IMF: The greatest challenge for Eastern Europe Is Guiding Capital Flows

After the financial crisis, Emerging Europe"s biggest challenge will be steering capital flows and avoiding a resurgence of the imbalances that precipitated economic declines across the region, a report by the International Monetary Fund says.

The document notes: "The key policy challenge will be attracting and harnessing healthy capital inflows to restore economic growth. For countries that are already seeing a resumption of inflows, adequate macroeconomic policies will be critical to stemming an excessive surge".

The global economic crisis swept through emerging Europe via its export markets and investment, with the Baltic states of Latvia, Lithuania and Estonia hit the hardest after their respective real estate booms ended.

In Russia, the economy continued to rely on commodities, leaving capital markets exposed and affecting the Ruble"s exchange rate.

Lithuania, Latvia and Estonia pegged their currencies to the Euro, despite the recession, but resorted to cutting wages and prices. "For countries with pegged exchange rates, the best response to inflows in excess of those driven by structural factors is to tighten fiscal policy. For countries without pegged exchange rates, the most effective response could be to let the currency appreciate", the IMF report says.

• 1.4% economic growth this year, in emerging countries

The IMF estimates that emerging EU economies will on average grow 1.4 percent this year after contracting 3 percent in 2009. The most important growth will be posted by Poland: 2.7%, whereas Latvia could post the largest decline (-4%), the IMF estimates. The IMF expects Russia"s economy will 4% following 2009"s 7.9 percent decline, it estimates.

The Fund stresses that Europe is facing a tepid and uneven recovery, supported by the recovery of the global trade and by the stimulus policies.