20110521
Reuters
ASTANA (Reuters) - The European Bank for Reconstruction and Development agreed on Saturday to begin the process of expanding lending into the Middle East and North Africa, following a string of popular revolts in the Arab world.

The bank will explore how to direct funds to Egypt, where President Hosni Mubarak was toppled in February, and other Arab states in the same way it supported former Communist countries after the fall of the Iron Curtain more than two decades ago.

"We are witness to extraordinary times, and this calls for extraordinary measures," EBRD EU Alternate Governor Vassili Lelakis said at the bank's annual meeting in the Kazakh capital.

But while supporting a principle backed by the United States and Germany, others among the EBRD's 63 shareholders urged caution in entering a new region while political upheaval and violence persist.

Some critics have called for the EBRD to halt those plans because they say it is not yet clear what types of governments will emerge in the region, while the bank should also show more clearly it can help reduce poverty and gender inequality.

"Keeping in mind the development level of civil society in many of the countries where expansion is taking place, we could be creating big problems for ourselves from the start," Russian Deputy Finance Minister Sergei Storchak said.

He said Russia supported the idea in principle, but that expansion should be gradual and best done through the creation of a specific fund. "As far as I know, we are not alone in this position," Storchak said.

Created after the Cold War to help ex-Communist countries' transition to market economies, the EBRD lends about 9 billion euros a year to projects stretching from Croatia in central Europe to Kazakhstan's frontier with China in the East.

The Board of Governors asked the EBRD's directors to come up with proposals by July 31 to extend the lender's operating area.

INTO EGYPT

The bank is expected to approve a request this summer from Egypt, an EBRD shareholder, to become a country of operation. Egypt's military council is preparing for a September election.

Officials have said lending to Egypt could start at around 100 million to 200 million euros. An EBRD spokesman said a team would go there in the next few weeks to identify infrastructure, agriculture and other potential projects.

EBRD President Thomas Mirow said he was confident the bank's activities in the new region could begin in spring next year.

"All those who expressed themselves around the table had a clear sense of the fact that something very historic is happening in some countries of North Africa and the Middle East," Mirow told a news conference after the annual meeting.

"This deserves the same kind of encouragement and support as was displayed 20 years ago in central and Eastern Europe."

Mirow has said lending to the entire Middle East and North African region could grow to about 2.5 billion euros by 2015, although the Board of Governors stipulated the expansion should not require shareholders to raise the bank's capital or undermine its other operations.

Advocacy group CEE Bankwatch Network said the EBRD should refrain from expanding into the region while there is uncertainty around the change of governments.

"No agreement should be signed to expand the EBRD's operations to Egypt unless the current military junta is replaced by a legitimately elected government," said Fidanka Bacheva-McGrath, the group's EBRD coordinator.

"Similarly, expansion to other countries in North Africa and the Middle East should not be considered before democractically elected governments are in place," she said.

Morocco, also a shareholder, has expressed similar interest.

Critics have also said the EBRD has to date focused too heavily on export-oriented resource projects and called for an investigation into whether lending by the European Investment Bank -- also backed by the European Union -- has resulted in illicit gains by families linked to North African rulers.

Bacheva-McGrath said no agreements should be signed "until the EBRD has demonstrated the institutional capacity to properly address poverty reduction, without which operations in North Africa would be meaningless."

She said that, in Egypt, the EBRD should finance operations that bring direct benefits to the local population and to avoid projects where the beneficiaries are export-oriented resource companies or those linked to the military or former regime.

The EBRD now lends in 29 countries in central and Eastern Europe and the former Soviet Union. Its shareholders include EU states, Russia, Japan, the United States and other countries.