COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 13.01.1998 
COM(98) 3 final 
REPORT FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
ON THE IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE 
TO THIRD COUNTRIES IN 1996 
OVERVIEW 1 
1. Introduction 1 
2. Macro-financial assistance in 1996 2 
3. Trends and tendencies in macro-financial assistance 3 
4. Burden-sharing 4 
I.ALBANIA 24 
1. Introduction 24 
2. Macroeconomic performance 24 
3. Structural reform 25 
4. Implementation of macro-financial assistance 26 
II. ALGERIA 27 
1. Introduction 27 
2. Macro-economic performance 27 
3. Structural reforms 28 
4. Implementation of macro-financial assistance 29 
III. BELARUS 31 
1. Introduction 31 
2. Macroeconomic performance 31 
3. Structural reform 32 
4. Implementation of macro-financial assistance 33 
IV. BULGARIA 34 
1. Introduction 34 
2. Macroeconomic performance 34 
3. Structural reform 36 
4. Implementation of macro-financial assistance 36 
il 
V.ESTONIA 37 
1. Introduction 37 
2. Recent economic developments 37 
3. Implementation of macro-financial assistance 37 
VI. LATVIA 39 
1. Introduction 39 
2. Recent economic developments 39 
3. Implementation of macro-financial assistance 40 
VII. LITHUANIA 42 
1. Introduction 42 
2. Recent Economic Developments 42 
3. Implementation of macro-financial assistance 43 
VIII. MOLDOVA 44 
1. Introduction 44 
2. Macroeconomic performance 44 
3. Structural reform 45 
4. Implementation of macro-financial assistance 45 
IX. ROMANIA 47 
1. Introduction 47 
2. Macroeconomic performance 47 
3. Structural reform 48 
4. Implementation of macro-financial assistance 49 
X UKRAINE 50 
1. Introduction 50 
2. Macroeconomic performance 50 
3. Structural reform 51 
4. Implementation of macro-financial assistance 51 
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 the Central and East European countries (CEECs) embarked on the process of 
transition to a market economy they were faced with similar problems: substantial costs 
attached to the first steps of reform, additional external shocks (the Gulf War embargo, 
the collapse of 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 these countries to complement 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 CEECs, the Commission should enlist other donors 
to contribute in a similar way to support the economic programmes that these countries 
were implementing in agreement with the IMF and the World Bank. 
A number of such support operations by the EU and the G-24 took place in 1990-1994 
covering most Central and East European countries eligible for 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 a soft loan to Israel in July 1991. In September of the same year a medium-
term loan was decided to help Algeria carry through the political and economic reforms 
under way. ' A further loan to Algeria was decided in late 1994.2 Operations for European 
Newly Independent States (NIS) were also approved in 1994, comprising loans for 
Moldova and Ukraine. 
In 1995, the focus of the Community's macro-financial assistance continued to shift away 
from the Central and East European group, which, as a result of a generally positive 
economic performance, had less and less need to rely on external financial support from 
official sources. Instead, an increasing part of Community loans were directed towards the 
NIS and the Mediterranean region. While further amounts were disbursed to Albania, 
Rorhania and Lithuania, these were outweighed by disbursements of a second tranche to 
See: Report on the implementation of macro-financial assistance to third 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. 
Moldova and of new loans to Belarus and Ukraine. In addition the first tranche of a 
second macro-financial loan to Algeria was disbursed.3 
The Community's macro-financial assistance to all third countries is governed by a set of 
principles which were drawn up on the initiative of the European Commission and agreed 
among the G-24 to serve as guidelines for the implementation of EU/G-24 macro-financial 
assistance. These principles, which were subsequently endorsed by the EU Council of 
Ministers of Finance, underline the exceptional character of this assistance, its 
complementarity to financing from the IFIs and its macro-economic conditionally. 
2. Macro-financial assistance in 1996 
The shift of emphasis towards the NIS and away from the CEECs which was evident in 
1994 and 1995 was maintained in 1996. There was only one new commitment, which was 
a loan of ECU 15 million to Moldova. This was disbursed in December, after the IMF 
Board had approved a new three-year economic reform programme and the Commission 
services had confirmed that the conditions attached to the loan were met. The other NIS 
country to which a loan was disbursed in 1996 was Ukraine, which received a first tranche 
of ECU 100 million from a ECU 200 million loan that had been agreed by the Council in 
October 1995 to complement assistance from the IFIs and other bilateral donors aimed at 
supporting the efforts of the Ukrainian authorities to pursue economic reform. The 
situation in Belarus was marked by a lack of progress in some key aspects of structural 
reform and the reversal of some measures of liberalization. Consequently, the second 
tranche of the ECU 55 million loan approved in 1995 was not disbursed. At the end of the 
year consideration was being given to providing exceptional financial assistance to 
Armenia and Georgia and, when appropriate, to Tajikistan to enable them to carry out 
fundamental political and economic reforms in the context of IMF programmes. An 
essential pre-condition for such assistance will be full settlement of these countries' 
outstanding financial obligations towards the Community. 
The Commission, after consulting the Monetary Committ decided in early September 
1996 to disburse the second tranche (ECU 20 million) of a ECU 35 million grant to 
Albania, after the new government took measures to address the budgetary imbalances, 
which included the introduction of VAT, and on the basis of progress in implementing 
structural reforms stipulated in the Memorandum of Understanding. The second ECU 40 
million tranche of Bulgaria's loan of ECU 110 million approved in 1992 was at long last 
disbursed following the approval of a new IMF stand-by loan. In Lithuania improvements 
in the procedures adopted by the authorities for consulting and reporting to the 
Commission on the use being made of the first ECU 25 million instalment of the second 
ECU 50 million tranche of Community assistance led to the lifting of the freeze that had 
been imposed on the use of this assistance in 1995. 
i 
The smaller amounts disbursed in 1996 partly reflected the tendency for CEECs to have 
less need of external financing as their economies strengthened. Estonia not only did not 
draw on the second ECU 20 million tranche of its ECU 40 million loan, but sought to 
make early repayment of the first tranche. Elsewhere the reasons for the absence of 
3 See: Report on the implementation of macro-financial assistance to third countries, COM(96) 695 of 8 
January 1997. 
disbursements were less satisfactory. The loan of ECU 130 million to Slovakia decided in 
1994 was cancelled because of inadequate progress towards agreement between the 
Slovak authorities and the Commission on the economic policy conditions to be attached 
to it, and also because improved financial circumstances meant Slovakia had less need of 
this support. The second ECU 40 million tranche of the ECU 80 million loan to Latvia 
approved in 1992 was not released, despite the IMF's approval of a stand-by arrangement 
in May 1996, because of the Commission's serious reservations about the way in which 
on-lending of the proceeds of the first tranche was being managed. This assistance is in 
any case not necessary for balance-of-payments purposes. 
