Macroeconomic policy

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Macroeconomic overview

Monetary policy has remained accommodative in much of the transition region, reflecting the economic downturn and the relative lack of inflationary pressures. Central banks in the CEB and SEE regions have continued to cut interest rates, which have dropped to historic lows in the majority of countries.¹ Hungary has also tried to use unconventional monetary policy tools to revive credit to the private sector. By early 2013 monetary policy had begun to ease in Serbia, after a sharp rise in inflation prompted a tightening in the second half of 2012. Monetary policy was also broadly accommodative in EEC countries, with the exception of Belarus and Ukraine, where private-sector credit conditions remain restrictive due to latent exchange rate pressures. The Central Bank of Russia has resisted calls to provide monetary stimulus to the weakening economy while inflation remains above the target range of 5 to 6 per cent. In the SEMED region interest rates rose in Egypt, Jordan and Tunisia in response to rising pressure on prices and exchange rates, but stayed low in Morocco where inflation remains low and stable.

Fiscal consolidation efforts continue in virtually all EU member countries, with the aim of achieving deficit and debt targets. However, an increasing number of transition economies have seen their primary balances deteriorate as the economic slow-down has hit revenues.

Fiscal policy tightened in all CEB countries in 2012 – except in Estonia, which has low public debt and registered a small deficit, after running a surplus in the previous two years.² This consolidation has contributed to the downturn. Poland, in particular, has been unable to maintain government investment, given its constitutional debt limits³ and the EU fiscal rules. Fiscal policies have varied in other regions, with primary balances worsening in a number of countries (see Chart M.13). In Azerbaijan, Serbia and Ukraine this has partially reflected higher expenditure in the run-up to elections. In Russia and the commodity exporting nations of Central Asia the economic slow-down and weakening global commodity prices have led to slower growth in revenues.

There was a further widening of deficits across the SEMED region in 2012 as governments continued to increase spending on wages, social benefits and subsidies. Ongoing attempts to reform subsidies, in addition to budget support from the Gulf Cooperation Council for Egypt and Jordan, have contributed to a slower rate of fiscal deterioration compared with 2011.

1. In the CEB and SEE regions interest rates have reached all-time lows in Albania, Bulgaria, Hungary, Latvia, Lithuania, Poland and Romania. [back]
2. Slovenia's fiscal deficit has widened significantly in 2013, mainly reflecting the recapitalisation of ailing state-owned banks. [back]
3. Until this year, public expenditure in Poland was constrained by a law prohibiting increases in the budget deficit while public debt exceeds 50 per cent of GDP (and according to the domestic definition, it reached 52.7 per cent in 2012). However, this limit was suspended in July 2013, leading to a revision of the 2013 budget. [back]

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