beyondbrics

Egypt in 2011, with its young population heading towards 100m, looks a very different place from 1989 Poland or Hungary. So can the European Bank for Reconstruction and Development successfully play the same role in helping turn the countries of the Arab spring into thriving market democracies as it did in central and eastern Europe?

It has certainly faced scepticism, including initially from the US,  although president Barack Obama threw his weight behind the development bank’s new role last week. But there are reasons to think the EBRD is up to the task — and right to embrace it.

Thomas Mirow, the bank’s president, acknowledged to beyondbrics there were “obvious differences” with eastern Europe 20 years ago. The revolutions in the Middle East and north Africa did not, like those of 1989, result from the breakdown of a superpower. The cultural background in the Arab world is also quite different.

But many of the challenges the Arab region faces are similar to those that the EBRD has already faced and developed successful approaches to tackling elsewhere. They include fragile financial sectors, shallow local capital markets, underdeveloped utilities that need corporatising and privatising, and the lack of the sound regulation needed to attract investors.

The EBRD has skills in all these areas. So while it will need to hire new specialists with intimate knowledge of its new region, as Mirow notes,  “We do not need to build up a new team from scratch.”

The bank has expertise in lending to the private sector that many other multilateral financial institutions lack. It is already operating, outside eastern Europe, notably in Turkey — one of the fastest growers in its 29 countries of operation — and Mongolia.

After a capital increase last year, and with healthy profits, the bank can afford to lend up to Euros2.5bn a year into north Africa without needing further capital or affecting lending to its existing countries.

Yet it still faces a challenge in getting all of its 61 country shareholders to agree to make any north African or Middle East states countries of operation — though it could set up a special fund to finance particular countries with a lower level of shareholder support. Some shareholders are concerned about potential over-extension, and about how far the geographical scope of the bank’s new mandate should stretch.

The US has signalled it would like the bank to embrace not just north Africa as its new zone of operation, but reach deep into the Middle East; some existing countries of operation would prefer to limit its ambition.

Mirow and the bank have until July 31 to persuade the doubters. The bank’s governors on Saturday at the annual meeting in Astana, Kazakhstan, tasked the board with coming up with recommendations on its new role by then.

Shareholders ought to embrace it. A country such as Egypt is hugely important for the stability not just of the Middle East but the whole southern Mediterranean — Europe’s immediate hinterland. The countries of central and eastern Europe understand very well the need for international financing and knowhow to support transition.

Just three or four years ago, moreover, as its countries of operation started to join the European Union and to “graduate” from its support, some were questioning the EBRD’s future relevance. The financial crisis proved that the bank still has an important role to play, even in its core region. But voting to extend its mandate to the Arab world would ensure its accumulated expertise can be put to work on a whole new set of challenges.

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