At the end of the year two requests for assistance were being actively examined. The new 
government elected in Romania in November asked for the Community's and G-24's 
macro-financial assistance to be reactivated in the context of an ambitious programme of 
macroeconomic stabilization and structural reforms supported by the IFIs. At about the 
same time, the Former Yugoslav Republic of Macedonia, in view of its difficult external 
situation, requested macro-financial assistance to complement support from the IMF and 
the World Bank for its three-year stabilization and reform programme. In the light of the 
country's urgent needs and substantial progress in transition to a market economy, the 
Commission initiated internal consultations on providing Community macro-financial 
assistance of up to ECU 40 million. In view of the acute economic crisis in Bulgaria, the 
Commission began to examine the possibility of further macro-financial assistance of up to 
ECU 250 million which would complement funding from the IFIs in support of an 
anticipated economic stabilization and structural reform programme. 
No disbursements of macro-financial assistance were made in the Mediterranean region in 
1996. Discussions took place between the Algerian authorities and the Commission 
services on disbursing the second tranche (up to ECU 100 million) of the 1994 macro-
financial loan, but agreement was not reached on the conditions for its release, notably the 
calendar for implementing a programme of privatization of large state enterprises. In 
December 1996, however, the Commission decided as part of the MED A programme to 
s A port Algeria's stn jral reform programme through a Structural Adjustment Facility 
of ECU 125 million. 
Community operations have continued to incorporate 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 that are 
tailored to specific country needs with the overall objective of stabilizing the financial 
situation and establishing 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 
Two related trends present in 1995 were again in evidence in 1996. Both the range of 
(potential) beneficiary countries and the range of needs widened. The spectrum of 
(potential) beneficiary countries now runs from Armenia, Georgia and Tajikistan, which 
have need of assistance for humanitarian reasons, through to Central and East European 
countries which have applied for membership of the European Union and on whose 
readiness for accession the Commission has prepared opinions. At the same time, the shift 
in the geographical focus of the Community's macro-financial assistance already observed 
in 1994 and 1995 extended into 1996. 
The Community's macro-financial assistance was originally intended to support macro-
economic stabilization and the balance of payments. Over the years the number of 
countries to which it was appropriate for the Community to extend such support 
expanded, as a growing number of countries neighbouring the Community committed 
themselves to rigorous programmes of economic reform. This led to a change in the 
geographic balance of assistance from the early years, when most beneficiary countries 
were in the immediate vicinity of the Community, to the present, when assistance is 
increasingly flowing to somewhat more distant countries. 
It also became clear that, while macro-financial assistance geared to the original objective 
of supporting macro-economic stabilization and the balance of payments was still 
necessary for some countries, in the case of others macro-financial assistance could more 
usefully be directed to supporting the government's programme of structural reform. This 
tendency emerged first in some Central and East European countries, where macro-
financial assistance for structural reform could be effectively combined with technical 
assistance from the Phare programme to strengthen the capacity of institutions that were 
essential to the success of the structural reform programmes. The complementarity of the 
different forms of Community assistance was enhanced by broadening the dialogue with 
each beneficiary country to encompass the totality of assistance to reform efforts. More 
recently, similar developments have occurred in the context of assistance to some NIS 
countries. A comparable evolution has taken place in the programmes supported by the 
IMF and the World Bank, and this has led to closer co-operation between the Commission 
and these institutions. 
For the CEECs the focus on structural reform will be further emphasised in the context of 
their preparation for accession to the EU. The European Council in Copenhagen in June 
1993 agreed that any associated country in Central and Eastern Europe that so desired 
should become a member state as soon as it was able to satisfy the requisite political and 
economic conditions. The process of drawing up opinions on whether the ten associated 
countries of Central and Eastern Europe satisfy these conditions began in 1996 and has 
since been completed. 
The associated countries in preparing for accession to the EU will need substantial 
investment in areas such as environmental protection, transport, energy, industrial 
restructuring, agricultural infrastructure and rural society. Policy-based financial support 
will also continue to be necessary to facilitate the acceleration of structural adjustment. 
Careful consideration will therefore have to be given to how the Union's various forms of 
assistance and instruments can be used most effectively to contribute to this effort. It will 
also be necessary to intensify co-operation with the IFIs so as to achieve as much synergy 
as possible with their lending in support of structural reform and to ensure consistency 
between EU conditionality related to accession and conditionality associated with the IFIs 
operations. 
4. Burden-sharing 
Since the inception of macro-financial assistance, the absolute amounts committed by the 
EU have fluctuated substantially (Tables 3 and 3.1), but as a proportion of total balance-
of-payments support, Community macro-financial assistance has showed a steady decline. 
Initially, an important feature of Community assistance was that very large sums of money 
were found to support the programmes of the Bretton Woods institutions. The 
Community played a key role, both as a major provider of these funds and from 1991 as 
the co-ordinator of bilateral assistance for the CEECs through the G-24. 
The IFIs, however, were progressively able to mobilize more resources: 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 Sector Adjustment loans - EFSAL). As a 
result, the share of the IFIs in the financing packages has risen substantially (Table 3). 
At the same time, contributions oy external creditors, both public and private, were 
mobilized in the form of debt-relief and debt-reduction operations (Algeria, Bulgaria, 
Ukraine), which accounted for a substantial share of balance-of-payments support in 
1991, 1994 and 1995. In 1996 debt relief (to Moldova) accounted for a smaller share of 
balance-of-payments support. 
The increase in the resources provided by the IFIs resulted in the lending of the EU and of 
other bilateral donors (excluding debt relief operations) declining sharply as a proportion 
of total commitments, from 54% and 25%, respectively, in 1990 to 7% and 4%, 
respectively, in 1996 (or 6% and 3%, respectively, of total commitments including debt 
relief operations).4 While the EU's share of total balance-of-payments support has 
declined, its share of bilateral balance-of-payments support has remained roughly constant 
on average at around 60 per cent throughout the period 1990-96 (Table 2). 
