Stanley Fischer: A central banker's look at key issues facing the EBRD
Address by Professor Stanley Fischer, Governor of the Bank of Israel, at the EBRD Annual Meeting,
Belgrade, 22 May 2005.
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Mr. Chairman, Mr. President, Governors, Delegates, Ladies and Gentlemen:
It is a pleasure for me to be here in Belgrade for the first time in 15 years - eventful and extremely
difficult years for the peoples of this city and country and of neighboring countries - and to participate
in this 14th Annual Meeting of the EBRD as Governor of the Bank of Israel and the representative of
Israel.
It is a special pleasure for me to take part in a meeting of the EBRD, whose record has more than
justified its creation. As a researcher I benefited greatly from the basic research and analytic work on
the transition process done by the Bank, under the leadership of a series of outstanding Chief
Economists, John Flemming, Nick Stern, and Willem Buiter. The Bank has also managed to achieve
impressive operational and financial results. In 2004, for example, the financial commitments and
disbursements of the Bank were higher than ever before, the number of projects was greater than in
previous years, and there was a record amount of commercial co-financing of its projects.
I would like to express my congratulations to the Bank's management and staff for these
achievements, and to thank and congratulate Jean Lemierre for his highly effective leadership of the
institution. I would also like to express my appreciation to Noreen Doyle, First Vice-President of the
EBRD, and Willem Buiter, for their distinguished service to the EBRD, and to wish them well in their
future endeavors.
The countries of this region continue to face formidable economic and political challenges.
Nonetheless the prospect of dealing with them in the context of growing integration with Europe,
together with progress in our host country, Serbia and Montenegro, make the outlook brighter than it
has been for many years. This meeting provides all of us with an opportunity to strengthen our
commitment to the region, and I would like to thank the authorities of Serbia and Montenegro and the
city of Belgrade for being such good hosts and for making this meeting possible.
I would like to use this opportunity to make brief remarks on three key issues facing the EBRD: first,
SMEs and microfinance; second, currency risk; and third graduation.
1. SMEs and microfinance
It is well known that the SME sector is a key contributor to growth and employment, including and
perhaps especially in the transition countries. It is equally well known that in most countries this is a
difficult sector to finance: the financing of small and medium scale enterprises requires detailed local
knowledge of the relevant companies and entrepreneurs, and is likely to be very labor-intensive. This
work is best done by local financial institutions, which are more likely to have developed branch
networks that enable them to understand both the economic conditions facing these companies and
the quality of the firms' management.
The EBRD has been successful in promoting SME financing in several countries, including in Russia,
through onlending to local financial institutions. The Bank's work and familiarity with financial
intermediaries throughout the region has increased its effectiveness in assisting smaller enterprises in
its countries of operation. It is highly desirable that the Bank continue to promote SME lending,
especially in the countries of this region, both through its lending and by helping create a business
environment in which the private sector can flourish.
At the same time, let me put in a plug for the potential role of microfinance in helping even smaller
businesses than the SMEs to obtain financing, and also in helping the poorest consumers to obtain
access to the financial sector. Governments can contribute to this process by ensuring that their
regulatory framework does not discriminate against microfinance institutions. Private sector financial
institutions can contribute by working together with microfinance institutions, for instance by helping
them gain access to financing and by assisting in the development of microfinance products.
The EBRD has been successful in promoting SME financing in several countries, including in Russia,
through onlending to local financial institutions. The Bank's work and familiarity with financial
intermediaries throughout the region has increased its effectiveness in assisting smaller enterprises in
its countries of operation. It is highly desirable that the Bank continue to promote SME lending,
especially in the countries of this region, both through its lending and by helping create a business
environment in which the private sector can flourish.
2. Local currency financing
Governments in several regions have been attempting to develop local currency bond markets in
which foreign investors and institutions participate. In part this is designed to deal with the so-called
problem of "original sin", according to which developing countries are able only to borrow
internationally in foreign currencies, and consequently suffer financial losses in their own currency if
forced to devalue. Despite the belief that original sin will always be with us, several developing
countries, including Mexico and Malaysia, have recently been able to borrow from international
investors in their own currencies, and there is good reason to believe that this trend will continue.
Another reason to develop local currency bond markets is that it is desirable that local firms that need
to borrow have the option of doing so in their own currency. In this regard, the EBRD's initiative to gain
access to local currency funding for onlending to the private sector, rather than requiring that private
sector borrowers take foreign currency loans, should be strongly commended and encouraged. Given
the greater sophistication and financial strength of the international financial institutions, they are in a
much better position to in essence provide hedges against the risks of foreign currency financing than
are local institutions. The EBRD has been able to gain such access in some countries, and it deserves
our encouragement as it seeks to broaden this initiative.
3. Graduation
Despite many setbacks, and an unexpectedly difficult beginning, the transition process has on the
whole been successful - more so in some countries and less so in others in which the EBRD operates.
This year, eight of the countries of operation of the EBRD are already full-fledged EU member states,
and other countries of operation are preparing to achieve this status in the next few years.
The Bank has started a process of shifting resources away from the new European Union member
states to countries in South Eastern Europe and the CIS. Looking forward, further discussions of the
process of graduation from EBRD financing will take place later this year, within the context of the next
Capital Resources Review. This exercise should be oriented towards formulating the Bank's strategy
on graduation through the year 2010.
I believe that the EBRD should continue to shift its operations away from the more developed
countries that are already in the EU, and should strengthen its focus on operating in the less advanced
countries of operation, where the challenge of transition is greater, and where the available capital and
knowledge resources are more limited. It would be useful to set guidelines for the dates by which the
Bank would phase out and cease operating in certain countries - but these guidelines should leave
room for some flexibility, particularly in fields of operation in which the EBRD has special technical
expertise.
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In conclusion, let me say that the remarkable success of the EBRD in fostering transition in the region
deserves the appreciation of all its shareholders. I wish the Bank continuing success.
Thank you, Mr. Chairman.