 2018 Law on Public-Private Part- 2011PPP). With the unemployment rate from current to capital expenditures in the nerships (PPPs). The inclusion of liabilities declining in 2018 from 13.9 to 12.7 percent, medium-term, while efficiency improve- from PPPs in public debt is also an im- external transfers increasing, and weak ments will create some additional fiscal portant step. inflationary pressures, the poverty rate is space for higher capital spending. Public Georgia will remain vulnerable to region- estimated to have declined in 2018. debt is projected to stabilize around 43 al developments and the risks associated percent of GDP by 2020. with a sharp decline in export demand or Economic expansion will lead to more a reduction in remittance inflows. While Outlook employment and income -generating op- portunities for those at the bottom of the the Russian economy has withstood ex- ternal shocks and the Turkish economy income distribution. Increases in pen- has begun to stabilize, a fresh round of Georgia’s positive medium-term growth sions and social assistance in 2019 (also disturbances in either economy could outlook is supported by higher invest- planned for future years) will help re- undermine Georgia's prospects for tour- ment (public investment in particular) and duce poverty further. ism and investment, complicate access to stable external demand thanks to improv- financial markets, and negatively impact ing economic prospects in its main trading economic growth. At the same time, with partners (Azerbaijan, Russia and Turkey). Real GDP growth is projected to slow to Risks and challenges its stable business environment, Georgia is well placed to attract investors from 4.6 percent in 2019 as external demand neighboring countries due to stable oper- weakens and the NBG tightens measures Substantial quasi-fiscal risks emanate ating environment. to encourage responsible lending. Growth from the state-owned enterprises (SOEs). Rural poverty will remain a challenge. will rebound to 5 percent by 2021. The The liabilities of the 57 SOEs classified as Providing new job opportunities to work- external gap is expected to narrow, as high and medium-risk, total 16.2 percent ers now employed in low-productive agri- private consumption growth slows and of GDP and additional risks stem from culture—and supporting productivity exports (including tourism services) re- contingent liabilities generated by the 181 increases in agricultural production—will main robust. While newly introduced power purchasing agreements (PPAs), be critical to reducing rural poverty from measures in the banking sector are ex- which provide state guarantees for the current 26.4 percent. pected to slow credit growth and private purchase of excess electricity from power TABLE 2 Georgia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 2.8 4.8 4.7 4.6 4.8 5.0 Private Consumption -0.6 2.4 2.2 2.2 3.1 4.3 Government Consumption 6.8 -2.1 0.2 -0.6 -1.6 -1.5 Gross Fixed Capital Investment 10.0 1.8 4.3 8.8 9.5 8.0 Exports, Goods and Services 7.7 21.8 9.0 7.5 7.0 7.0 Imports, Goods and Services 6.3 10.4 4.5 5.0 5.4 5.7 Real GDP growth, at constant factor prices 2.9 4.7 4.7 4.6 4.7 4.9 Agriculture 0.3 -2.7 2.5 3.0 3.0 3.0 Industry 6.2 5.7 3.4 3.5 3.3 3.3 Services 2.1 5.2 5.5 5.1 5.4 5.6 Inflation (Consumer Price Index) 2.1 6.0 3.0 3.0 3.0 3.0 Current Account Balance (% of GDP) -13.1 -8.8 -8.1 -7.9 -7.7 -7.0 Net Foreign Direct Investment (% of GDP) 9.8 10.8 8.6 9.8 10.5 10.5 Fiscal Balance (% of GDP) -4.2 -3.7 -2.9 -2.8 -2.5 -2.0 Debt (% of GDP) 44.4 44.1 43.6 44.7 43.2 43.1 Primary Balance (% of GDP) -3.0 -2.4 -1.5 -1.4 -1.1 -0.9 International poverty rate ($1.9 in 2011 PPP) a,b 3.9 5.0 4.5 4.2 3.7 3.2 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 16.4 16.3 14.8 13.4 12.1 11.1 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 44.0 43.6 40.9 38.6 36.2 33.9 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HIS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 55 Apr 19 Selected Country Pages ●  63 bail-out packages in 2017, contributed to KAZAKHSTAN Recent developments the moderation in spending. On the reve- nue side, corporate income tax and value added tax—which account for two-thirds Real GDP expanded by 4.1 percent in 2018 of fiscal tax revenue— increased by a com- on the back of stronger exports and recov- bined 16.2 percent in 2018. The overall Table 1 2018 ering domestic demand. Net exports con- fiscal deficit is estimated at 0.6 percent of P o pulatio n, millio n 1 8.2 tinued to contribute substantially to GDP GDP (down from 4.6 percent in 2017), GDP , current US$ billio n 1 64.3 due to stronger-than-expected production while the non-oil fiscal deficit is estimated GDP per capita, current US$ 9036 from the ashagan oil field. But the impetus to have narrowed to 6.8 percent of GDP in appears to be diminishing as production 2018 (from 12.8 percent a year earlier). a Internatio nal po verty rate ($ 1.9) 0.0 Lo wer middle-inco me po verty rate ($ 3.2) a 0.4 flattens. Private consumption rose by an Public debt inched up to an estimated Upper middle-inco me po verty rate ($ 5.5) a 8.6 estimated 4.5 percent, benefiting from ris- 21.1 percent of GDP (from 20.1 in 2017). Gini index a 27.5 ing incomes and moderating inflation. The banking sector remains fragile. There Scho o l enro llment, primary (% gro ss) b 1 09.0 Higher oil prices supported a rise in profits is considerable uncertainty over the actual Life expectancy at birth, years b 72.3 in the extractive industries, which contrib- scale of nonperforming loans in the ab- uted to a 3 percent increase in overall in- sence of an asset quality review of banks. Source: WDI, M acro Poverty Outlook, and official data. Notes: vestment. On the supply side, the domes- Although retail credit bounced back re- (a) M ost recent value (2017), 2011 PPPs. tic, non-export manufacturing and services cently, corporate lending shows no sign of (b) M ost recent WDI value (2016). sectors continued to be the main engines of recovery. The National Bank of Kazakh- growth; the contribution of mining was stan’s (NBK) effectiveness as an independ- slightly lower compared to previous years. ent regulator may have been further com- Higher oil prices and robust foreign de- promised by becoming a shareholder in a The economy grew by 4.1 percent in 2018 mand have made a sizeable dent in the state-owned company and the sole bond- benefiting from higher oil exports and current account, which turned to a surplus holder of the Problem Loan Fund. of 0.5 percent of GDP in 2018 (from a defi- Annual inflation fell to 5.3 percent in De- strong private consumption. Poverty is cit of 3.3 percent of GDP in 2017). On the cember 2018 from 7.1 percent at end-2017. estimated to have fallen to 7.4 percent. capital account, net outflows of portfolio In response to a depreciation of the tenge, Economic growth is projected to deceler- investment offset higher inflows of foreign the NBK raised the policy interest rate in ate going forward as oil production levels direct investment (up by 9.8 percent) and mid-October; together with stagnant cred- off. Private consumption, fueled by in- Eurobond proceeds. Net international it to the economy, this dampened infla- reserves stood at $30.9 billion (18.1 per- tionary expectations. come tax cuts and a minimum wage in- cent of GDP) in 2018. Against the backdrop of buoyant econom- crease, is expected to drive growth and Budget spending growth was moderate in ic activity and labor market improve- support modest poverty reduction. nominal terms and slightly negative ad- ments, the poverty rate (using the $5.5/ The challenges to faster growth, however, justed for inflation, in line with the gov- day international poverty line) is estimat- ernment’s consolidation and deficit reduc- ed to have declined to 7.4 percent in 2018 are significant given Kazakhstan’s over- tion commitment. The completion of ma- from 8.6 percent in 2017, marking the sec- reliance on oil and structural bottlenecks jor infrastructure projects in 2018, and the ond consecutive year in which poverty that constrain private sector development. removal of one-off large banking sector has fallen since its peak in 2016. FIGURE 1 Kazakhstan / Real GDP growth and contributions FIGURE 2 Kazakhstan / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 5 70 1000000 4 60 800000 3 50 2 40 600000 1 30 400000 0 20 200000 -1 10 -2 0 0 2015 2016 2017 2018 e 2019 f 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Consumption Investment International poverty rate Lower middle-income pov. rate Net exports Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: Statistical Office of Kazakhstan; World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 56 Apr 19 64  ●   World Bank ECA Economic Update Spring 2019 Economic growth has contributed posi- than in previous years. Government tively to labor market outcomes. The re- ported increase in real wages in 2018 is initiatives to provide subsidized mort- gage and car purchase loans will also Risks and challenges expected to continue in 2019 following a support private consumption. A weaker significant increase in the national mini- The non -oil fiscal deficit is expected to As a commodity exporter, Kazakhstan mum wage in early January. The headline decline further in line with the govern- faces many risks. The forecast could unemployment rate hovers at about ment’s medium -term fiscal consolida- come under pressure if external condi- 5 percent. tion strategy. Assuming that prices, oil tions deteriorate beyond the baseline The President replaced his cabinet on Feb- demand, and oil and mining profit re- scenario. Three main risks face the Ka- ruary 25 in response to complaints by cer- patriation remain stable, the current zakh economy. First, new sanctions on tain segments of the population over the account will be roughly balanced in the Russia (by the European Union or the lack of inclusive growth. forecast period. United States) could negatively impact The NBK is expected to raise the key poli- Kazakhstan through Russian trade and cy rate to counter inflationary pressures investment channels and place down- Outlook from real wage growth, thereby keeping inflation within the 2019 target range. ward pressure on the value of the tenge. Coupled with rising domestic price pres- The tax cut for low income earners and sures—spurred by higher real wages GDP growth is projected to decelerate the 50 percent increase in the minimum following the minimum wage increase— slightly in 2019–20 and flatten thereafter. wage in January 2019, along with a tight this would require a more aggressive The outlook reflects slow productivity labor market, are expected to stabilize the tightening of monetary policy. growth and the underlying structural poverty rate at around 5 percent by 2021. Second, greater trade protectionism and a weaknesses of the economy, including However, a significant share of the popu- deeper-than-expected slowdown in Ka- market dominance by SOEs, unequal lation is close to the poverty line and zakhstan’s trading partners would ad- regulatory treatment of enterprises, and therefore will remain vulnerable to eco- versely affect demand for exports, slowing a low level of competition. Decelerating nomic shocks. GDP growth. economic growth in Kazakhstan ’s main The government’s concerted efforts to Third, rising uncertainty surrounding a trading partners—particularly China, combat corruption, modernize the judici- possible political transition in the com- the European Union, and the Russian ary, and reduce the share of state activity ing years may slow the progress of Federation—is also forecast to dampen in the economy need to be executed more planned economic reforms, adversely growth in 2019. decisively. These efforts will be even more impacting private investment, both do- Boosted by rising real wages, consumer critical as the country approaches a period mestic and foreign. spending will continue to drive eco- of political transition that could be disrup- nomic activity, though to a lesser extent tive to the economy. TABLE 2 Kazakhstan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 1.1 4.0 4.1 3.5 3.2 3.2 Private Consumption 1.2 1.5 4.5 4.0 3.7 3.4 Government Consumption 2.4 -2.5 -3.1 1.3 -0.4 1.4 Gross Fixed Capital Investment 3.0 6.2 3.0 3.2 3.4 3.3 Exports, Goods and Services -4.4 1.5 6.8 3.4 2.1 2.6 Imports, Goods and Services -2.2 -6.0 3.1 3.6 3.0 3.2 Real GDP growth, at constant factor prices 1.2 3.8 4.1 3.5 3.2 3.2 Agriculture 5.4 2.8 3.0 3.1 3.3 3.0 Industry 1.2 6.0 4.9 3.2 3.1 3.3 Services 0.9 2.7 3.8 3.7 3.2 3.1 Inflation (Consumer Price Index) 14.6 7.4 5.6 6.1 5.8 5.7 Current Account Balance (% of GDP) -6.5 -3.3 0.5 0.2 0.2 0.3 Net Foreign Direct Investment (% of GDP) 10.5 6.0 4.0 6.9 6.7 6.5 Fiscal Balance (% of GDP) -6.4 -4.6 2.0 0.5 0.0 -0.3 Debt (% of GDP) 19.6 20.1 21.1 18.8 17.3 16.5 Primary Balance (% of GDP) -5.3 -3.7 2.7 1.4 1.0 0.6 International poverty rate ($1.9 in 2011 PPP) a,b 0.0 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.7 0.4 0.4 0.3 0.3 0.3 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 12.2 8.6 7.4 6.6 5.8 5.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HB S. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 1 based o n GDP per capita in co nstant LCU. MPO 57 Apr 19 Selected Country Pages ●  65 This increase was driven by higher capital KOSOVO Recent developments investment (financed through privatiza- tion proceeds) and growing untargeted social protection benefit spending. The Growth registered at 3.9 percent in Q3 sharp increase in the social benefits is 2018 and is estimated to have reached 4.2 driven by proliferation of untargeted so- Table 1 2018 percent by end-2018, driven by higher cial benefits and new pension schemes, public investment, a recovery in consump- threatening fiscal stability. The changes to P o pulatio n, millio n 1.8 tion, and strong services exports. Higher the law to cap the spending on war veter- GDP , current US$ billio n 7.6 wages and social spending, remittance an’s benefits at 0.7 percent of GDP were GDP per capita, current US$ 41 08 growth, albeit slower than expected, and not implemented in 2018. The overall a Life expectancy at birth, years 71.6 increasing credit to households, promoted fiscal balance per fiscal rule was in line Source: WDI, M acro Poverty Outlook, and official data. private consumption and added 2 percent- with legal requirements and below 1.4 Notes: age points (pp) to growth. Public invest- percent of GDP, as it excludes capital (a) M ost recent WDI value (2016). ment registered a strong growth and spending financed by privatization pro- reached 8.1 percent of GDP in 2018, up ceeds. Public and publicly guaranteed from 7.3 percent of GDP. Private invest- debt was at 17.7 percent of GDP by end - ment also increased thanks to higher in- 2018 and is growing fast, driven by high- vestment in the retail sector, residential er primary budget deficits. investment fueled by continued demand The current account deficit (CAD) deterio- from the Kosovar diaspora, and higher rated in 2018 as higher services exports corporate lending. Overall, investment could not compensate for the investment- Economic growth remained high at added 5.7 pp to growth. Net exports sub- driven imports. The CAD increased to 8.7 4.2 percent in 2018, propelled by strong tracted 3.5 pp from real GDP growth as percent of GDP in 2018, up from 6 percent public investment and services exports. higher imports met increasing demand for of GDP in 2017. Overall fiscal deficit was at 2.7 percent capital goods. On the production side, Higher growth did not translate into job of GDP in 2018, driven by higher infra- services were the main engine of growth, creation, unemployment rose in 2018 de- followed by industry. Whereas agriculture spite the reduction in labor force partici- structure spending, but in line with fiscal contributed a mere 0.1 pp to growth. pation. In the third quarter of 2018, em- rules. The macroeconomic outlook is Consumer price inflation (CPI) was 1.1 ployment rate dropped by 0.3 pp yoy, positive, with a projected growth rate of percent at end 2018, down from 1.5 per- mostly driven by a decline in employment 4.5 percent for 2019-2021. Fiscal risks cent in 2017, but accelerated in December. in the manufacturing and construction In December y-o-y inflation was 2.9 per- sectors. Unemployment increased by 0.5 are on the rise due to further increases in cent due to price increases for fuel, food, pp despite the 1.5 pp decline in labor force untargeted social benefits and the recently tobacco, alcohol, and transportation. The participation in the third quarter of 2018, adopted law on public salaries. tariffs imposed on goods imports from compared to the same period last year. Serbia and Bosnia and Herzegovina might Youth unemployment increased by 1.7 pp have contributed to this increase. y-o-y, in the same period. The fiscal deficit doubled from 1.2 per- The poverty rate (measured at US$ 3.2/ cent in 2017 to 2.7 percent at end 2018. day, 2011 PPP) decreased slightly from FIGURE 1 Kosovo / Real GDP growth and contributions to FIGURE 2 Kosovo / Actual and projected poverty rates and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 8 60 3000 6 50 2500 4 40 2000 2 30 1500 20 1000 0 10 500 -2 0 0 -4 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2017 2018 2019 2020 2021 International poverty rate Lower middle-income pov. rate Consumption Investments Net exports Growth Upper middle-income pov. rate Real priv. cons. pc Sources: Kosovo statistics agency and World Bank staff projections. Source: World Bank. Notes: see table 2. MPO 58 Apr 19 66  ●   World Bank ECA Economic Update Spring 2019 3.1 percent in 2016 to 2.67 percent in 2017, Private investment is also expected to pick regulated through prudent secondary driven by welfare improvements in rural up because of the increase in credit from legislation to control employment and areas. Poverty in urban areas has been the partial credit guarantee fund for SMEs. allowances, could pose risks for macro stagnant, and extreme poverty increased CAD is expected to widen because of larg- fiscal sustainability through higher fiscal in urban areas. Poverty reduction in rural er trade deficits driven by domestic de- deficits or lead to a deterioration in the areas has been driven by rising labor earn- mand for investment goods. Despite the composition of the public spending. As ings among those at the bottom of the projected increase in exports and domestic the law will only come into force at end income distribution, and pensions. Labor production, the increased demand for 2019, the full impact will be felt in 2020. income has been the main driver of pov- investment goods is expected to lead to a Higher wages in the public sector can erty reduction. Despite weak employment widening of the CAD. FDI inflows, includ- also place a pressure on the private sec- gains and persistently high unemploy- ing in the energy sector, and remittances tor wages impacting export competitive- ment, net job creation was concentrated are expected to continue to finance CAD. ness of Kosovar exporters. There are ad- among sectors that are characterized by Given the negative developments in labor ditional fiscal risks that might arise from low productivity/low wages, benefitting market indicators and expected cost of further increases in untargeted social more those at the bottom of the income living pressures due to rising food prices protection spending. Even if the current distribution. While growth has been pro- and upward trend in urban inequality, fiscal deficit ceiling is respected, public poor in rural areas, in urban areas the poverty, measured at the lower middle- and publicly guaranteed debt has the distribution of growth benefitted the rich. income poverty line (U$ 3.2/day, 2011 potential to exceed 30 percent of GDP by This explains rising inequality, particular- PPP), is expected to remain stagnant. 