These statistics cover only the countries to which the EU has provided macro-financial assistance. 
Table 1: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES 
Status of effective disbursements as of December 1996 (in millions of ECU) 
Conntrv 
A. Macro-financial • 
Hungary I 
(structural adjustment tsistance to CEECi 
loan) 
Czech and Slovak Federal Republic 
(BOP loan) 
Hungary II 
(BOP loan) 
Bulgaria I 
(BOP loan) 
RouMnia I 
(BOP loan) 
Albaaial 
(BOP grant) 
Baltics 
(BOP loans) 
of which : 
Estonia 
Latvia 
Lithuania 
Romania II 
(BOP loan) 
Bulgarian 
(BOP loan) 
Romania III 
(BOP loan) 
Albania II 
(BOP grant) 
Slovakia 
(BOP loan) 
TOTAL A authorized 
870 
375 
180 
290 
375 
70 
220 
40 
80 
100 
80 
110 
125 
35 
130 
2860 Council 
Decision 
22 02 90 
25 0291 
240691 
24 06 91 
22 07 91 
28 09 92 
23 II 92 
27 11 92 
19 1092 
20 (>6 *J 
28 11 94 
22 12 94 Maiimom amount Pate of Pilburttti Amounts «id Pates Undisbursed 
of disbursements 
610 
180 
375 
Cancelled 
2315 350-Apr 1990 
260-Feb 1991 
185-Mar 1991 
190-Mar 1992 
100-Aug 1991 
80-Jan 1993 
150-Aug 1991 
140-Mar 1992 
190 -Jan 1992 
185-Apr 1992 
35-Dec 1992 
35-Aug 1993 
20 Mar 1993 20 
40 Mar 1993 40 
75 50-Jul 1993 25 
25-Aug 1995 
80 Feb 1993 
110 70-Dec 1994 
40-Aug 1996 
I5-Jun 1995 
20-Oct 1996 
B. Macro-financial assistance to other third countries 
Israel (1) 187.5 
(structural adjustment soft loan) 22.0791 187.5 
Algeria I 
(BOP loan) 23 09 91 400 250-Jan 1992 
150-Aug 1994 
Moldova I 
(BOP loan) 13 06 94 45 25-Dec 1994 
20-Auu 1995 
Algeria II 
(BOP loan) 200 221294 100 Nov 1995 
Ukraine I 
(BOP loan) 22 12 94 85 Dec 1995 
Belarus 
(BOP loan) 55 10 04 95 30 Dec 1995 
Ukraine II 
(BOP loan) 23 1095 100 50-Aug 1996 
50-Oct 1996 
Moldova II 
(BOP loan) 
TOTAL B 
TOTAL A+B 15 
1187.5 
4047.5 25 03 96 15 
962.5 
3277.5 Dec 1996 
225 
770 
(1) Assistance to Israël 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 96) 
Country 
(Identified 
gaps) 
Community 
EFTA* 
United States 
Japan 
Others 
Total ALBANIA 
(US $ 237 mi 
Commitments 
Mln 
uss 
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 lion) 
Disburs. 
Mln 
USS 
123.5 
10.1 
8.5 
142.1 %of 
disb. 
86.9 
7.1 
6.0 
100.0 BALTIC STATES 
(US $ 600 million) 
Commitments 
Mln 
USS 
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 
USS 
184.0 
67.9 
88.9 
340.8 %of 
disb. 
54.0 
19.9 
26.1 
too.o BULGARIA 
(USS 1130 million) 
Commitments 
Mln 
USS 
533.3 
129.5 
10.0 
150.0 
8.7 
831.5 %of 
gap 
47.2 
11.5 
0.9 
13.3 
0.8 
73.6 %of 
commit. 
64.1 
15.6 
1.2 
18.0 
1.0 
100.0 Disburs. 
Mln 
USS 
533.3 
98.5 
10.0 
100.0 
741.8 %of 
disb. 
71.9 
13.3 
1.3 
13.5 
100.0 
«ofwfaichA.S.SF | 11.7 | 4.9 | 6.7 | 10.1 | 7.1 | 8l| 13.5 | 15.5 | 67.9| Ï9^9~ HI 69.0 6.1 8.3 50.0 
Country 
(Identified 
gaps) 
Community 
EFTA* 
United States 
Japan 
Others 
Total CSFR 
(USS 1000 m 
Commitments 
Min 
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 Dion) 
Disburs. 
Mln 
USS 
500.0 
146.0 
150 
2000 
1.0 
862.0 %of 
disb. 
58.0 
16.9 
1.7 
23 2 
0.1 
100.0 HUNGARY (1) 
(US $ 500 mill 
Commitments 
Mln 
USS 
250.0 
95.0 
10.0 
150.0 
12.8 
517.8 %of 
gap 
50.0 
19.0 
2.0 
300 
2.6 
103.6 %of 
commit. 
48.3 
18.3 
1.9 
290 
2.5 
100.0 on) 
Disburs. 
Mln 
USS 
250.0 
95.0 
100 
125.0 
12.8 
492.8 %of 
disb. 
50.7 
193 
2.0 
254 
2.6 
100.0 ROMANIA 
(USS 1455 m 
Commitments 
Mln 
USS 
740.6 
162.2 
150.0 
22.0 
1074.8 %of 
gap 
50.9 
111 
10.3 
1.5 
73.9 %of 
commit. 
68.9 
15.1 
14.0 
2.0 
100.0 liion) 
Disburs. 
Mln 
USS 
660.7 
146.3 
100.0 
22.0 
929.0 %of 
disb. 
71.1 
15.7 
10.8 
2.4 
100.0 
|«ofwhich.A,S,SF | 90.0 | 9.0 | 10.1 | 90 0 | 10.4 j S0| 10.0 | 9 7 j 50| 10.1 | 87.TT 6.0 8.1 81.4 
Country 
(Identified 
gaps) 
Community 
EFTA* 
United States 
Japan 
Others 
Total j SLOVAKIA 
(USS 300 mil 
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 ion) 
Disburs. 
Mln 
USS 
60.0 
60.0 %of 
disb. 
