What do the sources and uses of funds tell us about credit growth in Central and Eastern Europe?

The aim of this study is to explore the policy challenges of the EU8 and the acceding member states of Bulgaria and Romania in the light of their convergence process towards the euro area. In recent years, the Baltic States and the Central and Eastern European member states have experienced a period of rapid credit growth to the private sector in many cases reaching levels of 30-50 percent per annum. This development is reminiscent of the experience of other catching-up member states during their run-up to the euro adoption and suggests that a similar process may be on the way in the EU8. Against this background, the EU8 stand to benefit from these countries’ past convergence experience in terms of possible policy challenges, allowing them to take pre-emptive measures.

This study sheds light on the high credit growth rates to the private sector in Central and Eastern Europe by analysing the anatomy of credit growth and the sources and uses of funds. Rather than focusing on mere growth rates, it emphasises the role of resource allocation as part of a more sophisticated understanding of credit growth. The findings are that countries with high credit growth have experienced large current account deficits, but concerns are partly alleviated by high productivity growth in the region. This is suggestive of the fact that high credit growth can be conducive to real economic convergence if channelled to the productive sector.