European Bank for Reconstruction and Development

European Bank for Reconstruction and Development (EBRD)

The European Bank for Reconstruction and Development (EBRD) is a multinational institution. It was established in 1991 to help countries in Central and Eastern Europe develop a market economy. Its 59 shareholders represent countries in this region. As well as in the rest of the world with the European Union and the European Investment Bank.

Short story

After World War II, the Soviet Union and other countries of Eastern Europe rejected the Marshall Plan, which led to their exclusion from international institutions.

On January 25, 1949, CAER was established. It is a collaboration between the Soviet Union, the countries of Eastern Europe, Cuba and Vietnam. Each participating country specialized to a certain extent in various industries. And since none of the national currencies was fully convertible, bilateral trade used the ruble as the base currency. But this institute was dissolved in 1991. Because the member countries gradually moved from a planned economy to a market economy, and the former CAEP member countries tried to expand their trading activities with Western countries in order to get a strong currency for imports. Western technology.

In this context, on May 29, 1990, after negotiations within the framework of Group 7 (G7), there was the creation of the European Bank for Reconstruction and Development. Also an important step in the negotiations was the adoption of the Soviet Union as a member of this bank. Because the economic policy of the Soviet Union did not find a clear and precise orientation towards a market economy.

Organization and functions of the European Bank for Reconstruction and Development

As with other international financial institutions, the highest governing body of the ERBD belongs to the Board of Governors. Which decides on the admission of new members, the cost of capital bank and other important issues. But the management of the bank is the responsibility of the board of directors, whose president is elected by a majority of members. The agreement on the establishment of the bank states that the countries of the European Union and the European Investment Bank will own the majority of the bank’s shares.

After strong pressure in Group 7, the United States became the largest individual shareholder (10%), followed by England, France, Germany, Italy and Japan. Each with 8.5%, the shares of the former Soviet republics 6% and the countries of Central and Eastern Europe, which together have a little over 6%. Also the number of votes is directly proportional to the actions in the bank. But a significant majority of votes is required for them to make an important decision.

The main function of the EBRD is to facilitate the transition to a market economy in previously centrally planned countries. Financing projects and providing advice to these countries is an implementation of this function. Also the second function is to attract private capital to Eastern Europe.

For a long time, one of the issues discussed was the bank’s participation solely in financing the private sector or in supporting government infrastructure projects. But the result was a compromise, according to which there was a restriction of public sector loans of 10% of total loans. Providing loans to governments or state-owned enterprises is the case of creating an environment within the framework of a market economy based on broad participation in a competition, or to facilitate its transition to private ownership and control.

Financial structure and financing of European Bank for Reconstruction and Development projects

The initial capital was 10 billion ECU, of which 30% of the paid-up capital. And the rest is guaranteed. All member countries accepted the ECU for the payment of contributions. But only Americans insisted on the payment of their contributions in US dollars.

The EBRD can provide loans, participate in equity and provide guarantees. General liabilities cannot exceed capital plus reserves. The bank takes loans on international capital markets and has a triple quote A. The bank also manages a number of special funds, including for the Baltic countries, financed by Scandinavian countries.

The EBRD provides financing for 25 member countries. All of which are in the process of transition to a market economy. It also sets priorities for each of these countries as part of a strategy with annual evaluations. But the basis of this strategy is the privatization of state-owned enterprises. And the transition from a centralized economy to a market one.

An important direction in financing projects is the reform of the banking system, the EBRD, by investing in local commercial banks, acquiring equity interests and providing financial support for professional training bank staff. The Bank also offers a wide range of financial instruments and has a flexible approach to structuring its financial services. As an indication, the minimum standard loan is 5 million ECU. But this figure can be flexible if the project brings significant benefits to the country.

Recently, the bank has shifted its focus from 5 major Eastern European countries (Czech Republic, Slovakia, Hungary, Poland, Romania) to countries behind the former Soviet Union. This is a much more difficult area for the bank to act. Since pre-reform forces are less influential and capture fewer enterprises, but it takes a lot of time to solve them, which leads to an increase in bank expenses.

General terms and conditions of lending

The general lending conditions by the European Bank for Reconstruction and Development are following. Also requesting countries must have multi-party democracy, a disciplined legislative system, and respect for human rights.

As for the future activities of the European Bank for Reconstruction and Development, there will be a maximum expansion of the bank’s powers to assist the former socialist countries.So that it continues to play the role of the catalyst in attracting private capital to Eastern Europe.

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