100.0 
100.0 TOTAL 
(US S 5222 mil 
Commitments 
Mln 
USS 
2603.5 
697.3 
35.0 
846.3 
69.5 
4251.6 %of 
gap 
499 
13.4 
0.7 
16.2 
1.3 
81.4 %of 
commit. 
61.2 
16.4 
0.8 
19.9 
1.6 
100.0 ion) 
Disburs 
Mln 
USS 
2251.5 
563.8 
35.0 
682.4 
35.8 
3568.5 %of 
disb. 
63.1 
158 
1.0 
19.1 
1.0 
100.0 
|*ofwhich.A,S,SF | 16.4 [ 5.5 [ 6.7 | | \ 405.3 | 7.8 | 9.5 | 349.4 | 9.8 | 
(1) 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, 1990-1996 (1) 
(in percent of total commitments) 
Including debt relief 
IFFs 
IMF 
World Bank 
Bilaterals 
EU(2) 
Other bilaterals (3) 
of which 
USA 
Japan 
Debt relief 
Paris Club 
London Club 
Other (4) 1990 
21 
11 
10 
79 
54 
25 
10 1991 
50 
37 
13 
50 
20 
13 
0 
8 
18 
5 
13 1992 
69 
40 
29 
31 
19 
13 
5 1994 
27 
21 
6 
73 
6 
5 
j 
1 
2 
63 
32 
28 
2 1995 
33 
26 
7 
67 
6 
3 
3 
59 
59 1996 
79 
62 
17 
21 
6 
3 
3 
12 
12 
Excluding debt relief 
IFI's 
IMF 
World Bank 
Bilaterals 
EU(2) 
Other bilaterals (3) 
of which 
USA 
Japan 1990 
21 
11 
10 
79 
54 
25 
10 1991 
61 
45 
16 
39 
24 
15 
0 
9 1992 
69 
40 
29 
31 
19 
13 
5 1994 
71 
56 
15 
29 
17 
12 
2 
6 1995 
80 
63 
17 
20 
14 
6 
6 1996 
90 
70 
20 
10 
7 
4 
4 
(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, 
debt rescheduling in favour of Moldova by Russia in 1996. 
Table 3.1.: Balance of payments snpport to recipients of EU 
macro-financial assistance by contributor, 1990-1996 
(in millions of USS and in percent of total commitments and disbursements) 
Balance of payments support - 1990 
IFTs 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Germany 
Other bilaterals 
Total Total 
Commitments 
mio USS 
419 
219 
200 
1618 
1108 
200 
311 
2037 % 
21 
II 
10 
79 
54 
10 
15 
100 P'siMwrnems 
mio USS •/. 
375 23 
175 II 
200 12 
1288 77 
777 47 
200 12 
311 19 
1663 100 Hungary 1 
Commitments 
mio USS •/. 
419 21 
219 II 
200 10 
1618 79 
1108 54 
200 10 
311 15 
2037 100 Disbursements 
mio USS '/• 
375 23 
175 II 
200 12 
1288 77 
777 47 
200 12 
311 19 
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 USS % 
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 
514" 5T 
1088 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 
1 
2189 100 Disbursements 
mio USS % 
1302 60 
852 39 
450 21 
862 40 
500 23 
15 1 
200 9 
147 7 
2164 100 Aiusna 1 
Commitments 
mio USS % 
690 23 
390 13 
300 10 
2290 
540 IS 
300 10 
1450 49 
1450 49 
2980 100 Disbursements 
mio USS % 
443 19 
293 12 
150 6 
1938 81 
338 14 
150 6 
1450 61 
1450 61 
2381 100 
Hungary 
Commitments 
mio USS •'. 
2262 81 
2012 72 
250 9 
518 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 Bukaria 1 
CommiiTients 
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 
IIP 67 
400 24 
10 1 
58 4 
95 6 
554 33 
554 33 
1657 100 
Romania 1 
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. (ml) 
Balance »f payments support -1992 
IFI's 
IMF 
WB (policy based) 
Hlaierab 
EU 
USA 
Japan 
Other bilaterals 
Tttal 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Total Total 
Commitments 
mio USS •/. 
1564 69 
909 40 
655 29 
708 31 
423 19 
120 5 
165 7 
2272 100 Disbursements 
mio USS •/. 
1193 71 
768 46 
426 26 
476 29 
298 18 
79 5 
100 6 
1670 100 
Latvia 
Commitments 
mio USS % 
215 56 
170 44 
45 12 
169 44 
91 24 
3$ 9 
43 11 
384 100 Disbursements 
mio USS % 
196 68 
151 52 
45 16 
94 32 
46 16 
23 8 
25 9 
290 100 Albania 1 
Commitments 
mio USS % 
48 29 
28 17 
20 12 
115 71 
83 51 
20 12 
12 8 
162 100 Disbursements 
mio USS % 
28 23 
18 15 
10 8 
95 77 
83 67 
9 7 
4 3 
123 100 
Lithuania 
Commitments 
mio USS % 
245 53 
185 40 
60 13 
217 47 
114 25 
45 10 
58 13 
462 100 Disbursements 
mio USS % 
194 62 
149 48 
45 14 
120 38 
57 18 
34 II 
29 9 
314 100 Estonia 
Commitments 
mio USS '/. 
116 S7 
86 42 
30 15 
87 43 
46 22 
20 10 
22 II 
204 100 Pisblirsemerits 
mm USS % 
109 69 
83 53 
26 17 
48 31 
23 14 
13 8 
13 8 
IS8 100 
Romania II 
Commitments 
mio USS % 
940 89 
440 42 
500 47 
119 11 
90 8 
29 3 
1059 100 Disbursements 
mio USS % 
666 85 
366 47 
300 38 
119 15 
90 II 
29 4 
785 100 
Balance or payments support 1994 
IFI'i 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club 
Other 
Total 
IFI'i 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Pans 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 °o 
2772 21 
2072 16 
700 5 
10591 79 
560 4 
90 1 
185 1 
HI 1 
9645 72 
4920 37 
4380 33 
34< 3 
13363 100 
Moldova 1 
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 11 
Commitments 
mio USS '.', 
75 63 
60 50 
15 13 
45 37 
41 34 
4 3 
120 100 Disbursements 
mio USS •/. 