2025, if recurrent spending growth con- ly in urban areas. tinues to exceed revenue growth. This ratio could expand further if the fiscal Risks and challenges risks materialize risking medium-term Outlook macro fiscal sustainability. The slower pace of poverty reduction, The positive outlook is vulnerable due to high incidence and long duration of un- Kosovo’s economic growth is projected at political uncertainty, lower than project- employment is a challenges. The level of 4.5 percent in the medium-term, driven ed IFI investment,. Moreover, the expan- unemployment is particularly worrisome mainly by public investment, supported sion of public investment as a driver of among the young (54 percent) and those by services exports and consumption. growth in 2019–2021 may suffer from with no schooling (48.4 percent), groups Public investment will continue to be fi- capacity constraints. that tend to be over overrepresented nanced through privatization proceeds Fiscal risks are on the rise. The recently among the poor. and IFI-financed infrastructure projects. approved law on public salaries, if not TABLE 2 Kosovo / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 4.1 4.2 4.2 4.4 4.5 4.5 Private Consumption 6.6 1.8 2.2 2.1 2.2 2.8 Government Consumption -6.3 -0.6 1.6 5.2 0.6 0.0 Gross Fixed Capital Investment 7.3 5.5 14.9 14.0 11.4 10.9 Exports, Goods and Services 2.4 16.8 9.0 7.4 8.5 7.4 Imports, Goods and Services 6.4 5.4 8.0 7.0 5.6 6.0 Real GDP growth, at constant factor prices 2.4 5.6 4.0 4.4 4.5 4.5 Agriculture 3.1 3.7 3.0 3.1 3.2 3.2 Industry 1.6 6.5 0.4 3.5 3.9 3.9 Services 2.8 5.5 6.4 5.1 5.0 5.1 Inflation (Consumer Price Index) 0.3 1.5 1.1 2.6 1.9 1.8 Current Account Balance (% of GDP) -7.9 -6.0 -8.7 -8.9 -10.3 -10.7 Net Foreign Direct Investment (% of GDP) 2.9 3.3 2.7 4.0 4.5 3.5 Fiscal Balance (% of GDP) -1.4 -1.2 -2.7 -3.9 -3.6 -3.0 Debt (% of GDP) 14.0 15.5 16.9 18.5 20.0 21.0 Primary Balance (% of GDP) -1.0 -0.9 -2.5 -3.5 -3.2 -2.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 59 Apr 19 Selected Country Pages ●  67 32.6 percent in 2017). Total spending KYRGYZ Recent developments was reduced to 33.4 percent of GDP (from 37.2 percent a year earlier) due to under -execution of the investment pro- REPUBLIC Real GDP growth slowed to 3.5 percent in 2018 (from 4.7 percent in 2017). Excluding gram. Excluding on -lending, the fiscal deficit fell to 1 percent of GDP, a de- gold production, output growth slowed to cline from the 3.1 percent of GDP deficit 3.5 percent from 5.1 percent a year earlier. recorded in 2017. Table 1 2018 On the demand side, growth was support- Annual inflation eased markedly in 2018, P o pulatio n, millio n 6.3 ed by consumption (fueled by remittance falling to 0.5 percent by end-2018 from GDP , current US$ billio n 8.0 inflows and a relatively relaxed monetary 3.7 percent at end-2017. Food prices GDP per capita, current US$ 1 277 policy) and investment, with a negative dropped by 2.6 percentage points as food Internatio nal po verty rate ($ 1.9) a 1.5 contribution from net exports. On the sup- supply exceeded demand. A broadly sta- Lo wer middle-inco me po verty rate ($ 3.2) a 1 9.6 ply side, while slowing (only agriculture ble exchange rate also helped to contain Upper middle-inco me po verty rate ($ 5.5) a 66.4 grew at a faster rate than in 2017), a posi- inflationary pressures. a 27.3 tive expansion was recorded in all sectors. With inflation well below the target range Gini index b Following an improvement in 2017, the of 5-7 percent, monetary policy was loos- Scho o l enro llment, primary (% gro ss) 1 06.4 b external position deteriorated in the first ened slightly in 2018. The National Bank 71.0 Life expectancy at birth, years nine months of 2018. The current account cut its policy interest rate by 25 basis Source: WDI, M acro Poverty Outlook, and official data. deficit widened to 12.2 percent of GDP points to 4.75 percent in May 2018. The Notes: (a) M ost recent value (2017), 2011 PPPs. (from 6.6 percent a year earlier), reflecting som experienced some fluctuations (b) M ost recent WDI value (2016). a larger trade deficit (which rose to 40.9 against the U.S. dollar in 2018, mainly percent of GDP in January-September). owing to seasonal factors. The National The current account deficit was financed Bank intervened in the foreign exchange by foreign direct investment (FDI), a debt market both as a buyer and seller with net write-off of $240 million by the Russian sales of $134 million during the year. Real GDP growth slowed in 2018 reflect- Federation, and a drawdown on foreign Gross international reserves declined by ing a deceleration in most economic sec- exchange reserves. 3.2 percent in 2018 but remained ade- tors. On the demand side, growth was The fiscal accounts strengthened signifi- quate at four months of goods and ser- driven by private consumption fueled by cantly in 2018. Strong tax collections, vices import cover. coupled with the underperformance of Banking sector performance remains remittances and supported by monetary capital investment, reduced the deficit robust with the key indicators well easing. Growth is projected to accelerate to 1.6 percent of GDP in 2018 (from above the required levels. However, the in 2019 before stabilizing in 2020–21 in 4.6 percent in 2017). Tax revenue rose to sector is vulnerable to interest rate and line with gold output projections. Risks to 25.4 percent of GDP in 2018 from concentration risks. the outlook include a slowdown in region- 23.9 percent in 2017, driven mainly by The poverty rate (measured at $3.20 per higher collections of import taxes. How- day, in 2011 PPP terms) was estimated at al growth, fluctuations in global commod- ever, non -tax revenue and grant sup- 19.3 percent in 2018. Higher remittance ity prices, and failure to implement fiscal port declined and, as a result, total rev- inflows supported household consump- consolidation measures. enues fell to 31.8 percent of GDP (from tion while falling food prices supported FIGURE 1 Kyrgyz Republic / Real GDP growth and contri- FIGURE 2 Kyrgyz Republic / Actual and projected poverty butions to real GDP growth rates and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 5 100 10000 4 80 8000 3 2 60 6000 1 40 4000 0 20 2000 -1 2014 2015 2016 2017 2018 2019 2020 2021 0 0 Agriculture Industry w/out gold sector 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gold sector Construction International poverty rate Lower middle-income pov. rate Services GDP growth Upper middle-income pov. rate Real GDP pc Sources: Kyrgyz authorities; World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 60 Apr 19 68  ●   World Bank ECA Economic Update Spring 2019 the purchasing power of poor house- global food prices, inflation will remain rate is projected to decline slightly to 18.8 holds. Moderate growth in construction below the central bank ’s target range percent in 2019 and 17.9 percent by 2021. and agriculture—sectors that employ over the medium term. more than one -half of the of the bottom The current account deficit is projected to 40 percent —constrained an increase in real labor incomes and the number of remain elevated at about 10 percent of GDP, reflecting structural constraints, the Risks and challenges jobs for the poor. significant import content of public invest- ment, and an indirect feed-through effect The Kyrgyz Republic's economic perfor- via imports. Borrowing and FDI will fi- mance will remain vulnerable to develop- Outlook nance the deficit. To rebuild fiscal buffers, the authorities ments in its major regional trading part- ners. Specifically, an unexpected slow- are committed to reducing the deficit to 3 down in Russia or Kazakhstan could neg- Real GDP growth is projected to acceler- percent of GDP by 2020 and maintaining it atively impact the baseline scenario ate to 4.3 percent in 2019 and stabilize at below this level thereafter in line with the through decreased remittances and trade. around 4 percent thereafter. This scenar- fiscal rule. In 2019–21, tax revenues as a A continuous real appreciation of the som io reflects the gold production forecast share of GDP are projected to rise on ac- against trading partner currencies would and assumes moderate economic growth count of the government’s commitment to undermine the competitiveness of Kyrgyz in Kazakhstan and Russia, which will implement policy measures to expand the goods and services. Export earnings benefit the Kyrgyz economy through the tax base and reduce tax exemptions. could fall considerably in the event of a traditional channels of remittances and Meanwhile, recurrent expenditures are slowdown in gold output or a decline in trade. Export earnings are expected to forecast to decline following efforts to gold prices. The inability to successfully provide an additional boost to growth as streamline non-priority purchases and implement the fiscal consolidation plan access to the Eurasian Economic Union reduce the wage bill as a share of GDP. could jeopardize macroeconomic stability market expands. Public investment spending is forecast to and sustainability. Average annual consumption growth is decelerate slightly. A central challenge for Kyrgyz producers projected at around 3 percent in 2019–21, Further increases in remittances, together will continue to be meeting EEU stand- mainly reflecting rising remittance in- with modest growth in the agriculture ards. In addition, improving the business flows. Investment is expected to grow at and construction sectors, will support environment and addressing issues relat- about 12 percent per year. household consumption and rural pov- ed to energy pricing will be critical to More buoyant economic activity will erty reduction. Social transfers and pen- boost exports and support overall growth stoke inflationary pressures in 2019. sions (which contribute 16.3 percent of in the medium term. However, assuming exchange rate stabil- income among the poor) will continue to ity and no significant adverse shocks to support poor households. The poverty TABLE 2 Kyrgyz Republic / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 4.3 4.7 3.5 4.3 4.0 4.1 Private Consumption -0.6 6.3 3.2 3.4 3.3 3.4 Government Consumption 1.5 1.3 -0.9 -1.2 2.1 2.0 Gross Fixed Capital Investment 7.8 9.2 2.1 16.8 9.7 10.8 Exports, Goods and Services -3.8 6.1 4.8 5.6 6.4 7.0 Imports, Goods and Services -1.1 7.4 8.5 11.5 8.1 9.3 Real GDP growth, at constant factor prices 4.3 4.7 3.5 4.3 4.0 4.1 Agriculture 2.9 2.2 2.7 2.5 2.5 2.5 Industry 7.1 8.6 6.2 7.2 5.3 6.0 Services 4.5 5.3 3.1 4.5 4.6 4.6 Inflation (Consumer Price Index) 0.4 3.2 1.5 4.1 4.5 5.0 Current Account Balance (% of GDP) -11.6 -6.4 -10.9 -9.7 -10.3 -9.4 Net Foreign Direct Investment (% of GDP) 8.5 -1.0 5.7 5.6 5.8 5.7 Fiscal Balance (% of GDP) -6.3 -4.6 -1.6 -3.7 -3.0 -3.0 Debt (% of GDP) 59.1 58.8 56.0 56.5 56.6 56.5 Primary Balance (% of GDP) -4.5 -2.8 -0.4 -2.6 -1.7 -1.3 International poverty rate ($1.9 in 2011 PPP) a,b 1.4 1.5 1.4 1.2 1.1 1.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 19.1 19.6 19.3 18.8 18.4 17.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 67.2 66.4 65.8 64.9 64.1 63.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 1-KIHS and 201 7-KIHS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using average elasticity (2011-2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 61 Apr 19 Selected Country Pages ●  69 maintained the reserve requirement to a rec- MOLDOVA Recent developments ord high of 40 percent, while keeping the base rate at 6.5 percent since end-2017. The Leu strengthened against USD during 2018, sup- Against the background of strengthening ported by remittances and export growth. fundamentals and financial situation, in 2018, Due to robust imports, in the first three quar- Table 1 2018 growth remained solid. Real GDP increased ters the current account deficit increased to P o pulatio n, millio n 3.5 by 4.0 percent during the first three quarters 10.3 percent of GDP, from 8.3 percent in GDP , current US$ billio n 1 1.4 in 2018, compared to 4.5 percent in 2016 and 2017. With FDI inflows accounting for only GDP per capita, current US$ 3226 4.7 percent in 2017. Tax cuts, strong wage 2.1 percent of GDP, external debt remained Lo wer middle-inco me po verty rate ($ 3.2) a 1.1 increases, and remittances supported real the main source of current account deficit Upper middle-inco me po verty rate ($ 5.5) a 1 6.3 growth of disposable income, resulting in a financing. Against this background, by end- Gini index a 25.9 2.7 percentage points contribution of private February 2019 foreign reserves amounted to Scho o l enro llment, primary (% gro ss) b 91.8 consumption to growth. On the back of low- 2.9 billion, after reaching a record high of 3.05 b 71.6 er inflation, favorable interest rates under- billion USD in November 2018, still covering Life expectancy at birth, years pinned investment growth, resulting in a 4- more than 5 months of imports. Source: WDI, M acro Poverty Outlook, and official data. percentage points contribution from capital Despite recovery in growth, labor markets Notes: (a) M ost recent value (2017), 2011 PPPs. formation. With strong domestic demand improved slowly, with key indicators (b) M ost recent WDI value (2016). and stronger Leu, imports expanded quicker largely stable during 2016-2017, and im- (+8.9 percent), resulting in a negative contri- proving throughout 2018, with falling bution to growth (-2.6 percentage points) unemployment rate, and increasing activi- from net exports. On the production side, ty and employment rates. Real wages in- favorable financial conditions and govern- creased by almost 10 percent y/y in Q4 of Real GDP growth is expected to increase ment programs in the sector, expanded the 2018, benefiting from lower inflation that construction sector adding 1.2 percentage protected purchasing power. Consistent by 3.8 percent in 2018 compared to the points to growth. The growth in disposable with these developments, the PPP US$5.5/ 4.6 percent average growth in the last income supported the wholesale and retail day poverty rate remained roughly con- decade. The pace of growth will remain trade, which combined with industry added stant during 2015-2017, as the effects of subdued in the coming years in the face another 2 percentage points to growth. After the recession lingered, although a down- of weaker foreign and domestic demand. two years of good yields, the agricultural ward poverty trend is projected to have sector subtracted 0.3 percentage points. resumed in 2018. Overall inequality con- Adverse demographic trends, low produc- Consumer inflation has been below the lower tinues to decline, but spatial disparities tivity and vulnerability to external shocks target of the corridor of 5 percent (+/- 1.5 per- remain and poverty is overwhelmingly constitute the main challenges to long-term cent) since April 2018. A high base effect, rural (80 percent of total poor population). growth. US$5.5/day poverty, roughly lower administrative prices, relatively weaker Despite of Parliamentary elections, fiscal demand, agricultural supply and lower im- position remained solid. Since mid-2017, constant at 16.3 percent during 2015-2017, ported inflation contributed to the observed public revenue growth has been strong as is projected to decrease slowly over the decline. In addition, excess liquidity result- growth expanded. On back of buoyant trade forecast period. ing from low financial intermediation per- and economic activity, total revenues in- sists in the system. As a response, authorities creased by 8.6 percent, while expenditures FIGURE 1 Moldova / Actual and projected real GDP growth FIGURE 2 Moldova / Actual and projected poverty rates and and current account balance real private consumption per capita Percent of GDP Poverty rate (%) Real private consumption per capita (constant LCU) 10 80 35000 8 70 30000 6 4 60 25000 2 50 0 20000 40 -2 15000 -4 30 -6 10000 20 -8 5000 10 -10 0 0 -12 