as visible by downward revision for the next year, as well. overall, while current recession is not a central scenario, the risk thereof is not out of the window. against this background, policymakers are faced with delicate trade - offs - how to address the risk of stalled recovery / recession, while curbing the rising inflation? fiscal and monetary policy again are expected to play their role in mitigating social costs, although now in a more complex environment than during the pandemic, which calls for different division of labour. in a higha€ “ inflation 2 / 4 bis - central bankers'speeches environment, monetary and fiscal policy cannot work hand in hand to support demand, as they did when the pandemics emerged. now central banks do not have leeway to focus on other objectives beyond their traditional remit. they have to remain focused on their mandate of medium - term price stability, which requires gradual normalization of monetary policy. short - term effects of the crisis have to be addressed by using fiscal policy tools, which given the tight fiscal space need to be well - targeted and time - bound. another argument that supports the above is that despite normalization, monetary policy will remain accommodative as observed by historically low real policy rates. overly expansionary fiscal policy may de - anchor inflation expectation and further fuel inflation. so far, some of the central banks have " looked through " these supply side factors, while others, where labour markets have been tight and economy has been gaining steam or inflation expectations have risen, have already started the tightening cycle. the tightening of monetary policy in the advanced world may lead to headwinds for emes that may well have no choice but adjust their monetary policy stance. not doing so risks capital outflows and currency depreciations, further fueling inflation. emerging europe already witnessed 300 million us $ outflow since the beginning of the war, though it is far smaller than in march 2020 when they amounted 1. 7 billion us $. while calibrating monetary policy, we also have to be mindful of the price effects of some structural forces such as green transition and globalization, which may put upward price pressures. in the past, globalisation enabled rapid trade integration of many countries, lifting up their growth potential and putting persistent downward pressure on inflation. now, with globalisation under threat, price pressures are upward. overall, in an environment of rising inflation and limited policy space, blanket support should give way to more targeted

and time bound policies, and even more importantly shift the focus back to structural and transformational policies, which are key for lifting the growth potential and building resilience. the latter is particularly relevant for the countries in the region that are faced with slow real convergence and stagnant growth potential. the slower catching up of the region is not a new phenomenon as it came on the surface right after the global financial crisis. most of the post transition real convergence ( around 60 % ) occurred in the 5 - year period preceding the gfc, against the backdrop of the remarkably growth - conducive global context, rising globalisation and trade integration, as well as favourable terms of financing. afterwards the convergence slowed down, and it took twelve years since 2008 up to the pandemic to achieve the pace pertinent for the five years pre gfc period. now, with the global environment becoming highly uncertain, risk of deglobalisation and supply chains defragmentation becoming more certain, and tightening of the global financial conditions already in place, faster real convergence seems even more complex issue. in this vein, there are estimates that crisis has adversely affected growth potential of the cesee region with average decline of 0. 7 pp in 2020. 3 / 4 bis - central bankers'speeches what are the main structural hurdles that prevent lifting of the growth potential and resilience? growth accounting framework reveals that in the last decade the slowdown was mostly through the total factor productivity, while the growth in the region became more reliant on capital accumulation. given the wide capital stock gaps compared to the more advanced countries, the accumulation of capital is warranted, and preferable way to grow. yet, the fact that the other sources of growth seem to be muted, gives ground for concerns. the contribution of labour is negligible, bringing to the fore the question on declining labour participation in the region, underpinned by the demographics and the intensive emigration of young and skilled workers. but, the marked slowdown in tfp, which is an indicator on how efficiently production factors are used, is worrisome. there are many forces that can influence total factor productivity and they are all endogenously interlinked. the competiveness of the economy, the quality of human capital, quality of institutions, innovation and technological readiness are just some of them. unfortunately, the region is not well positioned along those dimensions. the average ranks for quality of institutions and human capital