June 2, 2023
As prepared for delivery
Good Morning! Thank you to Prime Minister Plenković and Governor Vujčić for the kind invitation, and to all of you for joining us at this third Croatian National Bank-IMF conference. It is a pleasure to come to Dubrovnik, a city I admired well before its Game of Thrones fame. Our conference is so appropriately hosted here, a place that offers refuge from stormy waters.
Since this conference was last held in 2019, the world has indeed been in choppy waters. We have been hit by shock, upon shock, upon shock, as we all know: Covid. Russia’s war in Ukraine. A cost-of-living crisis. And accelerating impacts from climate change.
These shocks—especially the war—have been hard on the Central, Eastern, and Southeastern Europe region. For Ukraine, the war has been absolutely devastating to peoples’ lives and the economy. For the rest of the region, it sparked an unprecedented gas crisis, and food price inflation, especially impacting the most vulnerable.
The war has also sped up geo-economic fragmentation. The post-Cold War peace dividend is fading away as defense budgets understandably rise. And European and global supply chains have had to adjust to new realities.
What has all this meant for the region’s economy? Persistently high inflation and weak growth. Headline inflation has been falling since late 2022, but it is still painfully high, and core inflation has yet to show clear signs of decline. We project inflation will stay well above central bank targets past 2024.
Turning to growth, the region is facing deep economic scarring. We compared our current projections to our forecast for the region before the pandemic—while excluding Belarus, Russia, and Ukraine. Here is what we found: real GDP levels in 2024 are projected to be 3.5 percent lower than what we had expected at the beginning of 2020. It is like taking €50 billion out of peoples’ pockets over these five years.
The weak recovery, persistent inflation, and high uncertainty mean that the region will continue to face stormy weather. But this is a resilient region. Indeed—we can draw inspiration about how to navigate today’s challenges from Dubrovnik’s history as a seafaring republic in the Middle Ages.
Dubrovnik was then called Ragusa—and it was ahead of its time in many ways. For example, the government provided services for poor people and orphans, and invested in education. And Ragusa prospered by building an open economy with prudent state finances.
Let’s consider how this history applies to three big challenges facing your region today.
The first is to bring down inflation while sustaining the recovery and laying the foundations for future growth. This requires monetary, fiscal, and structural policies to work in concert. On the monetary side, countries with independent central banks will need to keep a tight policy stance—and possibly tighten further if inflation remains sticky.
On the fiscal side, staying prudent while protecting the vulnerable—as Ragusa did—is the order of the day. Consolidation should be even more ambitious than currently planned in most of the region. While this will require difficult choices, it will bring the triple benefit of reducing inflation, lowering debt service costs, and bolstering financial stability.
Structural reforms to invest in people are needed as well. This is easy to say, hard to do at a time of fiscal consolidation. But actions such as reskilling workers and subsidizing childcare are necessary to expand the workforce and ease labor shortages that are choking growth across the region. Integrating Ukrainian refugees will help, too. While supporting their return to Ukraine is essential, it may take a long time for many of them.
Recognizing this, Poland and Estonia have created online tools that are helping Ukrainians find jobs at a faster rate than previous refugee groups. Czech Republic is addressing under-employment by making it easier to recognize refugees’ professional qualifications.
Language support will also provide strong returns to host countries. And it is important to remember that integrating Ukrainian refugees into host countries’ labor markets is also an investment in the future of Ukraine—providing its citizens with new skills and connections that they can bring back with them.
The second challenge facing the region is energy security. While the vital resources of its day didn’t include energy, Ragusa can still inspire us. To secure the vital resource of water, the city built a 12-kilometer aqueduct. A huge public investment!
Securing energy today similarly requires major infrastructure connections. The Baltic Synchronization Project to connect Estonia, Latvia, and Lithuania to the EU electricity network is a great example. So too, are projects to close remaining gas bottlenecks.
And to make progress on both energy security and climate goals, the region must increase public and private investment in renewables. Governments can adopt more ambitious emission reduction targets, and more effective policies to meet them. Carbon pricing is needed—it is the fastest, most efficient way to achieve climate goals. However, standards
and regulations do also have a role to play. With the right domestic actions and support from EU climate policy, the region can accelerate its green transition.
The third challenge is seizing opportunities in a fragmented world. Ragusa adeptly navigated “fragmentation” for centuries, maintaining open trade with empires to its east, west, and north in an ever-shifting geo-political environment.
Today, fragmentation creates both risk and opportunity for the region.
The risk is that some multinationals may want—or be incentivized—to keep production at home. This would make it more difficult for economies in the region to grow by inserting themselves into these companies’ supply chains—as the Czech Republic, the Slovak Republic, or Slovenia did in the past.
The opportunity is that some production may move closer to home. Specifically, multinationals may consider moving out of far-away locations, such as Asia.
Which policies would enable the region to make the most of this ongoing shift in supply chains? Staying open to trade is one. Another one that will help non-EU members draw new investment and increase access the EU market is to further align their regulations and technological standards.
And all countries in the region could benefit from well-designed investments in transportation and digital infrastructure. Our simulations suggest that with improved connectivity and the same efficiency of public investment as EU-15 countries, the impact of these infrastructure investments on long-term output in this region could nearly double.
The role of the IMF
In other words, with the right policies, the region’s prospects can be bright even as we navigate choppy waters. And the IMF is proud to partner with you on this journey.
Our policy advice, and technical assistance in areas such as public investment management, has helped the region navigate three years of shocks. So has our financing for Kosovo, Moldova, Serbia, North Macedonia, and Ukraine. And in the case of Kosovo, our Resilience and Sustainability Trust will provide some longer-term funding to meet climate challenges.
And that brings me to one last bit of inspiration gained from walking the Stradun (historic main street) and the old town walls: think long-term and build it right. With the right choices and the right execution, policymakers today can leave a legacy as durable, as successful—and as beautiful—as Dubrovnik.