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Lower middle-income pov. rate Upper middle-income pov. rate Real GDP, % change Current account balance, % GDP Real priv. cons. pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 62 Apr 19 70  ●   World Bank ECA Economic Update Spring 2019 increased by 9.3 percent. The fiscal deficit be marginal provided favorable climatic uncertainty and vested interests under- totaled 0.8 percent of GDP, considerably conditions. Albeit relatively robust exports mine the reform agenda and the invest- lower than the planned levels (-2.5 percent mainly due to expansion of activities in free ment process. Extreme weather may affect of GDP). As some capital expenditure economic zones, given slower projected agricultural output, impacting overall were shifted closer to the 2019 parliament economic activity, the current account bal- growth and poverty. The large share of elections, the execution of the capital ance is projected to decrease till 2020. With the state in the economy, coupled with spending was 27 percent lower than the the reignition of economic activity it will weak institutions and governance chal- planned levels. Mainly due to stronger increase thereafter, however still remaining lenges, including in the financial sector, revenues, the public and publicly guaran- below historical values. The expansionary may pose additional risks. In the medium teed debt decreased to 27 percent from fiscal policy introduced before the elections term, the fiscal position may deteriorate 29.2 percent of GDP in 2017. combined with more dynamic agricultural due to inefficient public spending, declin- and regulated prices, will build up infla- ing economic activity and increasing bur- tionary pressures pushing the inflation out den from the wage and social transfers Outlook of the corridor in the second half of 2019. Nonetheless, in medium term, the monetary bills. Deficit financing also constitutes a risk as it heavily relies on external finan- stance is projected to remain adequate and cial sources, which may not materialize in Against the background of lower remittanc- consumer inflation is envisaged to variate in the post-election period. With higher pro- es, the projected weaker foreign and domes- the target corridor. jected inflation, the government may find tic demand, will decelerate economic Poverty is projected to decline, on account it costlier to finance the planned spending growth below historical values. Initially, the of improving economic and labor market on the local market, with the risk of expansionary fiscal policy measures adopt- conditions, but at a slower pace than in crowding-out the credit activity. Long- ed in 2018—tax cuts, increase in wages and the past, on account of slower projected term challenges to economic growth in- public transfers—and lower interest rates private consumption growth. Compared clude population ageing, large net migra- will underpin growth. As fiscal stimuli fade to the most recent survey estimate of 16.3 tion, and the unsustainable growth model, away after elections, consumer and busi- percent in 2017, the US$ 5.5/day poverty is characterized by remittances-driven con- ness confidence, together with the normali- projected to decline to 11 percent by 2021. sumption and low levels of productivity. zation of financial conditions, will continue Despite past poverty reduction, there is to support private consumption and invest- little visible convergence in recent years ment, resulting in an average growth of around 3.7 percent in the medium term. On Risks and challenges between bottom 40 and top 60 groups on some key dimensions such as educational the supply side, industry and non-tradable attainment, or access to key services. sectors will be the most dynamic, while Moldova remains highly vulnerable to contribution from agriculture is expected to external shocks. Additionally, political TABLE 2 Moldova / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 4.4 4.7 3.8 3.6 3.5 3.8 Private Consumption 2.9 5.3 3.6 3.2 3.1 3.7 Government Consumption 0.8 1.5 0.1 0.9 -0.1 0.3 Gross Fixed Capital Investment -0.9 8.0 10.7 9.8 6.8 8.1 Exports, Goods and Services 9.8 10.9 7.5 5.5 6.3 7.5 Imports, Goods and Services 2.8 11.0 8.3 5.8 5.2 6.7 Real GDP growth, at constant factor prices 4.5 4.2 4.1 3.6 3.5 4.0 Agriculture 18.1 8.9 0.2 1.2 1.4 2.4 Industry 0.4 3.9 5.1 4.5 4.1 5.3 Services 3.7 3.4 4.5 3.8 3.6 3.8 Inflation (Consumer Price Index) 6.4 6.6 3.8 4.7 4.5 5.0 Current Account Balance (% of GDP) -3.5 -5.8 -8.2 -6.9 -6.3 -6.6 Net Foreign Direct Investment (% of GDP) 1.0 1.5 1.8 1.7 1.6 1.4 Fiscal Balance (% of GDP) -1.6 -0.6 -0.8 -2.7 -2.2 -2.0 Debt (% of GDP) 36.9 32.7 30.0 30.3 31.0 29.9 Primary Balance (% of GDP) -0.4 0.5 0.0 -1.7 -1.2 -1.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 1.3 1.1 0.9 0.7 0.7 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 16.4 16.3 14.7 13.2 12.3 11.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HB S. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n private co nsumptio n per capita in co nstant LCU. MPO 63 Apr 19 Selected Country Pages ●  71 15.2 percent. At the same time, the survey- MONTENEGRO Recent developments based participation and employment rates reached their record highs of 56 percent and 47.5 percent, respectively. Due to Montenegro’s economic growth remains strong economic activity, the youth em- robust. In the first three quarters of 2018, ployment rate went up in 2018. Table 1 2018 the economy expanded by 4.9 percent, The external deficit further widened in P o pulatio n, millio n 0.6 bringing the estimated annual GDP 2018 to an estimated 17.1 percent of GDP. GDP , current US$ billio n 5.2 growth to 4.4 percent. Both private and Solid growth of exports of goods and ser- GDP per capita, current US$ 8365 public investments accelerated, and the vices was led by rising tourism, transport, Upper middle-inco me po verty rate ($ 5.5) a 4.8 tourism season recorded another strong electricity, and chemical products. Export Gini index a 31.9 year. Investment grew by an estimated 15 growth, however, was outpaced by real Scho o l enro llment, primary (% gro ss) b 96.0 percent in 2018 led by investments in tour- import growth, largely driven by import - b 77.1 ism and energy and supported by the mo- dependent investments. Specifically, the Life expectancy at birth, years torway construction. Private consumption imports of machinery and equipment, oil, Source: WDI, M acro Poverty Outlook, and official data. Notes: grew by an estimated 3 percent, supported steel, iron, minerals, and furniture further (a) M ost recent value (2014), 2011 PPPs. by solid employment and credit growth. increased in 2018. The primary income (b) M ost recent WDI value (2016) Given the high import-dependence of the account surplus declined due to higher investment projects, net exports were neg- dividend and interest payments. In 2018, ative. On the production side, industrial net FDI inflows declined to 7.1 percent of production growth was led by energy pro- GDP, because of repayment of intercom- duction, supporting stronger electricity pany debt and government repurchases of Strong investment activity, another rec- exports. By year-end, manufacturing shares of the power utility company. Ex- ord-high tourism season, and increased strengthened, while the mining sector con- ternal debt is estimated at 168 percent of tracted. Construction growth of 25 percent GDP in 2018. industrial production drove GDP growth and retail trade growth of 3.4 percent sup- In 2018, average annual CPI inflation stood to an estimated 4.4 percent in 2018. Solid ported strong economic activity. at 2.6 percent, driven by increased prices of growth is reflected in improved labor mar- The strong economic performance is re- transport, alcohol, and tobacco With nomi- ket dynamics as the unemployment rate flected in recent labor market dynamics. nal wages flat, inflation caused real gross Employment grew by 4.3 percent in 2018, wages to decline by more than 2 percent. reached a historic low. Poverty is estimat- mostly in construction, tourism, services, Solid growth and labor market improve- ed to have declined since 2012. External and the public sector. The administrative ments reduced poverty (measured as con- imbalances remain high due to import- employment data show that the total sumption below the standardized middle- dependent investments. Gradual fiscal number of unemployed declined by 13.7 income-country poverty line of $5.5/day consolidation led to a reduced fiscal defi- percent in 2018, resulting in a registered 2011PPP) from 8.7 percent in 2012 to an unemployment rate of 17.8 percent in De- estimated 4.8 percent in 2018. In 2018, cit, but higher than planned expenditures cember 2018 from 22.4 percent in Decem- poverty reduction slowed down due to delayed reaching a balanced budget until ber 2017. The survey-based unemploy- the mother’s benefit withdrawal, real next year. ment rate, which better captures informal gross wages decline, and the rise in indi- employment, declined to a historic low of rect taxes. FIGURE 1 Montenegro / Real GDP growth and contributions FIGURE 2 Montenegro / Actual and projected poverty rates to real GDP growth and real private consumption per capita Percent, percentage points Poverty rate (%) Private consumption per capita 16 12 3000 12 10 2500 8 8 2000 4 0 6 1500 -4 4 1000 -8 2 500 -12 2012 2013 2014 2015 2016 2017 2018e 2019f 20207f 2021f 0 0 Final consumption Gross fixed capital formation 2005 2007 2009 2011 2013 2015 2017 2019 2021 Change in inventories Net exports GDP growth Upper middle-income pov. rate Consumption pc Sources: MONSTAT, World Bank. Source: World Bank. Notes: see table 2. MPO 64 Apr 19 72  ●   World Bank ECA Economic Update Spring 2019 The financial sector has remained stable and publicly guaranteed debt at 75.4 per- The still large financing needs, which are during the ongoing resolution of two cent in 2018. estimated to average EUR 460 million smaller, non-systemic banks, one of which over 2019-2021, again highlight the im- is in bankruptcy. But a rapid resolution portance to fully commit to the implemen- focusing on the overall strength of the sector in observance of regulations is criti- Outlook tation of planned fiscal consolidation. Subject to improvements in private sector cal to maintain financial sector stability. employment and earnings, poverty is ex- The financial sector capital adequacy ratio The economy is expected to grow by an pected to decline to an estimated 4.7 per- of 16.5 percent as of October 2018 is above average of 2.5 percent in 2019-21. GDP cent in 2019 as the fiscal consolidation the 10 percent regulatory minimum. Overall growth is expected to slow down as pri- phases out. credit grew by 8.5 percent y-o-y by Decem- vate investment levels off after the strong ber 2018, driven by household and general increase in 2018 and the large public infra- government lending. The loan-to-deposit ratio of 85 percent indicates plenty of liquid- structure investment projects gradually phase out. After a moderation in 2019, due Risks and challenges ity in the system. Deposits grew by 5.9 per- to the fiscal consolidation and the imple- cent y-o-y with both corporate and house- mentation of the public administration Notwithstanding the positive outlook, holds deposits up. A recovery in credit staff reduction plan, private consumption there are significant downside risks. Apart growth helped to reduce non-performing and employment growth are expected to from external factors, domestic risks are loans to 6.9 percent of total loans. rebound in 2020. Increasing political and increasing due to increasing political un- The gradual fiscal consolidation program overall uncertainty will likely weigh on certainty ahead of the elections in 2020, has reduced the fiscal deficit, but higher- private consumption and investments. further cost overruns of the motorway than-planned public spending is delaying Inflation is projected at 1.9 percent over project, and the vulnerability of some the Fiscal Strategy goal of balancing the the medium term due to increasing smaller banks. Mitigating these risks re- budget. After reaching 5.6 percent in 2017, excises and the announced electricity quires a firm commitment to the fiscal the fiscal deficit is estimated to have fallen prices increase. consolidation plan and an acceleration in to 3.8 percent of GDP in 2018. Revenue Current imbalances are expected to slowly implementing critical structural reforms in growth of 10.1 percent was supported by moderate as investment-dependent infra- the labor market, social sectors, and the higher VAT, income tax, and non-tax rev- structure projects phase out. public administration. And it requires enues. Public spending went up by 5.5 Due to higher capital expenditures, the strengthening public institutions that en- percent due to higher capital spending fiscal deficit will reach 3.0 percent in 2019 force fair market competition to ensure and spending on wages and good and but is projected to turn into a surplus in that nobody benefits from special treat- services. Public debt is projected to have 2020-2021 as the first phase of the motor- ment and entrepreneurs are encouraged to peaked at 70.8 percent of GDP, and public way construction is completed. compete by innovating. TABLE 2 Montenegro / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 2.9 4.7 4.4 2.9 2.4 2.3 Private Consumption 5.4 3.9 3.0 2.1 2.4 2.0 Government Consumption 0.8 -1.4 2.9 -1.2 -0.3 -0.3 Gross Fixed Capital Investment 38.4 18.7 15.0 6.5 -2.8 -2.8 Exports, Goods and Services 5.9 1.8 6.6 3.7 4.6 4.8 Imports, Goods and Services 15.3 8.4 9.0 3.5 0.1 0.1 Real GDP growth, at constant factor prices 2.9 4.7 4.4 2.9 2.4 2.3 Agriculture 3.9 -3.1 0.0 0.1 0.5 1.0 Industry 22.7 18.9 5.0 3.4 2.9 2.5 Services -22.9 -21.4 4.7 2.8 1.7 2.4 Inflation (Consumer Price Index) -0.3 2.4 2.6 2.0 1.9 1.9 Current Account Balance (% of GDP) -16.2 -16.1 -17.1 -17.1 -14.9 -11.4 Net Foreign Direct Investment (% of GDP) 9.4 11.3 7.1 8.7 8.4 7.9 Fiscal Balance (% of GDP) -2.8 -5.6 -3.8 -3.0 0.2 2.2 Debt (% of GDP) 64.4 64.2 70.8 67.2 64.3 60.2 Primary Balance (% of GDP) -0.7 -3.2 -1.8 -0.9 2.0 3.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 4.2 4.4 4.8 4.7 4.6 4.5 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2009-HB S and 201 4-HB S. A ctual data: 2014. No wcast: 2015-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2009-2014) with pass-thro ugh = 0.4 based o n private co nsumptio n per capita in co nstant LCU, with estimated impact o f fiscal co nso lidatio n. MPO 65 Apr 19 Selected Country Pages ●  73 and public-sector, wage growth was 5.8 NORTH Recent developments percent in 2018, compared to 2.6 percent in 2017. Using the US$5.5/day (2011 PPP) pov- erty line, poverty is projected to have fallen MACEDONIA In 2018 the economy grew by 2.7 percent. Supported by consumption and net ex- to below 21 percent in 2018, continuing a decreasing trend present since 2009. Em- ports, economic activity picked up in 2018 ployment growth and increases in salaries, after stagnating in 2017. Private consump- partly led by the minimum wage increase, Table 1 2018 tion was the main driver of growth, con- are expected to have driven most of the P o pulatio n, millio n 2.1 tributing 2.4 percentage points (pp) be- poverty reduction in recent years. The ad- GDP , current US$ billio n 12.7 cause of rises in employment, wages, and ditional income-generation opportunities at GDP per capita, current US$ 6100 lending to households. Net exports, main- the bottom of the income distribution also ly FDI-related, contributed 1.7 pp. The contributed to a decline in inequality, with a Internatio nal po verty rate ($ 1.9) 5.3 Lo wer middle-inco me po verty rate ($ 3.2) a 9.8 remaining 0.8 pp came from government the Gini index falling from 43 in 2009 to Upper middle-inco me po verty rate ($ 5.5) a 23.2 consumption as investments reduced 35.6 in 2015. Gini index a 35.6 growth by 2.2 pp. On the production side, Consumer price inflation remained mod- Life expectancy at birth, years b 75.7 wholesale and retail trade and infor- erate in 2018, at 1.5 percent, led by rise in mation and transportation services were transport prices (up by 7.5 percent) and the main drivers of growth, contributing non-tradables. Annual growth of broad Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (2016), 2011 PPPs. 2.3 pp. The manufacturing contribution of money accelerated further to 11.8 percent, (b) M ost recent WDI value (2016) 0.6 pp was driven by higher production of reflecting accommodative monetary poli- busses, electric machinery, food and bev- cy stance and rise in deposits. In Decem- erages, pharmaceuticals, and basic and ber, the central bank reduced further the Economic growth rebounded to 2.7 per- fabricated metal products. Construction key policy rate by 25bp to a historically cent in 2018, driven by consumption and rebounded from October thanks to higher low 2.5 percent. Loans and deposits public investment and a continued recov- growth accelerated. The bulk of the over- net exports, while investment started re- ery of private investment. all credit increase of 7.3 percent, continued covering. Unemployment fell to a histori- Labor market continued improving in 2018. to be accounted for by households cal low, while wage pressure continues. The employment rate increased by one (growth of 10 percent). The banking sector Poverty decreased further, following the percentage point to 45.1 percent, while the remained stable and well capitalized--the activity rate increased only slightly to 56.9 NPL ratio stood at 5.1 percent at end-2018 trend set in 2009. The fiscal deficit de- percent. The employment expansion was and capital to risk-weighted assets stood clined in 2018 amid revenue growth and broad-based, with significant gains for at 16.3 percent. a significant under-execution of capital young men and prime-age women. Unem- Revenue growth and under-execution