March 27 (SeeNews) - Southeast Europe (SEE) needs to continue to implement structural reforms in order to raise productivity and lure investments, which are key to lifting the region's growth trajectory, with the ultimate aim of increasing the living standards of the population, Alfred Kammer, director of the European department at the International Monetary Fund (IMF), said.
"The challenges [in SEE] are very similar to ones in the wider central and eastern Europe region. The fundamental challenge which we are facing right now is the medium-term durable growth which we need to generate," Kammer told SeeNews in an interview on the sidelines of a meeting of regional central bank governors in the Croatian city of Split earlier this month.
SEE has over the last thirty years benefited from convergence towards the European Union in terms of living standards, but in the past decade this process slowed down considerably, Kammer noted. Per capita GDP of the region is less than half of the median of the euro area, and even lower in the Western Balkans, he added.
"It takes longer than we previously expected for the living standards in this region to approach the average or the median euro area standards," the IMF official said. "We now predict that living standards would converge around fifty years later than previously estimated, in 2100."
To speed up the region's convergence process, skilled labour is essential, according to Kammer. He pointed to North Macedonia as an example of a country where employers have to deal with large outflows of skilled workers.
"You need public policies in order to make it attractive for workers to stay in North Macedonia. It also means that you need to push forward on education," he explained.
Elsewhere in the region, in Romania, the female labour force participation rate can be increased by focusing on child care policies and opening more kindergartens, he added.
Productivity growth should be achieved by increasing both productivity of labour and productivity of capital, he stressed. Raising investments, both by domestic and foreign players, is an important element of the equation that the region needs to focus on.
"When you are looking at investment and at increasing your capital stock, you have a really good opportunity to raise productivity by embedding technological progress," he explained.
Kammer singled out high energy costs as another major problem for employers in SEE. The ongoing installation of renewable energy capacity should ease energy supply pressures and reduce energy costs over time. However, having in place an efficient electricity grid and working regulations need more attention because in the end energy will be a determinant for how fast the industry can grow, he added.
Building strong institutions and ensuring good policy making are particularly relevant for the SEE region, Kammer said, and urged the countries to ensure the independence of their central banks.
"Reducing trade barriers is a wonderful opportunity for the region to provide a much more enabling environment to the private sector," he added.
IMF forecast an economic growth of 2.9% for SEE in 2024 and 3.6% in 2025, following a 2.3% growth in 2023.
Measures to stifle inflation, however, should continue, Kammer stressed.
"In the broader [SEE] region, central banks fairly quickly took action to deal with inflation. They all tightened monetary policy or liquidity conditions, and that was a big contribution towards bringing inflation down since it dampened aggregate demand," the IMF official recalled.
He, however, cautioned, "The fight against inflation is proceeding very well, but it has not been won yet."
“In the short term, it is important that disinflation effort is continued, that wages are monitored, that fiscal conditions are kept tight,” Kammer said.
Among the factors fueling inflation in central and southeastern Europe he pointed to sharp wage increases over the last few years.
As of the end of 2023, wages in central and southeastern Europe were growing at above 10% on the year, he said, adding that this growth rate needs to slow down to no more than 4 to 6% this year in order for the countries to reach their inflation targets in the next couple of years.
In Bulgaria in particular, which is a candidate to join the eurozone, keeping inflation under control through tight fiscal policy is critical as this is one of the membership requirements. The country has done a lot in terms of euro adoption but the inflation rate is still a bit on the high side, he noted.
Yet, the entry in the eurozone will bring numerous advantages to Bulgaria, Kammer said, adding that it will anchor the macroeconomic policies and increase the ability to attract financing.
"Capital flows are likely to increase as part of that and a lot of the uncertainty which is embedded when you have your own exchange rate and your own currency is going to go. This will be a positive boost for the economy and it is something Bulgaria should really strive at getting to,” he concluded.