COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 08.01.1997 
COM(96) 695 final 
REPORT FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
ON THE IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE 
TO THIRD COUNTRIES IN 1995 

4-
I. OVERVIEW 1 
1. Introduction 1 
2. Macro-financial assistance in 1995 2 
3. Trends and tendencies in macro-financial assistance 3 
4. Burden-sharing 4 
II. ALBANIA 25 
1. Introduction 25 
2. Macroeconomic performance 25 
3. Structural reforms 26 
4. Macro-financial assistance 28 
III. ALGERIA 30 
1. Introduction 30 
2. Macro-economic performance 31 
3. Structural reforms 32 
4. Implementation of macro-financial assistance 33 
IV. BALTIC COUNTRIES 35 
1. Introduction 35 
2. Recent economic developments 35 
Estonia 35 
Latvia 36 
Lithuania 31 
3. Implementation of macro-financial assistance 39 
V. BELARUS 41 
1. Introduction 41 
2. Macroeconomic performance 41 
3. Structural reform 42 
4. Implementation of macro-financial assistance 43 -6-
4 OL 
VI. BULGARIA 44 
1. Introduction 44 
1. Macroeconomic performance 45 
3. Structural reforms 46 
4. Implementation of macro-financial assistance 48 
VII. MOLDOVA 49 
1. Introduction 49 
2. Macroeconomic performance 49 
3. Structural reforms 51 
4. Implementation of macro- financial assistance " 51 
VIII. ROMANIA 53 
1. Introduction 53 
2. Macroeconomic developments 53 
3. Structural reforms 55 
4. Implementation of macro-financial assistance 56 
IX. THE SLOVAK REPUBLIC 57 
1. Introduction 57 
2. Macroeconomic developments 57 
3. Structural reforms 59 
4. Implementation of macro-financial assistance 60 
X. UKRAINE 62 
1. Introduction 62 
2. Macroeconomic performance 62 
3. Structural reforms 63 
4. Implementation of macro-financial assistance 63 
dlr 
I. OVERVIEW 
1. Introduction 
Initially conceived for intra-Community balance-of-payments support, macro-financial 
assistance from the Community has been extended since 1990 to third countries, mainly 
those of Central and Eastern Europe, but, progressively, also to other countries, in the 
former Soviet Union and in the Mediterranean area, with a view to supporting their 
political and economic reform efforts. As they embarked on their process of transition to a 
market economy, the countries of this region were faced with similar problems: substantial 
costs attached to the first steps of reform, additional external shocks (the Gulf War 
embargo, the collapse of the COMECON), insufficient resources available from the 
International Financial Institutions (IFIs) and virtually non-existent flows from the private 
sector. 
Against this background, the European Community decided to extend macro-financial 
assistance to the countries in the region in complement to the financing provided by the 
IFIs. It was also decided that, in the context of the assistance co-ordination process 
agreed among the 24 industrial countries (G-24) to help the Central and Eastern European 
Countries (CEECs), the Commission should get other donors to contribute in a similar 
way to support the economic programmes that these countries were implementing in 
agreement with the IMF and World Bank. 
A number of such support operations by the EU and the G-24 took place in 1990-1994 
covering most central and eastern European countries eligible to G-24 assistance 
(Tables 1 and 2). 
Outside the region of Central and Eastern Europe, several other Community loan 
operations were decided by the Council during this period. In the context of Community 
support for Mediterranean countries adversely affected by the Gulf conflict, the Council 
made available to Israel an ECU 160 million soft loan in July 1991. In September 1991, a 
medium-term loan of ECU 400 million was also decided in favour of Algeria to help the 
country carry through the political and economic reforms under way1. A further loan to 
Algeria for an amount of up to ECU 200 million was decided in late 19942. 
Operations in favour of European Newly Independent States (NIS) have also been 
decided in 1994 comprising loans of up to ECU 45 million for Moldova and of up to ECU 
85 million for Ukraine. 
At the initiative of the European Commission, a set of principles was agreed among the G-
24 to serve as guidelines for the implementation of EU/G-24 macro-financial assistance. 
These principles which underline the exceptional character of this assistance, its 
complementarity to financing from the IFIs and its macro-economic conditionality, have 
See: Report on the implementation of macro-financial assistance to thud countries, COM(94)229 of 7 
June 1994. 
2 See: Report on the implementation of macro-financial assistance to third countries, COM(95)572 of 
27 November 1995. 
been subsequently endorsed by the EU Council of Ministers of Finance (ECOFIN) and 
are now applying to the Community's macro-financial assistance to third countries. 
2. Macro-financial assistance in 1995 
In 1995, focus in the Community's macro-financial assistance shifted away from the 
Central and Eastern European group which, as a result of a generally positive economic 
performance, is relying less and less on external financial support from official sources. 
Instead, an increasing part of Community loans were directed towards the NIS and the 
Mediterranean region. 
Within the Central and Eastern European group, a first tranche of ECU 15 million of a 
grant to Albania totalling ECU 35 million, decided in December 1994, was actually 
disbursed in May 1995. The second tranche has, however, been delayed due to slippages 
in policy implementation in Albania. For similar reasons, disbursements pertaining to a 
ECU 125 million macro-financial loan to Romania decided in 1994 were delayed and the 
actual disbursement of the first tranche of ECU 55 million took place only in November 
1995. In the case of Bulgaria, serious disturbances in the economy have considerably 
delayed the resumption of external assistance from the international financial institutions, 
the European Union and bilateral donors. A second tranche of ECU 40 million which is 
part of a Community loan of ECU 110 million to Bulgaria and which was initially decided 
in 1992 and reactivated in 1994 is expected to be disbursed in 1996. In the case of 
Slovakia, no disbursements were made during 1995 under the ECU 130 million loan 
facility decided in late 1994. To the contrary, in the absence of sufficient progress between 
the Commission and the Slovak authorities in agreeing on the economic policy conditions 
to be attached to this facility and on account of the improving economic conditions in the 
country, the Commission has proposed to repeal the Council decision from 1994 to grant 
further macro-financial assistance to Slovakia. As regards all three Baltic states for which 
the Council had approved in 1992 macro-financial assistance, second tranches pertaining 
to the loans in favour of Latvia and Estonia have not been disbursed, on account mainly of 
the good record of the countries' balance of payments. In August 1995 the Commission 
disbursed an ECU 25 million instalment on the second tranche of the Community loan in 
favour of Lithuania, on account of the country's good record of progress of reforms. 
Among the NIS (former Soviet Union), the Commission was, for Moldova, in a position 
to release the second tranche of ECU 20 million pertaining to a ECU 45 million loan from 
1994 in August 1995, following fulfilment on the part of Moldova of the agreed 
conditions for the release of this tranche. With a view to ensuring a sustainable balance-of-
payments situation for Moldova also during the 1995-1996 period the international donor 
community recognised, in early 1995, the need to provide further macro-financial 
assistance to this country. The Council consequently decided, in early 1996, to provide 
Moldova with a further loan of up to ECU 15 million. Belarus, which has been relatively 
late in embarking on economic reform, agreed a stand-by arrangement with the IMF in 
1995. In the circumstances, the Council, after assessing the economic and financial 
situation of the country, decided in April 1995 to assist Belarus with a macro-financial 
loan of up to ECU 75 million. The Commission eventually in October set the amount of 
the loan at ECU 55 million on the basis of the country's revised financing needs. A first 
tranche of this loan (ECU 30 million) was disbursed in December 1995. Regarding 
Ukraine, finally, the Commission was, after significant delays on the part of the Ukrainian 
authorities, in a position to disburse a macro-financial loan of ECU 85 million in 
December of 1995. In the light of the continued economic difficulties of the country and 
renewed efforts by the Ukrainian government to address these difficulties, the Council 
decided in October 1995 to provide further macro-financial assistance to Ukraine up to an 
amount of ECU 200 million. The first disbursements under this loan facility are expected 
for the second half of 1996. 
In the Mediterranean region, finally, a second macro-financial loan to Algeria, of the 
amount of ECU 200 million, was decided by the Council in December 1994 and the first 
tranche - of ECU 100 million - was disbursed in November 1995. 
Each Community operation has continued to respond to the set of principles applying to 
this type of assistance. In particular, Community macro-financial assistance has supported 
efforts by recipient countries to bring about economic reforms and structural changes. In 
close co-ordination with the IMF and the World Bank, it has promoted policies tailored to 
the specific national needs, designed to stabilize the financial situation and set up market-
oriented economies, (macroeconomic performance and progress in reforms in beneficiary 
countries are summarized in Tables 4 and 5 and discussed country by country in the 
following chapters). 
3. Trends and tendencies in macro-financial assistance 
As indicated earlier, developments in 1995 further reinforced a trend that could be seen 
already in 1994 with respect to the geographical focus of the Community's macro-financial 
assistance. Simultaneously, the increasing diversity in economic conditions among 
beneficiaries led to increasingly diverse demands, which - in turn - have made the macro-
financial instrument, as such, evolve further. A relevant question for the future is to what 
extent the existing instrument(s) can be adapted further to suit the goals of the Union 
while at the same time meeting the evolving needs of beneficiary countries. 
In the case of the Central and East European countries, macro-financial support has 
formed part of a broad effort by the Union to establish closer links with them. 
Association Agreements have been signed with practically all these countries. In 
accepting, in Copenhagen in June 1993, the goal of Union membership for them, the 
European Council put forward political and economic measures to promote this end, 
among which macro-financial assistance was explicitly mentioned as one avenue. Since 
then, the process of preparing the associated states of Central and Eastern Europe for 
membership has intensified. 
During this process, the links between macro-economic stabilisation and structural 
adjustment have become increasingly clearer. For the IMF, it translated into a better 
integration of such aspects into programmes negotiated with these countries while the 
World Bank supported national authorities to design specific programmes focusing on key 
structural reforms to be supported by policy-based lending. 
For the Union as well, both timing and content of programmes have been affected. 
Community lending has become more policy-oriented while at the same time achieving 
greater synergy with grant-based instruments (mostly PHARE). 
The countries in Central and Eastern Europe are in different stages of economic 
transformation and some of them have clearly moved to a stage in their economic reform 
process where balance of payments assistance may no longer be needed. The Community 
macro-financial assistance in its original form, to support macro-economic stabilisation 
and the balance of payments, is still fully relevant for assisting some of them. In several 
other countries macro-financial assistance is now more centred on supporting the 
government's structural reform, programme in combination with PHARE, which whenever 
possible can contribute to strengthening the capacity of relevant national institutions to 
underpin such reforms. In general, these developments have also led to increased co­
operation between the Commission and the Bretton Woods institutions. At the same time, 
the dialogue with the authorities in the countries concerned has broadened considerably. 
While overall amounts of resources committed have fallen, the Community macro-
financial assistance has thus tended to become geographically more targeted on associate 
countries further to the east and south in Europe. 
The trend towards supporting neighbouring countries further away from the immediate 
borders of the Union is reinforced if we also consider the three European New 
Independent States that have received macro-financial support from the Community -
Ukraine, Belarus and Moldova. Here too, focus has gradually shifted towards more 
emphasis on structural reform. As in CEECs, grant-based instruments (mainly TACIS) 
have been relied upon in parallel to support the countries concerned. 
The specific examples of Ukraine and Belarus, together with Bulgaria and Romania 
among the CEECs, also serve to illustrate another trend, namely that countries that have 
either embarked late on economic reform, like Belarus, or have moved slowly, like 
Romania, or have lost time while hesitating or even partly reversing reforms, like Ukraine 
or Bulgaria, all find themselves in relatively difficult positions. In this respect, the macro-
financial assistance provided by the Community seems to have well served its cause by 
reinforcing the transition efforts in those countries who choose to embark on ambitious 
reform programmes. 
4. Burden-sharing 
While Community macro-financial assistance has been evolving towards a deepened 
policy-oriented approach, resources mobilized by the Union in this context have been 
decreasing substantially (Tables 3 and 3.1). Initially, an important feature of Community 
assistance was that very large sums of money were to be found to support Bretton Woods 
institutions programmes. The Community played a key role both as the largest single 
provider of these funds, (mobilizing 54% of total balance of payments support to Hungary 
in 1990) and through its role as the co-ordinator of bilateral assistance (the G-24 process 
for CEECs since 1991), which ensured a wide participation in this effort. 
Eventually, more resources were mobilized by the IFIs (whose contribution increased 
from 21% of balance of payments support - excluding debt relief- in 1991 to some 80 
percent in 1995): a new lending instrument, the Systemic Transformation Facility (STF) 
was created which, together with the increase in the access limits, enabled the IMF to 
increase its assistance to CEECs and countries of the former Soviet Union. The World 
Bank, for its part, developed successive generations of policy-based balance of payments 
operations (Structural Adjustment loans -SAL-, followed by Enterprise and Financial 
Sectors Adjustment loans -EFSAL3). 
Most EFSAL operations discussed with beneficiary countries could not be concluded by end-1995 and 
arc therefore not included in the commiunents recorded in Tables 3 and 3.1. When they are, 
contribution by the World Bank will increase accordingly. 
In parallel, contributions by external creditors, both public and private, were mobilized in 
the framework of debt-relief and debt-reduction operations (Algeria, Bulgaria, Ukraine), 
accounting for a substantial share of balance of payments support in 1991 and 1994. 
In this context, relative contributions4 from the European Union and from other bilaterals 
(beyond debt relief operations) declined sharply from 54% and 25%, respectively in 1990 
to 14% and 6%, respectively, in 1995 (or 6% and 3%, respectively, of total commitments 
including debt relief operations). 
Only the countries for which macro-financial assistance from the EU has been mobilized are covered 
by these statistics. 
Table 1: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES 
EXTENDED THROUGH END 1995 
Status of effective disbursements as of April 1996 (in millions of ECU) 
Country Maximum «mount Pat; of Disbursed Amounts and Pates Undisbursed 
«Hthprfoed Council 
Decision of disbursements 
A. Macro-financial assistance to CEECs 
Hungary I 
(Structural adjustment loan) 870 22.02.90 610 350-Apr. 1990 
260-Feb. 1991 260 
Czech and Slovak Federal Republic 
(Balance of payments loan) 375 25.02.91 375 185-Mar. 1991 
190-Mar. 1992 
Hungary II 
(Balance of payments loan) 180 24.06.91 180 100-Aug. 1991 
80-Jan. 1993 
Bulgaria I 
(Balance of payments loan) 290 24.06.91 290 150-Aug. 1991 
140-Mar. 1992 
Romania I 
(Balance of payments loan) 375 22.07.91 375 190-Jan. 1992 
185-Apr. 1992 
Albania I 
(Balance of payments grant) 70 28.09.92 70 35-Dec. 1992 
35 - Aug. 1993 
Baltics 
(Balance of payments loans) 
of which : 
Estonia 
Latvia 
Lithuania 220 
40 
80 
100 23.11.92 135 
Mar. 1993 
Mar. 1993 
50-Jul. 1993 
25 - Aug. 1995 85 
20 
40 
25 
Romania II 
(Balance of payments loan) 80 27.11.92 80 Feb. 1993 
Bulgaria II 
(Balance of payments loan) 110 19.10.92 70 Dec. 1994 40 
Romania III 
(Balance of payments loan) 125 20.06.94 55 Nov. 1995 70 
Albania II 
(Balance of payments grant) 35 28.1194 15 Jun. 1995 20 
Slovakia 
(Balance of payments loan) 130 22.12.94 130 
TOTAL A 2860 2255 605 
B. Macro-financial assistance to other third countries 
Israel (1) 187.5 
(Structural adjustment soft loan) 22.07.91 187.5 Mar. 1992 
Algeria I 
(Balance of payments loan) 400 23.09.91 400 250-Jan. 1992 
150-Aug. 1994 
Moldova 
(Balance of payments loan) 45 13.06.94 45 25-Dec 1994 
20-Aug. >r )S 
Algeria II 
(Balance of payments loan) 200 22.12.94 100 Nov. 19 
Ukraine I 
(Balance of payments loan) 85 22.12.94 85 Dec 1995 
Belarus 
(Balance of payments loan) 10.04.95 30 Dec 1995 25 
Ukraine II 
(Balance of payments loan) 200 23.10.95 
TOTAL B 
TOTALA+B 1172.5 
4032.5 847.5 
3102.5 325 
930 
(1) Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27.5 million 
in the form of interest rates subsidies. 
Table 2: EU/G-24 macro-financial assistance to Central and Eastern Europe since 1991 (cumulative amounts) 
(Status as of December 95) 
Country 
(Identified 
gaps) 
Community 
EFTA* 
United States 
Japan 
Others 
Total ALBANIA 
(US $ 237 million) 
Commitments 
Mln 
US$ 
123.5 
14.2 
36.3 
174.0 %of 
gap 
52.1 
6.0 
15.3 
73.4 %of 
commit. 
71.0 
8.2 
20.9 
100.0 Disburs. 
Mln 
US$ 
100.1 
4.2 
8.5 
112.8 %of 
disb. 
88.7 
3.7 
7.5 
100.0 BALTIC STATES 
(US $ 600 million) 
Commitments 
Mln 
US$ 
300.0 
123.1 
100.0 
523.1 %of 
gap 
50.0 
20.5 
16.7 
87.2 %of 
commit. 
57.4 
23.5 
19.1 
100.0 Disburs. 
Mln 
US$ 
184.0 
67.9 
88.9 
340.8 %of 
disb. 
54.0 
19.9 
26.1 
100.0 BULGARIA 
(USS 1130 million) 
Commitments 
Mln 
US$ 
533.3 
126.0 
10.0 
228.1 
8.7 
906.1 %of 
gap 
47.2 
11.2 
0.9 
20.2 
0.8 
80.2 %of 
commit. 
58.9 
13.9 
1.1 
25.2 
1.0 
100.0 Disburs. 
Mln 
US$ 
487.7 
95.0 
10.0 
100.0 
692.7 %of 
disb. 
70.4 
13.7 
1.4 
14.4 
100.0 
* ofwhich. A, S, SF [ 11.7 | 4.9 | 6.7 | 4.2 | 3~7~ M J5T[ "19^1 I 6.1 | 7.6 | 50.0 | 7.2 || 13.5 67.9 69.0 
Country 
(Identified 
gaps) 
• 
Community 
EFTA * 
United States 
Japan 
Others 
Total CSFR 
(USS 1000 million) 
Commitments 
Mln 
USS 
500.0 
146.0 
15.0 
200.0 
26.0 
887.0 %of 
gap 
50.0 
14.6 
1.5 
20.0 
2.6 
88.7 %of 
commit. 
56.4 
16.5 
1.7 
22.5 
2.9 
100.0 Disburs. 
Mln 
USS 
500.0 
146.0 
15.0 
200.0 
1.0 
862.0 %of 
disb. HUNGARY (1) 
(US $ 500 million) 
Commitments 
Mln 
USS 
58.0 1 250.0 
16.9 1 95.0 
1.7 1 10.0 
23.2 j 150.0 
0.1 1 12.8 
100.0 i 517.8 %of 
gap 
50.0 
19.0 
2.0 
30.0 
2.6 
103.6 %of 
commit. 
48.3 
18.3 
1.9 
29.0 
2.5 
100.0 Disburs. 
Mln 
USS 
250.0 
95.0 
10.0 
125.0 
12.8 
492.8 %of 
disb. 
50.7 
19.3 
2.0 
25.4 
2.6 
100.0 ROMANIA 
(USS 1455 million) 
Commitments 
Mln 
USS 
740.6 
162.2 
150.0 
22.0 
1074.8 %of 
gap 
50.9 
11.1 
10.3 
1.5 
73.9 %of 
commit. 