42 SO 
34 41 
8 9 
41 SO 
41 50 
83 100 
Romania III 
Cpmmirments 
mio USS % 
913 81 
713 63 
200 18 
218 19 
143 13 
50 4 
26 2 
1131 100 Disbursements 
mio USS % 
447 86 
247 48 
200 38 
73 14 
63 12 
10 2 
520 100 A|Ker,a II 
Commitments 
mio USS % 
1397 19 
1097 15 
300 4 
5920 81 
335 5 
150 2 
135 2 
5300 72 
1120 15 
4180 57 
7317 100 Disbursements 
mio USS % 
1182 17 
882 13 
300 4 
' 6 83 
-ul 3 
95 1 
70 1 
5300 77 
1120 16 
4180 61 
6848 100 
Slovak Reoublic 
Commitments 
mio USS % 
426 64 
346 52 
80 12 
242 36 
155 23 
60 9 
27 4 
668 100 Disbursements 
mio USS % 
308 84 
228 62 
80 22 
60 16 
60 16 
368 100 BMls*nall 
Commitments 
mio USS % 
646 13 
521 11 
125 3 
4214 87 
125 3 
50 1 
39 1 
4000 82 
3800 78 
200 4 
4860 100 Disbursements 
mio USS % 
195 5 
195 5 
4125 95 
125 3 
4000 93 
3800 88 
200 5 
4320 100 
Ukraine 
Commitments 
mio USS % 
465 47 
365 37 
100 10 
530 53 
100 10 
70 7 
15 2 
345 35 
345 35 
995 100 Disbursements 
mio USS % 
465 47 
365 37 
100 10 
520 53 
100 10 
70 7 
5 1 
345 35 
345 35 
985 100 
11 
Table 3.1 (com) 
Balance of payments support 1995 
IFI's 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club 
Other 
Total Iojaj 
Commitments 
mio USS 
1877 
1477 
400 
3885 
330 
150 
3405 
3405 
5762 % 
33 
26 
7 
67 
6 
3 
59 
59 
100 Pisbursem 
mio USS 
1770 
1370 
400 
3573 
168 
3405 
3405 
5343 ems 
•/• 
33 
26 
7 
67 
3 
64 
64 
100 Belarus 
Commitments 
mio USS % 
270 79 
270 79 
70 21 
70 21 
340 100 Disbursements 
mio USS % 
163 81 
163 81 
38 19 
38 19 
201 100 Ukraine II 
Commitments 
mio USS % 
1607 30 
1207 22 
400 7 
3815 70 
260 5 
150 3 
3405 63 
•« 
3405 63 
5422 100 Disbursements 
mio USS % 
1607 31 
1207 23 
400 8 
3535 69 
130 3 
3405 66 
3405 66 
5142 100 
Balance of payments support 1996 
IFTs 
IMF 
WB (policy based) 
Bilaterals 
EU 
USA 
Japan 
Other bilaterals 
Debt relief 
London Club 
Paris Club 
Other 
Total Total 
Commitments 
mio USS 
250 
195 
55 
67 
19 
10 
38 
38 
317 % 
79 
62 
17 
21 
6 
3 
12 
12 
100 Disbursements 
mio USS % 
32 33 
32 33 
67 67 
19 19 
10 10 
38 38 
38 38 
100 100 Moldova II 
Commitments 
mio USS •/• 
250 79 
195 62 
55 17 
67 21 
19 6 
10 3 
38 12 
38 12 
317 100 Disbursements 
mio USS % 
32 33 
32 33 
67 67 
19 19 
10 10 
38 38 
38 38 
100 100 
a) Disbursements are shown under the year of corresponding commitments 
There are no data for 1993 as no EU operation was decided that year 
12 
Table 4: Selected economic indicators 
1993 1994 1995 1996 
Programme (1) Estimates 
GDP at constant prices 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 9.6 
-2.2 
11.6 
-1.5 
-8.5 
16.0 
16.2 
-8.7 
1.5 
17.1 (Percent change) 
9.4 
-0.9 
-20.0 
1.8 
-1.8 
2.0 
1.0 
-31.0 
3.9 
-23.0 8.9 
3.9 
-7.0 ~ 
2.1 
4.3 
-0.8 
3.0 
-3.0 
7.1 
-12.0 4.2 
-
-
3.1 
2.0 
-
4.0 
4.0 
-8.0 8.2 
4.0 
2.6 
-10.9 
4.0 
2.8 
3.6 
-8.0 
4.1 
-10.0 
Consumer price (end year) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 30.9 
16.1 
1990.0 
63.8 
35.6 
35.0 
163.0 
837.0 
295.0 
10155.0 (Percent change) 
15.8 
38.6 
2220.0 
122.0 
41.7 
26.0 
72.2 
116.0 
61.7 
401.0 6.0 
21.9 
290.0 
32.9 
28.9 
23.0 
35.7 
24.0 
27.8 
182.0 15.0 
-
-
23.7 
16.0 
-
15.0 
19.0 
47.0 17.4 
15.1 
39.0 
310.8 
14.8 
13.0 
13.1 
26.5 
56.9 
39.7 
Fiscal balance 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 14.4 
-8.7 
-8.3 
10.9 
-0.7 
0.6 
-5.1 
-6.8 
-0.4 
10.1 (Percent of GDP) 
-12.4 
-4.4 
-1.7 
-5.8 
1.3 
-4.1 
-1.7 
-9.0 
-1.9 
-8.2 -10.4 
-1.4 
-3.2 
-5.7 
-1.2 
-4.4 
-1.8 
-5.5 
-2.6 
-5.0 0.3 
-
-
-1.4 
-1.8 
-
-3,4 
-2.2 
-3.0 -11.4 
3.0 
1.9 
-11.0 
-1.5 
-1.2 
-2.5 
-7.2 
-3.9 
-3.2 
13 
Table 4: Selected economic indicators (continued) 
1993 1994 1995 1996 
Programme (1) Estimates 
Current account 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine •29.7 
1.6 
-8.7 
12.8 
1.3 
6.7 
-6.2 
-9.3 
-4.7 
-5.9 (Percent of GDP) 
-14.3 
-4.4 
-11.4 
-2.1 
-7.1 
-4.6 
-2.1 
-9.2 
-1.7 
-6.0 -7.5 
-5.3 
-4.1 
-0.5 ^ 
-5.1 
-4.0 
-10.3 
-6.7 
-4.9 
-5.0 -4.7 
-4.3 
-
-6.9 
-4.4 
-
-6.8 
-3.2 
-3.8 -7.7 
2.8 
-9.0 
0.0 
-10.2 
-6.8 
-8.2 
-14.4 
-6.6 
-3.9 
Official foreign exchange reserves 
(end year) (Months of imports) 
Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 2.3 
2.3 
0.3 
2.0 
4.0 
5.6 
2.4 
1.5 
0.1 
0.2 3.2 
2.9 
0.3 
3.0 
3.2 
5.5 
3.1 
3.1 
1.1 
2.3 3.5 
2.1 
0.7 
2.8 
2.7 
4.8 
3.9 
4.0 
0.4 
3.7 -
2.5 
na 
-
2.7 
3.1 
-
3.4 
1.0 
1.2 3.2 
4.5 
na 
1.6 
2.4 
2.9 
2.4 
4.0 
0.6 
1.3 
(1) Programme targets as set in : June 96 for Algeria, September 1995 for Belarus, July 96 for Estonia, 
April 96 for Latvia, May 96 for Moldova, December 95 for Romania, May 96 for Ukraine. 