of spending. Nevertheless, public debt in- ployment rate declined to 20.7 percent in capital investments brought the fiscal defi- creased further. As the political outlook 2018, compared to 22.7 percent a year earli- cit down in 2018. General government er. Most of the new jobs were created in revenues rose 4.2 percent, tracking rises in improved, the emphasis should be on eco- manufacturing, wholesale and retail trade, social contributions, excises, and corpo- nomic reforms to reignite EU convergence and industries closely related to tourism. rate and personal income tax revenues. process and stabilize public finances. Led by agriculture, manufacturing, trade Net VAT revenues also increased, despite FIGURE 1 North Macedonia / Real GDP growth and contri- FIGURE 2 North Macedonia / Actual and projected poverty butions to real GDP growth rates and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (LCU constant) 4 40 250000 2 35 200000 0 30 -2 25 150000 -4 20 15 100000 -6 10 -8 50000 5 -10 2011 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 0 0 2010 2012 2014 2016 2018 2020 Final consumption Gross fixed capital formation Change in inventories Net exports International poverty rate Lower middle-income pov. rate Residual item GDP growth Upper middle-income pov. rate Real GDP pc Source: North Macedonian Statistical Office. Source: World Bank. Notes: see table 2. MPO 66 Apr 19 74  ●   World Bank ECA Economic Update Spring 2019 a surge in refunds to clear arrears to busi- nesses. Spending went up only 1.1 percent because the historically largest drop in Outlook Risks and challenges capital spending made up for higher cur- rent spending by 6.3 percent caused by a The economic outlook is positive, with Lower growth prospects in Europe could surge in social transfers and higher subsi- growth expected at average 3.1 percent affect exports and thus growth in North dies to firms. The general government during 2019-2020. Construction activity Macedonia. The successful resolution of deficit declined from 2.8 percent in 2017 to spurred by investments is expected to agreement with Greece on the country’s 1.8 percent (adding in the Public Enter- recover, as technical difficulties that inter- name dispute and deblocking of the EU prise for State Roads raises the deficit to rupted the construction of one of the membership processes provide a stimulus an estimated 2.3 percent of GDP). highways are resolved. The manufactur- for growth and reforms. Strengthening The current account deficit (CAD) declined ing sector should benefit from the re- public spending efficiency and broaden- to 0.3 percent of GDP in 2018, compared to newed FDIs cycle, propelled by higher ing the tax base would help stabilize pub- 1 percent in 2017. The continued solid ex- exports, and still stable demand along the lic debt and rebuild fiscal buffers against port performance of FDI-related industries supply chain to Germany. Private con- future shocks. In the baseline scenario of like automobiles and electrical machinery sumption is projected to rise supported gradual consolidation, the PPG debt-to- was supplemented by growth of exports in by higher wages, employment, and rising GDP ratio is expected to rise to 55 percent such traditional products as iron and steel, credit to households. by 2021, to decline thereafter, which un- furniture, and apparel. This helped to bring Poverty is expected to continue trending derscores the need for strong and front- down the goods trade deficit to 16.2 percent downwards. Real wage growth and con- loaded structural reforms to stabilize debt of GDP. Net services exports surplus re- tinuous improvement in labor markets, in the medium term. Increasing overall mained solid at 3.3 percent of GDP, driven especially with expansions of employment levels of productivity in the economy re- by transport and services for processing in construction, manufacturing and the mains one of the most important challeng- manufactured goods. Net private transfer tourism-related industries, will provide es for local firms to be able to compete inflows continued increasing and were more income earning opportunities at the globally and sustain increases in salaries. more than sufficient to cover the entire bottom of the distribution, where unem- As poverty continues declining, tailored goods and services deficit. Net FDI inflows ployment is still high. Public investment policies will be needed to support human surged to 5.8 percent of GDP in 2018, due in infrastructure should sustain employ- capital accumulation and job prepared- to significant investments coming from UK. ment creation. The social assistance re- ness for specific groups where poverty Gross external debt, excluding central bank form currently under implementation could remain entrenched. transactions, increased by September to 77.6 should reduce poverty, as the re- percent of GDP (up 3.4 pp y-o-y), reflecting orientation of benefits envisioned should the January 2018 issuance of Eurobonds. favor poorer households. TABLE 2 North Macedonia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 2.8 0.2 2.7 2.9 3.2 3.6 Private Consumption 3.9 0.6 3.3 2.4 2.1 2.3 Government Consumption -4.9 -2.5 6.2 1.0 0.8 0.5 Gross Fixed Capital Investment -6.2 -8.7 -7.2 5.0 6.0 6.5 Exports, Goods and Services 9.1 8.1 15.3 7.5 8.1 8.2 Imports, Goods and Services 11.1 6.4 9.1 5.8 6.1 6.1 Real GDP growth, at constant factor prices 2.0 0.1 2.8 2.9 3.2 3.6 Agriculture -0.4 -13.5 -5.0 1.8 1.5 1.5 Industry -2.9 -1.0 2.2 5.5 5.9 6.4 Services 4.5 2.3 3.9 2.0 2.3 2.6 Inflation (Consumer Price Index) -0.2 1.3 1.5 1.8 1.9 2.2 Current Account Balance (% of GDP) -2.9 -0.8 -0.3 -1.7 -2.1 -1.8 Net Foreign Direct Investment (% of GDP) 3.3 1.8 5.8 4.4 4.6 4.8 Fiscal Balance (% of GDP) -3.8 -3.5 -2.3 -3.5 -2.9 -2.5 Debt (% of GDP) 48.7 47.7 48.4 53.4 54.4 55.0 Primary Balance (% of GDP) -2.6 -2.1 -1.1 -2.1 -1.5 -1.1 International poverty rate ($1.9 in 2011 PPP) a,b 4.9 4.9 4.8 4.5 4.5 4.2 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 10.0 10.0 9.7 9.5 9.4 9.0 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 24.8 24.7 23.7 23.2 21.8 20.4 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-SILC-C. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 67 Apr 19 Selected Country Pages ●  75 1.6 percent in 2018, due to low core in- POLAND Recent developments flation of 0.7 percent. Strong domestic demand caused imports to grow by 6.3 percent in the first three Poland ’ s GDP grew by 5.1 percent in quarters of 2018. As Poland ’s key trade 2018, driven primarily by slightly de- partners experience economic slow- Table 1 2018 celerating domestic consumption (4.3 down, growth of exports almost halved P o pulatio n, millio n 37.9 percent growth in 2018 compared to to 5.3 percent compared to 9.1 percent GDP , current US$ billio n 580.6 4.5 percent in 2017) and stronger in- growth in the first three quarters of 2017, GDP per capita, current US$ 15310 vestments (7.3 percent growth). Private resulting in neutral net exports. The cur- consumption grew by 4.5 percent, rent-account balance returned to a deficit a Internatio nal po verty rate ($ 1.9) 0.4 Lo wer middle-inco me po verty rate ($ 3.2) a 0.8 fueled by a strong labor market, in- in 2018 as robust household consump- Upper middle-inco me po verty rate ($ 5.5) a 2.6 creased average salaries (by 7.1 per- tion, higher investments, and depreciat- Gini index a 31.8 cent) and social programs such as ed Polish currency pushed up the vol- Scho o l enro llment, primary (% gro ss) b 110.1 “ Family 500+”. Despite the lower FDI ume and cost of imports. Life expectancy at birth, years b 77.5 inflow (net FDI increased due to falling The labor market has further tightened outward FDI), investments continued despite rising employment rates, partly Source: WDI, M acro Poverty Outlook, and official data. Notes: to recover (7.3 percent increase in due to lowering the retirement age while (a) M ost recent value (2015), 2011 PPPs. 2018) after a major decline in 2016 introducing a child benefit that contribut- (b) M ost recent WDI value (2015) caused by a cyclical fall in EU - funded ed to workers withdrawing from the la- projects. Increased government invest- bor market during a period of growing ments strongly influenced by local demand. Labor shortages have started to elections held in Autumn and higher affect business activity, as the job vacan- absorption of EU funding have con- cy ratio increased in quarter three of 2018 tributed to the rebound of total invest- by 0.1 pp to 1.2 percent compared to the Poland’s economy continued to perform ments. On the production side, indus- previous year. strongly in 2018. Real GDP growth is try (up by 5.5 percent), transportation With strong growth, a tight labor mar- estimated to reach 5.1 percent in 2018, (9.2 percent increase), and construction ket and higher social spending, the pov- driven by domestic consumption and (up by 17 percent) were the key drivers erty rate using the Upper Middle - of growth. Income Class line of $5.50 per day (2011 higher investments. The pace of growth Despite growing public expenditures, PPP) is estimated to decline from 2.7 is expected to subside in the coming years the general government deficit for 2018 percent in 2015 to 2.0 percent in 2018. in the face of a tightening labor market is estimated to amount to 0.5 percent of The Gini coefficient of inequality has and slowing growth in the rest of the EU. GDP, safely below the 3 percent EU progressively declined since 2004, re- Labor shortages, procyclical government threshold. Poland ’s debt -to-GDP ratio is flecting strong income growth for set to decrease to approximately 49.2 bottom 40 households as a result of em- policies and global factors are the main percent, as budget revenues exceeded ployment and wage growth and an in- challenges to sustained growth in the budget projections. Despite increased crease in the progressivity of the tax medium term. energy prices and strong consumption, and benefit system following the intro- consumer prices rose by a modest duction of Family 500+. FIGURE 1 Poland / Real GDP growth and contributions to FIGURE 2 Poland / Actual and projected poverty rates and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 6 14 35000 5 12 30000 4 10 25000 3 2 8 20000 1 6 15000 0 4 10000 -1 2 5000 -2 2011 2013 2015 2017 2019f 2021f 0 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 Final consumption Gross fixed investment Change in inventories Net exports International poverty rate Lower middle-income pov. rate Statistical discrepancy GDP growth Upper middle-income pov. rate Real priv. cons. pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 68 Apr 19 76  ●   World Bank ECA Economic Update Spring 2019 expected to widen the current account encouraged by the political calendar and Outlook deficit. In the medium term, economic growth is forecast to decelerate to 3.6 per- adverse global factors. The shortage of labor will eventually cent in 2020 and 3.3 percent in 2021. None- weigh heavily on potential GDP growth, After three consecutive years of accelerat- theless, rising real incomes are expected to and will be exacerbated by the early re- ing growth, the pace of Poland’s economic lead to further declines in poverty. The tirement of an increasing share of the expansion is expected to decline. Amid $5.50/day 2011 PPP poverty rate is project- workforce. Too few workers could nega- the economic slowdown in the EU, Po- ed to decline to 1.9 percent in 2019 and tively affect production capacity and in- land’s GDP growth may reach 4.0 percent further to 1.6 percent by 2021. vestment. The problem may be amplified in 2019, driven by both private and gov- Fiscal performance remains a challenge by the possibility that other EU countries ernment consumption, as well as invest- despite the sound budget position so far. open their labor markets to workers from ments. The previous projection of 2019 In the short-term public expenditure is Ukraine, who have so far helped Poland real GDP growth has been revised up- likely to increase significantly due to re- mitigate the shortfall in labor supply. ward by 0.1 pp due to persistently strong cently announced policies that are ex- A dense political calendar, with EU, presi- domestic consumption and expanding pected to enter into force prior to the gen- dential, and general elections all coming investments. Household consumption eral elections in October 2019. Subsidized up within a year, inspired a range of pro- expenditures are set to continue growing, energy prices, the extended “Family 500+” cyclical policies. Proposed measures in- fueled by government spending on social program, lower PIT rates and the 13th creasing social benefits, lowering tax rates benefits and labor market conditions. month pension payment are expected to and inflating the cost of pension payments However, as the positive effects of the elevate the general government deficit in are expected to put pressure on public Family 500+ program fade and are not 2019 and will become a fiscal burden in finances in the short and medium term. fully compensated for by increased sala- the medium term. Thanks to the economic Due to their irreversible nature, such poli- ries, the contribution of private consump- expansion, general government gross debt cies would weigh on Poland’s fiscal posi- tion to GDP is expected to fall in coming is expected to stabilize at around 49 per- tion in the coming years and may push years. A stable banking sector, low inter- cent of GDP in 2019-20. the deficit towards the EU threshold. est rates and availability of EU funds are Poland’s economy is likely to feel the neg- expected to support private investments ative impact of global factors. A slowing and offset an anticipated post-election decline in growth of local government Risks and challenges German economy will affect Polish ex- ports. In addition, given that the UK is the investments. A trade deficit is predicted to third biggest market for Polish exports, emerge on the back of a slowing German The three main challenges ahead for Poland’s economic growth could be fur- economy, which accounts for roughly Poland are a shortage of labor in the econ- ther weakened, should a no-deal Brexit a quarter of Polish exports, and it is omy, procyclical government policies scenario materialize TABLE 2 Poland / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.1 4.8 5.1 4.0 3.6 3.3 Private Consumption 3.9 4.9 4.5 4.1 3.9 3.7 Government Consumption 1.9 3.5 5.9 5.7 4.0 4.2 Gross Fixed Capital Investment -8.2 3.9 7.3 6.0 5.9 5.6 Exports, Goods and Services 8.8 9.5 6.4 4.5 4.2 3.8 Imports, Goods and Services 7.6 10.0 6.7 5.9 5.4 5.4 Real GDP growth, at constant factor prices 3.0 4.7 5.0 3.8 3.5 3.2 Agriculture 3.0 5.2 4.0 3.0 2.3 1.8 Industry 3.9 5.2 5.5 4.8 4.0 3.4 Services 2.4 4.4 4.8 3.4 3.2 3.1 Inflation (Consumer Price Index) -0.6 2.0 1.6 3.0 2.7 2.5 Current Account Balance (% of GDP) -0.5 0.1 -0.1 -0.2 -0.2 -0.5 Net Foreign Direct Investment (% of GDP) 0.9 1.2 2.0 1.7 1.5 1.0 Fiscal Balance (% of GDP) -2.2 -1.2 -0.5 -1.4 -1.6 -1.8 Debt (% of GDP) 54.1 50.6 49.2 49.0 48.7 48.6 Primary Balance (% of GDP) -0.5 0.3 0.9 0.0 -0.1 -0.2 International poverty rate ($1.9 in 2011 PPP) a,b 0.4 0.4 0.3 0.3 0.3 0.3 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.7 0.6 0.6 0.5 0.5 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 2.4 2.2 2.0 1.9 1.7 1.