68.9 
15.1 
14.0 
2.0 
100.0 Disburs. 
Mln 
USS 
660.7 
143.3 
100.0 
22.0 
926.0 % of 
disb. 
71.3 
15.5 
1.0.8 
2.4 
100.0 
* ofwhich. A, S, SF [ 90.0 | 9.0 1 10.1 [ 9.7 | 90.0 10.4 50 10.0 50 10.1 87.3 6.0 78.4 8.5 fl 
Country 
(Identified 
gaps) 
Community 
EFTA* 
United States 
Japan 
Others 
Total SLOVAKIA 
(USS 300 million) 
Commitments 
Mln 
USS 
156.0 
27.4 
60.0 
243.4 %of 
gap 
52.0 
9.1 
20.0 
81.1 %of 
commit. 
64.1 
11.2 
24.7 
100.0 TOTAL 
(USS 5222 million) 
Disburs. | Commitments 
Mln 
USS 
60.0 
60.0 %of 
disb. 
100.0 
100.0 Mln 
USS 
2603.5 
693.8 
35.0 
924.4 
69.5 
4326.2 %of 
gap 
49.9 
13.3 
0.7 
17.7 
1.3 
82.8 %of 
commit. 
60.2 
16.0 
0.8 
21.4 
1.6 
100.0 Disburs. 
Mln 
USS 
2182.5 
551.4 
35.0 
682.4 
35.8 
3487.1 %of 
disb. 
62.6 
15.8 
1.0 
19.6 
1.0 
100.0 
I 405.3 | 7.8 1 * of which. A, S, SF | 16.4 | 5.5 | 6.7 | 9.4 340.5 9.8 
(I) In 1990, the Community committed in favour of Hungary an additional 870 MECU loan which is not taken into consideration in this table 
since it took place outside the G-24 process. 
Source: European Commission 
8 
Table 3: Balance of payments support to recipients of EU 
macro-financial assistance by contributor, 1990-1995 (1) 
(in percent of total commitments) 
Including debt relief 
"~" I Î99Ô Ï99Î Ï992 Ï994 Ï995 
ÏFTs 21 50 69 27 33~ 
IMF 11 37 40 21 26 
World Bank 10 13 29 6 7 
Bilaterals 79 50 31 73 67 
EU (2) 54 20 19 6 6 
Other bilaterals (3) 25 13 13 5 3 
ofwhich 
USA 0 0 .* 0 1 0 
Japan 10 8 5 2 3 
Debt relief 0 18 0 63 59 
Paris Club 5 32 0 
London Club 28 0 
Other (4) 13 2 59 
Excluding debt relief 
I Î99ÔÏ99ÏÏ992Ï994 Ï995 
IFFs 21 61 69 71 80" 
IMF 11 45 40 56 63 
World Bank 10 16 29 15 17 
Bilaterals 79 39 31 29 20 
EU (2) 54 24 19 17 14 
Other bilaterals (3) 25 15 13 12 6 
ofwhich 
USA 0 0 0 2 0 
Japan 10 9 5 6 6_ 
(1) Based on Council Decisions for EU operations. 
No operation was decided in 1993. 
(2) EU macro-financial assistance. 
(3) Including EU Member States. 
(4) Syndicated commercial banks loan in favour of Algeria in 1991, 
debt relief in favour of Ukraine by Russia and Turkmenistan in 1994 and in 1995. 
Table 3.1.: Balance of payments support to recipients of EU 
macro-financial assistance by contributor, 1990-1995 
(in millions of USS and in percent of total commitments and disbursements) 
Balance of payments support - 1990 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Germany 
Other bilaterals 
Total Total 
Commitments 
mio USS % 
419 21 
219 11 
200 10 
1618 79 
1108 54 
0 0 
200 10 
311 15 
0 
2037 100 Disbursements 
mio USS % 
375 23 
175 11 
200 12 
1288 77 
777 47 
0 0 
200 12 
•311 19 
0 
1663 100 Hungary I 
Commitments 
mio USS % 
419 21 
219 11 
200 10 
1618 79 
1108 54 
0 0 
200 10 
311 15 
0 0 
2037 100 Disbursements 
mio USS % 
375 23 
175 11 
200 12 
1288 77 
777 47 
0 0 
200 12 
311 19 
0 0 
1663 100 
Balance of payments support-1991 
« 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
Paris Club 
Syndicated loan 
Total 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
Paris Club 
Syndicated loan 
Total Total 
Commitments 
mio US$ % 
5607 50 
4177 37 
1430 13 
5600 50 
2190 20 
35 0 
850 8 
521 5 
2004 18 
554 5 
1450 13 
11207 100 Disbursements 
mio USS % 
3930 43 
2825 31 
1105 12 
5147 57 
1988 22 
35 0 
633 7 
487 5 
2004 22 
554 6 
1450 16 
9077 100 
CSFR 
Commitments 
mio USS % 
1302 59 
852 39 
450 21 
887 41 
500 23 
15 1 
200 9 
172 8 
2189 100 Disbursements 
mio USS % 
1302 60 
852 39 
450 21 
862 40 
500 23 
15 1 
200 9 
147 7 
2164 100 Algeria I 
Commitments 
mio USS % 
690 23 
390 13 
300 10 
2290 77 
540 18 
0 0 
300 10 
0 0 
1450 49 
1450 49 
2980 100 Disbursements 
mio USS % 
443 19 
293 12 
150 6 
1938 81 
338 14 
0 0 
150 6 
0 0 
1450 61 
1450 61 
2381 100 
Hungary 
Commitments 
mio USS % 
2262 81 
2012 72 
250 9 
51&. 19 
250 9 
10 0 
150 5 
108 4 
2780 100 Disbursements 
mio USS % 
1020 67 
845 56 
175 12 
493 33 
250 17 
10 1 
125 8 
108 7 
1513 100 Bulgaria I 
Commitments 
mio USS % 
640 35 
390 22 
250 14 
1168 65 
400 22 
10 1 
100 6 
104 6 
554 31 
554 31 
1808 100 Disbursements 
mio USS % 
540 33 
390 24 
150 9 
1117 67 
400 24 
10 1 
58 4 
95 6 
554 33 
554 33 
1657 100 
Romania I 
Commitments 
mio USS % 
713 49 
533 37 
180 12 
737 51 
500 34 
100 7 
137 9 
1450 100 Disbursements 
mio USS % 
625 46 
445 33 
180 13 
737 54 
500 37 
100 7 
137 10 
1362 100 
10 
Table 3.1. (cont.) 
Balance of payments support - 1992 
Commitments 
mio USS % Disbursements 
mio USS % Albania 1 
Commitments 
mio USS % Disbursements 
mio USS % Commitments 
mio USS % Disbursements 
mio USS % 
IFPs 
IMF 
WB (policy based 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 1564 
909 
655 
708 
423 
0 
120 
165 
1670 100 1193 
768 
426 
476 
298 48 
28 
20 
115 
83 
0 
20 
12 109 
83 
26 
48 
23 
0 
13 
13 
123 100 204 100 
Commitments 
mio US$ % Disbursements 
mio USS % Commitments 
mio USS % Disbursements 
mio USS % Commitments 
mio USS % Disbursements 
mio USS % 
IFI's 
IMF 
WB (policy based 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 215 
170 
45 
169 
91 
0 
35 
43 196 
151 
45 
94 
46 
0 
23 
25 245 
185 
60 
217 
114 
0 
45 
58 194 
149 
45 940 
440 
500 
29 
1059 666 
366 
300 
119 
90 
Balance of payments support 1994 
IFI's 
IMF 
WB (policy based 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club' 
Other 
Total 
IFI's 
IMF 
WB (policy based 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club 
Other 
Total Total 
Commitments 
mio USS % 
4086 27 
3206 21 
880 6 
11299 73 
952 6 
100 1 
350 2 
252 2 
9645 63 
4920 32 
4380 28 
345 2 
15385 100 Disbursements 
mio USS % 
2772 21 
2072 16 
700 5 
10357 79 
336 3 
90 1 
185 1 
101 1 
9645 73 
4920 37 
4380 33 
13129 100 
Moldova I 
Commitments 
mio USS % 
164 56 
104 35 
60 20 
130 44 
54 18 
30 10 
40 14 
6 2 
294 100 Disbursements 
mio USS % 
133 56 
121 51 
12 5 
106 44 
30 12 
20 8 
30 13 
26 11 
239 100 Albania II 
Commitments 
mio USS % 
75 63 
60 50 
15 13 
45 37 
41 34 
0 0 
0 0 
4 3 
120 100 Disbursements 
mio USS % 
42 70 
34 58 
8 13 
18 30 
18 30 
0 0 
0 0 
0 0 
59 100 
Romania III 
Commitments 
mio USS % 
913 81 
713 63 
200 18 
218 19 
143 13 
0 0 
50 4 
26 2 
1131 100 Disbursements 
mio USS % 
447 100 
247 55 
200 45 
0 0 
0 0 
0 0 
0 0 
0 0 
447 100 Algeria II 
Commitments 
mio USS % 
1397 19 
1097 15 
300 4 
5920 81 
335 5 
0 0 
150 2 
135 2 
' 5300 72 
1120 15 
4180 57 
7317 100 Disbursements 
mio USS % 
1182 17 
882 13 
300 4 
5666 83 
201 3 
0 0 
95 1 
70 1 
5300 77 
1120 16 
4180 61 
6848 100 
Slovak Republic 
Commitments 
mio USS % 
426 64 
346 52 
80 12 
242 36 
155 23 
0 
60 9 
27 4 
668 100 Disbursements 
mio USS % 
308 84 
228 62 
80 22 
60 16 
0 0 
0 0 
60 16 
0 0 
368 100 Bulcaria II 
Commitments 
mio USS % 
646 13 
521 11 
125 3 
4214 87 
125 3 
0 0 
50 1 
39 1 
4000 82 
3800 78 
200 4 
4860 100 Disbursements 
mio USS % 
195 5 
195 5 
0 
4088 95 
88 2 
0 0 
0 0 
0 0 
4000 93 
3800 89 
200 5 
4283 100 
Ukraine 
Commitments 
mio USS % 
465 47 
365 37 
100 10 
530 53 
100 10 
70 7 
0 0 
15 2 
345 35 
345 35 
995 100 Disbursements 
mio USS % 
465 53 
365 41 
100 11 
420 47 
0 0 
70 8 
0 0 
5 1 
345 39 
345 39 
885 100 
T1 
Table 3.1 (cone) 
Balance of payments support 1995 
Total 
Commitments 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club 
Other 
Total mio USS 
1877 
1477 
400 
3885 
330 
0 
150 
0 
3405 
0 
0 
3405 
5762 % 
33 
26 
7 
67 
6 
0 
3 
0 
59 
0 
0 
59 
100 Disbursements 
mio USS % 
1770 3 
1370 2 
400 
3443 
38 
0 
0 
0 
3405 
0 
0 
5213 100 Belarus 
Commitments 
mio USS 
270 
270 
70 
70 
0 
0 
0 
0 
340 % 
79 
79 
0 
21 
21 
0 
0 
0 
0 
0 
0 
0 
100 Disbursements 
mio USS 
163 
163 % 
201 81 
81 
0 
19 
19 
0 
0 
0 
0 
0 
0 
0 
100 Ukraine IJ 
Commitments 
mio USS % 
1607 
1207 
400 
3815 
260 
150 
3405 
3405 
5422 30 
22 
7 
70 
5 
0 
3 
0 
63 
0 
0 
63 
100 Disbursements; 
mio USS 
1607 
1207 
400 
3405 
3405 % 
3405 
5012 32 
24 
68 
0 
0 
0 
0 
68 
0 
0 
68 
100 
12 
Table 4: Selected economic indicators 
1992 1993 1994 1995 
Programme (1) Estimates 
GDP at constant prices (Percent change) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine -9.7 
2.2 
-7.3 
-19.3 
-35.0 
-37.7 
-29.1 
-13.6 
-7.0 
-17.0 9.6 
-1.8 
•11.6 
-2.4 
-3.5 
•15.0 
•16.2 
-8.7 
1.3 
-4.1 
•17.1 9.4 
1.1 
-20.0 
1.8 
4.0 
2.0 
1.5 
-31.0 
3.9 
4.8 
-23.0 6.0 
2.0 
•10.0 9.0 
4.3 
-7.0 
2.6 
4.0 
0.0 
3.0 
-3.0 
6.9 
7.4 
•12.0 
Consumer price (end year) (Percent change) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine 236.6 
31.7 
79.4 
942.0 
958.0 
246.0 
2198.0 
198.5 
9.1 
2000.0 30.9 
20.5 
1990.0 
63.8 
36.0 
35.0 
163.0 
837.0 
295.0 
25.0 
10155.0 15.8 
28.0 
2220.0 
122.0 
42.0 
26.0 
45.0 
116.0 
62.0 
11.7 
401.0 10.0 
10.0 
8.0 
138.0 6.0 
22.0 
290.0 
32.9 
28.0 
23.0 
35.0 
24.0 
33.3 
7.2 
182.0 
Fiscal balance (Percent of GDP) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine -21.3 
-1.3 
-15.0 
0.2 
-0.8 
0.5 
-23.4 
-4.6 
-12.8 
-30.4 -15.9 
-9.2 
-8.3 
-15.7 
-0.7 
0.6 
-5.1 
-6.8 
-0.1 
-7.6 
-10.1 •13.6 
-4.4 
-1.7 
-6.6 
0.0 
-4.1 
-4.2 
-9.0 
-1.0 
-1.4 
-8.2 -140 
-3.5 
-3.0 
-4.6 -8.4 
-1.4 
-3.2 
-6.7 
0.3 
-4.4 
-33.4 
-5.5 
-2.8 
0.5 
-5.0 
13 
Table 4: Selected economic indicators (continued) 
1992 1993 1994 1995 
Programme (1) Estimates 
Current account (Percent of GDP) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine -65.7 
2.9 
-9.3 
7.6 
2.3 
3.4 
-3.0 
-8.6 
0.4(2) 
-3.5 -33.4 
2.1 
-8.7 
-7.9 
-5.7 
6.7 
-6.2 
-9.3 
-5.5 
-5.4 
-5.9 -13.5 
-4.3 
-11.4 
-0.3 
-9.0 
-4.6 
-4.3 
-9.2 
-1.4 
5.7 
-6.0 11.1 
-2.3 9.7 
-5.6 
-4.1 
2.3 
-10.6 
-4.0 
-3.4 
-6.0 
-4.4 
4.3 
-4.4 
Official foreign exchange reserves 
(end year) 
Albania 0.7 
Algeria 2.2 
Belarus 
Bulgaria 3.5 
Estonia 4.5 
Latvia 2.0 
Lithuania 2.6 
Moldova 0.0 
Romania 0.2 
Slovak Republic 1.1 
Ukraine (Months of imports) 
2.2 3.3 
2.3 2.6 
0.3 0.3 
2.4 3.2 
4.0 3.2 
5.6 5.5 
2.4 2.7 
1.5 3.1 
0.1 4.0 
1.2 1.4 
0.2 2.3 3.3 
3.0 
2.4 
4.3 3.8 
1.8 
1.5 
3.3 
2.8 
4.8 
3.5 
4.0 
1.9 
3.8 
3.7 
(1) Programme targets as set in : July 93 (and revised in Aug 94) for Albania, May 94 for Algeria, 
March 95 for Moldova, May 94 for Romania, July 94 for Slovakia, April 95 for Ukraine. 
(2) After fiscal transfers from the Czech lands, estimated at about 7% of Slovak GDP. 
Sources: National authorities and IMF 
14 
TABLE 5 
STATUS OF ECONOMIC REFORM 
5.1 ALBANIA 
Price liberalisation 
Trade liberalisation 
Exchange regime 
Foreign direct investment Most price controls and subsidies eliminated, with the 
exception of bread and flour. Electricity prices will soon be 
fixed by a regulatory body. 
No quantitative restrictions on imports. Export restrictions 
limited to scrap metals and wood. 
Free float since July 1992 within a unified exchange market. 
Early licensing of foreign exchange dealers and exchange 
bureaux. Current account convertibility. Agreement on the 
large external debt arrears to commercial banks reached in 
August 1995. 
Liberal legislation. Liberalisation of land sale to foreigners. 
Creation of economic free zones. 
Monetary policy 
Public finances Tight monetary policy. Use of bank-by-bank credit ceilings. 
Administrative guidance to ensure that interest rates remain 
positive in real terms. Treasury bill auctions (3,6, 12 months). 
Tight fiscal policy until October 1995. VAT introduction 
delayed until July 1996. Removal of tariff exemptions, new 
classification, new tariff rates approved in May 1995. 
Revenue: 24.6 % of GDP in 1995. 
Privatisation and enterprise 
restructuring 
8. Financial sector reform 96 % of total arable land privatized. Distribution of temporary 
titles nearly completed in March 1996. Laws on land market, 
mortgage, collateral, leasing, subleasing, bankruptcy. Small 
privatisation in trade and services completed. Industrial 
enterprises: privatisation of small and medium-sized 
enterprises largely completed; progress with biggest state-
owned enterprises. Mass privatisation process. Strategic 
enterprises and utilitie offered for sale to foreign investors. 
Stock exchange. 
Two-tier banking system. State-owned banks to be privatized 
in the course of 1996 and 1997 with majority share offered for 
sale to foreign investors. Audits completed in 1996. New law 
on the role and responsibilities of the Bank of Albania. New 
law on the banking system with streamlining licensing 
procedures to facilitate the entry of new private banks. Several 
applicants. Important informal banking system. End of the 
state monopoly in the insurance sector. 
15 
5.2 ALGERIA 
1. Price liberalization 
Trade liberalization 
3. Exchange regime 
Foreign direct investment 
5. Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform Major price liberalisation and subsidies elimination in 1994. In 
1995, more "sensitive" products (public utilities, basic food 
staples etc.) moved closer to total liberalization. The 
Competition Law enacted in January 1995 institutionalised the 
principle of free pricing while providing safeguards against 
monopolist practices. 
Further strengthening of the reforms initiated in 1994. No 
quantitative restrictions on imports left apart from a few 
products for religious reasons. Import restrictions on ten basic 
commodities abolished in May 1995. 
Following two devaluations in 1994, the foreign exchange 
allocation system has been substantially liberalised. In 1994, 
the Dinar was moved from a fixed peg to a managed float. A 
full-fledged interbank foreign exchange market was established 
as of end-December 1995. The premium on the parallel market 
has dropped considerably but remained substantial at 20% at 
end 1995. Total current account convertibility of the Dinar 
expected in the near future. 
A liberal foreign investment regime, including the banking 
sector, was adopted in 1993. However, apart from the 
hydrocarbon sector, no significant foreign investments have 
taken place in view of the security situation. 
Interest rates have been liberalised and the temporary ceiling 
on the commercial banks' spread was abolished in December 
1995. Real rates, however, remained negative in 1995. The use 
of indirect instruments for monetary management was 
strengthened. Repurchase-auctions and a formal auction 
system for the sale of negotiable treasury bonds on the money 
market were established in 1995. 
The overall fiscal deficit in 1995 dropped further to 1.4% of 
GDP, mainly due to expenditure reductions (strict wage 
controls and subsidy reductions) with exchange rate 
depreciation also contributing to the budgetary improvement. 
Hardening of budget constraint, financial restructuring and 
signing of management contracts for the 23 largest loss-making 
enterprises. Interruption of all on-lending to autonomous public 
enterprises from the Treasury. Launching of a restructuring 
programme for all public construction enterprises. Initiation of 
a divestiture programme for 103 small and medium enterprises 
with World Bank support. Enactment of a new privatisation 
law. 