Sources: National authorities and IMF 
14 
1. Price liberalization 
Trade liberalization 
Exchange regime 
Foreign direct investment 
Monetary policy 
Public finances 
Privatization and enterprise 
restructuring 
Financial sector reform ALBANIA 
Prices mostly market-determined, with the exception of 
medicines and some publicly provided goods and services 
(health care, urban transport, rail, energy and water). 
No quantitative restrictions on imports. Export restrictions 
limited to scrap metal and unprocessed wood. Removal of 
tariff exemptions, new classification, new tariff rates approved 
in May 1995. Average tariff rate about 12%. Lower tariffs for 
some capital goods. Request for accession to WTO still at 
early stage. 
Since July 1992 free float within a unified exchange market. 
Exchange system largely free of restrictions on current account 
transactions, including profit repatriation. Controls remain on 
some capital transactions 
Liberal legislation. Sale of land to foreigners permitted, but 
owing to delays in land registration process no sale of 
agricultural land. Economic free zones set up. 
Bank-by-bank credit ceilings. Banks free to determine lending 
rates, but central bank sets minimum deposit rates to ensure 
that real interest rates remain positive. Treasury bill auctions 
(3. 6. 12 months). 
VAT introduced in July 1996. Budgetary revenue estimated at 
19% of GDP in 1996; expenditure estimated at 29.4% of GDP. 
96% of total arable land privatized. Distribution of temporary 
titles nearly completed. Small privatization in trade and 
services completed. Substantial progress in privatization of 
small and medium-sized industrial enterprises. Privatization of 
large state-owned enterprises slower. Strategic enterprises 
offered for sale to foreign investors. Voucher-based mass 
privatization programme launched in mid-1995 aimed at 
privatizing 400 medium-sized or large enterprises by end-1998. 
Only 97 enterprises sold by July 1996 because of difficulties in 
implementation (including vouchers issued at too high a 
nominal value). Stock exchange set up in March 1996; trading 
so far limited to Treasury bills and privatization vouchers. 
Two-tier banking system dominated by three large inefficient 
state-owned banks. Bad loans account for more than one-third 
of all credit. With a view to privatizing two state-owned banks, 
in December 1996 the government transferred 28 of their 
branches to the third one. 
Inefficient banking system caused informal financial market to 
expand. Several pyramid schemes, offering very high interest 
rates, collapsed late 1996. 
15 
1. Price liberalization 
Trade liberalization 
Exchange regime 
Foreign direct investment 
Monetary policy 
Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform ALGERIA 
Price liberalization almost completed with abolition of 
generalized food subsidies, including the most sensitive 
products (powdered milk, semolina, and regular flour). 
Controls remain on profit margins and prices of medicine and 
energy products, though prices for gas and electricity gradually 
adjusted in 1996 with a view to covering economic cost by 
end-1997. Competition Law adopted in 1995 institutionalized 
principle of free pricing, provided safeguards against 
monopolistic practices and ©bliged all suppliers to publish 
prices. 
Reforms initiated in 1994 were further strengthened. At end-
1996, no import restrictions (except for goods permanently 
banned for social and religious reasons). Maximum import 
tariff lowered from 60% to 50% in January 1996. 
Some restrictions on availability of foreign exchange for some 
current invisible payments and for remittances by non­
residents. Government made clear its intention to introduce full 
current account convertibility by end-1997. Managed float 
regime further enhanced following establishment of fully 
fledged interbank foreign exchange market in December 1995. 
Liberal foreign investment regime, including banking sector, 
but apart from hydrocarbon sector, no significant foreign 
investments have taken place owing to the security situation. 
Deregulation of interest rates, including elimination of cap on 
banks' spreads, in December 1995, together with deceleration 
of inflation, allowed positive real interest rates to emerge from 
beginning of 1996. Use of indirect instruments of monetary 
control further strengthened with a view to facilitating 
development of open-market operations by central bank. 
Continued strong fiscal management, including wage 
containment and tight policies on transfers and subsidies. 
Privatization Law enacted in 1996. First 
privatization/liquidation programme covering 274 small 
enterprises launched. Implementation constrained by need to 
restructure loss-making companies, strong social resistance 
and some technical and legal delays. Law allowing sale of all 
state-owned agricultural land adopted in 1996. 
Public enterprise restructuring made further progress, in 
particular for the 23 largest loss-making enterprises. All public 
enterprises subject to hard budget constraints. 
Commercial banks almost exclusively s'ate-owned. In 1996, 
authorities launched overhaul of commercial banks' practices 
aimed at establishing greater autonomy in credit allocation and 
implementing new prudential regulations. As a result, all banks 
improved their capital/risk weighted ratio. 
16 
1. Price liberalization 
Trade liberalization 
Exchange regime 
Foreign direct investment 
Monetary policy 
6. Public finances 
7. Privatization and enterprise 
restructuring 
8. Financial sector reform BELARUS 
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 delayed 
to mid-1997. Price ceilings administered by local authorities 
introduced for a number of products (bread, dairy products, 
baby food, etc.) in mid-1996. Central authorities (directly) 
control the price of alcohol; profit margins for agriculture are 
regulated. 