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2004-EU-SILC and 201 5-EU-SILC. A ctual data: 2015. No wcast: 201 6-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2004-2015) with pass-thro ugh = 1based o n private co nsumptio n per capita in co nstant LCU. MPO 69 Apr 19 Selected Country Pages ●  77 to 2.4 percent of GDP in 2018. The do- ROMANIA Recent developments mestic demand pressures contributed to a temporary hike in inflation to 5.4 per- cent in May 2018, prompting the NBR to The economy grew by 4.1 percent in increase its policy rate by 75 ppts cumu- 2018, in line with potential but down latively (to 2.5 percent) in three rounds Table 1 2018 from a post-crisis high of 7 percent in in 2018. Slowing consumption growth in P o pulatio n, millio n 19.5 2017. Growth was driven by private con- H2 2018 eventually brought inflation GDP , current US$ billio n 228.7 sumption (up 4.7 percent yoy) supported down to 3.3 in December. The labor mar- GDP per capita, current US$ 11745 by increases in the minimum and public - ket benefited from economic growth, a Internatio nal po verty rate ($ 1.9) 5.7 sector wages and pensions. Investment with unemployment falling to 4.2 per- underperformed, contracting by 3.2 per- cent in December 2018, a 27 -year low, a Lo wer middle-inco me po verty rate ($ 3.2) 13.3 Upper middle-inco me po verty rate ($ 5.5) a 25.6 cent yoy, owing to weak performance in and real wages increasing by 8.9 percent Gini index a 35.9 construction and a slowdown in indus- yoy. Nonetheless, the low employment Scho o l enro llment, primary (% gro ss) b 89.4 try. Exports grew by 4.7 percent yoy rate (66.2 percent, below the EU average Life expectancy at birth, years b 75.0 reflecting weaker demand from the ma- of 69.1 percent) and high youth unem- jor export markets, while imports re- ployment (16.4 percent in Q3 2018) re- mained strong (up 8.6 percent). On the flect persistent rigidities in the labor Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (2015), 2011 PPPs. production side, ICT (up 7 percent yoy) market. A key driver of low employment (b) M ost recent WDI value (2016) and industry (up 4.1 percent yoy) were is low female participation - 55.8 percent the main drivers. The fiscal deficit was in 2017, the fifth lowest rate in the EU - 2.9 percent of GDP in 2018, but fiscal and one of the highest participation gen- policy continued to be pro -cyclical. In- der gaps. In line with robust economic Economic growth remained strong at creases in public wages and pensions led growth, boost in private consumption 4.1 percent in 2018, largely in line with to a 23.7 percent hike in the public sector and labor market improvements, the wage bill and a 16.5 percent increase in poverty rate corresponding to upper the country’s long-term potential. current budget spending. Social contri- middle -income countries (using the Growth was driven by private consump- bution revenues were strong (up 36.8 $5.50/day 2011 PPP poverty line) is fore- tion, supported by expansionary fiscal percent yoy) reflecting the legal transfer cast to have declined to 22.3 percent in policy, while investment was subdued. of the social contributions from employ- 2018, from 25.6 percent in 2015, after ers to employees and improved collec- peaking at nearly 32 percent in 2012. The Improved labor market outcomes, includ- tion. The impact was partially offset by incomes of the bottom 40 were boosted ing historically low unemployment, the 24.8 percent contraction in personal by employment gains in sectors with a have contributed to the further reduction income tax revenues from the reduction large share of low -skilled workers. The of poverty. Risks to the growth outlook of the income tax rate from 16 to 10 per- impact has been stronger for those in the have increased, stemming mainly from cent in January 2018. The boost in con- bottom 80 percent of the income distri- sumption led to a widening of the cur- bution, who have seen an increasing weaker demand from the major export rent account deficit to 4.7 percent of GDP share of total incomes over this period. markets, a tightening labor market and mainly on the back of an increase in the Tightening labor markets and minimum fiscal policy uncertainties. goods trade deficit. FDI inflows amounted wage increases have contributed to a FIGURE 1 Romania / Real GDP growth and contributions to FIGURE 2 Romania / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 12 50 10000 10 8 40 8000 6 4 30 6000 2 0 20 4000 -2 -4 -6 10 2000 -8 2015 2016 2017 2018f 2019f 2020f 2021f 0 0 Net exports Private consumption 2006 2008 2010 2012 2014 2016 2018 2020 Gross fixed capital formation Public consumption International poverty rate Lower middle-income pov. rate GDP Upper middle-income pov. rate Real GDP pc Sources: World Bank, Romanian National Statistical Institute. Source: World Bank. Notes: see table 2. MPO 70 Apr 19 78  ●   World Bank ECA Economic Update Spring 2019 reduction in inequality, reversing a rise space for investment. Further planned in the Gini index seen between 2010 and 2014, although Romania ’s inequality increases in pensions and public wages will exacerbate these pressures. Widen- Risks and challenges indicators remain high in the EU con- ing of the fiscal deficit to 3 percent of text. Since 2014 poverty has declined in GDP, coupled with an increase in bor- The slowdown in Romania’s export mar- both rural and urban areas, but in 2016 rowing costs and a slowdown in growth kets in the EU, mainly Germany and Italy, estimated poverty rates in rural areas would push public debt from 43 percent could adversely affect growth and invest- remained 6 times higher than in cities of GDP in 2017 to 43.3 percent at end - ment. Negative effects could be exacer- and just over twice as high as in towns 2021, still among the lowest ratios in the bated by fiscal policy uncertainties, cou- and suburbs. EU. After peaking in the spring of 2018, pled with a tightening labor market. The inflation is expected to stabilize at cur- partial decoupling of real wage growth rent levels of around 3.5 percent, reflect- and productivity could also affect Roma- Outlook ing slowing growth in domestic demand. The expected slowdown in Romania ’s nia’s competitiveness, putting supple- mentary upward pressures on the current traditional export markets, coupled with account deficit. Renewed efforts are need- The economy is projected to grow at a persistently high international commodi- ed to improve labor participation, in par- slower pace over the medium term, re- ty prices, would contribute to a further ticular to address labor market barriers flecting the closing output gap, labor mar- widening of the current account deficit to for women, and to tackle higher unem- ket tightening and fiscal policy uncertain- 5.2 percent in 2019 from 4.7 percent in ployment among the youth and those ties. Fiscal measures promoted at end - 2018. Strong private consumption aided with secondary education or less, helping December 2018 risk slowing the economy by the expansionary fiscal policy and to ease labor supply constraints and im- further in 2019 and beyond. These continued growth in real wages, partly prove the sustainability of growth. Over measures include the introduction of a tax supported by minimum wage increases, the medium term, fiscal policy should be on bank assets, a turnover tax for compa- should boost real incomes and lead to re-balanced from boosting consumption nies in energy and telecoms; and further declines in poverty incidence. to mobilizing investment, primarily from measures to increase the capitalization of However, these gains will be eroded by EU funds, with the aim of supporting a the second pension pillar funds. The gov- Romania’s fiscal system, which deepens sustainable EU convergence path and ernment has committed to maintaining rather than alleviates poverty due to the social inclusion. Reforms in public admin- the budget deficit within 3 percent of large regressive impact of indirect taxa- istration and SOEs, increased regulatory GDP in 2019. However, the fiscal tion. The $5.50/day 2011 PPP poverty rate predictability, reduction in of social and measures passed in 2017 and 2018 have is projected to decline to 21.6 percent in spatial discrepancies should be key gov- put pressure on the consolidated budget 2019, 21.0 per-cent in 2020, and 20.4 per- ernment priorities. deficit and reduced the available fiscal cent in 2021. TABLE 2 Romania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 4.8 7.0 4.1 3.6 3.3 3.1 Private Consumption 7.4 9.2 4.7 5.6 5.5 5.4 Government Consumption 1.8 5.2 6.4 5.2 5.0 4.6 Gross Fixed Capital Investment -0.2 3.5 -3.2 4.1 3.5 2.9 Exports, Goods and Services 16.0 10.0 4.7 6.7 6.6 6.5 Imports, Goods and Services 16.5 11.3 8.6 7.1 7.0 6.9 Real GDP growth, at constant factor prices 4.9 7.1 4.1 3.6 3.3 3.1 Agriculture 4.2 14.6 9.9 2.1 2.1 2.1 Industry 5.1 8.3 4.1 4.0 3.9 3.8 Services 4.9 5.5 3.4 3.5 3.1 2.8 Inflation (Consumer Price Index) -1.5 1.3 4.6 3.5 3.4 2.9 Current Account Balance (% of GDP) -2.1 -3.2 -4.7 -5.2 -5.3 -5.2 Net Foreign Direct Investment (% of GDP) 2.7 2.6 2.4 2.0 2.2 2.4 Fiscal Balance (% of GDP) -2.4 -2.8 -2.9 -3.0 -3.0 -3.0 Debt (% of GDP) 44.3 43.0 42.5 43.0 43.2 43.3 Primary Balance (% of GDP) -0.9 -1.7 -1.6 -1.7 -1.7 -1.7 International poverty rate ($1.9 in 2011 PPP) a,b 6.3 7.2 7.8 8.5 9.1 9.7 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 12.9 12.4 12.1 11.9 11.6 11.4 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 24.6 23.2 22.3 21.6 21.0 20.4 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2007-EU-SILC, 201 2-EU-SILC, and 2015-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using annualized elasticity (2007-2012) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 71 Apr 19 Selected Country Pages ●  79 July 2018 reflecting ruble depreciation, a RUSSIAN Recent developments weaker harvest, higher gasoline prices, an upcoming value added tax (VAT) rate increase, and a narrowing of the output FEDERATION Supported by robust global growth, high- er oil prices, one-off construction projects, gap. In December 2018, the Central Bank increased the key policy rate by 25 basis and Russia’s hosting of the FIFA World points to 7.75 percent citing elevated infla- Cup, GDP growth accelerated to 2.3 per- tionary risks. Table 1 2018 cent in 2018 from 1.6 percent in 2017. In Higher oil prices, combined with a weaker P o pulatio n, millio n 144.3 the first half of the year, manufacturing ruble, a better tax administration, and a GDP , current US$ billio n 1657.0 drove growth in the tradable sectors. The conservative fiscal policy further im- relaxation of the OPEC+ agreement in proved fiscal balances at all levels of the a GNI per capita, US$ (A tlas metho d) 9230 Internatio nal po verty rate ($ 1.9) b 0.0 June 2018 provided a growth boost to budget system in 2018. In 2018, the gen- Lo wer middle-inco me po verty rate ($ 3.2) b 0.3 mineral resource extraction and related eral government posted a surplus of 2.9 Upper middle-inco me po verty rate ($ 5.5) b 2.7 non-tradable sectors (transportation and percent of GDP, compared to a deficit of Gini index b 37.7 storage) in the second half of the year. The 1.5 percent of GDP in 2017. Scho o l enro llment, primary (% gro ss) c 102.1 construction sector grew by 4.7 percent New development goals announced by Life expectancy at birth, years c 71.6 (compared with a contraction of 1.2 per- the President in May 2018 ordered in- cent in 2017), driven by the completion of creased government spending on educa- WDI, M PO, Rosstat, and Bank of Russia. Notes: energy sector construction projects. tion, health, and infrastructure starting in (a) M ost recent WDI value (2017). The current account surplus widened to 2019. Revenue will be boosted through a (b) M ost recent value (2015), 2011 PPPs. (c) M ost recent WDI value (2016). about 7 percent of GDP in 2018 (from 2.1 VAT rate hike and tax maneuver in the oil percent of GDP in 2017), supported by sector. The fiscal rule has been temporari- higher commodity prices and robust ex- ly relaxed to accommodate higher spend- port volume growth. Difficult external ing. While these measures will raise fiscal financial conditions for emerging markets risks, these will remain modest thanks to Real GDP growth in the Russian Federa- and elevated geopolitical tensions boosted Russia’s low public debt. tion surpassed expectations in 2018, reach- net capital outflows to $72.1 billion (about Despite recent bailouts, Russia's banking ing 2.3 percent. However, this was mostly 4.8 percent of GDP) in 2018 and led to a sector remains relatively weak with a due to one-off effects in non-housing con- depreciation of the real effective exchange lower capital adequacy ratio (12.3% in struction. A downgraded forecast for GDP rate of 7.7 percent. At $468.5 billion at end December 2018) and a higher ratio of non- -2018, international reserves were $33.7 performing loans (10.4%) than other growth in 2019 reflects lower oil prices; billion higher for the year (compared to an emerging markets, leaving the sector vul- the medium-term outlook remains modest. increase of $15.4 billion in 2017), due nerable to macroeconomic shocks. How- Poverty rates eased in 2018, but the gov- mainly to foreign currency purchases un- ever, the situation is stabilizing, and lend- ernment’s goal of halving the poverty rate der the fiscal rule framework. ing activity is recovering. In 2018, house- Average annual consumer price inflation hold credit grew at double -digit rates, in six years will require the mobilization decreased to 2.9 percent in 2018 (from 3.7 prompting the Central Bank to tighten of additional resources and better targeting percent in 2017). However, consumer prudential requirements to slow unse- of social spending. price inflation has been on the rise since cured consumer lending. FIGURE 1 Russian Federation / Real GDP growth and con- FIGURE 2 Russian Federation / Actual and projected pov- tributions to real GDP growth erty rates and real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 6 25 300000 4 250000 20 2 200000 15 0 150000 10 -2 100000 5 -4 50000 2017 2018 Stat error Import 0 0 Export Change in inventories 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gross fixed capital formation Consumption International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real priv. cons. pc Sources: Russian Statistical Authorities and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 72 Apr 19 80  ●   World Bank ECA Economic Update Spring 2019 The unemployment rate fell to 4.8 percent over the next six years. The current fore- incomes and contribute to a gradual de- in 2018 from 5.2 percent in 2017. Rising cast of average annual GDP growth of cline in the poverty rate in 2019–21. How- real wages in 2018 reflected low average about 1.7 percent does not support the ever, many Russians lack formal employ- inflation and higher public sector wage achievement of this goal. Additional ment, and many households will remain growth. Real disposable incomes, howev- budget funding and improved targeting close to the poverty line. er, remained unchanged compared to of social protection programs will be 2017, suggesting a contraction in real needed to supplement the poverty reduc- terms of some unobserved components (informal earnings, for example). Never- tion impact of GDP growth. Failing to introduce these reforms will jeopardize Risks and challenges theless, incomes at the bottom of the dis- the achievement of the government’s pov- tribution grew slightly faster than at the erty reduction target. Downside risks to Russia’s growth out- top, possibly driven by the higher mini- look stem from the potential expansion of mum wage and new family benefits. sanctions, a deterioration in financial mar- The poverty rate under the national defi- nition (population share with income be- Outlook ket sentiment, and a dramatic drop in oil prices. Investment growth is subject to the low 10,088 rubles/month in 2017) fell by successful and efficient implementation of 0.5 percentage points (from 13.8 to 13.3 Russia's overall growth prospects for 2019 government infrastructure investment percent) in the first nine months of 2018, –21 are modest given low growth poten- initiatives. The recent expansion in house- as the poverty line grew below the rate of tial. Supported by relatively high oil pric- hold credit may pose a risk to financial inflation and incomes rebounded at the es, the general government budget is ex- stability in the case of a deterioration in bottom of the distribution. Poverty also pected to remain in surplus in 2019–21. the macroeconomic environment. declined under the World Bank’s upper- Inflation is forecast to accelerate in 2019 In addition to expanding the labor force middle-income country poverty measure on the back of the VAT rate increase and by raising the retirement age, lifting Rus- (population share with per capita con- ruble depreciation pass-through, but re- sia’s potential growth rate will require sumption under $5.5/day in 2011 PPP, turn to the Central Bank’s target of 4 per- the implementation of reforms that sup- equivalent to 4,351 rubles/month in 2017), cent in 2020–21. The forecast of a narrower port total factor productivity growth. falling from 2.6 percent in 2017 to 2.4 per- external surplus reflects lower oil prices The continuing presence of high price - cent in 2018. Income inequality remained and a pick-up in import spending. Stable cost margins and lower -than-average broadly unchanged. economic growth, wage growth in the market entry rates point to the limits to In May 2018, the President announced a private sector, and the indexation of pen- competition, which is essential for im- target of halving the official poverty rate sions to inflation should support disposable proving productivity. TABLE 2 Russian Federation / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 0.3 1.6 2.3 1.4 1.8 1.8 Private Consumption -1.9 3.2 2.2 1.1 1.7 2.0 Government Consumption 1.4 2.5 0.9 1.0 1.0 1.0 Gross Fixed Capital Investment 0.7 5.5 2.3 2.8 3.9 3.9 Exports, Goods and Services 3.2 5.0 6.3 3.9 4.0 4.0 Imports, Goods and Services -3.6 17.4 3.8 4.2 5.3 5.8 Real GDP growth, at constant factor prices 0.4 1.6 2.2 1.4 1.8 1.8 Agriculture 2.2 1.4 -2.0 1.7 1.7 1.7 Industry 2.2 0.8 2.8 1.4 2.0 2.0 Services -0.7 2.0 2.3 1.4 1.7 1.7 Inflation (Consumer Price Index) 7.1 3.7 2.9 5.2 4.0 4.0 Current Account Balance (% of GDP) 1.9 2.1 6.9 6.2 5.4 4.6 Net Foreign Direct Investment (% of GDP) 0.8 -0.5 -0.5 -0.5 -0.5 -0.5 Fiscal Balance (% of GDP)a -3.7 -1.5 2.9 1.7 1.6 1.5 Debt (% of GDP) 15.7 15.1 14.3 14.8 15.6 16.5 Primary Balance (% of GDP) a -2.8 -0.6 3.8 2.4 2.3 2.2 International poverty rate ($1.9 in 2011 PPP) b,c 0.0 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) b,c 0.3 0.3 0.2 0.2 0.2 0.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) b,c 2.9 2.6 2.4 2.3 2.2 2.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Fiscal and P rimary B alance refer to general go vernment balances. (b) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-HB S. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (c) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n private co nsumptio n per capita in co nstant LCU. MPO 73 Apr 19 Selected Country Pages ●  81 $5.5/day in 2011PPP terms, the standard- SERBIA Recent developments ized middle -income -country poverty line) is estimated to have declined from 23.8 percent in 2014, to estimated 21.3 The strong 4.8 percent y/y growth in the percent in 2018. first half of 2018 was mainly related to a The budget remained in surplus (of an Table 1 2018 rebound from the low base in the same estimated 0.6 percent of GDP) in 2018, P o pulatio n, millio n 7.0 period of 2017. In the second half of the thus helping to continue lowering the GDP , current US$ billio n 49.9 year growth moderated to 3.7 percent (y/ public debt burden. Strong revenue collec- GDP per capita, current US$ 7134 y) thus leading to a new estimate for the tion helped to offset an increase in ex- annual growth of 4.2 percent. Growth in penditures in 2018. Revenues increased by a Internatio nal po verty rate ($ 1.9) 5.6 Lo wer middle-inco me po verty rate ($ 3.2) a 11.1 2018 was primarily driven by investment 6.7 percent while expenditures increased Upper middle-inco me po verty rate ($ 5.5) a 23.6 which increased by 16.4 percent in real by 7.9 percent compared to 2017. Reve- Gini index a 39.7 terms. As public sector wages and pen- nues were up primarily because of higher Scho o l enro llment, primary (% gro ss) b 100.6 sions were increased, consumption was proceeds from social insurance contribu- Life expectancy at birth, years b 75.2 up 3.3 percent, y/y. Higher consumption tions (up by 9.4 percent) and the VAT (up to some extent influenced an increase in 11.8 percent), but practically all other Source: WDI, M acro Poverty Outlook, and official data. Notes: imports (up 12.6 percent, in euro terms) sources of revenues increased as well. The (a) M ost recent value (2015), 2011 PPPs. which led to a negative contribution of net fiscal surplus, as well as a favorable dol- (b) M ost recent WDI value (2016) exports to growth of 2 percentage points. lar/euro and dinar/euro exchange rate Looking at sectoral composition, growth dynamic (in particular appreciation of in 2018 was broad-based, with all sectors dinar against euro) have helped to reduce increasing value added compared to the public debt as a share of GDP from 62.5 Growth in 2018 is estimated at 4.2 per- same period last year. percent at the end of 2017, to an estimated Recent economic growth contributed to 54.3 percent at the end of 2018. cent. Growth is broad-based and driven steady labor market performance in 2018. Inflation averaged 2 percent in 2018, after by both investment and consumption. The activity rate (within the working age reaching a peak level of 2.6 percent (y/y) Growth has translated into steady im- cohort) increased to 67.8 percent in 2018, in August. As food price inflation provement in the labor market outcomes, while the employment rate stood at 58.8 reached a peak in August at 2.7 percent percent. Unemployment also declined y/y, it drove the CPI. The NBS lowered bringing unemployment to 12.9 percent from 14.1 percent in 2017 to 13.2 percent the key policy rate to 3.25 percent in in Q4 2018. Poverty is estimated to have in 2018 (annual average). Female employ- March 2018, it lowered it again to 3.0 declined from 23.8 percent in 2014 to ment rate still remains significantly lower, percent in April 2018, and kept it un- 21.3 percent in 2018. Over the medium - at 41.7 percent in Q3 2018 compared to changed since. After a significant appre- term, growth is expected to reach 3-4 per- 57.3 percent for males. Average salaries ciation of the dinar in the last quarter of increased by 6 percent in nominal terms 2017 the exchange rate against the euro cent, although risks remain, including (or 3.9 percent in real terms) in 2018. remained stable in 2018. The NBS inter- from policy reversals as well as from de- Thanks to improvements in the labor mar- vened regularly on the foreign exchange lays in structural reforms. ket outcomes and to higher salaries and market to prevent more significant vola- pensions, poverty (living on income under tility of the exchange rate. In 2018, the FIGURE 1 Serbia / Value added index: 2000=1 FIGURE 2 Serbia / Actual and projected rates and real pri- vate consumption per capita Percent of GDP Poverty rate (%) Real private consumption per capita (constant LCU) 1.8 30 500000 1.6 25 400000 1.4 20 300000 1.2 15 1.0 200000 10 0.8 100000 5 0.6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 0 0 Agriculture value add (Index 1=2010) 2012 2014 2016 2018 2020 Service value add (Index 1=2010) International poverty rate Lower middle-income pov. rate Industry value add (Index 1=2010) Upper middle-income pov. rate Real priv. cons. pc Source: Statistics Office. Source: World Bank. Notes: see table 2. MPO 74 Apr 19 82  ●   World Bank ECA Economic Update Spring 2019 NBS was a net-purchaser of foreign cur- by about 6.5 percent in real terms annual- the work on regional projects (mainly on rency, in the amount of EUR 1.6 billion. ly, over the next three years. On the other investment in infrastructure which con- Credit activity recovered in 2018 (up 7.6 hand, consumption will increase as well, nects – roads, railways etc.), would help percent, by December, y/y), but its struc- driven by wages and employment Serbian exporters and growth of the econ- ture remains somewhat unfavorable. Most growth. Increase in consumption has al- omy overall. of the increase in lending comes from the ready impacted imports (up by 12.6 per- With economic growth and improvements household sector (up 12.5 percent), while cent in 2018, compared to 2017, in euro in the labor market, poverty is expected to loans to private businesses were up by 6.9 terms) and resulted in higher CAD in 2018 continue its gradual decline. Poverty, percent, y/y. Loans to households in- by 8.4 percent (in euro terms). measured as income below the standard- creased primarily because of the high in- The medium-term growth projections ized $5.5/day 2011PPP line is estimated to crease in short-term loans (so called cash- crucially depend on the pace of structural fall to around 20.5 percent by 2019. loans) to individuals. The stock of those reforms and progress with EU accession. loans is 18.7 percent higher than a year Most importantly, Serbia needs to deal ago (in euro terms ). with its large and unsustainable state - owned enterprises (SOEs) sector. It was Risks and challenges encouraging to see recent renewed Outlook attempt to deal with some of the main loss-makers (like for instance RTB Bor, Risks are mainly associated with internal political developments. Regional dis- PKB) and this should remain at the center putes, slow progress with the EU acces- The Serbian economy is expected to con- of government’s efforts. Similarly, it is sion process and constant threat of early tinue with the solid growth of around 3-4 expected that privatization of state - elections cause a caution among both percent over the medium-term, although owned financial institutions speeds up. local and foreign investors. This in turn growth in 2019 is expected to slow down Slower growth in some parts of EU (most delays realization of some of important to 3.5 percent, as effects from the increase importantly Italy, which is one of the projects both related to infrastructure and in consumption and investment were to a most important trading partners for Ser- to the real sector. Despite recent labor large extent exhausted in 2018. Investment bia) are a downside risk. Acceleration of market improvements, employment rates and exports will be the main drivers of the EU accession process is important not remain low and limit the scope for robust growth. Exports are projected to grow by only from the point of view of strengthen- welfare improvements. around 9.5 percent annually in real terms, ing of institutions but also as a signaling while investment are projected to increase device to attract investment. In addition, TABLE 2 Serbia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.3 2.0 4.2 3.5 4.0 4.0 Private Consumption 1.3 1.9 3.1 3.0 3.8 3.8 Government Consumption 1.3 3.3 4.6 2.1 1.5 2.3 Gross Fixed Capital Investment 5.4 7.3 12.4 7.5 6.2 5.8 Exports, Goods and Services 11.9 8.2 10.5 9.0 8.7 8.7 Imports, Goods and Services 6.7 11.1 10.8 8.4 8.1 8.0 Real GDP growth, at constant factor prices 3.8 2.1 3.4 3.5 4.0 4.0 Agriculture 8.3 -11.2 10.0 3.8 3.0 3.0 Industry 4.3 3.4 1.5 4.6 3.5 3.5 Services 3.0 3.3 3.6 3.0 4.3 4.4 Inflation (Consumer Price Index) 1.1 3.1 2.0 2.6 3.0 3.0 Current Account Balance (% of GDP) -3.3 -6.3 -5.4 -5.1 -5.0 -4.7 Net Foreign Direct Investment (% of GDP) 3.5 4.4 5.8 5.6 5.6 5.2 Fiscal Balance (% of GDP) -1.2 1.1 0.5 -0.6 -0.6 -0.7 Debt (% of GDP) 68.9 58.7 56.2 55.4 53.7 51.9 Primary Balance (% of GDP) 1.7 3.6 2.6 1.4 1.6 1.6 International poverty rate ($1.9 in 2011 PPP) a,b 5.5 5.4 5.3 5.2 5.1 4.9 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 10.8 10.6 10.2 9.9 9.5 9.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 23.0 22.1 21.2 20.5 19.2 18.4 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n private co nsumptio n per capita in co nstant LCU. MPO 75 Apr 19 Selected Country Pages ●  83 Preliminary estimates indicate that fiscal TAJIKISTAN Recent developments deficit narrowed to 5 percent of GDP in 2018 (from 6.9 percent in 2017) facilitated by cuts to capital spending. While public Real GDP growth accelerated slightly to spending cuts and delays targeted non - Table 1 2018 7.3 percent in 2018 (from 7.1 percent in priority capital expenditures, the govern- P o pulatio n, millio n 9.1 2017). Robust private consumption and ment safeguarded energy sector invest- GDP , current US$ billio n 7.5 public investment in energy, which offset ment and core social obligations and a decline in net exports, supported the raised civil servant wages, pensions, and GDP per capita, current US$ 822 a expansion. Sustained remittance inflows other social transfers on September 1, Internatio nal po verty rate ($ 1.9) 4.8 propped up activity in the services sector, 2018. Investments into the Rogun Hydro- a Lo wer middle-inco me po verty rate ($ 3.2) 20.3 and new capacity in energy, food pro- power Plant (HPP) accounted for 14 per- cessing, and metallurgy bolstered indus- cent of total budget spending in 2018, a Upper middle-inco me po verty rate ($ 5.5) 54.2 Gini index a 34.0 trial output. Migrant transfers and rising only slightly less than total education Scho o l enro llment, primary (% gro ss) b 95.7 wages helped to reduce the national pov- spending at 16 percent. In 2018, the gov- Life expectancy at birth, years b 71.1 erty rate from 34.3 percent in 2013 to 29.5 ernment received a budget support grant percent in 2017. from the European Union in the amount Source: WDI, M acro Poverty Outlook, and official data. Notes: The external position deteriorated in 2018 of €9.4 million. (a) M ost recent value (2015), 2011 PPPs. as public investment in energy capacity Subsiding consumer price inflation in 2018 (b) M ost recent WDI value (2016) boosted imports of machinery and con- reflected prudent monetary policy and struction materials. The current account benign food-import prices, especially for posted a deficit of 5.6 percent of GDP in agriculture products from Uzbekistan. At Tajikistan's economy registered strong January-September 2018 (a reversal from 5.2 percent, annual inflation fell within the growth in 2018 driven by private con- the surplus of 2.5 percent of GDP record- central bank’s medium-term target band sumption and public investment in the ed in the same period of 2017). Given the of 5-9 percent. Despite increases in water concentration of metallic minerals, partic- and electricity tariffs, continued adminis- energy sector. The poverty rate fell below ularly gold, in Tajikistan’s export basket, trative measures and withdrawal of li- 29 percent thanks to sustained remittance the substantial fall in international prices quidity by the monetary authorities en- inflows. Growth is expected to remain at for minerals severely affected export pro- sured limited exchange rate depreciation. around 6 percent over the medium-term ceeds and could not be offset by the in- Except for two problem banks, the creased export of cotton and electricity. financial sector was generally healthy drawing on favorable commodity prices, Although Chinese mining sector invest- in 2018. Adopted amendments in the substantial public investment, and a ments helped lift foreign direct invest- legal framework in mid -2018 are ex- gradual recovery of domestic lending. ment (FDI) to 2.6 percent of GDP, the pected to strengthen the regulator's su- Rising debt service obligations, height- country’s investment needs are such that pervisory powers. However, the banking ened state-owned enterprise (SOE) con- FDI needs to rise further. system remains non -transparent, partic- In light of the exhausted fiscal space ularly regarding related-party lending; tingent liabilities, and costly energy pro- and the need to improve the country ’s the overdue resolution of two toxic jects with uncertain revenue prospects high risk of debt distress, Tajik authori- banks will require additional efforts by pose significant downside risks. ties sought fiscal consolidation in 2018. the authorities. FIGURE 1 Tajikistan / GDP growth decomposition FIGURE 2 Tajikistan / Actual and projected poverty rates and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 8 100 1000 80 800 6 60 600 4 40 400 2 20 200 0 0 0 2016 2017 2018e 2019f 2020f 2021f 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Agriculture Industry Services International poverty rate Lower middle-income pov. rate Net taxes Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: TajStat; World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 76 Apr 19 84  ●   World Bank ECA Economic Update Spring 2019 The decline in remittance inflows to bank’s expected move to an inflation target- public finances. Delays in much-needed households slowed the pace of poverty ing regime and the accompanying adminis- structural reforms to improve the business reduction between 2014 and the first half trative measures will dampen inflationary environment will further dampen private of 2016. The poverty rate returned to a and exchange rate pressures. sector development. Limited fiscal space downward trend in the second half of The country’s current account is expected and low policy buffers leave Tajikistan 2016 and accelerated throughout 2017. to remain in deficit owing to continued vulnerable to potential shocks. An escala- Poverty was relatively stagnant in urban strong demand for capital-intensive im- tion of global trade tensions, or economic areas during 2015 - 16 at 24 percent before ports for the construction of Rogun HPP slowdown in the region's large economies, falling to 22 percent in 2017. By contrast, and a remittance-propelled expansion of would negatively impact inflows of FDI rural poverty fell significantly from private consumption. FDI inflows are and remittances. 36.1 percent in 2014 to 33.1 percent in forecast to suffer from weaknesses in the The construction of the Rogun HPP could 2017. The official unemployment rate general business climate and slowing present a serious risk to debt sustainability stood at 2 percent in December 2018. growth in China. and crowd-out social spending if the author- Although the government is expected to ities are unable to secure alternative financ- pursue fiscal consolidation, in the medium ing for the project from private sources or Outlook term, Tajikistan will continue to face fiscal stress. The primary sources of this stress improve revenue collection while sufficient- ly reducing spending inefficiencies. will be the tight schedule for Rogun HPP A potential three-year program with the Tajikistan’s positive medium-term outlook construction and high public debt service IMF suggests an upside risk if the govern- assumes that external environment will re- obligations. The targeted social assistance ment successfully meets the pre-program main favorable and publicly-driven invest- (TSA) program is expected to be rolled out conditions. An IMF arrangement is ex- ment programs will be sustained. Prospects nationwide in 2019. pected to have a positive impact on Tajiki- of positive (albeit modest) growth in the stan’s image in international capital mar- Russian Federation, elevated prices for ma- ket and the pricing of Eurobonds. jor export commodities (cotton and alumi- num), and deepening regional cooperation Risks and challenges Although extreme poverty is expected to benefit from the national rollout of TSA should sustain high rates of GDP growth in program, the budget will need to be in- Tajikistan. Remittance inflows will continue Domestic and external risk factors weigh creased to adequately compensate for to support private consumption, while long- down Tajikistan's economic growth pro- utility tariff increases, especially for elec- awaited resolution of problem banks, once spects. Governance challenges at public tricity and water, in the coming years. The completed, would restore trust in the bank- enterprises - particularly in the energy TSA methodology also needs to be revised ing system and lead to a gradual pickup in and transport sectors - present high quasi- to account for household size and the fre- private credit and investment. The central fiscal risks and threaten sustainability of quency of disbursements. TABLE 2 Tajikistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 6.9 7.1 7.3 6.0 6.0 6.0 Private Consumption 6.4 0.0 3.2 3.5 4.0 4.2 Government Consumption 3.9 2.5 2.1 2.0 1.7 1.8 Gross Fixed Capital Investment 20.3 20.1 20.7 21.1 20.0 19.8 Exports, Goods and Services 0.0 0.0 2.5 2.9 3.2 3.2 Imports, Goods and Services 0.0 0.0 3.0 2.8 2.5 2.5 Real GDP growth, at constant factor prices 6.6 7.5 7.1 6.0 6.0 6.1 Agriculture 5.2 6.8 4.0 5.3 5.0 5.1 Industry 18.1 21.3 11.8 10.2 10.0 10.2 Services 2.2 0.7 6.0 3.7 3.9 3.7 Inflation (Consumer Price Index) 6.0 7.3 3.9 6.0 6.5 6.5 Current Account Balance (% of GDP) -5.2 2.2 -5.1 -3.6 -3.0 -3.0 Net Foreign Direct Investment (% of GDP) 3.4 0.2 2.5 2.5 2.4 2.3 Fiscal Balance (% of GDP) -9.8 -6.9 -5.0 -3.8 -3.0 -2.4 Debt (% of GDP) 42.0 52.3 49.3 46.5 51.7 49.9 Primary Balance (% of GDP) -8.3 -6.4 -4.1 -2.4 -1.6 -1.0 International poverty rate ($1.9 in 2011 PPP) a,b 4.2 3.4 2.8 2.5 2.3 2.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 18.0 15.6 14.1 12.6 11.4 9.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 51.0 47.6 44.1 42.0 39.5 36.8 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-HSITA FIEN. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 1 based o n GDP per capita in co nstant LCU. MPO 77 Apr 19 Selected Country Pages ●  85 sheet repair, with their liabilities to for- TURKEY Recent developments eign banks falling by 16 percent from their peak in August, and domestic credit has contracted since end-September. Growth in 2018 fell to 2.6 percent, with the Unemployment is steadily rising, and last two quarters seeing a contraction in food price inflation has spiked, adding Table 1 2018 economic activity. A slowdown in the real further to economic difficulties for low- P o pulatio n, millio n 81.4 sector began in the second half of 2018. income households. The sharp fall in de- GDP , current US$ billio n 768.9 Private consumption declined by 1.6 and mand has begun to feed through into GDP per capita, current US$ 9445 2.4 percent in Q3 and Q4 respectively, business cut-backs: The economy experi- Internatio nal po verty rate ($ 1.9) a 0.2 while investment fell by 6.7 and 3.6 per- enced a net loss of 200,000 jobs in 2018 and Upper middle-inco me po verty rate ($ 5.5) a 9.9 cent in the same quarters (seasonally- unemployment rose from 10 to 13 percent Gini index a 41.9 adjusted, quarter on quarter). Over the last in the last year. Meanwhile, the youth Scho o l enro llment, primary (% gro ss) b 101.3 year, Turkey has experienced intense mar- unemployment rate peaked at 22.2 per- b 75.8 ket turbulence, ending 2018 with its nomi- cent, having risen by three percentage Life expectancy at birth, years nal effective exchange rate 25 percent low- points in a year. Annual inflation acceler- Source: WDI, M acro Poverty Outlook, and official data. er, consumer inflation above 20 percent, ated to 19.7 percent in February 2019; the Notes: (a) M ost recent value (2016), 2011 PPPs. and policy interest rates tripling to 24 per- rate of food price inflation rose even faster (b) M ost recent WDI value (2016) cent. Since the end of September, the ex- at 29.3 percent. While poverty had been change rate has become more stable, and declining until 2016, the latest available gross international reserves have risen data point, recent inflation, and unem- nearly 20 percent to $99 billion although ployment evolution put poverty trends at market risk perception remains elevated. risk of stagnation and reversal. The sharp external adjustment that Tur- The impact on growth would have been The government raised the minimum more severe were it not for a strong exter- wage by 26 percent in January to stem low key experienced in mid-2018 is now feed- nal adjustment, with import volumes con- -income households’ eroding purchasing ing through to the real sector. The econo- tracting sharply and exports rising during power. In addition, benefit levels of cer- my is contracting, and unemployment is the year. The current account moved from tain government transfers increased since rising. The livelihoods of low-income a deficit of $3.4 billion per month in the first they are indexed to the minimum wage, three quarters of 2018 to a surplus of $900 but the target population of those trans- households and the incidence of poverty million per month in the fourth quarter. fers is limited and composed mainly of the are at risk of deterioration. The downturn With a large proportion of domestic credit elderly and disabled. has so far been tempered by a strong, posi- extended in foreign currency or FX - tive contribution of net exports. The out- indexed loans and weakening domestic look hinges on how early a recovery takes demand, part of the corporate sector is under stress. While the nonperforming Outlook root, with well-targeted policy responses loan ratio has only risen to 4.1 percent so and clear communication of macroeco- far, a much larger fraction of domestic Growth in 2019 is projected to decelerate nomic risks likely to be key. credit may be unable to be collected soon. to 1 percent, reflecting three consecutive Banks are undergoing a process of balance quarters of contraction from the fourth FIGURE 1 Turkey / Real GDP growth and contributions to FIGURE 2 Turkey / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 45 25000 40 10 35 20000 5 30 15000 25 0 20 10000 15 -5 10 5000 -10 5 2003 2005 2007 2009 2011 2013 2015 2017 0 0 Private consumption Government spending 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 International poverty rate Upper middle-income pov. rate Investment Net exports Stocks Growth Real GDP pc Sources: Turkstat and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 78 Apr 19 86  ●   World Bank ECA Economic Update Spring 2019 quarter of 2018 to the second quarter of year is expected to peak at around 18 per- However, market actors are increasingly 2019. This marks a downward revision, cent. In later years, inflation is expected to concerned about poorly planned, inter- as a deeper-than-expected fall in con- fall towards the high single digits. ventionist policies targeted to artificially sumption in the last quarter of 2018 is Credit markets will remain muted as lower market prices and boost credit expected to continue in the first half of banks go through a process of deleverag- growth in the short run, and in the ab- 2019. Private consumption growth is ex- ing in 2019. Many firms will be effectively sence of an adequate policy response, the pected to resume in the third quarter under bankruptcy protection in 2019, so economy may experience a prolonged aided by the substantial minimum wage the full extent of balance sheet losses is period of recession. hike in January and recently -announced unlikely to be realized until 2020. A recovery in mid-2019 will depend on an employment support programs. A larger Despite the increased minimum wage, high- improving environment for both con- primary deficit and higher interest costs er social assistance transfers will be needed sumption and investment. Further shocks are forecast to drive a widening of the to protect unemployed people and informal from the external sector, domestic supply overall fiscal deficit in 2019. Robust gov- workers from potential shocks. Poverty is shocks, or materialized risks in the finan- ernment consumption growth is also projected to stagnate around 9 percent from cial system could lead to a delayed, or expected to contribute to growth in 2019 2018 to 2020, measured with the upper- weaker, recovery. while investment—both public and pri- middle-income country poverty line of $5.5/ The most significant known risk is the vate—is projected to contract substantial- day in 2011 PPP. The total number of poor is rising level of uncollectable debts in the ly. Import volumes are forecast to fall forecasted to rise from 7.37 million people in private sector (especially in the non- slightly, reflecting slowing consumption 2018 to 7.42 million in 2020. tradeable sectors) which, if not well man- growth and declining investment. De- aged, could lead to severe problems in the spite lower growth expectations in Eu- financial sector. rope, improved price competitiveness is expected to boost exports in 2019. Risks and challenges High inflation and unemployment stand out as the major risks to Turkey's pro- In 2020, growth is expected to recover spects for poverty reduction in 2019. Ris- momentum to 3 percent, led by recovering The outlook for 2019 hinges on how early ing food prices should be monitored care- private consumption and investment, and a recovery takes root. At present, the au- fully and addressed with adequate poli- further to 4 percent in 2021. thorities are in a position to support a cies to ensure continued poverty reduc- Inflation is forecasted to decline steadily recovery, by providing more transparent tion. Poor households are particularly beginning in mid-2019; aided by a contin- information to the market about the health vulnerable to high food price inflation ued tight monetary stance, inflation of the banking sector and measures to since food comprises a larger share of should fall to 15 percent by year-end. support a recovery, such as a corporate their budgets. The continuation of adverse However, with inflation beginning the debt restructuring program and well- trends in 2019 would put the poverty re- year high, average annual inflation for the targeted counter-cyclical fiscal policy. duction gains of the last decade at risk. TABLE 2 Turkey / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.2 7.4 2.6 1.0 3.0 4.0 Private Consumption 3.7 6.1 1.1 0.6 2.2 2.7 Government Consumption 9.5 5.0 3.6 5.4 2.0 2.6 Gross Fixed Capital Investment 2.2 7.8 -1.7 -5.9 4.8 9.0 Exports, Goods and Services -1.9 11.9 7.5 5.5 5.7 4.8 Imports, Goods and Services 3.7 10.3 -7.9 -1.5 6.0 7.5 Real GDP growth, at constant factor prices 3.1 7.9 2.9 1.0 3.0 4.0 Agriculture -2.6 4.9 1.3 0.9 2.0 2.0 Industry 4.6 9.1 0.2 1.0 3.3 3.8 Services 3.2 7.6 4.4 1.1 2.9 4.2 Inflation (Consumer Price Index) 7.8 11.1 16.3 18.0 11.0 9.5 Current Account Balance (% of GDP) -3.8 -5.6 -3.6 -2.7 -4.0 -4.5 Net Foreign Direct Investment (% of GDP) 1.3 1.0 1.2 1.0 1.1 1.1 Fiscal Balance (% of GDP) -1.4 -1.8 -2.7 -3.8 -2.7 -2.0 Debt (% of GDP) 28.3 28.3 32.7 33.6 33.9 32.8 Primary Balance (% of GDP) 0.6 0.1 -0.4 -1.2 0.3 0.5 International poverty rate ($1.9 in 2011 PPP) a,b 0.2 0.2 0.2 0.2 0.2 0.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 9.9 9.2 9.1 9.1 8.9 8.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 1-HICES, 201 7-, and 2016-HICES. A ctual data: 2016. No wcast: 2017-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2011-2017) with pass-thro ugh = 1based o n GDP per capita in co nstant LCU. MPO 79 Apr 19 Selected Country Pages ●  87 production (supported by import sub- TURKMENISTAN Recent developments stitution programs), resulted in a 47.8 percent reduction in import spend- ing. Foreign investment continued to Real GDP growth slowed to 6.2 percent in drop owing to challenges in the foreign 2018 (from 6.5 percent in 2017), according exchange market and the economy ’s Table 1 2018 to official estimates. Improved terms of weaker growth prospects. As a result, a P o pulatio n, millio n 5.8 trade and continued strong Chinese de- the current account deficit is estimated a GDP , current US$ billio n 42.4 mand for natural gas helped to sustain the to have narrowed to about 2.9 percent GDP per capita, current US$ a 7356 strong rate of economic growth. On the of GDP, a sharp decline from double - Scho o l enro llment, primary (% gro ss) b 88.4 other hand, public and private investment digit levels in recent years. Life expectancy at birth, years c 67.8 fell sharply (by 26 percent) in the context Throughout 2018, the authorities contin- of fiscal consolidation, lower inflows of ued to impose tight foreign exchange con- Source: IM F, WDI, M acro Poverty Outlook, and official data. Notes: foreign direct investment and weaker trols on international trade and access to (a) estimations. credit expansion. hard currency reduced in early 2018. Alt- (b) M ost recent WDI value (2014). (c) M ost recent WDI value (2016). Officially -reported inflation subsided to hough strong export earnings served to 7.2 percent in 2018 (from 10.4 percent in ease pressure on the exchange rate in mid- 2017). While limited access to hard cur- 2018, pressures remained elevated. Market rency drove inflationary pressures for trends suggest overvaluation of the offi- imported non -food items, administra- cial manat rate. tive measures and the state -led import The government continued fiscal consol- Even as favorable external environment of consumer staples (to ease food sup- idation efforts in 2018 in line with its supported export expansion, Turkmeni- ply constraints) contained food prices. medium-term objective of a balanced stan’s economic growth eased slightly in The upward adjustment of gasoline budget. Revenue collection slightly over prices (by 50 percent) and public sala- - performed budget projections, bol- 2018 on weaker domestic demand. Trade ries, pensions, and other social transfers stered by higher hydrocarbon proceeds, and fiscal balances improved, benefitting (by 10 percent) in early 2018 also con- while expenditure was reduced by from higher hydrocarbon prices. However, tributed to the accumulation of infla- 17.6 percent following cuts to non - rising inflation - driven by prices for im- tionary pressures. priority capital investment and a reduc- ported consumer goods - and continued Turkmenistan ’s external position im- tion of welfare transfers. proved in 2018 on account of improved Turkmenistan does not release official cutbacks in welfare subsidies negatively terms of trade and lower demand for statistics on living standards, and little is affected living conditions. Higher global imports of capital and consumer goods. known about the country’s labor market. demand for energy and emerging regional Strong Chinese demand, coupled with Data constraints prevent a thorough anal- cooperation opportunities suggest favora- surging natural gas prices (up by over ysis of the social impact of slower eco- 30 percent in 2018 year on year), boost- nomic growth. Nonetheless, the gradual ble GDP growth prospects, although the ed export earnings by almost reduction of welfare subsidies—which the slow pace of structural reforms presents 50 percent. Meanwhile, reduced capital population has enjoyed since shortly after downside risks. investment, limited access to foreign independence—has negatively affected exchange, and broadening domestic living standards. FIGURE 1 Turkmenistan / GDP growth and natural gas FIGURE 2 Turkmenistan / Official exchange rate and natu- prices, 2010-18 ral gas prices, 2010-18 Annual percentage change US$ per mmbtu TMT per US$, inverse series US$ per mmbtu 16 16 2.6 14 14 14 2.8 12 12 12 3.0 10 10 10 3.2 8 8 8 3.4 6 6 6 3.6 4 4 4 3.8 4.0 2 2 2 0 0 4.2 0 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Real GDP growth (lhs) Natural gas prices, Europe (rhs) Exchange rate (lhs) Natural gas prices, Europe (rhs) Source: Statistical Committee of Turkmenistan. Source: Central Bank of Turkmenistan. MPO 80 Apr 19 88  ●   World Bank ECA Economic Update Spring 2019 attempts to rebuild depleted policy buff- support economic diversification and Outlook ers. However, the expansion of public in- vestment in strategic infrastructure using private sector development. Liberalizing business regulations and easing foreign off-budgetary funds cannot be ruled out. exchange controls will be necessary to Turkmenistan’s positive economic outlook While ending free access to water, gas, improve investor confidence. Long -term assumes that global energy demand re- and electricity in 2019 may result in dete- socio-economic sustainability will re- mains strong and that China’s economy riorated living standards for the poor, quire a shift toward investment in hu- does not falter; both assumptions carry such measures underscore the govern- man capital . significant uncertainties. Ongoing high- ment’s firm commitment to reforming In a push to improve the fiscal accounts level talks with the Russian Federation the country's utilities and improving and, more broadly, adopt market econo- may result in the resumption of natural their finances. The agriculture sector — my principles, Turkmenistan recently gas sales to Russia. Policies aimed at fos- which employs most of the labor force— reversed a long-standing policy of tering private sector development and is expected to benefit from increased gov- providing free water, electricity, natural economic diversification could gradually ernment procurement prices for wheat gas, and housing. While full information promote non-hydrocarbon sectors and and cotton, which were raised by 100 on the depth and breadth of the tariff contribute to inclusive growth. percent and 50 percent, respectively, in increases is not yet officially available, Inflationary and exchange rate pressures are January 2019. such measures undoubtedly will impact expected to ease, supported by ample hy- the welfare of households. The social drocarbons earnings. The authorities are consequences of the reform should be likely to adhere to the exchange rate peg and considerations to adjust the national curren- Risks and challenges considered, and a distributional analysis performed, together with mitigating cy will largely depend on the evolution of measures to protect vulnerable house- public sector foreign liabilities. Turkmeni- External and domestic risks to the econo- holds through a well-targeted social pro- stan’s external position will continue to ben- my will remain elevated. A sudden drop tection mechanism. Although the social efit from elevated prices for natural gas and in hydrocarbons prices would significant- protection system in Turkmenistan con- controlled access to foreign exchange, ac- ly reduce economic growth prospects. sists of a set of social policies (both cash companied by expanded industrial output Other external risks include the escalation and non-cash), a performance assessment supported by export promotion and import- of trade tensions or the tightening of glob- of the system in terms of coverage, tar- substitution policies. However, ongoing al liquidity, which could result in a sud- geting accuracy, and impact on the Sus- challenges associated with expatriating den deceleration in economic growth in tainable Development Goals - in particu- profits will discourage strong FDI inflows. Turkmenistan's trade partners. lar, goal 1 (no poverty) and goal 10 The government will seek consolidation of Domestically, risks include slow progress (reduced inequality) - is needed. the state budget in the medium term as it on the implementation of policies that TABLE 2 Turkmenistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 6.2 6.5 6.2 5.6 .. .. Inflation (consumer price index, end of period) 6.2 10.4 7.2 6.0 .. .. Current account balance (% of GDP) -19.9 -11.5 -2.9 -2.4 .. .. Financial and capital account (% of GDP) 5.9 7.3 5.8 7.2 .. .. of which: net foreign direct investment (% of GDP) 5.4 5.1 3.4 4.3 .. .. Fiscal balance (% of GDP) -2.4 -2.8 0.4 0.0 .. .. Public debt (% of GDP) 24.1 28.8 29.9 31.2 .. .. So urces: Wo rld B ank, Internatio nal M o netary Fund. No tes: e = estimate, f = fo recast. MPO 81 Apr 19 Selected Country Pages ●  89 in 2018 from 4.9 percent in 2017 and 6.4 UKRAINE Recent developments percent in 2016. Strong domestic de- mand, together with real exchange rate appreciation, contributed to a pick -up in In 2018, GDP grew by 3.3 percent (after imports and a widening of the current 2.3 and 2.5 percent in 2016 and 2017 re- account deficit to 3.7 percent of GDP in Table 1 2018 spectively). The pickup in growth was 2018 (vs 1.9 percent in 2017). Remittanc- P o pulatio n, millio n 44.5 driven by a