Commercial banks are almost exclusively state-owned. Signing 
of performance contracts and recapitalisation of four public 
banks (out of five) in 1995. Capital adequacy ratio 
requirements gradually increasing. 
16 
5.3 BELARUS 
1. Price liberalisation 
Trade liberalisation 
Exchange regime 
4. Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and .enterprise 
restructuring 
8. Financial sector reform First price liberalisation in 1993. Most prices (except for state 
monopolies) freed by end-1994-early 1995. Phased increases 
of public utilities prices up to 80% of cost recovery levels by 
end-1995. 
In 1994 abolition of most import licences and export taxes, as 
well as surrender requirements for exporters. (However 
reintroduction in early 1996 of surrender requirements). 
Early 1995 entry into force of a Customs Union with Russia. 
As a result, increase of import taxes up to the Russian external 
tariff. Partnership and Co-operation Agreement with the 
European Union (not yet ratified). 
In 1994 departure from Russian rouble zone. Only partial 
current account convertibility. Limitations on inter-bank 
currency operations. Managed exchange rate (informal peg) to 
the dollar at 11500 rbl/US$ over the year 1995. 
Free repatriation of capital and profits. Owing to political 
uncertainties, only minor flows of foreign direct investment. 
Two tier banking system with Central Bank conduct of 
monetary policy. In 1995 tightening of monetary policy. 
Weekly auctions for a large share of credits to the banking 
sector (60%). Restrictive* monetary policy and positive real 
interest rates proved successful to bring inflation down from 
hyper-inflationary levels to below 5% per month in second half 
1995. 
Introduction of VAT in 1993. General government budget in 
deficit in 1994 (2%) and 1995 (2.3%). General government 
revenue: 48.9% of GDP (1995). 
Slow and delayed privatisation process. Only 6% of state 
assets and 12% of small firms privatised by end 1995. Free 
distribution of vouchers to the population not yet completed. 
A large share of the banking sector privately owned. Prudential 
regulations progressively tightened, minimum capital 
requirement recently increased to 2 million ECU. Banks remain 
burdened with bad loans weakening their financial position. 
17 
5.4 BULGARIA 
1. Price liberalisation 
Trade liberalisation 
3. Exchange regime 
4. Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform At present some 50% of goods are subject to monitoring or 
control. Price controls still maintained on some public services 
(energy, telecommunications, water supply and transports). 
Export prohibitions have been removed. Average import tariff 
on industrial goods: 22%. Some import protection measures 
are still in place.. 
Since 1991, unified and quasi-free floating exchange rate 
regime. Internal current account convertibility established (few 
restrictions). Limited BNB interventions in support of the lev. 
Official (Paris Club) debt rescheduling reached in April 1994. 
This was followed by the finalization of DDSR Arrangement 
with (London Club) commercial creditors in July. 
Liberal foreign investment legislation adopted in early 1992. 
Small amounts of foreign investment so far recorded owing to 
external debt problems, policy slippages and political 
uncertainty. 
Bank credit ceilings were discontinued in mid-1994. In 1994 
monetary and credit indicators used as nominal anchor. 
Limited open market operations. 
New rules on tax administration adopted in 1994. VAT entered 
into force in April, same year. Revenue/GDP ratio in 1995: 
38% - budget deficit/GDP ratio: 6.7. 
Property restitution programme well advanced. A financial 
rescue plan for enterprises was initiated in 1994 but important 
problems remain. Privatization, although having been delayed, 
is now proceeding in a more rapid pace. 
Banking supervision remains weak. Despite an early bank 
consolidation effort, " substantial non-performing loans have 
been accumulated undermining credibility in the banking 
system necessitating tough structural action.. 
5.5 ESTONIA 
Price liberalisation 
Trade liberalisation 
4. Exchange regime 
Foreign direct investment 
Monetary policy 
6. Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform Major price liberalisation in 1991. By end 1992, virtual 
completion of price liberalisation, including in energy sector. 
In early 1992, abolition of most import tariffs (except few 
luxury goods), and of most remaining quotas and licensing 
requirements except for oil shale, clay, quartz. Import subject 
to a 0.5% administrative fee plus 18% VAT. Few exports 
tariffs. Free trade agreement with Baltic and Nordic countries, 
and with the European Union (as of 1.1.95). 
Current account convertibility. In 1992 departure from rouble 
zone. Since 1992, Estonian Kroon pegged to the DM, at a rate 
of eight Kroons to one DM, under a currency board system. 
Free repatriation of profits and proceeds of liquidation of 
investment by non-residents. 
Central bank responsible for operation of currency board 
(Issue Department) and, in exceptional cases, for emergency 
lending to banking system (Banking Department, responsible 
for managing reserves in excess of currency board cover). 
Restrictive monetary policy proved successful to bring 
inflation down from hyper-inflationary levels to two digit levels 
(29%, 1994 year-end figures). Central Bank does not interfere 
with the commercial banks' setting of interest rates. 
Already in 1991, personal income tax and VAT introduced, 
turnover tax replaced by corporate income tax; social security, 
natural resource and specific excise taxes. Balanced general 
government budget in 1995. General Government expenditure 
at40%ofGDPinl995. 
Small-scale privatisation virtually completed (about 1000 
SMEs privatised). Wide distribution of vouchers, large-scale 
privatisation already advanced in 1995 (400 enterprises 
privatised by year-end, out of 500 to be privatised). 
Two-tier banking system. Increased pressure on state 
enterprises to restructure through hard budget constraints and 
selective application of the bankruptcy law. Reduction of 
number of commercial banks from 40 to 24 through regular 
increases in minimum capital requirement following a banking 
crisis in Winter 92/93. Stock exchange introduced. Credit 
Institutions Act enhanced supervision and prudential regulation 
powers of Central Bank. 
19 
1. Price liberalisation 
2. Trade liberalisation 
Exchange regime 
4. Foreign direct investment 
5. Monetary policy 
6. Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform 5.6 LATVIA 
Major price liberalisation in 1991 and 1992 including for 
energy products. By end-1992, price liberalisation essentially 
completed, excluding utility prices and rents. 
All trade limitations abolished in 1992. Free trade agreements 
with Baltic States and Nordic countries, and with the European 
Union (as of 1.1.95). 
In July 1992 departure from rouble zone. Current account 
convertibility. Exchange rate of lats stabilised under managed 
floating system, informally pegged to the SDR. 
Free repatriation of profits and proceeds of liquidation of 
investment by non-residents. Substantial flows of foreign direct 
investment (165 million US$ in 1995). 
Independent central bank. Strict monetary policy resulted in 
lowest inflation rate among Baltic States. Credit policy through 
indirect instruments. Exceptional Central Bank 6-month credit 
line to the Government in 1995. 
VAT introduced in February 1992. In 1993 introduction of flat 
rate income tax (25%) plus a 10% surcharge on annual 
income. General government expenditure at 38% of GDP, and 
budget in deficit in 1995 (3.3%% of GDP). 
Well advanced small-scale privatisation. Privatisation agency 
established in 1994. Auctions of large enterprises started in 
November 1994. State enterprises not ready for immediate 
privatisation transformed into stock companies, to be managed 
by a State Property Fund established in 1994. 
Two-tier banking system. 49 former branches of the Bank of 
Latvia either merged into a core bank (21 now forming the 
Universal Bank to be restructured and privatised later) or 
privatised, except for one which was liquidated. Capital 
adequacy ratio increased in January 1994. Balance sheets of 
Universal Bank of Latvia and of Latvian Savings Bank 
recently strengthened. Nine bank licences withdrawn in 1994. 
Stock exchange already introduced. 
20 
5.7 LITHUANIA 
1. Price liberalisation 
Trade liberalisation 
3. Exchange regime 
Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform Major price liberalisation in 1991, 1992 and 1993, including 
for most energy products. Level of subsidisation reduced for 
household heating (prices raised 50% in October 1994), 
electricity (prices raised 33% in October 1994), and transport. 
Export quotas and licensing removed partially in the course of 
1992 and completely in June 1993. All import controls and 
licenses removed. Since May 1994 import tariffs for a broad 
range of goods, representing two thirds of imports, suppressed. 
In July 1994 import tariffs on several agricultural goods raised 
to average 40%, and lowered to average 30% in October. Free 
Trade Agreement with EU entered into force on 1 January 
1995. 
Current account convertibility. Lithuania left rouble zone in 
Spring 1992. Since April 1994, Litas pegged to US dollar at a 
fixed rate four litas to one dollar. 
Free repatriation of profits and proceeds of liquidation of 
investment by non-residents. 
Independent central bank (new central bank law enacted in 
December 1994). In April 1994, introduction of a currency 
board arrangement, according to which the money in 
circulation is limited to the amount of foreign exchange held in 
the central bank. Monetary expansion moderate in 1994 (45% 
year average growth). 
The tax system was reformed and now includes personal 
income and profit taxes, property tax, natural resource tax, 
individual excise taxes, as well as general sales tax. New value 
added tax replacing previous general excise tax. State budget 
in deficit in 1995 (3.4% of GDP). 
Substantial progress on small and large-scale privatisation 
through auctions, public shares subscriptions and voucher 
system. By January 1995, 76% of all companies eligible for 
privatisation (1/3 of state capital) privatised. Little progress on 
land privatisation. Autonomous r^-ation of state enterprises 
promotes efficiency. 
Creation of two-tier banking system established in 1992. 
Central Bank and Commercial banking act enacted in early 
1995, tightening prudential rules. International auditing of 
banks now compulsory. Stock exchange already introduced. In 
June 1996 new law denationalizing bankrupt Innovation Bank 
and establishing a bad loans agency. Foreign banks' 
subsidiaries allowed as of 4 June 1996. 
21 
5.8 MOLDOVA 
Price liberalization 
Trade liberalization 
Exchange regime 
4. Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform Full liberalisation of prices of goods and services with some 
exceptions (mainly energy products). 
All export quotas removed, including those on grain and grain 
products abolished on 1 December 1995. Maximum import 
tariff lowered to 20 % by end November 95, with a few 
exceptions. Excise taxes on exports to non-CIS countries 
introduced in late 1995, but to be suppressed before adoption 
of the new IMF programme. 
New currency introduced in November 93. Freely floating and 
rather stable against the US$ in 1995. Daily operated FX 
auctions at the Chisinau Inter bank Foreign Currency 
Exchange. Current account convertibility. Acceptance in June 
1995 of IMF Article VIII. 
Liberal regime: free repatriation of profits and proceeds of 
liquidation of investments within three months of the closure. 
Agency for Foreign Investment Promotion established in 
January 1995. Partnership and co-operation agreement with 
the EU signed in November 1994. Conference on foreign 
investments in Moldova held in Chisinau in September 1995 to 
attract foreign investors. 
Relying on credit ceilings. Key objective: rapid reduction of 
inflation, based on introduction of new currency, enforced 
financial discipline and enhanced central bank independence. 
VAT introduced in 1992. Tax administration improved. Strong 
VAT receipts, including arrears. Receipts of privatisation far 
below expectations, because of a lack of domestic capital. On 
expenditure side, overruns due to higher-than-programmed 
spending in social sphere and to net lending by the 
Government, owing to the assumption by the Government of 
guaranteed loans to enterprises in default. 
New programme for 95/96 adopted in March 95. 2200 
enterprises, representing about 70% of the economy privatised 
through the voucher programme, concluded in November 
1995. Privatisation for cash not successful, because of a lack 
of domestic capital. Liquidation proceedings initiated against 
20 state enterprises. 
Two-tier banking system with National Bank responsible for 
monetary policy and bank supervision. Regulation imposing 
provisions for bad loans approved in 1995. Starting from 1 
January 1996, all banks failing to keep their reserve level at a 
minimum of Mdl 4 million (about US$ 900.000) forced to 
close or to merge into a larger bank. 
22 
5.9 ROMANIA 
1. Price liberalisation 
Trade liberalisation 
Exchange regime 
Foreign direct investment 
Monetary policy 
Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform The process of price liberalisation began in November 1990. 
By the middle of 1995, only 3"% of all prices on consumer 
goods and services were administered (down from 90% in 
1989). In the cases of industrial producer prices and 
procurement prices on raw materials, the share of administered 
prices was equal to 7% and 27%, respectively. 
Full liberalization apart from a limited number of 
import/export quota/bans still in force, either for health reasons 
or for subsidised goods. Europe agreement with the EU in 
force since 1 February 1995. MFN status in the US. 
Limited current account convertibility. A market-based 
exchange rate regime was established in April 1994 but 
multiple exchange rates persist. Foreign exchange is available 
to individuals through private exchange bureaux. The 
authorities, however, have a history of backtracking on their 
measures to liberalise the foreign exchange market. After 
dropping considerably in the middle of the year, the premium 
in the bureau de change market had risen above 20% again by 
end 1995. 
Free legal environment for equity participation and profit 
repatriation by non-residents. Lack of progress with respect to 
privatization has limited the volume of investment inflows. 
The Central Bank uses both direct and indirect instruments for 
monetary policy management. Central Bank financing of 
Treasury deficits has almost ceased. Weak financial discipline 
of state companies. 
Gc )d progress with fiscal reform and introduction of new 
taxation systems, including VAT. Overhaul of the income tax 
system is expected by end 1996. Fiscal deficit is relatively low 
and under control. 
Little progress with medium- and large scale enterprises 
privatization through the State Ownership Fund. Some success 
with small-scale privatization through buy-outs. Large inter-
enterprise arrears hamper financial restructuring of loss 
makers which are ? source of considerable quasi-fiscal 
pressure. A new atte tpt at restructuring the most problematic 
enterprises was launched at the end of 1995 with the support of 
the World Bank. 
In 1995, a reform programme for the banking system was 
agreed with the World Bank, a number of prudential rules were 
adopted and the interbank clearing system was reformed. 
Progress with the privatisation of state-owned banks remained 
very slow with only one bank in the process of being divested. 
In November 1995, trading began on the Bucharest Securities 
Exchange. 
23 
5.10 THE SLOVAK REPUBLIC 
1. Price liberalization 
Trade liberalization 
Exchange regime 
4. Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform 95% of total turnover based on free prices, with regulation still 
in force in the areas of energy, public transportation, rents, 
telephone, telegraph and pharmaceutical products. 
Imports liberalized except for a few sensitive items subject to 
import licences. Export licensing remains for a limited number 
of products. Free trade agreements with the EC, the EFTA 
countries and the Visegrad countries. Customs union with 
Czech Republic since dissolution of the CSFR. A 10% 
surcharge on consumer imports was introduced in March 1994 
and reduced to 7.5% in mid-1996. 
In October 1996, remaining restrictions on current account 
convertibility lifted and clearing system with Czech Republic 
terminated. Exchange rate pegged to a basket of Western 
currencies since February 1993. 
No limits on equity participation in enterprises by non­
residents, except in the case of a few sensitive or defence-
related sectors. Free repatriation of profits and proceeds from 
the liquidation of investment. 
National Bank of Slovakia, established in January 1993. 
operates independently from government. Slovak crown 
introduced in February 1993. Increasing reliance on indirect 
instruments of monetary control : remaining credit ceilings on 
banks abolished in January 1996. 
VAT reformed, excise tax system and personal income tax 
introduced in January 1993. General government revenues 
estimated at 51% of GDP in 1995. 
First wave of large scale privatization completed by Spring 
1993. Second voucher privatization scheme, launched in 1994, 
cancelled in mid-1995. Current privatization strategy 
emphasizes traditional methods (in particular, direct sales to 
managers and employees). Bankruptcy law came into effect in 
June 1993 but few companies have filed for bankruptcy. 
Two-tier banking system established in January 1990. Partial 
privatization of major financial institutions under first wave of 
large-scale privatization. State stakes in State Savings Bank, 
two largest commercial banks and largest insurance company 
to be sold off in 1996. Since 1991, several measures to 
strengthen banks' balance-sheets. Stricter rules for 
classification and provisioning of bad loans introduced in mid-
1995. Bratislava Stock Exchange in operation since 1993 but 
financial markets remain underdeveloped. 
24 
5.11 UKRAINE 
1. Price liberalization 
Trade liberalization 
Foreign exchange regime 
4. Foreign direct investment 
Monetary policy 
Public finances 
Privatisation and enterprise 
restructuring 
8. Financial sector reform Limits on profit margins abolished. Reduction in number of 
goods for which price changes must be approved in advance. 
Increases in coal, electricity, gas, transportation and housing 
prices for households aiming at achieving cost recovery during 
1996. 
System of state orders abolished. All domestic trade 
restrictions abolished. 1995 budget allocations for state 
procurement of agricultural products limited to needs of 
budgetary organizations and at market deterrnined prices. 
Import regime free of quantitative restrictions, with few 
exceptions primarily for health and safety reasons. Maximum 
import tariff lowered to 30%. Elimination of all export quotas 
and licences except for exports subject to VERs. 
Abolition of official exchange rate and unification of exchange 
rate determined at interbank auction market. High degree of 
current account convertibility reinstated. 
Decree of May 1993 grants tax relief (exemption from income 
and profit tax for 5 years) for certain investments constituting 
at least 20% of a enterprise's charter capital. 
Allocation of all Central Bank credit to commercial banks by 
auction. No more directed credits issued. Central Bank 
refinance rate adjusted to ensure that it remains positive in real 
terms. 
Since 1992 gradual tightening and rationalization of budget 
including reform of VAT, enterprise and income taxes. 
Reduction of public expenditure from 72% in % of GDP in 
1992 to some 45% in 1995. Ratio revenue/GDP: 40% in 1995. 
Mass voucher privatization programme launched at beginning 
of 1995. Some 1500 medium and large enterprises privatized. 
Programme will be accelerated in 1996. Progress with small-
scale privatization. Decision to close some 15 loss-making coal 
mines. Bankruptcy procedures simplified in 1995. 
Central bank law submitted to Parliament. Plans to strengthen 
supervision and regulation of the banking sector. Provisioning 
against bad loans to be made tax deductible. Auditing in 
process. Profit tax for banks reduced to 40%. Deposit 
insurance scheme to be introduced. 
25 
II. ALBANIA 
1. Introduction 
Supported by an IMF Stand-By Arrangement (SBA) and by complementary financial 
assistance from the EC5 (ECU 70 million) as well as from G-24 bilateral members, 
Albania's macroeconomic and structural adjustment efforts were initiated in 1992 and 
have largely been successful. Following the decision by the IMF to provide further 
assistance in the form of a 3-year (August 1993 - July 1996) Enhanced Structural 
Adjustment Facility (ESAF), the Council decided on 28 November 19946 to grant Albania 
renewed macro-financial assistance up to a maximum amount of ECU 35 million, with the 
same aim of ensuring a sustainable balance of payments situation and strengthening the 
reserve position of the country. 
Albania had so far fulfilled the policy conditions attached to the present IMF ESAF when, 
in September 1995, the IMF could not complete the second review under this facility, 
because of disagreement over budgetary policies. The ESAF is currently not operative 
but, with the proviso that a strong financial package would be implemented immediately 
after the May 1996 general elections, ESAF discussions could resume relatively quickly. 
2\ Macroeconomic performance 
GDP growth of 9 % was achieved in 1995. Agriculture has led the recovery, responding 
favourably to price reform and privatization. However, marketable surpluses still represent 
a small fraction of the production (12-20 %) and marketing channels are improving 
slowly. Construction, transport, and other (private) services have made strong 
contributions to growth. Albania's industrial output has begun to recover. 