Most import licences and export taxes abolished in 1994. 
Requirements for exporters to surrender foreign exchange 
reintroduced in early 1996, as well as a 10% tax on purchases 
of foreign exchange. 
Customs union with Russia entered into force early 1995. As a 
result, import taxes rose to level of Russian external tariff. 
Ratification of Partnership and Co-operation Agreement with 
the European Union on hold. 
Left Russian rouble zone in 1994. Only partial current account 
convertibility. Limitations on inter-bank currency operations. 
Free repatriation of capital and profits. Owing to political 
uncertainties, flows of foreign direct investment almost zero. 
Two-tier banking system. Central Bank determines monetary 
policy. Since second half of 1996, expansionary monetary 
policy. Weekly auctions for a large share (60%) of credits to 
the banking sector. Mounting inflationary pressures. 
Introduction of VAT in 1993. General government budget 
showed small (1.9%) deficit in 1996, but quasi-fiscal activities 
and arrears not properly accounted for. 
Slow and delayed privatization process. Only 10% of state 
assets privatized by end 1996. Mass privatization cancelled 
despite free distribution of vouchers to the population. 
A large share of the banking sector privately owned. Prudential 
regulations progressively tightened, minimum capital 
requirement recently increased to 2 million FCU. Banks remain 
burdened with bad loans, which weaken their financial 
position. 
17 
BULGARIA 
1. Price liberalization 
2. Trade liberalization 
3. Exchange regime 
4. Foreign direct investment 
5. Monetary policy 
6. Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform Systems of control or monitoring of approximately 50% of 
goods (weighted by their share in the consumer price index) 
remained in force up to end-1996. 
The regime is generally liberal, though an import surcharge at 
a rate of 5% was imposed in mid-1996. 
A unified and quasi-free floating exchange regime was 
introduced in 1991. This has been subject intermittently to 
substantial intervention by the central bank trying to defend the 
currency. 
Liberal foreign investment legislation was adopted in 1992, but 
was partly tightened in late 1996. 
Although nominally independent, the central bank has had on 
occasion to provide considerable volumes of direct credit to the 
budget. 
In common with the economy as a whole, public finances 
suffered a severe crisis in 1996. as the deficit reached over 
10% of GDP owing to the burden of interest payments on 
domestic and foreign debt. A large primary balance was, 
however, recorded. Tax collection is poor, and a reform of 
taxation is planned. 
A mass (voucher) privatization programme got under way in 
1996. Enterprise restructuring accelerated somewhat as the 
government initiated action to deal with the largest loss-making 
state enterprises. 
Approximately one-third of the banks were closed in 1996. The 
sector is now dominated by 5 state-owned banks. Banking 
supervision remains poor. 
18 
1. Price liberalization 
2. Trade liberalization 
3. Exchange regime 
4. Foreign direct investment 
5. Monetary policy 
Public finances 
7. Privatization and enterprise 
restructuring 
8. Financial sector reform ESTONIA 
Major price liberalization in 1991. At end of 1996, remaining 
price controls affected land and forestry, oil shale, medicines 
and utilities. Prices of a limited number of services (e.g., rents 
and public transport) controlled at municipal level. 
No import duties, except for a very limited number of products 
(furs, sea- and snow-scooters, and small vessels). Export 
quotas/licences for clay and gravel. Flat fee of EEK 200 
charged per import and export declaration. Free trade 
agreement with EU in force since 1 January 1995. Estonia has 
free trade agreements with the EFTA countries and with Latvia 
and Lithuania (since 1 April 1996). Estonia has applied for 
membership of the Central European Free Trade Agreement. 
Full current account convertibility. Kroon pegged to DM since 
1992 (1DM=8EEK) under a currency board regime, with a 
technical fluctuation limit of 3 per cent. 
Non-residents may freely repatriate profits and proceeds of 
liquidation of investment. 
Central Bank responsible for operating currency board and, in 
exceptional cases, for emergency lending to the banking 
system. Inflation fell in 1996 to 14.8% (year-end figure). 
Tax reform completed by early 1994. Indirect taxes (VAT in 
particular) represent more than 50% of government revenues. 
Excise taxes raised in 1996. General government expenditures 
represented 42% of GDP. 
Small-scale privatization virtually completed. At the end of 
1996, more than 450 of the 500 medium-sized and large 
companies had been privau~~d. 
Two-tier banking system. Consolidation of the banking sector 
continued: at the end of 1996, there were 15 commercial banks. 
The Tallinn stock exchange was successfully launched in 1996 
and volumes have increased steadily. 
19 
1. Price liberalization 
2. Trade liberalization 
3. Exchange regime 
4. Foreign direct investment 
5. Monetary policy 
6. Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform LATVIA 
By end-1992, price liberalization essentially completed, 
excluding utility prices and rents. In 1996, there was continued 
progress in bringing the remaining regulated prices into line 
with world prices. 
All trade restrictions abolished in 1992. Free trade agreements 
with EU, Baltic States and EFTA countries. Latvia has applied 
for WTO membership. 
Left rouble zone in July 1992. Full current account 
convertibility. Exchange rat&jof lats stabilized under managed 
floating system, informally pegged to the SDR. 
Non-residents may freely repatriate profits and proceeds of 
liquidation of investment. Substantial flows of foreign direct 
investment (US$ 171 million in 1996). 
Independent central bank. Credit policy conducted through 
indirect instruments. Interest rates fully liberalized. 
VAT introduced in February 1992. Flat rate income tax (25%) 
plus a 10% surcharge on annual income introduced in 1993. 
Tight control of public finances in 1996; budget deficit turned 
out lower than expected. 
Latvian Privatization Agency set up in February 1996 and 
procedures for privatization made more transparent and quick. 
Sell-off of Latvian energy supplier and shipping company well 
under way by end of 1996. 
Two-tier banking system set up in 1992. Banking crisis in 
1995 reduced number of banks to 33, of which only 16 can 
accept household deposits. 75% of banking sector in private 
hands, of which 39% in foreign ownership. Capital of state-
owned banks strengthened in preparation for privatization. 
Stock exchange started to operate in July 1995. 