good agricultural harvest, es reached 9 percent of GDP in 2018, but GDP , current US$ billio n 1 24.6 and sectors dependent on domestic de- they were not sufficient to cover the GDP per capita, current US$ 2799 mand—domestic trade and construction growing trade deficit. Internatio nal po verty rate ($ 1.9) a 0.1 (which both grew by over 5 percent). Monetary policy helped to maintain a Lo wer middle-inco me po verty rate ($ 3.2) a 0.5 Household consumption continued to macroeconomic stability. Fiscal deficit Upper middle-inco me po verty rate ($ 5.5) a 6.4 grow rapidly in 2018 on the back of (i) amounted to 2.1 percent of GDP (vs 2.3 a 25.0 significant hikes in public sector wages percent in 2017) that helped to reduce Gini index b and pensions; (ii) sizable remittance in- PPG to 63 percent of GDP in 2018. At Life expectancy at birth, years 71.5 flows due to labor migration to EU coun- the same time, significant hikes in min- Source: WDI, M acro Poverty Outlook, and official data. tries; and (iii) resumption of consumer imum wages and additional sectoral Notes: (a) M ost recent value (2016), 2011 PPPs. lending. At the same time, investment top -ups resulted in the wage bill to (b) M ost recent WDI value (2016) growth decelerated to around 9 percent grow up to 11 percent of GDP (vs 9 (vs 18 percent in 2017) due to reform percent in 2016). Social assistance delays, election and conflict -related un- spending remained high at 4 percent of certainties, and continued low domestic GDP. To deal with the outcomes of savings. Structural weaknesses remain in higher current expenditures the Na- In 2018 GDP growth accelerated to 3.3 the banking system and the real sector. tional bank increased the policy rate percent, but macroeconomic vulnerabili- The debt overhang and legacy non - sharply over 2018 to 18.5 percent, alt- performing loans in the corporate sector hough this has raised the cost of funds ties remain. Growth was supported by a still remain high. FDI inflows remained and dampened investment. With lim- record harvest, services, and favorable low (just 2 percent of GDP) for the third ited access to external funds, domestic domestic demand conditions. Consump- consecutive year. public borrowings have increased in tion continued to grow due to higher pub- Higher consumption helped reduce 2018 crowding out the private sector lic spending, real wages, and remittances. poverty but pressures on the current investment. This limited the supply account have intensified. Real wages responses to the growing demand pres- Investment is held back by uneven reform continued to grow in 2018 due to further sures. As a result, the external trade progress, election related uncertainties, increases in minimum wages and pres- deficit has widened significantly in and low domestic savings. The growth sures from outward labor migration. 2018. Ukraine ’s renewed cooperation outlook depends on accelerating reforms After four consecutive years of decline, with the IMF, EU and WB helped to pensions increased by 22.2 percent in cover the current account deficit and to and mobilizing adequate financing as real terms in 2018. As a result, poverty rebuild international reserves that Ukraine faces formidable financing needs (consumption per capita below 5.5 USD/ reached $20.8bn (or equivalent of 3.5 to repay its public debt in 2019-2021. day in 2011 PPP) declined to 4.0 percent month of import cover). FIGURE 1 Ukraine / GDP growth by sectors FIGURE 2 Ukraine / Actual and projected poverty rates and real private consumption per capita Percent Poverty rate (%) Real private consumption per capita (constant LCU) 20 50 25000 15 10 40 20000 5 0 30 15000 -5 20 10000 -10 -15 10 5000 -20 -25 0 0 -30 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2015-Q1 2015-Q3 2016-Q1 2016-Q3 2017-Q1 2017-Q3 2018-Q1 International poverty rate Lower middle-income pov. rate Agriculture Manufacturing Domestic trade GDP Upper middle-income pov. rate Real priv. cons. pc Sources: UKRSTAT, World Bank. Source: World Bank. Notes: see table 2. MPO 82 Apr 19 90  ●   World Bank ECA Economic Update Spring 2019 business environment and privatizing and meeting the fiscal target of a deficit of Outlook large state -owned enterprises, develop- ing a market for agricultural land, and 2.5 percent of GDP to maintain macroeco- nomic stability. Ukraine needs about $11 tackling corruption; (ii) ensuring fiscal billion per year (8 percent of GDP per The growth outlook depends critically on sustainability through affordable imple- year) to repay public debt and finance the sustaining the reform momentum to sup- mentation of the health and education fiscal deficit in 2019, 2020, and 2021. To port investment and mobilizing adequate reform, rationalizing social assistance, raise the necessary financing, it is critical financing. In 2019, growth is projected at and a more equitable and growth - to maintain the reform momentum and 2.7 percent as investment remains con- friendly tax system; (iii) further reducing stay on track with completion of IMF re- strained by difficult external conditions, inflation and rebuilding reserves; and views. Ukraine will continue to need an election-related uncertainties, and the (iv) reviving sound bank lending to the IMF program after the SBA runs out in resulting high cost of external borrowing. enterprise sector. If reforms do not pro- March 2020. In addition, Ukraine’s terms of trade are gress and adequate financing is not mo- Ukraine remain highly vulnerable to ex- projected to soften and limit traditional bilized, growth could fall below 2 per- ternal shocks and commodity price cycles exports. Growth in 2019 will thus continue cent as investor confidence deteriorates, due unfinished structural transformation to be supported by the services sectors macroeconomic vulnerabilities intensify, of the economy. To increase resilience to and consumption. The continued growth and financing difficulties force a com- external shocks Ukraine will need higher of consumption is expected to help contin- pression in domestic demand. and more sustainable economic growth, ue to mildly reduce poverty. supported by tradable and higher value- Going forward, if the reform momentum added sectors. This will require significant is sustained, growth can recover to 4 percent in the medium term after elec- Risks and challenges capital investments and deeper integra- tion into global value chains. To facilitate tion related uncertainties abate. This investments, it is critical to maintain the will require progress in the following Ukraine faces formidable financing needs reform momentum, reduce macroeconom- areas: (i) attracting private investment in the next three years, which will require ic risks and insure repayment of public into tradable sectors by improving the mobilizing sizable international financing external obligations. TABLE 2 Ukraine / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 2.3 2.5 3.3 2.7 3.4 3.7 Private Consumption 1.8 8.4 8.9 3.8 3.5 3.0 Government Consumption 0.0 3.3 0.1 0.5 1.0 1.5 Gross Fixed Capital Investment 20.1 18.4 14.3 6.6 9.3 9.6 Exports, Goods and Services -1.6 3.6 -1.6 0.5 2.0 4.5 Imports, Goods and Services 8.4 12.8 3.2 3.8 4.2 5.0 Real GDP growth, at constant factor prices 2.4 2.6 3.3 2.5 3.4 3.7 Agriculture 6.0 -2.5 7.8 1.5 2.5 4.5 Industry 3.3 2.1 2.0 3.0 4.5 6.0 Services 1.4 3.7 3.0 2.4 3.2 2.7 Inflation (Consumer Price Index) 13.9 13.7 9.5 6.8 6.0 5.4 Current Account Balance (% of GDP) -3.7 -2.1 -2.9 -3.0 -3.5 -3.7 Net Foreign Direct Investment (% of GDP) 0.2 2.1 1.9 2.2 2.4 2.5 Fiscal Balance (% of GDP) -2.3 -2.3 -2.0 -2.1 -2.2 -2.4 Debt (% of GDP) 81.2 72.3 63.2 60.1 57.9 55.7 Primary Balance (% of GDP) 2.0 1.5 1.9 2.3 1.9 2.3 International poverty rate ($1.9 in 2011 PPP) a,b 0.1 .. .. .. .. .. Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.5 0.4 0.3 0.3 0.2 0.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 6.4 4.9 4.0 3.4 2.8 2.3 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 6-HLCS. A ctual data: 2016. No wcast: 2017-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2016) with pass-thro ugh = 0.87 based o n private co nsumptio n per capita in co nstant LCU. MPO 83 Apr 19 Selected Country Pages ●  91 exchange rate unification in late 2017, and UZBEKISTAN Recent developments since then a depreciation of the som against major currencies. In response to inflationary pressures, au- Economic growth in 2018 accelerated thorities raised the policy (refinancing) reflecting the high growth in industry rate by 2 percentage points (from 14 to 16 Table 1 2018 and construction. Agricultural produc- percent) in September 2018. The effects of P o pulatio n, millio n 32.3 tion was disappointing due to unfavor- this increase were dampened by the in- GDP , current US$ billio n 49.7 able weather and water shortages. crease in government-directed lending, Domestic demand remained robust in which drove annual domestic credit GDP per capita, current US$ 1535 a 2018 due to strong domestic investment growth of 50.8 percent in 2018. Scho o l enro llment, primary (% gro ss) 101.0 a growth (18.1 percent), supported by Total government expenditure as a share Life expectancy at birth, years 71.3 large increases in government lending of GDP, including directed lending, rose Source: WDI, M acro Poverty Outlook, and official data. to fund capital investments of state - to 35.7 percent of GDP in 2018 (from 31.5 Notes: (a) M ost recent WDI value (2016) owned enterprises (SOEs). Annual in- percent of GDP in 2017). Central govern- flation averaged 17.9 percent in 2018 ment expenditures grew by 3.7 percent of mainly due to the effects of the 2017 GDP due to an expansion in public invest- exchange rate unification, wage increas- ment and reform-related social spending es, and the removal of administrative initiatives. A surge in extra-budgetary price controls. government lending to SOEs of Import spending rose sharply in 2018 (up 5.1 percent of GDP compounded this in- 25.8 percent year on year) due to large crease. A push to improve tax collection capital imports by SOEs. Export growth and administration helped to partially was weaker at 10.7 percent. A more com- offset these expansions, leading to an petitive real exchange rate and removal of overall fiscal deficit of 2.5 percent of GDP Economic growth was 5.1 percent in 2018 export controls helped textile and food in 2018 (compared to a deficit of due to strong investment growth in in- exports, which grew by 41.4 and 25.3 per- 2.1 percent of GDP in 2017). dustry and infrastructure . Despite a pro- cent, respectively. Car exports declined by The banking sector remains well- jected external weakening, Uzbekistan’s 39.7 percent due to weaker demand and capitalized and stable. Large capital injec- medium-term outlook remains favorable supply bottlenecks. Commodity exports of tions by the Uzbekistan Fund for Recon- gas and metals grew by 65.8 percent and struction and Development in 2017 and as market reforms address production 27.6 percent, respectively. Gold exports, 2018 have helped banks remain well capi- bottlenecks and liberalize high-potential however, declined by 10.8 percent due to talized after the foreign exchange unifica- growth sectors of the economy. lower global prices in 2018. As a result, tion in late 2017, despite rapid credit the current account moved from years growth in 2018. At end-2018 the capital of surplus to a deficit of 8.1 percent of adequacy ratio stood at about 16 percent. GDP in 2018, financed by a drawdown Non-performing loans were low at 1.3 in reserves and from external creditors. percent of gross loans, mainly due to the The real effective exchange rate depreciat- recent restructuring of debts from energy ed by about 10 percent in 2018 due to the SOEs to state-owned banks. FIGURE 1 Uzbekistan / Real GDP growth and contributions FIGURE 2 Uzbekistan / Poverty, GDP per capita, and small to real GDP growth business development Percent, percentage points GDP per capita, US$ Percent 10 3,000 70 2,500 60 8 50 2,000 40 6 1,500 30 1,000 4 20 500 10 2 0 0 2006 2008 2010 2012 2014 2016 2018 0 Small business, % of GDP (rhs) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 US$ (lhs) National poverty rate, % of population (rhs) Services Construction Agriculture Industry Net taxes Real GDP growth Sources: Uzbekistan official statistics. Due to the lack of data access, the World Bank cannot validate the official figures. Source: Uzbekistan official statistics. Note: Poverty line is national data based on minimum food consumption at 2,100 calories per person per day and excludes non -food items. MPO 84 Apr 19 92  ●   World Bank ECA Economic Update Spring 2019 The official poverty rate, which stood at expected to address production bottle- curtail directed lending in the economy 11.9 percent in 2017, is estimated to have necks and liberalize high-potential growth to maintain fiscal discipline. Steady eco- declined to 11.5 percent in 2018. Esti- sectors of the economy, such as horticul- nomic growth and remittance income are mates of PPP adjusted poverty rate at the ture, tourism, food processing, textile, and expected to contribute to a modest pace LMIC line was 9.6 percent in 2018. The chemicals. These will be supported by a of poverty reduction. Changes in govern- official unemployment rate was significant reduction in 2019 of the busi- ment policies may further expand sup- 9.3 percent in the last quarter of 2018. ness tax burden. Inflationary pressures port programs to the poor and vulnera- Unemployment was 17 percent among will persist in 2019–20 due to further price ble households and reduce poverty. For youth (16-25 years old) and 12.9 percent reforms and wage increases, but the 2019 the government has increased the among women in 2018. According to effects are expected to moderate by 2021. budget allocation for social protection by official statistics, 59.3 percent of the total The current account is expected to moder- 50 percent. employed in the economy were em- ate from its 2018 level but remain in deficit ployed in the informal sector in 2018. as the economy continues increasing im- Since September 2018, income growth among the B40 has been driven by in- ports of capital and machinery to modern- ize production. This is expected to be fi- Risks and challenges creased remittances and a 30 percent nanced by increased donor support and a nominal increase in social protection gradual increase in FDI. External buffers Uzbekistan’s economy remains reliant on payments in 2018. Poor and B40 house- are expected to remain comfortable over a state dominated economic model and on holds consistently cite local labor market the medium-term, with forex reserves at traditional trading partners that face conditions as their most pressing eco- over 13 months of import cover. Gross heightened external risks over the medi- nomic concern. Government public external debt is expected to slightly de- um term (for example, the Russian Feder- works and employment programs were cline by 2020 to about 39 percent of GDP, ation). While market reforms have begun expanded in 2018. while total public debt is expected to in- to address these issues, the next phase of crease to about 29 percent of GDP. reforms aims to tackle more complex is- Central government budget (excluding sues such as SOEs and the financial sector, Outlook policy-based lending) is expected to shift from a surplus to a small deficit of about 1 agricultural reforms, and the privatization of non-agricultural land. These reforms percent of GDP over the medium-term are critical to economic transformation Despite a slowdown relative to historical due to the significant reductions in excise, and to sustaining growth and job creation. averages, Uzbekistan’s economic outlook income and payroll tax rates, and in- They also carry significant economic and remains positive, with growth projected at creased spending to maintain public in- social risks that will need to be carefully 5.3 in 2019 and converging to around vestments, pensions, and low-income al- monitored and managed. 6 percent by 2021. Market reforms are lowances. The government is expected to TABLE 2 Uzbekistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 6.1 4.5 5.1 5.3 5.5 6.0 Private Consumption 1.4 1.3 3.5 3.6 3.8 4.0 Government Consumption 3.8 6.6 1.5 1.4 2.3 2.6 Gross Fixed Capital Investment 4.1 19.4 18.1 15.3 10.2 10.1 Exports, Goods and Services 7.9 1.3 10.7 8.2 2.2 2.5 Imports, Goods and Services -2.2 18.7 25.8 18.4 7.1 6.8 Real GDP growth, at constant factor prices 6.1 4.5 5.1 5.3 5.5 6.0 Agriculture 6.2 1.2 0.3 2.9 3.2 3.4 Industry 5.9 5.4 10.4 6.4 6.3 6.7 Services 6.2 6.0 4.7 5.9 6.3 7.0 Inflation (Private Consumption Deflator) 8.0 12.5 17.9 14.8 14.1 11.0 Current Account Balance (% of GDP) 0.3 1.4 -8.1 -7.8 -6.3 -5.7 Fiscal Balance (% of GDP) -0.6 -2.1 -2.5 -2.0 -2.1 -2.1 Debt (% of GDP) 10.5 24.1 24.4 28.1 29.0 28.5 Primary Balance (% of GDP) -0.6 -2.0 -2.1 -1.5 -1.6 -1.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 85 Apr 19 WORLD BANK ECA ECONOMIC UPDATE SPRING 2019 cial Inclusion Financ Financial services can help drive development by facilitating people’s investments in their health, education, and businesses, and making it easier for people to manage emergencies. There is great variation in financial inclusion in the Europe and Central Asia region. Some countries have seen significant growth in account ownership, despite starting from a low base. These experiences underline the potential role of digital payments in driving financial inclusion. But nearly 30 percent of unbanked adults report trust in banks as a barrier, which is nearly double the developing country average. And in some countries, gender gaps in account ownership remain significant. Given the heterogeneity of experiences, there are ample opportunities for countries in the region to learn from each other and contribute to the rich research and operational agenda going forward. 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