The target for the domestically-financed budget deficit had been set at 7 % of GDP for 
1995. However, wage increases in the public sector in the second part of the year made 
this goal unattainable and the deficit instead reached 8.1 % of GDP. Starting in 1995, the 
central bank's financing of the deficit will be strictly limited to a maximum amount of 10% 
of government revenues of the previous year (for 1995: Leks 4.6 billion or 2.8 % of 
GDP). Therefore, the government and the central bank have recently taken measures to 
support the development of the treasury bill market. Six-month and more recently 12 
month treasury bills have been introduced, and the government has started the 
securitization of its outstanding debt. 
The total fiscal deficit, at 13 % of GDP, was still high in 1995. All categories of public 
expenditure have been reduced in relation to GDP: public spending was equivalent to 33% 
of GDP in 1995, whereas in 1991 it represented over 60 %. The structure of expenditure 
has been improved, shifting away from subsidies and social benefits towards public 
investment. Employment in the budgetary institutions has also been sharply reduced, by 
over one-quarter between mid-1992 and end-1994. Further reductions have been achieved 
in 1995 but failed to offset the impact on expenditure of a 20 % wage increase in the 
5 Council Decision of 28 September 1992 (92/482/EC) 
6 Council Decision of 28 November 1994 (94/773/EC) 
26 
public sector. The tax base has been widened by the introduction of personal income, land 
and property taxes. VAT implementation at a 12.5 % rate was delayed until July 1996. 
As a result of tight fiscal and monetary policies, year on year inflation had fallen 
considerably, from over 300 % in late 1992, to around 15 % by spring 1995 and to 6 % in 
December 1995. However, wage pressures in the public sector stopped this downward 
trend in the first months of 1996. Unemployment is also reported to have been reduced to 
15 % of the labour force, substantially lower than its peak of 36 % in early 1993. 
The exchange rate against the dollar has been stable since the autumn of 1992 and even 
appreciated somewhat in late 1995 (94 Leks/US$ in December 1995), reflecting in part 
the international weakness of the dollar. The renascent inflation in early 1996 put the Lek 
under pressure (104 Leks/US$ in April 1996), but interest rates were raised to reverse the 
tendency. Payments for current international transactions are virtually free from 
restrictions. 
Exports grew rapidly in 1993 and 1994, albeit from extremely low levels: in 1995, exports 
(at US$ 200 million) corresponded to about one-third of the value of imports. The 
resulting deficit was financed by foreign aid and emigrants' remittances, the latter normally 
amounting to roughly twice the value of exports in recent years. The current account 
deficit, at US$ 21 million, fell considerably in 1995. However, this was mainly due to the 
level of remittances, whose sustainability is questionable. Foreign exchange reserves 
improved (US$ 240 million or 3.8 months of imports at year-end) even though the Bank 
of Albania had carried out the upfront cost of the foreign debt agreement (US$ 96.4 
million). 
3. Structural reforms 
Although most prices have been liberalized, price controls remain in place for a small 
number of goods and services. This is the case of flour and bread for which, respectively, 
subsidies and price ceilings are in place. Further action will become necessary, but given 
the political sensitivity of this matter in a pre-election context, no moves are envisaged in 
the short run. In the case of electricity, the pricing policy is to be reassessed in the more 
global perspective of the reform of the energy sector. No more subsidies are scheduled for 
electricity in the 1996 Albanian state budget. 
With regard to external debt, Albania reached a satisfactory agreement (fixed price 
buyback at 20 % and a par bond option) with its external commercial creditors in late 
August 1995. The upfront cost of this agreement has been paid. 
A new system of customs tariffs entered into force on 1 July, eliminating the exemptions 
on investment machinery, equipment, agricultural machinery and medical equipment, and 
introducing a new classification (six-digit harmonized classification) and new tariff rates 
(7/25/40 percent). These changes had a limited impact on the 1995 budget revenue, owing 
to a late introduction (July) and the low rate (7 %) applied to previously exempted goods. 
Moreover, medicines as well as imports of materials that are re-exported have been 
exempted from tariffs. A backward move has been observed: the export of all kind of 
wood products, except furniture and charcoal, has been banned from early 1996. 
Since 1992, Albania has applied a market-determined floating exchange rate regime. In 
practice, current account convertibility of the Lek has been achieved, and the authorities 
envisage progressively lifting restrictions on capital transactions. The Bank of Albania's 
27 
interventions in the foreign exchange market are guided primarily by its targets for net 
international reserves. 
With regard to fiscal and budgetary reform, VAT implementation (at a single rate of 
12.5%) was delayed because of both technical and political difficulties. However, the 
VAT law was amended in March 1996 and the introduction has now been fixed for 1 July 
1996. Employment in the budgetary institutions has continued to be reduced and its level 
has fallen below the requested level of 160,000 at end-June 1995, against 174,000 in 
August 1994. 
Concerning the privatization of state-owned enterprises, the government decided in early 
1995 to implement a broad mass privatization programme (MPP) for the medium and 
large-sized enterprises. This MPP has started and vouchers are being distributed; three 
rounds of auctions have already been held comprising 69 enterprises and creating 15,000 
shareholders. Moreover, over 3,000 small and medium-sized enterprises have already been 
privatized through normal auctions and the remaining few have been transferred to the 
MPP program. 
In the case of public utilities and resource-based enterprises, the Government has decided 
to give priority to sales to strategic investors. Legislation enabling the privatization of the 
electricity company (KESH) has been approved by the Parliament. Legislation also 
envisages a framework for the regulatory body entitled to formulate the pricing policy for 
electricity. Privatization is starting with the electricity distribution system, with pilot sales 
of three regional networks. 30 % of these distribution units are sold through the mass 
privatization programme, while for the remaining 70 % the Government is preparing the 
bidding documents allowing strategic foreign investors to become shareholders. Similar 
legislation for other sectors has been approved (mining and telecommunications sectors) 
or is under preparation (water supply sector). New investments in these sectors have been 
planned with the support of international donors. 
A' law covering private investment funds and which sets out the legal framework for their 
establishment, licensing, operation and governance was approved in July 1995. Parliament 
adopted a law on sales of shares in October and an Albanian stock exchange came into 
operation in early May 1996. 
With regard to incentives for foreign investments, the creation of free economic areas has 
been adopted and foreigners have been allowed to buy land in Albania. 
Concerning the liquidation or privatization of the 32 problematic Enterprise Restructuring 
Agency (ERA) enterprises, 5 of these have been privatized through mass privatization. Six 
of them are in the process of liquidation, while for the others a strategy of splitting them 
into smaller units before privatization in the MPP is being followed. Total employment in 
ERA enterprises was in the order of 10,000 in late 1995 against 49,000 a few years ago, 
with a majority of the enterprises ceasing activity and the remaining ones drastically 
reducing their workforce. 
In the key agricultural sector, the Parliament approved in August 1995 the law on a "Land 
Market" allowing, in particular, the sale and purchase of land. Moreover, laws on 
mortgages, collateral, land leasing and administrative mechanisms to resolve land disputes 
were approved during 1995. With regard to the former state farm land, land "users" have 
received the full ownership rights, whereas, with regard to the former cooperative land, 
the right to lease, sublease and mortgage land has been established for those who have 
28 
already received temporary certificates of land ownership. These temporary certificates 
have been issued covering approximately 85 % of agricultural land. Their distribution has 
been continuing and will be completed shortly. Through the Land Market Action Plan 
supported by PHARE, the authorities have been accelerating the establishment of a land 
registry, a necessary condition for the issuing of ownership permanent titles. Concerning 
the agro-industrial sector, the privatization process is well under way: 2/3 of the "small 
and medium" state-owned agro-enterprises and 50 % of the "large" ones have been 
privatized. The remaining 50 % of "large" ones will be privatized later during the Mass 
Privatization Programme. 
In the financial sector, several major steps have been taken: 
- concerning the privatization of the state-owned banks, Parliament adopted on 16 
November 1995 the law on transforming the state banks into commercial companies. 
Business plans were completed, but their scope was rather limited. With a more 
ambitious objective, a privatization feasibility study for the Rural Commercial Bank 
(RCB) and an external independent audit on the two other state-banks were carried out. 
Moreover, privatization advisors for the Rural Commercial Bank (RCB) have recently 
been appointed whereas those for the National Commercial Bank (NCB) will be 
appointed by June 1996. Based on bank external audits already completed, viable parts 
of these banks will be offered for sale to foreign strategic investors before the end of 
1996. Negotiations are already under way for the RCB. The Savings Bank (SB) should 
be offered to private investors by July 1997. The objective is to attract foreign investors 
to take over a majority share, whereas the remaining state share will be sold on the 
domestic market. 10 % of the banks capital will be sold in the form of privatization 
vouchers; 
- concerning banking regulation and legislation, a system of clearance and a chart of 
accounts are being prepared in line with international standards, with the aim of 
replacing the existing system during 1997. In February 1996, Parliament adopted the 
law determining the role and responsibilities of the Bank of Albania, including its 
relationship with the Government in terms of lending. Simultaneously, the law on the 
banking system was adopted, streamlining the licensing procedures and regulations for 
banking activity in Albania (in particular for co-operative banks and other financial 
institutions). Since then, several foreign and two Albanian private banks have lodged 
requests to open subsidiaries in Albania; three of them have already been licensed. A 
modern law on procedures on bankruptcy, including specific provisions for banking and 
insurance institutions, was adopted by the Parliament in Octob^r 1995. A new law on 
insurance, allowing private firms to operate, has ended the state monopoly in this area. 
4. Macro-financial assistance 
On 28 November 1994, the Council of Ministers decided to grant Albania further macro-
financial assistance up to a maximum amount of ECU 35 million in the form of a grant in 
the context of an initiative of the Group of Twenty-Four, aiming at mobilizing a total of 
US$ 72 million. This grant is complementary to assistance provided by the IMF under a 3-
year Enhanced Structural Adjustment Facility (ESAF) initiated in mid-1993, with a view 
to ensuring a sustainable balance of payments situation and strengthening the reserve 
position of the country. 
29 
The Community grant was to be disbursed in two tranches. The disbursement of the first 
tranche (ECU 15 million) was effected in May 1995, following signature of the 
Memorandum of Understanding (MoU) laying down the macroeconomic and structural 
conditions attached to the grant. 
The approval by the General Affairs Council of 10-11 April 1995 of the Commission's 
report on progress in Human Rights in Albania allowed the Commission services to go 
ahead with the implementation of the second tranche (ECU 20 million) of this assistance. 
The Commission concluded in July 1995 that the Albanian authorities had achieved 
satisfactory progress in their adjustment and reform process and that Albania, 
consequently, was complying with the conditions attached to the grant. Nevertheless, 
owing to Albanian difficulties in reaching the 1995 budgetary targets and in agreeing new 
budgetary objectives in the pre-electoral context of 1996, the conclusion of a third annual 
programme under the current ESAF had been delayed and, as a result, the Commission 
decided to postpone the disbursement of its second tranche. 
Since then, the Albanian authorities have irrevocably fixed the date for the beginning of 
VAT implementation for 1st July 1996. Moreover, further significant progress in the areas 
of reform where delays had been experienced (privatization of state-owned enterprises, 
banking sector reform, land ownership certificates) have been achieved. These positive 
developments, in addition to Albanian assurances about corrective measures which would 
be implemented to cope with the worsening budgetary situation, have cleared the way 
towards the disbursement of the grant. 
30 
EH. ALGERIA 
1. Introduction 
Despite a favourable track record of policy implementation and some signs of 
macroeconomic stabilization, Algeria's pace of structural reform and the development of a 
dynamic private sector in 1995 were seriously hindered by continuing political uncertainty 
and security problems which negatively affected growth, employment and domestic as 
well as foreign investment projects. Thus, the development of a political dialogue with the 
opposition is an essential prerequisite for progress in macroeconomic stabilization and for 
more decisive reform measures. 
A major turnaround occurred in 1994, in light of a further serious degradation of the 
socio-economic situation of the country. The Algerian Dinar was devalued by some 45% 
and the fixed exchange rate regime was replaced by a managed float, aiming at a 
stabilization of the real effective exchange rate. Prices, imports and access to foreign 
currency were substantially liberalized. Consumer subsidies were gradually reduced and a 
more effective social safety net was put in place. Financial discipline for state-owned 
enterprises has since been tightened and the first steps towards privatization have been 
taken. Despite diversification efforts, the country's economy is still heavily dependent on 
hydrocarbons (20% of GDP, 60% of fiscal revenue and 95% of exports). In this respect, 
Algeria is a "policy-taker" country, in the sense that its economic development prospects 
in the medium-term still rely heavily upon the development of oil prices in the world 
market which in 1995 stabilized at a low level (approximately 15 dollars a barrel). 
The ambitious policy programme launched during 1994 was confirmed by the new 
government which was formed in the aftermath of presidential elections in November 
1995. Algeria's renewed reform efforts were supported by the International Financial 
Institutions and the Community throughout 1994 and 1995. In May 1994 the IMF 
approved a one-year Stand-by arrangement of US$ 1 bn. This was followed by a three-
year Extended Fund Facility (EFF) of US$ 1.8 bn in May 1995. The first Fund review 
occurred in December and it was concluded satisfactorily, leading to a new "purchase" of 
funds by Algeria in 1996. 
In January 1995, the World Bank approved a US$ 150 million Emergency Rehabilitation 
Loan. In late 1995 the World Bank finalized a Financial Enterprise Structural Adjustment 
Loan (FESAL), which was actually approved by the Board in April 1996. The total 
lending envisaged is US$ 400 million ofwhich 300 million for adjustment support and the 
rest for supporting agricultural and housing sectors. Arrangements on external debt 
rescheduling were also reached with both the Paris and London Clubs in 1994 and 1995, 
respectively. 
In August 1994 the Community released the remaining second tranche (MECU 150) of its 
first macroeconomic loan in favour of Algeria, decided in 1991. In December 1994 the 
Council adopted the European Commission's proposal for an additional MECU 200 
macro-financial assistance, to be disbursed in two tranches. 
The conditions attached to the disbursement of the first tranche (notably further 
liberalization of imports, reforms in the financial sector and progress towards restructuring 
and privatization of public enterprises) are contained in the Memorandum of 
31 
Understanding negotiated with the Algerian authorities in January 1995. After reviewing 
the fulfilment of these conditions, the first tranche (MECU 100) was disbursed in 
November 1995. 
It was agreed with the Algerian authorities that the conditions related to the disbursement 
of the second tranche would be negotiated at a later stage in a Supplemental 
Memorandum of Understanding. Furthermore, agreement has been reached for a fast 
mobilization of existing grants under various co-operation protocols. Reinforced bilateral 
assistance is also envisaged under the Community's 1996-1998 MED A programme. 
2. Macro-economic performance 
Despite some encouraging first results and the mobilization of generous external 
assistance, Algeria's overall economic situation in 1995 remained quite fragile, reflecting 
the impact of a number of internal and external shocks, a small non-hydrocarbons 
production base, modest job creation capacity, growing security problems, a backward 
financial system and administrative resistance to reforms. 
In 1995, real GDP growth is estimated at 4.3%. This result was the first positive change in 
per capita GDP in more than five years. The increase in real GDP was driven mainly by 
strong hydrocarbon exports and by a rebound in agricultural production following two 
drought years. Growth, however, remained insufficient to have a positive impact on the 
high unemployment rate (25% at the end of 1995). Despite progressive (but still 
incomplete) price liberalization, the Dinar devaluation and subsidy reduction in 1995 the 
government managed to keep the annual inflation rate below 30% through the use of a 
mix of administrative price control measures on basic commodities (which constitute the 
core of the basket upon which inflation rate is calculated) and moderately restrictive 
monetary, fiscal and incomes policies. 
The fiscal deficit dropped further from 4.4% in 1994 to 1.4% in 1995, reflecting the 
implementation of a number of restrictive measures aimed at compressing the upward 
dynamics of public wages and salaries, the reduction of subsidies and transfers as well as 
the increase in fiscal and duty revenues. 
The exchange rate system is presently based upon a sort of managed floating with limited 
Central Bank interventions in support of the Dinar, compatible with the availability of 
foreign currency reserves (which at the end of 1995 were equivalent to 1.8 months of 
imports, down from 2.6 months at the end of the previous year). 
The substantial devaluation of the Dinar in 1994 coupled with a floating rate mechanism 
led to a sharp reduction in the gap between the official and parallel exchange rate. In early 
1994 this gap was 250% and this contracted to around 50% as of mid-1995. However, 
the persistence of this gap (albeit declining) reflects an imperfect implementation of 
current account convertibility announced in 1994 and the continuing use of practices 
restricting the access to foreign currency by residents, particularly for tourism and small 
cross border trade purposes. The gap also fuels further devaluation expectations, 
unrecorded (and potentially destabilizing) foreign currency dealings and capital outflows. 
Interest rates are still negative in real terms which has a depressive effect on savings and 
weakens the confidence in the Dinar by encouraging a shift from Dinar to dollar 
denominated accounts and holdings by residents. 
32 
The overall balance of payments situation deteriorated in 1995. During the first half of the 
year, a considerable external shock (due to adverse exchange rate movements and 
deteriorating terms of trade) compounded the negative short term impact expected to 
result from external liberalisation. Faced by these challenges, the authorities chose to 
adjust, tightening demand management and increasing the rate of depreciation of the 
Algerian Dinar under the managed float, thus actually managing to achieve a small surplus 
in the trade balance (US$ 0.06 bn). However, this was more than outweighed by a 27.7% 
increase in interest payments. As a result, the current account continued to deteriorate, 
showing a deficit of 5.6% of GDP for 1995 against a deficit of 4.3% the previous year. 
On capital account, some FDI went into the hydrocarbon sector. The country has virtually 
no access to the international capital market and despite London and Paris Club debt 
arrangements leading to the normalization of relations vis-à-vis Western creditors, 
virtually no new bank lending was made available to Algeria in 1995. 
Following the above-mentioned debt relief arrangements, debt service as percentage of 
exports dropped from 82% in 1993 to around 49% in 1995. But servicing residual debt is 
still a heavy burden for Algeria given weak oil revenues, higher prices in the world grain 
market and declining foreign currency reserves. 
3. Structural reforms 
Stringent administrative import controls and foreign currency allocation have been 
abolished in April 1994 and were replaced by a more liberal regime comprising a system 
of professional criteria for importers and a limited list of prohibited imports. The latter list 
has been gradually reduced and was abolished end 1994, except for goods prohibited for 
religious and security reasons. The list of goods subject to professional criteria is also 
being reduced. State monopolies on certain imports have also been eliminated. According 
to the new legislation, access to foreign currency has been completely liberalised for all 
visible current account transactions by private and public enterprises. Only imports 
financed through foreign credits are still subject to authorization. 
However, the implementation of these liberalization measures is imperfect and is 
delivering only mixed results, given, in particular, the presence of a growing number of 
unlicensed, informal traders who have no access to banks' foreign currency. Therefore 
they fuel informal foreign currency deals via private (tolerated) bureaux thus encouraging 
market segmentation and a persistent gap between official and parallel exchange rates. 
Compulsory surrender requirements have been lifted. Residents ^r^ allowed to open 
foreign currency accounts at local banks. There is no limit on the amount held and interest 
is offered at more attractive rates than for Dinar deposits. 
The legal environment for enterprises has improved considerably. A Competition Law was 
adopted in January 1995 which liberalizes the price regime and puts stringent limits on 
cartels and monopolies. A Commercial Code, introduced in 1993, has put private and 
public enterprises on an equal legal footing. The Investment Code on Joint Ventures 
provides for full repatriation of profits. 
The restructuring of the public enterprise sector is based upon two strategies, financial 
and administrative restructuring and privatization. However, the reform process of public 
enterprises moved only slowly in 1995. 
33 
In 1995, five public enterprises were granted financial autonomy and the Treasury stopped 
all on-lending to autonomous public enterprises. The authorities imposed a ceiling on the 
access to commercial bank credit for the 23 largest loss-making enterprises and initiated 
their financial restructuring under World Bank guidance and support. Performance and 
"management" contracts have been signed with 7 other public enterprises in April 1995. A 
restructuring programme for all 94 public construction enterprises was also launched in 
order to strengthen the housing sector with a view to shifting construction activity in 
housing to the private sector, while reorienting public enterprises to public works. Some 
88 local public utilities have been closed down. 
A Privatization Law was adopted in July 1995 and in August the authorities announced 
the intention to privatize over 500 public enterprises. The same legislation also restored to 
the original owners some previously nationalized land. A pilot programme for privatizing 
5 hotels has been launched but results have been short of initial expectations, given that 
the present political and security situation is not conducive to private sector investments in 
Algeria, domestic or foreign. 
As part of the reform of the banking and financial system, the Bank of Algeria has 
strengthened its supervisory capacity and established more effective prudential regulations 
and controls. The five state-owned commercial banks have been audited regularly since 
1992, institutional development plans put in place and performance contracts signed. On 
the basis of the audits, four banks were recapitalized with a view to increase their capital 
adequacy ratio (which is expected to rise to the BIS norm of 8% by 1999). Banks are now 
free to set their own creditor and debtor interest rates as a temporary ceiling on their 
spread was eliminated in December 1995. A new private bank was chartered in September 
1995 but private involvement in the banking sector remains extremely limited in spite of a 
liberal investment regime. 
4. Implementation of macro-financial assistance 
Following the agreement in principle between the Algerian authorities and the IMF in 
April 1994 and a request for further macro-financial assistance from the Algerian 
authorities, the Council endorsed the Commission's intention to release the remaining 
second tranche of the 1991 programme and agreed in principle on additional macro-
financial assistance for an amount of ECU 200 million. 
The second tranche of ECU 150 million was effectively disbursed in August and the 
Commission proposal for an additional ECU 200 million macro-financial assistance, to be 
disbursed in two tranches, was adopted by the Council on 22 December 19947. A 
Memorandum of Understanding specifying the conditions related to the disbursement of 
the first tranche of ECU 100 million was agreed with the Algerian authorities in early 
1995. The structural reform conditions relate to further liberalisation of the imports and 
exchange rate regimes, reforms in the financial sector and progress towards restructuring 
and privatization of public enterprises. Furthermore, the Memorandum emphasizes 
Community concerns in the social sector and the synergy between macro-financial 
assistance and other Community aid instruments, with a view to facilitate the 
Council Decision 94/936/EEC 
34 
implementation of economic reforms in Algeria. After reviewing the fulfilment of these 
conditions, the Community decided the disbursement of the first tranche in November 
1995. 
The conditions related to the release of the second tranche will be negotiated at a later 
stage in a Supplemental Memorandum of Understanding provided the IMF programme 
remains on-track. 
35 
IV. BALTIC COUNTRIES 
1. Introduction 
The three Baltic states, who recovered their sovereignty in August 1991, had already 
initiated reforms under the past regime after the adoption by the Supreme Soviet of the 
bill on their economic independence in November 1989. In 1992, as they were already 
actively engaged on the way of reforms to a market economy, economic prospects 
worsened. The dismantling of trade relations among former Soviet republics and the 
increase of prices on energy imports from Russia to world levels resulted in a trade shock. 
External accounts deficits were expected to be unsustainable without international 
support. The three countries defined stabilisation and reform programmes covering the 
period mid-1992 to mid-1993 and concluded stand-by arrangements with the IMF. G-24 
donors were called to contribute to fill the remaining expected balance of payments gap 
for the programme period, estimated at a level of US dollar 105 million for Estonia, US 
dollar 210 million for Latvia and US dollar 285 million in the case of Lithuania. On the 
basis of favourable prospects of support within the G-24, the IMF board approved the 
respective stand-by arrangements in September and October 1992 
In November 1992, the EC Council8 approved macro-financial assistance of up to ECU 
220 million for the three countries (ECU 40 million for Estonia, ECU 80 million for 
Latvia and ECU 100 million for Latvia) in support of the countries' programmes, 
corresponding to about 50% of the estimated balance of payments gap. The bulk of the 
remaining bilateral support within the G-24 group came from Japan and EFTA countries. 
Loan agreements and memoranda of understanding between the Community and each 
beneficiary were signed in early 1993. The Commission disbursed the first tranche (50% 
of the loan amounts) in March 1993 for Estonia and Latvia, and in July 1993 for 
Lithuania. The release of the second tranche was made subject to a positive evaluation of 
performance criteria, regarding both macroeconomic stabilisation aspects and progress of 
structural reforms, as set out in the memoranda of understanding. 
2. Recent economic developments 
Estonia 
After a sharp decline in 1992 and early 1993 the Estonian economy was emerging from 
recession by the end of 1993. GDP grew by 4% in 1994 and about the same level in 1995 
(4.5%>). Unemployment, at about 5%, remained moderate. Macro-economic stabilisation, 
after price increases which reached hyper-inflationary levels in 1992 and 1993, was to a 
large extent achieved after the introduction in June 1992 of a currency board arrangement 
under which the monetary base is limited by the amount of hard currencies and gold 
detained by the central bank. A new currency, the Estonian Kroon, was introduced at thc 
same time. This proved successful in stabilising the economy: inflation dropped ar 
continued to decline from 42% in 1994 to 29% in 1995 (year-end figures). Inflationa 
pressures remained strong, however, in 1995, particularly in the area of services. Under 
the currency board arrangement central bank lending to the state is prohibited, which 
contributes to budgetary discipline. In 1995 government expenditure increased above the 
programmed budget, but this increase was counter-balanced by growing tax revenues and 
Council Decision 92/542/EEC (O.J. L351 of 2 December 1992) 
36 
social security contributions. The financial balance was in surplus (0.8% of GDP). 
Increased government deposits in the banking sector resulted in a slightly lower fiscal 
balance surplus (0.3% of GDP). The 1996 budget envisages an almost balanced budget. 
Estonia has already implemented the bulk of structural reforms leading to a market 
economy. Prices and foreign trade are completely free. The small scale privatisation 
covering some 1000 small enterprises is now virtually completed. Out of the 500 medium 
and large scale enterprises about 100 remain in the state's hands and are expected to be 
privatised in 1996, with the exception of natural monopolies. Land privatisation, which 
was slow to start, is being accelerated. Financial sector reform appears as the most 
sensitive area. The Bank of Estonia has increased its supervision capacities and reduced its 
share of assets in the Savings Bank to 25% of the capital. The state also reduced below 
10%) its minority shareholding in commercial banks. Capital adequacy requirements are 
being gradually increased. An action plan was set up to restructure a virtually insolvent 
bank, the North Estonian Bank. 
The Free Trade Agreement with the European Community entered into force on 1 January 
1995. External trade continued to grow at a high pace, particularly imports which 
increased in 1995 by 33% over 1994. Estonia's external trade with the European Union 
increased markedly after independence and is characterised by a large deficit on the 
Estonian side. The overall trade deficit considerably increased to an estimated US$ 690 
million, or 20% of GDP. Owing to a positive services balance, particularly growing 
tourism receipts which grew to, about US$ 150 million, the current account deficit 
remained below this level (285 million dollars or about 8% of GDP, excluding official 
transfers). Estonia however succeeded in financing this substantial current account deficit 
with a large capital account surplus: for the third consecutive year the capital account was 
in surplus, due principally to high inflows of foreign direct investment of about US$ 200 
million. Official foreign exchange reserves continued to grow and, at US dollars 580 
million at end-1995, covered approximately 3 months of imports. Under the currency 
board arrangement the Estonian Kroon is pegged to the DM at a fixed 8 to 1 rate. This 
has led, given the two digit inflation level, to a relative loss of external competitiveness 
which remains sustainable given the low initial rate of peg of the Estonian Kroon to the 
Deutsche Mark and the moderate rate of industrial price increases. 
In March 1995 the IMF approved a new fifteen-month stand-by arrangement for SDR 14 
million (US$ 21 million), on which the authorities did not make any purchases. 
Latvia 
After a sharp deterioration in 1992 and 1993, Latvia's overall economic situation had 
stabilised in 1994: growth was at about 1%, inflation continued to slow down, falling to 
26% at year-end, and the budget deficit remained within 2% of GDP. In April 1995, the 
IMF confirmed its support of the authorities' policy by approving a second stand-by 
arrangement for a 13-month period. 
In 1995, the budget deficit had initially been programmed to remain at 2% of GDP as in 
1994. However, Latvia's budget situation deteriorated in early 1995 and the budget deficit 
rose to 92 million lats (US$ 184 million) in 1995, or 4% of GDP. Additionally, a major 
crisis in the banking sector occurred in April 1995 with the main Latvian commercial 
bank, Banka Baltija, being declared insolvent, which alone accounted for 20% of the 
country's deposits. By mid-1995 eight other banks had been declared insolvent and a 
37 
number of others were no longer allowed to take deposits. Altogether, the insolvent banks 
represented a total assets value of one third of the total bank assets in the country, or 
about US$ 1.2 billion. 
As a result of the crisis, broad money dropped by 10% over the second quarter. However, 
the high percentage of savings held in cash in foreign currencies obviously dampened its 
contractionary effect. GDP overall declined by 1.5% in 1995. Unemployment remained 
stable at about 6.3% by end-1995. The Bank of Latvia maintained its conservative 
monetary policy stance, and inflation thus continued to slow down, falling from 26% in 
1994 to about 23% in 1995. 
In the Summer the authorities adopted a package of measures to address immediate and 
long term needs of the financial sector, by enhancing prudential regulations and setting up 
a deposit insurance scheme. Other structural reforms continued in 1995. The Privatisation 
Agency became fully operational and 230 additional firms were privatised in 1995. The 
sale of shares of the Universal Bank, one of the three main public banks, started in the 
third quarter of the year. The Free Trade Agreement signed with the European Union 
came into force on 1 January 1995. 
Imports and exports increased markedly in 1995, and reflected the continued shift of trade 
towards the West. As in 1994, the trade balance remained negative over the year (440 
million US$ deficit, or 10% of GDP). The positive services balance, mainly due to the 
transport sector, allowed for a current account deficit of about half the size of the trade 
deficit (180 million US$, or 4% of GDP, excluding official transfers). 
The authorities have successfully pursued a stable exchange rate policy with an informal 
peg to the SDR and, despite speculative attacks which led to a loss of foreign exchange 
amounting to 90 million US dollars in Spring, the Lats exchange rate remained broadly at 
its previous level in 1995. Under a two-digit inflation this translates into a real 
appreciation in the exchange rate. The overall competitiveness of the economy however 
seems to have been maintained. 
In order to cover its current account deficit Latvia is dependant upon private capital 
inflows, which remained substantial in 1995 in spite of the financial crisis. Thus, the 
damage of the crisis was contained and Latvia's reserves position remained relatively 
strong, with approximately US$ 600 million net reserves at year-end, which corresponds 
to around 5 months of imports. The IMF programme went-off track after the Spring crisis 
and its Summer review could not be completed. In early 1996 the IMF staff concluded a 
new stand-by arrangement with the authorities which the IMF board approved in May of 
this year. 
Lithuania 
After four years of recession, Lithuania's economy began to show signs of recovery in 
1994, with a 2% increase in GDP. Growth for 1995, despite a drop in GDP in the first 
quarter of the year, is estimated at 2.5%. The fundamental growth trend is now 
considered to be solid and is expected to be fuelled by investment and export growth. 
Unemployment, however, significantly rose in 1995 to about 7% of the active population, 
against 2% at the end of 1994. 
Inflation, which had peaked at hyper-inflationary levels in 1992, slowed down in 1993 and 
early 1994. On 1 April 1994, a currency board arrangement was introduced under which 
38 
monetary growth is limited by the market value of gold and hard currencies held by the 
Bank of Lithuania. The reduction in inflation after the introduction of the currency board 
has been striking: price increases fell substantially in 1994, at a year-end rate of 45%. 
Inflationary pressures however remained in 1995, fuelled by the low foreign exchange rate 
of the litas and increases of public prices. As a result, inflation, with an estimated 35% 
(year-end rate), remained above the authorities' initial target (25%) in 1995. The fiscal 
deficit target (GDP 3.4%) for 1995 was broadly met, despite weak revenue performance 
in early 1995 which forced the government to cut expenditure. 
Structural reforms have been further implemented. Prices had already been liberalised in 
1993. The only items with prices remaining under government control relate to cases of 
monopolistic situations. The bankruptcy law, which has started to be implemented, was 
redrafted in early 1996 in order to make it more operational. Housing and small-scale 
privatisation are now virtually completed but, owing to delays in the establishment of the 
Privatisation Agency, large scale privatisation has been delayed until 1996. The financial 
sector reform is the most sensitive area. After the enactment of the Central Bank and 
Commercial Bank laws in early 1995 and the subsequent tightening of prudential 
regulations, the banking sector went through drastic adjustments and 4 small banks (out of 
initially 28) were declared insolvent and will in most cases eventually be liquidated. In 
December the crisis worsened when two medium-sized banks, Litimpeks and Innovative 
Bank, were also declared insolvent. The authorities, with IMF and World Bank support, 
prepared a new set of measures to consolidate the three major state-owned banks, to 
create a depositors insurance scheme and to review the commercial banking law. 
Compensation to depositors of the insolvent banks amounted to 30 million litas (i.e. half 
the total of their estimated losses), of which 20 million were programmed in the 1996 
Budget. Parliament eventually approved, in June 1996, a law to re-nationalise Innovation 
Bank and to recapitalize it with resources collected from new issues of government bonds, 
amounting to the equivalent of 250 million US dollars. Bad loans from the Innovation 
bank as well as from the state-owned Commercial bank and Savings bank were transferred 
to a newly established ad hoc bad loans agency. 
For the third consecutive year the trade balance was in deficit (US$ 335 million, or 4.5% 
of GDP), with exports increasing slightly faster than imports (respectively 15% and 13% 
increases). The shift of trade towards the West continued, and was reflected in higher 
growth rates of west-oriented trade flows (more than 20%). The weak point of external 
trade remains the energy balance (deficit: 5.7% of GDP), with imports of energy 
representing 40% of the total imports. The current account deficit remained near the level 
of 1994 (US$ 250 million, or about 2.3% of GDP, excluding official transfers). On 1 
January 1995, the Free Trade Agreement with the European Union entered into force. 
The uncertainties in the area of the local banking sector translated into lower private 
capital inflows than in the previous years (US$ 135 million), and which did not counter­
balance the current account deficit. In December the Central Bank lost US$ 45 million of 
reserves as a result of the crisis of confidence after Litimpex Bank and Innovation Bank 
were declared insolvent. Significant medium- and long-term borrowing (US$ 230 million) 
was necessary to cover the remaining financing needs, out of which US$ 60 million were 
borrowed on the private capital market in December. At year-end official reserves were 
estimated at about US$ 800 million, or 3.5 months of imports. 
The IMF Board approved in June 1996 the third review of the current programme, an 
SDR 134.55 million three-year (1994-1997) Extended Fund Facility fEFF). This will 
39 
contribute to consolidate the reserves and help finance key energy and investment related 
imports. 
3. Implementation of macro-financial assistance 
Owing to the expected increasing demand for investment related hard currency finance, 
and to the track record of surplus of the three countries' external capital account, the 
Commission, after consulting Member States exceptionally agreed in supplemental 
memoranda of understanding signed with the authorities in 1994 and 1995 to channel the 
bulk of the loans' second tranche through the banking sector, for sound bankable projects 
in need of hard currency financing. 
Economic stabilisation and progress of structural reforms conditionality criteria attached 
to the Community macro-financial assistance have been satisfactorily met in Estonia. The 
Estonian authorities however, after having considered drawing the loan's second tranche 
in 1994, eventually did not request its disbursement in 1995. 
In Latvia the IMF programme went off-track after the financial and budgetary crisis in 
Spring 1995, and the normal Autumn review of the stand-by programme could not be 
completed. In June the Latvian authorities requested the release of the Community loan's 
second tranche (ECU 40 million). Commission services subsequently went on mission in 
July to assess the situation and seek explanations from the authorities on their intended 
use of the funds. The authorities made it clear that the funds would be channelled to 
refund small depositors which had lost their savings in the bankruptcy of Banka Baltija. 
The Commission considered that this would be inconsistent with the general aim of the 
EC macro-financial assistance, which is to finance balance-of-payments external related 
needs and not to cover internal budgetary financing needs. This would also be inconsistent 
with the normal conditionality criteria of the loan (including a satisfactory track record of 
the IMF programme) and with the undertaking of the Memorandum of Understanding 
signed in 1994 relating to the loan's second tranche. Accordingly, the Commission, after 
having consulted the Member States, declined the authorities' request to release the loan's 
second tranche in October 1995. 
In the case of Lithuania, the Authorities requested the disbursement of the second tranche 
(ECU 50 million) of Community assistance in early 1995. On account of progress of 
stabilisation and reforms, particularly in the areas of privatisation and of the banking 
sector prudential regulations, Lithuania complied with the conditionality criteria attached 
to the release of the second tranche. A Memorandum of Understanding relative to the use 
of proceeds under this second tranche was signed in July. As already foreseen in Latvia 
and Estonia, it was agreed that the use of proceeds of the second tranche would be 
earmarked for sound bankable projects and channelled through banks complying with 
Central Bank prudential regulations. Owing to the local banking sector's limited 
absorption capacity, it was agreed to split the second tranche in two separate ECU 25 
million instalments and to release the first one, which the Commission disbursed in 
August. The authorities decided to channel the bulk of the funds through two medium-
sized banks complying with central bank sound banking criteria. In September however 
the Commission requested a freeze in the use of proceeds of Community assistance 
pending improvements in the envisaged consultation process. In November, Commission 
services went on mission to Vilnius and requested further improvements in the 
management of the Community macro-financial assistance. 
40 
In spite of internal tensions, particularly in the financial sector area, the Baltic economies 
have successfully implemented the core reforms leading to a market economy and have 
overall been performing remarkably well. The growth trend is now considered to be solid, 
and the level of external financing needs which had been anticipated when the IMF 
concluded the first generation of stand-by arrangements in late 1992 has eventually, to a 
large extent, been covered by private capital inflows. The scope for external official 
macro-financial assistance has been more limited than initially anticipated, and the 
Commission thus did not release the full amount of Community macro-financial assistance 
initially approved. External tensions on the Baltic countries' balance of payments remain 
possible on account of growth-driven increasing trade deficits. The Commission will keep 
the situation under regular review. 
41 
V. BELARUS 
1. Introduction 
Belarus, which had been one of the most developed republics under the command 
economy regime of the Former Soviet Union (FSU), embarked on reforms later than most 
countries in the region. A first limited set of reforms were launched in 1993 and were 
supported by the IMF with a Systemic Transformation Facility (STF) first tranche. 
Following the Presidential elections in July 1994, the authorities launched stabilisation 
reforms in the second part of 1994 and in early 1995. The IMF released the second STF 
tranche by end-January 1995. The conclusion of a more ambitious programme in the form 
of a stand-by arrangement, initially envisaged for March 1995 was postponed pending the 
adoption of new reforms. The IMF board eventually approved a stand-by arrangement on 
12 September 1995. 
On 10 April 1995 the Council of the European Union9 approved a Community macro-
financial assistance to Belarus in the form of a 10-year loan, conditional upon the 
conclusion of an IMF stand-by arrangement, to support the country's programme of 
macro-economic adjustment and structural reforms. On the basis of preliminary estimates 
from the IMF of the country's residual external financing gap for 1995, the amount of the 
Community assistance was set at a maximum of ECU 75 million. In addition, it was 
understood that the mobilisation of Community macro-financial assistance to Belarus 
would require that the country fully met its financial obligations to the Community in a 
timely manner. 
2. Macroeconomic performance 
The drop of production in Belarus was in the initial stage of transition lower than in other 
FSU countries, with GDP down by about 10% per year in 1992 and 1993, which was less 
than in Russia. However, a considerable drop (-20%) was recorded in 1994, one of the 
most severe in the countries in transition, followed by a further 10% decrease in 1995. 
Investment dramatically declined over the last five years below 50% of its 1990 level. 
Inter-republican payments and trade in the FSU collapsed in 1993 resulting in a general 
deterioration of enterprises' situation in Belarus. Inter-enterprise and bank credits piled up, 
with Central Bank unlimited refinancing of the banking system, which triggered price 
increases reaching hyper-inflationary levels in 1993 and 1994. The general government 
deficit remained under control, however, below 2% of GDP in both 1993 and 1994. 
Belarus left the Russian rouble zone only in April 1994 when the Belarus rouble was 
declared the only legal tender in the country. Stringent monetary policy was implemented 
from early 1995. As a result, inflation dropped from 40% per month in January to 2.5% in 
June and, despite high increases of public utilities tariffs, the authorities succeeded in 
stabilising inflation which remained below an average monthly 5% until the end of the 
year. Market mechanisms for the allocation of central bank credits were introduced in 
early 1995. The authorities pursued over the year a flexible interest rate policy aiming at 
maintaining positive and attractive real interest rates, so as to mobilise rouble deposits 
within the banking system. The positive real interest rates and a tight monetary policy 
contributed to stabilise the Belarus rouble in nominal terms at 11500 rouble per US dollar, 
Council Decision 95/132/EC (O.J. L89 of 21 April 1995) 
42 
and led to a significant appreciation in real terms against the dollar (+340 % over the year 
1995). The budget deficit, at 2.3% of GDP for 1995, was limited within the level agreed 
with the IMF. The bulk of this deficit was financed internally. 
The current account which had been in deficit in 1993 and 1994 (about -10% of GDP), 
remained negative in 1995 (-3.5% of GDP). The competitiveness of Belarus' exports to 
the west was reduced by raising import tariffs to Russian levels as a result of the entry into 
force of the Customs Union with Russia in early 1995. Despite fears of a loss of external 
markets, 1995 recorded a high growth of exports (+75%). Imports, at the same time, 
increased by 65%, and the trade balance, as a consequence, remained in deficit (-6% of 
GDP). Belarus progressively lifted restrictions on foreign exchange transactions in 1995 
and thus moved towards current account convertibility. 
3. Structural reform 
Initial progress in the area of structural reform had only recently been undertaken and 
remain a weak point in Belarus. Cross subsidisation of households by industry with regard 
to energy prices was high. A first wave of adjustment of public prices took place in 
Autumn 1994, when prices on communal services were increased. Rents, water and 
heating increased by factors of 42, 24 and 9, respectively. Further increases took place in 
early 1995. The number of "monopolistic enterprises", for which prices are regulated, was 
reduced from about 350 in mid-1994 to 50 in mid-1995. As a result, most prices have 
now been freed. Public sector prices, which are still highly subsidised, were increased in 
July to 60% of cost recovery levels and further adjusted in December to 80% of these 
levels. State orders in production and procurement have been reduced to 6% of the total 
output but remained particularly high in the agricultural sector. 
Most import licences requirements and the surrender requirements on exports had been 
abolished by end-1994 and early 1995. External trade however remained subject to some 
limitations. Export taxes which had been abolished in December 1994 were reintroduced 
in early 1995 as a result of the entry into force of the Customs Union with Russia. (At the 
time of writing this report the authorities have reintroduced, in early 1996, new 
administrative limitations on external trade and foreign exchange transactions). 
The banking sector is burdened with bad loans and remains globally inefficient. Progress 
was made recently on accounting standards, but external auditing remains scarce. The 
authorities recently raised capital requirements for banks from ECU 1 million to ECU 2 
million. It was further decided to proceed with the liquidation of two small insolvent 
banks. Inter-enterprise arrears reportedly accounted for more than 50% of GDP by end-
1995. Actions to improve enterprises' financial discipline were adopted but seemed to be 
inefficient in the absence of effective bankruptcy sanctions, owing mainly to the lack of 
clear mechanisms to declare enterprises insolvent (a revised Bankruptcy law was later 
approved in May 1996). In the context of high energy prices, loss of markets and 
increasing payments arrears, profitability in enterprises has been cut by about 50% over 
the last three years. The number of loss-making enterprises increased significantly in 1995 
up to 29% of the total (April 1996 figures, on the basis of 1995 accounts). 
Privatisation is only at an initial stage. Enterprises representing no more than 6% of the 
total asset value had been privatised by end-1995. The privatisation of small enterprises, 
which has been the most rapidly conducted part of privatization in countries of Central 
and Eastern Europe was delayed in Belarus due to rigid auctioning procedures, and, by 
the end of 1995, only 12% of small enterprises had been privatised. A voucher 
43 
privatisation programme approved in 1994 was designed to cover the subscription of 50% 
of the total assets to be privatised, but the distribution of vouchers to the population, 
which was to be completed by end-1995 was substantially delayed. The privatisation 
process overall slowed down in 1995. 
The process of reforms in agriculture has also been slow. Agricultural prices were only 
freed in early 1995, while input prices of the agricultural sector had been liberalized 
earlier, leading to a squeeze in profitability of the state-owned farms and to the 
accumulation of arrears, in particular on energy supplies. About 20% of the sovkhozes 
and kolkhozes farms were transformed into joint-stock enterprises. However, privatisation 
had not yet started by end-1995 and is likely to be particularly complicated under such 
difficult financial circumstances. There is further scope for reform of the ownership status 
of agricultural land, which by law is the state's property and can only be leased for 99 
years, without possibility to sell or mortgage leases. 
4. Implementation of macro-financial assistance 
After approval on 12 September 1995 by the IMF board of the first stand-by arrangement 
with Belarus, in late September Commission services went on mission to Belarus to assess 
the economic and financial situation and discuss with the authorities of the country the 
terms and conditions of the Community macro-financial assistance. 
A Memorandum of Understanding setting out the macro-economic and structural 
transformation conditions attached to the Community assistance was agreed. Beyond the 
respect of the macro-economic performance criteria foreseen in the IMF stand-by 
arrangement, the Belarus authorities undertook significant commitments in several areas 
of structural reform (price liberalisation, privatisation and enterprise reform, financial 
discipline of enterprises and banking reform), on which progress will be essential for the 
disbursement of the second tranche of the assistance. 
Over the programme period of the IMF stand-by arrangement (July 1995 - June 1996) the 
country's external financing needs have been estimated at about US$ 600 million, almost 
half of which would be covered by the IMF. The Community contribution, taking into 
account the revised residual gap, was set at ECU 55 million and, matched together with 
the other bilateral donors' contributions, contributed to fully cover the residual balance-of-
payments financing gap. The amount of the first tranche was set at ECU 30 million, and 
disbursement took place in December 1995. 
44 
VI. BULGARIA 
1. Introduction 
In 1995, the Bulgarian economy witnessed continued, modest progress in terms of 
stabilization and growth both in the public and private sector, essentially reflecting a 
relatively unambitious policy programme launched by the new Government, following the 
December 1994 elections. On the other hand, developments in the area of structural 
reform continued to disappoint, particularly as regards the adoption of measures aimed at 
accelerating privatization and addressing significant managerial and financial problems of 
the domestic banking sector which continues to be overburdened by a huge number of 
non-performing loans. 
The insufficient progress on overall economic reform and lack of credibility in the 
government's policy programme for 1995 led to a declining confidence of the International 
Financial Institutions, Western commercial banks and private investors. 
The deterioration in the western perception of Bulgaria's financial risk and a number of 
fundamental reserves repeatedly expressed by the IFIs on the pace of the country's 
structural adjustment in 1995 was a major setback for the Bulgarian authorities, 
particularly if one takes into account that in 1994 both the IMF, the World Bank and 
western commercial creditor banks agreed on a major, global assistance package in favour 
of Bulgaria. In fact, in April 1994 the Fund approved a twelve-month Stand-by facility 
worth 97 million associated with a Systemic Transformation Facility for US$ 324 million 
and in September, same year, it decided, together with the World Bank, further to 
augment its financial contribution by US$ 225 million. Moreover, in April 1994 a Paris 
Club debt rescheduling arrangement was agreed with official creditors and this was 
followed by a debt and debt service reduction programme (DDSR) agreed with Western 
commercial banks in July. 
In the event, the Fund's assistance was suspended in late 1994 and failure to reach a new 
agreement for further funding in 1995, due to disagreements on the compliance of the 
Bulgarian government with .the Fund and the World Bank's macro-economic and 
structural adjustment conditions led to a further worsening of the country's external 
financial position at the end of 1995 and during the beginning of 1996. Continuing 
absence of external financial assistance, very low foreign direct investment (FDI), 
(particularly if compared with other central and Eastern European countries) and the 
steady erosion in the country's foreign currency reserves has brought Bulgaria again on 
the verge of an external payment crisis. And this is particularly disturbing, in view of huge 
external debt-related obligations falling due in 1996 and beyond (in excess of US$ 1 bn a 
year). 
In the framework of the G-24 coordination process, the Community decided in April 
199410 to reconfirm its commitment of a loan of ECU 110 million, decided in October 
1992. The release of a first tranche (ECU 70 million) took place in December 1994. 
10 COM(94)118 Final 94/0103 (CNS) of 21 April 1994 
45 
2. Macroeconomic performance 
The policy programme for 1995, approved only in May by the newly elected government, 
was a rather uncertain and unclear compromise between the demand on the one hand, to 
rein in high inflation via moderately restrictive monetary, income and fiscal, policies, attain 
exchange rate stabilization, sustain output growth, investment and export and, on the 
other, to minimize the social costs of the country's economic transformation by 
postponing privatization and granting a generous social safety net. 
Key measures aiming at enhancing financial discipline in selected large loss-making state 
owned enterprises or, if required, liquidating them, rehabilitating banks and strengthening 
bank supervision were either postponed or insufficient, thereby jeopardizing the 
sustainability of macroeconomic stabilization. 
After five years of recession, the economy began a recovery in 1994. Real GDP grew by 
1.4%, followed by an increase of 2.6% in 1995. A sharp depreciation of the lev in Spring 
1994 boosted exports and industrial output, while imports were reduced. The foreign 
trade balance swung from a deficit of almost US$ 1 billion in 1993 to a surplus of over 
US$ 400 million in 1995. Reserves of foreign exchange held by the central bank rose from 
US$ 0.6 billion at the start of 1994 to US$ 1.5 billion by mid-1995. 
Industrial production increased by 5% in 1994. The rise in output was concentrated in 
chemicals and basic metallurgy. These sectors were able to expand exports, their 
competitive advantage deriving from the currency depreciation and also from cheap 
energy. Up until very recently, energy prices remained below world levels. 
Other macroeconomic indicators also pointed to positive economic developments. The 
budget deficit, which had been in double digits as a percentage of GDP during the early 
years of the 1990s, was cut to 7% in 1994 and 1995. Having peaked at over 16% of the 
labour force in early 1994, the unemployment rate fell to under 11% in mid-1995. The 
rate of inflation slowed, from an average monthly rate in the range of 4 to 6% during 
1992-1994, to below 2% per month in Spring and Summer 1995. 
The reduction in inflation was helped by a prolonged period of stability in the nominal 
exchange rate, but also by increased Government intervention in markets, reversing earlier 
liberalization measures. Weighted by their share in the consumer price index "basket", 
approximately 50% of goods are now subject to some form of official monitoring or 
control. One consequence of these measures, combined with low domestic wheat 
purchase prices and ineffective export controls, is the emergence of bread queues. 
In general, the improvement in macroeconomic performance was not based on solid 
microeconomic, or structural foundations. In the financial and enterprise sectors, lack of 
progress in restructuring and privatization contributed to the development of a symbiotic 
relationship between banks and companies. Unprofitable enterprises with loan arrears 
continued to have access to credit from banks. Banks continued lending to enterprises in 
the expectation - based on past experience - that the state would ultimately bail them out. 
The central bank implicitly colluded with this situation by providing uncollateralized loans 
to commercial banks. 
By the second half of 1995, there were increasing signs that the economic situation was 
unsustainable. The growth in industrial output slowed to below 2% for the year. The price 
advantage conferred by the Spring 1994 currency depreciation was eroded by the 
46 
subsequent exchange rate stability and the differential between domestic and foreign cost 
increases. Consumer price inflation accelerated somewhat, and the exchange rate began to 
come under pressure. Foreign exchange reserves declined as the central bank intervened in 
support of the lev. 
The country is regularly meeting its external debt-related obligations stemming from the 
implementation of the Paris Club debt rescheduling arrangement and DDSR arrangement 
with the London Club creditor banks. In 1995, debt-related payments amounted to some 
US$718 million. 
Following the arrangements, Bulgaria's relations with the international financial 
community have been restored but the recent eruption of a new financial crisis in the 
country's banking system and declining confidence in the currency has again increased 
Bulgaria's financial risk with depressive effects on the value of "Brady bonds". 
3. Structural reforms 
Despite a number of constraints, policy slippages and weak management, Bulgaria was in 
1995 successful in preserving previous policy achievements such as trade liberalization, 
current account convertibility and a liberalized exchange rate regime. Undoubtedly, 
maintaining this "acquis" may become more problematic particularly in view of the 
country's new financial fragility, exchange rate volatility, loss of confidence on the lev and 
the insufficient speed in the structural adjustment process. 
The progress in trade liberalization has been encouraging but uneven. In 1995, Bulgaria 
implemented a liberalized customs policy (in particular in trade with the EU) but at the 
same time it adopted a number of temporary import restrictions aimed at protecting 
selected domestic industries and agriculture, such as minimum import prices, restrictive 
import licenses, tariff quotas etc. 
Bulgaria still operates export quotas, export fees and export taxes on selected goods. 
Occasional export bans were imposed in 1993 on industrial products but were eventually 
lifted in July 1995. Bulgaria's Interim Association Agreement with the EU entered into 
force on January 1, 1994. 
The progressive adoption of an outward-oriented trade regime has been associated with 
efforts aimed at further liberalizing the exchange rate regime. A major liberalization was 
introduced in February 1994 whereby foreign exchange ceilings for current personal 
payments (tourism etc.) by residents have been raised significantly and current account 
convertibility is ensured for trade related payments. Some restrictions on current payments 
and transfers are however still in force. Residents are allowed to hold foreign currency 
deposit accounts (export proceeds are subject to repatriation but not a surrender 
requirement). Some inter-governmental clearing and barter arrangements with third 
countries were also terminated in 1995. 
As regards the reform of the state enterprise sector, the new government has pursued its 
strategy based upon three main "pillars", i.e. the implementation of financial rescue plans 
for state enterprises (SOEs), enterprise restructuring and privatization. Moreover, policy 
implementation was delayed by political conflict, policy and administrative shortcomings, 
lack of commitment to harden budget constraints on SOEs, insufficient financial resources 
47 
and a weak banking system. In this respect, 1995 has been a sort of transition year 
towards a more decisive and ambitious reform programme which presently is being 
prepared, for implementation in 1996. 
The financial rescue strategy lays its foundation on a law passed in December 1993 
authorizing the government to issue long-term bonds in both domestic and foreign 
currency aimed at replacing uncollectable lev and dollar-denominated loans and interest 
arrears accumulated in banks' portfolios by end of 1991. Loans to state enterprises will 
therefore be borne by the government which eventually may convert them into equity or 
decide for their write-off or rescheduling as soon as companies are restructured or 
privatized. In the end of 1995 Bulgaria had concluded some 77 privatization deals where 
domestic debt bonds were used in debt-equity swaps amounting to 2.9 bn leva. Few more 
privatizations were also carried out through debt-for-equity swaps with the use of 
government "Brady bonds" (issued on the occasion of the DDRS arrangement) held by 
Western investors. 
In the field of restructuring, steps were taken late in 1995 with a view to strengthening 
SOEs' financial discipline. Loss reduction and rationalization plans were prepared as well 
as a list for closing non viable enterprises or to put them into "financial isolation", 
implying that all banks would be prohibited from extending further loans to them. 
However, these plans were not implemented. 
The privatization programme approved in June 1995 listed some 600 eligible firms but at 
the same time it indicated some key sectors (such as energy, railways, mining etc.) which 
would be excluded from the programme. Large SOEs will be only partly privatized, 
reflecting the new government strategy to keep a significant state control in any sizeable 
firm. In 1995 the Privatization Agency completed only 69 privatization deals (out of 170 
deals originally envisaged for 1995) with total proceeds of 12.1 bn leva (ofwhich only 3 
bn paid in cash and the rest by swapping government foreign and domestic debt bonds 
into enterprise equity). 
Furthermore, in 1995 a mass privatization scheme was launched, involving some 1000 
public enterprises. Sale of vouchers began in January 1996 and sell-off tenders are 
expected to be issued by the autumn. 
The situation of the Bulgarian banking system worsened considerably during 1995 and the 
beginning of 1996 reflecting continuing undercapitalization, inadequate management, 
insufficient supervision by the BNB, lack of financial discipline ("easy credit"), 
fragmentation and a growing amount of non performing loans to enterprises. Despite 
some measures taken in 1994 and 1995 focusing on the strengthening of the bank 
supervision capability at the BNB and implementing a bank consolidation programme by 
the Bank Consolidation Company (BCC), the situation deteriorated so much (particularly 
in two main banks, Mineralbank and Economicbank) that presently the country's financial 
system is on the verge of collapse. 
In order to address the problem of the banking system, the Bulgarian authorities presently 
envisage a number of new, wide-reaching measures such as limiting new credits by the 
BNB, further strengthening of bank supervision, removal from office of banks' 
administrators and bank licenses revocation. More medium-term strategies being 
48 
considered include the closure on financial stabilization of public enterprises which are the 
biggest debtors to these two "ailing" banks and, in parallel, their financial restructuring 
and recapitalization, in view of their subsequent privatization. 
4. Implementation of macro-financial assistance 
The disbursement of the ECU 110 million Community loan decided in October 1992 in 
the framework of G-24, as a complement to the IMF assistance to Bulgaria, was delayed 
as the 1992 stand-by arrangement with the Fund went off track. For the same reason no 
other G-24 assistance was released under this initial package. At the end of 1993 
conditions were restored for the resumption of EU/G-24 assistance to Bulgaria. Following 
the adoption of a new IMF stand-by arrangement, on May 16, 1994, the Council agreed 
with the Commission that the 1992 decision on Community macro-financial assistance to 
Bulgaria could be re-activated in the context of the new programme. The release of a first 
tranche (ECU 70 million) took place in December 1994 on the basis of the approval of the 
new IMF Stand-by and the debt relief arrangement agreed between creditors. The release 
of the second tranche is conditional upon observance by Bulgaria of standard macro-
economic performance criteria including a satisfactory track record of the IMF Stand -by, 
a proper implementation of DDSR operation and progress with structural reform. 
49 
VH. MOLDOVA 
1. Introduction 
On 13 June 1994 the Council of the European Union decided to grant the Republic of 
Moldova a loan of ECU 45 million with a maximum duration often years11 to assist the 
country in its efforts to transform its economy to a market economy and to strengthen the 
reserve position of the central bank. The Community loan was part of an overall package 
mobilised by the international donor community in favour of Moldova to complement the 
resources provided by the IMF and the World Bank. The first tranche of the loan, 
amounting to ECU 25 million, was disbursed in December 1994. The disbursement of the 
second tranche which was subject to the fulfilment of conditions specified in the 
Memorandum of Understanding (MOU) attached to the loan agreement, took place in 
August 1995. 
2. Macroeconomic performance 
Following the introduction, in November 1993, of its national currency - the Moldovan 
leu, Moldova has made a decisive turn towards financial stabilisation in the context of the 
15-month economic programme supported by an IMF stand-by arrangement (approved in 
December 1993) and complementary assistance from the international community, 
including the ECU 45 million Community loan. 
In March 1995, a new stand-by arrangement was approved by the IMF to support the 
1995 economic programme of the Moldovan government. The objectives of this 
programme were the consolidation of financial stabilisation and the implementation of 
structural transformation measures to restore economic growth. 
After a 31% decline in GDP in 1994, due to severe weather conditions and to the 
continuing disruptions to output and trade associated with the collapse of central 
planning, Moldova's economic recession appeared to have bottomed out and preliminary 
estimates indicate that real GDP, including that of the region of Transnistria, fell by 3 
percent in 1995, which suggests a modest rise in activity in the economy excluding 
Transnistria. This improvement was partly due to a recovery in the important agricultural 
sector with the return of normal climatic conditions - a rise of some 4% was registered, 
but also to a reduction in the rate of decline of industrial production, which is estimated to 
have dropped by "only" 10%. Official unemployment remained relatively low, i.e. at some 
2% by end-1995, but a lot of workers were on unpaid leave and the actual unemployment 
figure far exceeded 10%. Real wages rose in 1995 but dollar wages, which averaged US$ 
32 per month, remained low compared to those of neighbouring countries. 
The 1995 programme's key monetary objective was to cut inflation to a sustainable, low 
level through tight credit policy. The National Bank of Moldova (NBM) successfully 
achieved this aim in the first half of 1995: monthly rates below 0.75% were registered, 
compared to annual inflation of about 800% in 1993 and 120% in 1994. However, 
inflationary pressures re-emerged in the autumn of 1995. These were partly due to 
increases in administered prices and seasonal increases in food prices, but also to strong 
capital inflows, which were unsterilized since the NBM was reluctant to allow a significant 
11 Council Decision 94/346/EC 
50 
appreciation of the leu. In the fourth quarter, as the inflationary consequences of these 
policies were becoming apparent, the central bank tightened monetary policy, which was 
reflected in upward pressure on interest rates. With an average monthly rate of 3.5%) 
between September and December, inflation reached 24% for the whole year, the lowest 
in the CIS. 
The fiscal performance improved in 1995, with the general government cash deficit falling 
from 9% of GDP in 1994 to 5.5% in 1995, not so far from the 3.5% official target. The 
deficit was financed by higher-than-expected net foreign financing - mainly postponement 
of repayments due to Russia - and by higher-than-expected sales of government securities. 
A severe control of expenditure - falling from 30.2% of GDP in 1994 to 28.5% in 1995 -
was necessary to make this reduction possible. On the revenue side, VAT receipts and 
land tax collections were particularly strong. Revenue collection remained insufficient, 
however - 24% of GDP against 23.5% in 1994 - and privatisation receipts were far below 
expectations, because of a lack of domestic capital. Both revenue and expenditure arrears 
- including almost all wage arrears - were reduced as a percentage of GDP. 
The balance of payments remained under severe pressure in the first half of 1995, 
primarily because of the continued impact of the terms-of-trade shock caused by the 
increase in imported energy prices to world market levels. In the second half of the year, 
however, a better-than-expected export performance coupled with an important reduction 
in energy imports resulted in the trade balance showing only a small deficit. For the whole 
year, the current account deficit was just over US$ 100 million, or 6% of GDP. Moldova 
was still highly dependent on foreign assistance, medium- and long-term loans 
representing an important part of capital inflows in 1995. Disbursements of assistance 
came from the EU, the USA, Japan and the Bretton Woods institutions for a gross 
amount of some US$ 120 million. Direct investment remained low at US$ 22 million in 
1995, to be compared to US$ 18 million in 1994. Complementary to this amount, the 
balance of payments recorded in 1995 a US$ 41 million foreign investment representing 
equity swapped for debt to the Russian company Gazprom. Gross reserves of the central 
bank reached about US$ 260 million by end-1995, or the equivalent of 4 months of 
imports, compared to 3 months at end-1994 and 1.4 months by the end of 1993. 
By the end of June 1995, Moldova accepted the obligations of Article VIII, sections 2, 3 
and 4 of the IMF's Articles of Agreement and has since then maintained an exchange 
system free of restrictions on payments and transfers for current international transactions. 
The Moldovan leu, introduced in November 1993, was remarkably stable during the 
whole of 1995, having fluctuated in a narrow band around Mdl 4.5 per US$. 
All quantitative performance criteria under the SBA-supported IMF programme were 
observed for all quarters of 1995. A new 3-year programme has been prepared by the 
Moldovan authorities, and a request for an EFF to support this programme will be 
considered by the IMF Board in May 1996. Prior actions will however have to be taken, 
notably in the area of energy policy (price rise to provide cost recovery) and price and 
trade liberalisation (reduction of import tariffs, abolition of excise taxes on exports to non-
CIS, amendment of the system of reference prices for exports). 
Arrears remained a substantial problem in Moldova in 1995, despite the progress made by 
the Government in reducing its own arrears, and even though some progress were made in 
stabilising the situation. Several measures have already been implemented to tackle the 
problem and further measures are envisaged in the new programme. 
51 
3. Structural reforms 
Important measures were initiated in 1995. The privatisation process slowed in early 
1995, owing partly to a "wait-and-see" attitude of enterprise managers for the new 
1995/96 Privatisation Programme, finally approved by Parliament in March 1995. It 
gathered momentum in the following months, however, and according to Government 
estimates, 2200 enterprises, representing about 70% of the economy were privatised 
through the voucher programme, concluded in November 1995. Cash privatisation 
revenues were however disappointing: 44 enterprises were privatised for an amount of 
Mdl 22 million (about US$ 5 million), to be compared to a schedule of 200 enterprises to 
be privatised for an estimated value of Mdl 140 million (about US$ 30 million). Important 
to note is the role of fiduciary companies and investment funds which, following first 
estimates, subscribed about 70% of total shares. The development of a securities market 
will however be vital to the final success of the privatisation process. In this respect, the 
start in June 1995 of the Moldovan Stock Exchange operations was an important step. 
Satisfactory progress has been registered since then, especially when compared with the 
experience of other stock exchanges at a similar stage of development. Concerning 
apartments and housing, roughly 70% of all apartments were privatised, and housing 
privatisation is scheduled to be completed by mid-96. Progress in privatisation of 
agriculture has been slow: a number of state farms and collectives have been transformed 
into joint stock companies but land cannot be transferred for cash - and this will remain 
the case until 2001 under the present law, which represents a legal impediment to 
privatisation of agriculture. 
Important progress was recorded in enterprise restructuring: liquidation proceedings were 
initiated against 20 state enterprises, of which 10 were completed. However, much 
remains to be done to enforce financial discipline. Progress in bankruptcy and collateral 
laws has been slow: the bankruptcy law, still under discussion in Parliament, will need 
substantial revision to reach international standards. 
The maximum import tariff was lowered to 20% in December 1995, with a few 
exceptions, and the remaining export quotas - on grain and grain products - was lifted. 
However, the 1996 draft budget, presented by the Government in November 1995, 
included provisions on tariffs and export taxation, which raised fears of a reversal of the 
significant trade liberalisation advances made over the past two years. As already 
indicated, these trade measures will haye to be cancelled to allow for the adoption of the 
new EFF-supported IMF programme. 
4. Implementation of macro- financial assistance 
The Community loan of ECU 45 million, decided on 13 June 1994, was to be disbursed in 
two tranches, upon the fulfilment of conditions specified in the Memorandum of 
Understanding (MOU) attached to the loan agreement. The first tranche, of ECU 25 
million, was disbursed in December 1994, on the basis of the successful completion of the 
first programme review under the IMF stand-by arrangement. The disbursement of the 
second tranche, of ECU 20 million, was conditional upon a successful track record of the 
IMF stand-by arrangement and subject to a positive evaluation by the Commission of 
performance criteria and of progress made with respect to structural reform in the areas of 
price, trade and foreign exchange liberalisation, privatisation, and financial discipline of 
enterprises and financial sector. 
52 
In view of the measures taken and the commitments provided by the authorities, the 
conditions attached to the disbursement of the second tranche of the Community loan 
were broadly met. The disbursement of the second tranche therefore took place in August 
1995. 
In order to ensure a sustainable balance of payments situation in the 1995-1996 period, 
further macro-financial assistance in favour of Moldova, to complement the resources 
provided by the IMF and the World Bank, was recognised as being necessary by the 
international donor community, in the framework of the Consultative Group meeting 
organised by the World Bank in March 1995. In this context, the ECOFIN Council 
indicated on 20 March 1995 that it would favourably consider a Commission proposal for 
further Community assistance. Following the disbursement of the second tranche of the 
first macro-financial assistance, the Commission formally adopted in November 1995 a 
proposal for further macro-financial assistance to Moldova of up to ECU 15 million. The 
Council decided on 25 March 199612 to adopt the Commission proposal. The 
implementation of this new assistance is however subordinated to the adoption by the IMF 
of the new three-year programme to be supported by an EFF and will also be subject to 
the fulfilment of conditions still to be negotiated with the Moldovan authorities and to be 
included in a new Memorandum of Understanding. 
12 Council Decision 96/242/EC 
53 
Vffl. ROMANIA 
1. Introduction 
Romania was a relatively latecomer among Central and Eastern European countries in the 
implementation of the adjustment and reform process required for the establishment of a 
market economy. Despite a number of exogenous shocks (collapse of the traditional 
Soviet market, the need for a fast trade re-orientation, the negative impact of the UN 
imposed embargo on Serbia etc.), Romania's macroeconomic performance has been 
encouraging in 1995. 
Available data point to a very high real GDP growth in 1995. The official unemployment 
rate was brought down and the high inflation rate (1993:300%) was drastically reduced. 
In 1995 the estimated budget deficit/GDP ratio was 2.8%. Consumer prices have been 
liberalized, trade has been re-oriented towards the West and exports are expanding 
vigorously. The role of private enterprises is increasing in terms of added value, 
employment, capitalization, investment and exports. 
In 1995 the country regained access to the international capital market. At the same time, 
Romania experienced growing difficulties with implementing tight monetary and fiscal 
policies; the trade balance and the current account both deteriorated, the exchange rate 
failed to stabilize and a significant divergence (up to 20%) re-appeared by the end of last 
year between the interbank exchange rate and the (relatively free) exchange bureaux rate, 
reflecting the government's involvement in the forex market. This means that Romania is 
de facto under a dual exchange rate regime. The government continues to rely heavily 
upon administrative, regulatory and restrictive licensing measures particularly vis-à-vis 
financial intermediaries and commercial banks active on the foreign exchange market. 
In 1995 foreign currency reserves declined substantially, reflecting the Central Bank's 
attempt to stabilize the leu exchange rate. 
Results attained so far with structural reform appear to be mixed, particularly as regards 
the demonopolization of financial services, financial restructuring and privatization of 
state-owned enterprises, further reductions in subsidies and further trade liberalization. 
Despite some delays and "stop-and-go" policies, many decisions have finally been adopted 
during 1995 and the legislative and administrative lay-out is now available for programme 
implementation in 1996 and beyond. 
The IMF review in November-December 1995 led to the approval by the Fund of an 
extension of the current stand-by arrangement to April 1997 and the increase of it to US$ 
750 million, to be disbursed in several tranches. At the same time, the World Bank 
finalized a FESAL loan in favour of Romania worth US$ 280 million. The Community 
decided to disburse the first tranche (ECU 55 million) of its macroeconomic loan, totalling 
ECU 125 million in November 1995. 
2. Macroeconomic developments 
The main objective of the government's macroeconomic programme for 1995 was to 
bring annual inflation down from 62% as of end of 1994 to around 30%, reduce the fiscal 
deficit, support production and exports, liberalize the foreign exchange market, stabilize 
the leu exchange rate, and improve the country's external position. To attain these 
54 
ambitious objectives, the government committed itself to continue implementing a rather 
restrictive monetary, fiscal and incomes policy and, at the same time, accelerate structural 
reforms and develop market-based regulatory instruments in the financial market. 
To strengthen the overall position of the country's balance of payments and stabilize the 
leu, adequate external financing was required, under the form of IMF and WTB financial 
support, FDI investment and borrowing on the international capital market. In this 
respect, efforts were made with a view to increasing the Western and IFIs' confidence on 
the Romanian policy programme and in the country's economic perspectives on the 
medium-term. 
Moreover, while Romania's economic performance continued to be positive in 1995 in 
several respects, only a sluggish progress was recorded in carrying out structural reforms. 
The overall situation became more problematic by the end of the year with the re­
appearance of a major spread between the official and the market-determined exchange 
rates; foreign currency reserves further contracted, the country's external position 
weakened considerably and the confidence on leu declined sharply. 
GDP real growth in 1995 reached 6.9% (against 1.3% and 3.9% in 1993 and 1994 
respectively). Industrial production increased by 8.9%, agriculture by 4.9% and 
construction by 11.9%. Hourly labour productivity increased by 15% in 1995, compared 
to the same period of the preceding year. The unemployment rate contracted from 11% at 
the beginning of 1995 to 9.3% at the end of December. This was caused in large part by a 
reallocation of employment towards the agricultural sector, which appears to have 
absorbed a substantial portion of the labour force released from industry. This trend could 
hardly be seen as sustainable, given the low level of productivity of the agricultural sector, 
which already employs above 30% of the total labour force. Inflation has been reduced 
substantially from an annual rate of 62% in 1994 to 33.3% in 1995. However, consumer 
prices increases sharply accelerated during the last quarter of the year, partly in the light of 
seasonal factors and partly reflecting the fact that non-inflationary economic growth 
cannot be sustained without major structural adjustment. 
In 1995, the budget deficit ratio was contained to 2.&% of GDP, reflecting administrative 
decisions aimed at cutting direct current public expenditure, limiting public financial 
transfers to loss-making enterprises and raising fiscal revenue, following the 
implementation of a tax reform in 1994. A considerable quasi-fiscal deficit still exists 
under the form of preferential lending by the Central Bank and state owned banks to loss 
making SOEs. Some autonomous extra-budgetary funds have also been established. 
In 1995, Romania's external position deteriorated. The trade deficit was around US$ 1.3 
bn, more than twice the deficit recorded in 1994 (US$ 582 million). The deficit rose in 
spite of a rather promising expansion of exports, which increased by about 22% compared 
to 1994. Moreover, the increase in imports was much higher, slightly above 32%, 
reflecting a surge in the demand for Western manufactured and capital goods as well as 
energy, mainly by loss-making public enterprises. In line with the weakening current 
account position (which recorded a deficit of 4.4% of GDP) in 1995, foreign exchange 
reserves declined, to reach US$ 2.7 bn by the year-end equivalent to less than two months 
of imports, down from a level corresponding to about four months of imports at the 
beginning of the year. 
55 
FDI through joint ventures started to pick up in the third quarter of 1995. However, 
foreign investment performance in 1995 was disappointing with new flows in the region of 
US$ 400 million against 500 million witnessed in 1994. In 1995, Romania also managed 
to regain access to the international financial market through a series of syndicated loans 
which were over-subscribed. 
Romania's external debt remains relatively low. At the end of 1995 the medium and long 
term external debt increased moderately to US$ 5.3 billion, from US$ 4.5 billion at the 
end of the previous year. 
Monetary and fiscal policy has followed a rather uneven path in 1995. Restrictive policies, 
responsible for most of the positive results particularly as regards the decline of inflation 
rate and the leu's relative stability during the first half of the year were somewhat loosened 
in the course of 1995. However, in view of negotiations on the extension of the IMF 
stand-by arrangement, the authorities again tightened monetary policy during the last two 
months of 1995 mainly through a sharp increase in the refinancing rate and introduced a 
restrained draft budget for 1996. The National Bank of Romania (NBR) still provides 
preferential credit ("directed credit") in favour of the agricultural sector, export and 
energy at an interest rate of 35%. 
The implementation of credit control measures by the monetary authorities reduced 
commercial banks' access to the Central Bank refinancing, thus weakening their financial 
position. The subsequent credit squeeze led to a considerable expansion of payment 
arrears at enterprise level. 
The continuing administrative intervention on the foreign exchange market throughout 
1995 and the temporary measures taken by the monetary authorities in March 1996, 
limiting the number of banks licensed to operate on the forex market, have been causes of 
serious concern. At present, a dual exchange rate fixing mechanism is "de facto" in place, 
and the volume of daily foreign exchange transactions on the inter-bank market contracted 
sharply during the first quarter of 1996. 
3. Structural reforms 
Eliminating arrears and imposing financial discipline on loss-making state-owned 
enterprises constituted key objectives in Romania's economic stabilization and 
restructuring programme for 1995. A number of large state-owned companies and 
"Regies autonomes" have been targeted for strict financial surveillance. These measures 
include isolation from the banking system, negotiation of conciliation agreements with 
their creditors as well as elaboration and implementation of Financial Recovery Plans. 
Also it was envisaged to accelerate the standard and mass privatization programmes. 
Results attained so far are preliminary and difficult to assess because of a number of 
delays in programme implementation, growing financial problems, and administrative 
inefficiency. The overall picture, however, is rather disappointing. Parliament approved 
the long-overdue Commercial Insolvency Law in March 1995. The law permits out-of-
court conciliation procedures and, if required, the initiation of bankruptcy proceedings, 
while allowing sufficient flexibility for rescue operations. 
The large state enterprises which still dominate the economy continue to benefit from 
partially hidden quasi-subsidies such as below-market interest rates and directed credits. If 
properly accounted for, these would increase the public deficit, thus clearly making the 
56 
fiscal policy stance less restrictive. Furthermore, state companies unable to service their 
debts are rarely forced into liquidation, which adds to the inefficiency of the financial 
sector. 
The number of privatized enterprises has increased, but by the end of the year only one 
third of small enterprises, and merely 6% of large ones, had been privatized. The response 
of the public to the mass privatization programme launched in mid-1995 has been worse 
than expected, thus obliging the authorities to postpone the deadline for registration. 
Citizens may now invest their vouchers directly into companies until the end of March 
1996, or in the Private Ownership Fund until the end of April. 
The procedure for privatising two of the five major state-owned banks was due to start in 
1995 but was postponed until 1996 and only one bank has so far been nominated, the 
Romanian Development Bank. 
4. Implementation of macro-financial assistance 
Following Romania's agreement in principle with the IMF on a new programme for 1994-
95, the authorities requested the EU and the G24 to grant further macro-financial 
assistance to Romania to cover the residual external financing gap of US$ 275 million 
under the 1994-95 programme. Commitments by the EU/G-24 reached some US$ 219 
million or nearly 80% of the residual gap. This includes further EU macro-financial 
assistance for an amount up to ECU 125 million, in two tranches, decided by the Council 
on 20 June 199413.In December 1994, the Commission agreed with the Romanian 
authorities the macro-economic conditions attached to the disbursement of the loan. 
However, the disbursement of the first tranche (ECU 55 million) was delayed, due to 
policy slippages that occurred during the implementation of the programme in the first 
quarter of 1995. 
In early July the Romanian authorities reached an understanding with the IMF that paved 
the way for completion of the first review of the programme, which eventually took place 
in November/December 1995. The disbursement of the first tranche of the EU loan took 
place in November 1995. 
The disbursement of the second tranche (70 MECU) is linked to the effective 
implementation of specific structural reform measures, including progress in privatization, 
financial restructuring of loss-making enterprises and banking sector reforms, agreed upon 
with the Romanian authorities in the Memorandum of Understanding. 
13 Council Decision 94/369/EC 
57 
IX. THE SLOVAK REPUBLIC 
1. Introduction 
The dissolution of the Czech and Slovak Federal Republic (CSFR) on 1 January 1993 had 
several negative implications for the Slovak economy at a time when it was still suffering 
from the shock associated with the dismantling of the Council of Mutual Economic 
Assistance and from the difficulties accompanying the transition to a market economy. 
The dissolution of the federation implied the loss of substantial fiscal transfers from the 
Czech-lands, disrupted trade with the Czech Republic, restricted Slovakia's access to the 
international capital markets, and was accompanied by speculation against the Slovak 
crown that practically depleted its official foreign exchange reserves. 
In this context, the Slovak government agreed with the IMF in mid-1993 on a 
macroeconomic stabilization programme for the rest of that year, which was supported by 
the'approval in July 1993 of a first purchase in the amount of SDR 64.4 million under the 
IMF's Systemic Transformation Facility (STF). In addition, the World Bank granted 
Slovakia a US $ 80 million Economic Recovery Loan (ERL) in November 1993. 
In July 1994, the IMF approved a 20-month stand-by credit and a second purchase under 
the STF totalling SDR 180 million, in support of a more comprehensive economic 
programme for 1994-95. In parallel, the World Bank began discussions on a possible 
Enterprise and Financial Sector Adjustment Loan (EFSAL). In support of this 
programme, the EU Council adopted on 22 December 199414 a decision making available 
macro-financial assistance to Slovakia amounting up to ECU 130 million, as part of a G-
24 initiative to respond to the request by the Slovak authorities for complementary 
assistance. Other members of the G-24 made further commitments amounting to US$ 
87.3 million. 
2. Macroeconomic developments 
The improvement in macroeconomic performance that started in 1994 continued and 
intensified in 1995. The recovery of economic activity accelerated, with real GDP growing 
by an impressive 7.4% and industrial production by an estimated 8.4%. Domestic demand 
replaced net exports as the driving force behind economic expansion. The strengthening of 
domestic demand, however, largely reflected the behaviour of private consumption and 
stock building. Fixed investment, which had been declining sharply ever since the 
transition process began, recorded practically no growth in 1995. The economic upswing 
has also been reflected in a decline in the unemployment rate from 15.2% in January 1995 
to 13.7% in February 1996. 
Despite this strong growth performance, inflation has continued to show a downward 
trend. Inflation, as measured by the year-on-year consumer price index (CPI) declined 
from 11.7% in December 1994 to only 6.1% in March 1996, the lowest inflation rate 
recorded by any transition country. Real wage growth remained high in 1995 (real wages 
in the industrial sector increased by about 6%) but is, to a significant extent, being offset 
by strong productivity gains. 
14 Council Decision 94/939/EC. 
58 
The reduction in inflation has continued to be supported by restrictive macroeconomic 
policies. Reflecting larger than anticipated revenues from VAT and income tax, the state 
budget finished 1995 with a deficit of Sk 8.3 billion, well below the Sk 21 billion deficit 
that had been programmed. At the same time, the general government surplus was 
estimated at about 0.5% of GDP, which compares to a deficit of 1.4% of GDP in 1994 
and of 7.6% of GDP in 1993. Monetary policy has also remained relatively tight, although 
its stance has been somewhat eased compared to 1994. The net domestic assets of the 
banking system expanded by 5% in 1995, approximately as programmed. The money 
supply (M2), however, grew faster than programmed, reflecting the rapid expansion of net 
foreign assets, in turn a consequence of the stronger than expected balance of payments 
situation. M2 is estimated to have increased by 20.8%, compared to a programme target 
of 10%. Consistent with its policy of increasingly relying on indirect instruments of 
monetary control, the National Bank of Slovakia (NBS) abolished all remaining credit 
ceilings on banks in January 1996. 
After the remarkable improvement experienced in 1994, Slovakia's balance of payments 
continued to strengthen in 1995. The current account, which had swung from a deficit of 
5.4% of GDP in 1993 to a surplus of 5.7% of GDP in 1994, recorded a new surplus of 
4.3% of GDP in 1995. The evolution of the trade balance in the first months of 1996, 
however, suggests that the surplus will continue to shrink in 1996 reflecting the strength 
of domestic demand. 
The capital account also improved in 1995, with total net capital inflows reaching almost 
US$ 1 billion, compared to US$ 130 million in 1994. The main factor behind this rise in 
net capital inflows has been the substantial increase in foreign borrowing by Slovak 
enterprises and banks. Also, the tight management of interbank liquidity by the NBS, in 
combination with the perceived stability of the Slovak crown (and, during the first half of 
1995, the expectation of a revaluation against the Czech crown), has led to some short-
term capital inflows. Foreign direct investment inflows, however, have remained low, 
partly reflecting uncertainty over the government's market-oriented reforms and, in 
particular, over privatization (see below). 
Slovakia's access to the international capital markets has been facilitated by successive 
upgradings of Slovakia's credit ratings. In May 1995, Moody's assigned to Slovakia an 
investment grade rating (Baa3). Standard & Poor's, for its part, upgraded Slovakia's rating 
in April 1995 (from BB" to BB+) and again in April 1996 (to BBB", an investment grade 
mark). Slovakia has thus become one of the few transition countries that can boast 
investment grade ratings from the leading US rating agencies. 
These favourable trends in both the current and capital accounts have been translated into 
a substantial increase in international reserves. Official reserves (including gold) rose from 
US$ 1.75 billion at the end of 1994 to US$ 3.4 billion at the end of 1995. This represents 
a comfortable level of about 4 months of imports. During the same period, the reserves of 
whole banking system have increased from US$ 3.1 billion to US$ 5 billion. 
Following a 10% devaluation of the Slovak crown in July 1993, the exchange rate of the 
crown has been kept stable against a basket of Western currencies. In July 1994, the 
number of currencies in the basket was reduced from five to two (the Deutsche mark and 
the US dollar). In view of the termination of the bilateral clearing system with the Czech 
59 
Republic in October 1995, the Slovak crown was revalued by 5% against the Czech 
currency. In January 1996, the fluctuation band around the central rate was increased 
from+- 1.5% to+-3%. 
Slovakia inherited from the Czechoslovak federation a relatively low . external debt. 
Although debt and debt service ratios have deteriorated since the country reached 
independence, they remain at reasonable levels. The foreign debt-over-GDP ratio has 
increased from 25.7% in early 1993 to 33.8% in October 1995. The debt service-over-
exports ratio, for its part, has risen from 3.3% in 1992 to an estimated 9.5% in 1995. 
3. Structural reforms 
In Spring 1994, the Slovak authorities adopted a plan to accelerate privatization based on 
a greater reliance on voucher privatization. By November 1994, about 3.5 million citizens 
had registered to buy vouchers. The new Slovak government formed in December 1994, 
however, decided in June 1995 to cancel the voucher privatization scheme. Instead of 
shares in state enterprises, the Slovak citizens that bought vouchers have been given 5-
year interest bearing bonds issued by the National Property Fund (NPF). NPF bonds 
totalling Sk 33.3 billion (or the equivalent of about 8% of GDP) were issued in January 
1996. This new scheme not only implies a new delay in the privatization process but could 
have negative fiscal implications, particularly given the fact that the total market value of 
the shares that were earmarked for voucher privatization is likely to be significantly below 
the total face value of the bonds issued by the NPF. 
The decision to cancel the voucher scheme is part of a more general shift in privatization 
policy announced by the current government. The new privatization policy emphasizes 
standard methods of privatization. Direct sales (largely sales to managers and employees) 
have gathered momentum since mid-1995, but (they) are being criticized for their lack of 
transparency. Another important element of the new privatization policy is the 
government's decision, incorporated in Law No. 175 passed in July 1995, to keep 
permanent state ownership in 29 so-called "important enterprises" (including the big 
utilities in the energy sector, telecommunications and armament enterprises). Since the 
bulk of the "important enterprises" had initially been included in the 1994 voucher 
privatization scheme, this measure has effectively reduced by about 35% the total book 
value of the enterprises slated for privatization under the second wave of large-scale 
privatization. Law No. 175 also allows the state veto power over key decisions in 45 so-
called "strategic enterprises" (including the largest industrial enterprises) and shifts the 
exercise of the state ownership rights over "strategic enterprises" back from the NPF to 
the founding ministries. These decisions regarding "strategic enterprises" could slow both 
the privatization and the restructuring of these enterprises. However, the part of Law No. 
175 allowing the state to maintain (or regain) "golden shares" in "strategic enterprises" 
has been declared unconstitutional by the Slovak constitutional court. 
Regarding the Slovak financial system, substantial progress still needs to be made with 
respect to the problem of non-performing loans, privatization and the promotion of 
competition. Stricter regulations on the classification and provisioning of bad loans came 
into force in July 1995. Government concern about the negative fiscal repercussions, 
however, has so far prevented the passing of tax law amendments temporarily granting to 
banks full tax deductibility for bad-loan provisions, a measure that the authorities had 
originally envisaged to take place by end-1994. In January 1996, the government 
announced its intention to sell in 1996 its majority holdings in the country's largest savings 
60 
bank (Slovenska Sporitelna), the two largest commercial banks (VUB and IRB) and the 
largest insurance company (Slovenska Poistovna). In February 1996, the Parliament 
passed a new banking law strengthening the supervisory powers of the NBS. 
Following abuses and irregularities by certain privatization investment funds (PEFs) and 
investment companies, the Ministry of Finance, in the first half of 1995, restricted the 
operations of several of them. In addition, new legislation was adopted in July 1995 aimed 
at increasing the transparency and control of their activities, and at better protecting the 
shareholders of the PIFs. Unfortunately, however, the new regulations, in conjunction 
with the cancellation of the voucher privatization scheme, will also limit the role of PIFs in 
corporate governance. In particular, with effect from the end of 1996, the limit on the 
maximum equity stake an PIF may hold in a given company will be reduced from 20% to 
10% of the company's capital. 
Under pressure from the EU and WTO, the Slovak authorities reduced the 10%» import 
surcharge on consumer goods which was introduced in March 1994, to 7.5% from mid-
July 1996. Following deliberations in the WTO Balance of Payments Committee, the 
Slovak authorities have announced that they would abolish the surcharge by the end of 
1996. 
On 1 October 1995, a new foreign exchange act came into effect. The Slovak crown was 
made fully convertible for current account purposes, and the bilateral clearing system 
maintained with the Czech Republic, since early 1993 was terminated. The authorities also 
intend gradually to relax certain restrictions on capital movements. 
Most prices in Slovakia have been liberalized. The share of items that still have regulated 
prices represents only about 5% of total turnover. These items include energy (electricity, 
gas, heating and petrol), water, pharmaceutical products, rents, telephones and public 
transportation. Electricity, gas and heating tariffs paid by households remain significantly 
below their economic cost-recovery levels. The upward adjustment of these tariffs 
envisaged under the World Bank ERL's and the IMF's stand-by programmes have not 
been implemented. 
4. Implementation of macro-financial assistance 
Slovakia met all the macroeconomic targets and performance criteria agreed with the IMF 
in the context of the 1994-95 stand-by programme. However, the failure to implement the 
structural reform conditions prevented a successful completion of the mid-term review of 
the programme, which had initially been scheduled for March 1995. The main factor 
preventing the approval of the mid-term review were the delays and the subsequent policy 
shifts in the area of privatization, including the unexpected cancellation of the shares-for-
vouchers scheme and its replacement by the scheme based on the issuance of NPF bonds. 
The authorities also failed to comply with the conditions regarding the granting of 
temporary full tax deductibility for bad loan provisions made by banks, the adjustment of 
energy prices and the elimination of the import surcharge. The slow formulation and 
instability of privatization and other structural policies also led the World Bank to 
discontinue discussions on an EFSAL operation in April 1995. 
In May 1995, the Commission services held discussions with the Slovak authorities on the 
economic policy measures to be attached to the implementation of the EU loan facility. 
During the discussions, however, insufficient progress was made, with the Slovak 
authorities showing little flexibility with respect to the measures emphasized by the 
61 
Commission, in particular the early phasing out of the 10% import surcharge, the 
adjustment of energy prices and the need to prevent the new regulations on PJJFs from 
weakening their role in corporate governance. The resumption of the discussions was 
complicated by the government's decisions on privatization announced in June 1995, 
including in particular the cancellation of the shares-for-vouchers privatization scheme, 
which was considered by the Commission to be an essential condition for the effective 
disbursement of the assistance. 
Meanwhile, and as noted above, Slovakia's macroeconomic and, in particular, balance of 
payments situation experienced a remarkable turnaround. In view of the strengthening of 
the external position, the Slovak government announced that they did not wish to draw on 
the remaining tranches of the IMF stand-by credit. In the event, Slovakia only made the 
first two purchases (totalling SDR 32.2 million) under this stand-by arrangement, which 
expired in March 1996. 
In this context, on 23 January 1996, the Commission approved a proposal for a Council 
decision repealing the 1994 decision granting further macro-financial assistance to 
Slovakia. This decision is expected to be adopted by the Council in 1996. 
Regarding the implementation of the complementary macro-financial assistance committed 
by other G-24 members, Japan released its US$ 60 million assistance in early May 1995, 
in the form of an Exim Bank co-financing of the World Bank's ERL. No disbursements by 
other donors had taken place at the time of writing of this report. 
62 
X. UKRAINE 
1. Introduction 
The on-going struggle between reformers and conservative forces, continues to 
characterize economic policy and slows down progress in economic reform in Ukraine. In 
the second half of 1995 several slippages in policy implementation led to a weakening of 
the exchange rate and to the budget and inflation targets being missed. Therefore, the IMF 
suspended the execution of its Stand-By Arrangement (SB A) in December (and eventually 
let it expire in early 1996). Nevertheless, progress in stabilisation has been considerable in 
1995: the speed of decline in the economy was halved from -23 % in 1994 to -11,8%, 
inflation and the general government deficit were brought down, and the trade balance 
improved. Structural reforms were started in the end of 1994 and have achieved some 
results, mainfy in price and trade liberalisation and more recently in small-scale 
privatization. However, progress on large-scale privatization and restructuring has been 
slow and foreign direct investment is still negligible. As a consequence of erratic policy 
implementation and slow structural reform as well as severe weather conditions, it is 
expected that economic growth will only recover in 1997. 
2. Macroeconomic performance 
It took three years after the independence of the country before economic reforms were 
finally started in Ukraine in October 1994. After his election, President Kuchma 
introduced a programme of price, trade and exchange liberalisation, combined with 
reductions in subsidies and state intervention. A tighter fiscal policy was adopted, 
buttressed by a restrictive monetary policy. The programme was able to slow down the 
rapid economic deterioration. By mid-1995, monthly inflation was reduced to around 5%, 
the exchange rate of the karbovanets (Ukraine's temporary currency) stabilised, 
international reserves accumulated and a stabilisation of output seemed possible in the 
short-term. 
However, President Kuchma and Prime Minister Marchuk continued to be confronted 
with a conservative majority, in Parliament that managed to delay or even cancel some 
reform measures. Furthermore, during the summer of 1995, doubts arose over the 
commitment of the government to continue the transformation process. The government 
encouraged the commercial banks to increase their credits to insolvent enterprises, 
enterprise subsidies were increased and the budget continued to pay for accumulated gas 
debts of the enterprise sector. Monetary financing of the deficit was also higher than 
expected. Consequently, the karbovanets weakened again and the end-of-year budget and 
inflation targets were missed. Because structural reform was also lagging, the IMF 
decided in December 1995 to postpone a decision on the disbursement of the fourth 
tranche of the SB A. 
Although Ukraine was not able to observe the objectives of its stabilisation programme in 
winter 1995/96, progress in stabilisation has been considerable in 1995. The speed of 
dc cline in the economy was halved from -23% in 1994 to -11,8% in 1995 with even some 
month-on-month improvements before August. It is now expected that GDP will continue 
to fall in 1996 before stabilising in 1997 at an output level of around 40% of the pre-
transition level. However, because of the growing importance of the informal sector, 
official figures might underestimate the actual progress in economic activity. Yearly 
inflation was brought down from 401% in December 1994 to 182% one year later. 
63 
Further improvement is expected for 1996. Although different data sources differ widely 
on sign and level of the trade balance, they all show an improvement in 1995, as a 
consequence of growing exports, mainly to non-FSU countries and stagnating imports. 
Registered unemployment in Ukraine remains extremely low at about one half percent of 
the labour force. Actual unemployment, however, may be considerably higher since 
hidden unemployment in large state firms and administration remains high and many 
enterprises in difficulty maintain their personnel but send them on unpaid leave. Wages 
generally increased quite rapidly in 1995. Real wages increased by 12% and the average 
wage increase in the government sector in the first half of 1995 was about 50% in real 
terms, bringing wages to the same levels as in the enterprise sector, thereby adding 
pressure on the budget and on inflation. 
The government budget for 1995 aimed at reducing the cash deficit from 8.6% of GDP in 
1994 to 3%. The actual outcome is more likely to have been around 4%, mainly due to an 
overrun in public expenditures. The overrun is even more important when it is taken into 
account that the government again accumulated some payment arrears on energy imports 
which are not visible in the deficit figure on a cash basis. 
3. Structural reforms 
Before 1994, Ukraine made little or no progress with structural reform. After his election, 
President Kuchma issued a decree, in November 1994, to initiate a voucher-based mass 
privatization programme and set a target of 8,000 (out of 18,000) medium and large 
enterprises to be privatised in 1995. However, due to organisational problems, opposition 
from the Parliament and local bureaucracies, too high reservation prices, the exclusion of 
foreign investors as well as a lack of confidence on the part of the general public, only 
2,700 enterprises were actually put up for sale and the majority of shares in only 1,500 of 
these enterprises have effectively been sold. This lack of progress is particularly 
preoccupying in the important agricultural sector. Continued disagreement between the 
President and Parliament on the way to proceed has prevented any significant progress. 
Until recently, progress with regard to small-scale privatization has also remained limited. 
The beneficial effects of new measures that were introduced in late 1994 only appeared in 
the third quarter of 1995. Consequently, an important number of small businesses was still 
to be privatised in 1996, although it was originally intended to end this operation by the 
end of 1995. 
Given the limited progress on privatization and the absence of foreign direct investment, 
enterprise restructuring continues to be weak. The old monopolistic structure of the 
economy is still widely present, mainly in heavy industries and in the chemical and 
pharmaceutical sectors. Because directed bank credits and important subsidy flows persist, 
the budget constraint for most enterprises remains soft. Furthermore, inter-enterprise 
arrears are accumulating rapidly and although a bankruptcy legislation exists, its 
implementation is ineffective. 
4. Implementation of macro-financial assistance 
The EU loan of ECU 85 million decided on 22 December 1994 (94/940/EC) was to be 
disbursed in a single tranche conditional upon an IMF stand-by arrangement, a rapid 
implementation of the EU/G-7 Nuclear Safety Action Plan for Ukraine and progress with 
structural reform. After significant delays oh the part of Ukraine, it was finally disbuised 
in December 1995. 
64 
In view of Ukraine's urgent financial needs and against the background of further efforts 
being made by the Ukrainian authorities to pursue with economic reform, the Council 
decided on 23 October 199515 to provide Ukraine with further Community macro-
financial assistance in the form of a second loan of up to ECU 200 million that would 
complement financial assistance from the international financial institutions and other 
bilateral donors. 
15 Council Decision 95/442/EC 



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