21 
MOLDOVA 
1. Price liberalization 
2. Trade liberalization 
3. Exchange regime 
4. Foreign direct investmenl Prices of goods and services fully liberalized with some 
exceptions (mainly energy products). 
All export quotas removed. Maximum import tariff of 20%, 
with a few exceptions. 
New currency introduced in November 1993. Managed float, 
with slow nominal depreciation against USD. Daily foreign 
exchange auctions at the Chisinau Inter-bank Foreign Currency 
Exchange. Current account convertibility. 
Liberal regime: free repatriation of profits and proceeds of 
liquidation of investments within three months of closure. 
Agency for Foreign Investment Promotion established in 
January 1995. Partnership and co-operation agreement with 
EU signed in November 1994. 
Relies on credit ceilings. Policy geared to further reduction of 
inflation, enforced financial discipline and enhanced central 
bank independence. 
VAT introduced in 1992. Tax administration improved. 
Privatization receipts far below expectations, because of a lack 
of domestic capital. On expenditure side, overruns resulted 
from higher-than-programmed social spending and from net 
lending by the government, which assumed guaranteed loans to 
enterprises in default. 
Privatization and enterprise 2200 enterprises, representing about 70% of the economy, 
restructuring privatized through the voucher programme. Mass privatization 
process concluded in October 1996. Privatization for cash not 
successful, because of a lack of domestic capital. Monetary policy 
Public finances 
8. Financial sector reform Two-tier banking system. National Bank responsible for 
monetary policy and bank supervision. Regulation imposing 
provisions for bad loans approved in 1995. From 1 January 
1996, banks with reserve level below Mdl 4 million (about 
US$ 900,000) forced to close or to merge with a larger bank. 
22 
ROMANIA 
1. Price liberalization 
Trade liberalization 
Exchange regime 
4. Foreign direct investment 
5. Monetary policy 
Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform Phased programme of price liberalization introduced at the end 
of 1990. In 1993, most consumer subsidies eliminated and the 
number of consumer goods under direct price control greatly 
reduced. 
Liberalization of foreign trade regime largely completed by the 
end of 1992. though in 1995, around half of Romania's imports 
were subject to special arrangements. Substantial trade 
restrictions were introduced in 1996 in an attempt to curb 
rising trade deficit. 
Almost full current account convertibility. Remaining 
restrictions concern maximum amounts that residents may take 
out of the country. In early 1996, significant controls imposed 
on enterprises* and banks' foreign exchange operations; 
number of banks licensed to operate on foreign exchange 
market restricted to four. 
FDI and portfolio investment regulated by law. FDI inflows 
dropped in 1996 and are small for the size of the country 
National Bank is independent, though in 1996 it contributed to 
budget deficit financing and extended directed credits to state-
owned enterprises and agricultural sector. 
Basic tax reform completed. VAT and wage tax main sources 
of government revenue. Budget deficit soared in 1996, because 
of increase in subsidies. 
Little progress on restructuring of inefficient and large energy-
intensive enterprises, in particular because of overvaluation of 
exchange rate and low energy prices. By October 57% of small 
enterprises privatized, but privatization of large and medium-
sized enterprises progressed slowly. 
Two large private banks collapsed in 1996. Limited deposit 
insurance scheme introduced in August 1996. In 1996, 
secondary OTC market (RASDAQ) launched successfully. 
23 
UKRAINE 
1. Price liberalization 
Trade liberalization 
Foreign exchange regime 
Foreign direct investment 
Monetary policy 
Public finances 
Privatization and enterprise 
restructuring 
8. Financial sector reform Limits set by local governments on profit margins for bread 
and oil products abolished in May 1996. Most goods no longer 
subject to price declaration (only energy and transport prices 
have to be declared). Increases for households in prices of coal, 
electricity, gas and transport, but still below full cost recovery. 
Also, increases in rents. 
System of state orders abolished, except for grain for 
budgetary reasons. Budget allocations for state procurement of 
agricultural products limited to needs of budgetary 
organizations and based on market-deterred prices. 
Import regime free of quantitative restrictions, with few 
exceptions, which are primarily for health and safety reasons. 
Maximum import tariff 30%. No export quotas and licences 
(except for hides and skins). Partnership and Cooperation 
Agreement with EU signed June 1994. 
Exchange rate determined at interbank auction market. 
Tax relief granted to some foreign direct investments 
constituting at least 20% of an enterprise's charter capital. This 
relief was granted by a 1993 decree and provided for 
exemption from income and profit tax for 5 years. 
Central bank credit to commercial banks allocated mostly 
through the Lombard facility, and to a lesser extent through 
auction. Directed credits no longer 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% of GDP in 1992 to 
some 40% in 1996. Ratio revenue/GDP: 37% in 1996. 
Mass voucher privatization programme launched at beginning 
of 1995. By end-1996, about 80% of small enterprises and 
50% of medium-sized and large enterprises had been 
privatized. Coal sector reform programme implemented with 
the help of the World Bank. 
Measures to strengthen supervision and regulation of the 
banking sector implemented. 
24 
I. ALBANIA 
1. Introduction 
Albania's macroeconomic and structural adjustment efforts were initiated in 1992 against 
a backdrop of severe economic, social and administrative deficiencies. The country made 
considerable progress towards macroeconomic stabilization, supported by an SDR 20 
million stand-by arrangement from the IMF, complementary assistance from the EC in the 
form of an ECU 70 million grant5 and bilateral assistance from G-24 members. 
Following the IMF's decision to back Albania's medium-term programme of structural 
reforms with a SDR 42.4 million Enhanced Structural Adjustment Facility for the period 
from mid-1993 to mid-1996, the Council of the European Union decided in November 
1994 to grant the country renewed macro-financial assistance up to a maximum amount of 
ECU 35 million6. 
Performance from 1993 until mid-1995 was satisfactory: yearly GDP growth averaged 
9%, tight budgetary and monetary policies were implemented, external imbalances were 
reduced, foreign reserves were built up to the equivalent of over 3 months' imports and 
structural reforms progressed. Subsequently, however, the pace of reform slowed down 
and important budgetary policy slippages appeared, which were only partially corrected 
after the May 1996 general elections. 
2. Macroeconomic performance 
In 1996, real GDP grew by 8.2 %, continuing the positive performance of the three 
previous years. Agriculture, which accounts for over half of GDP, grew 4.5%, down from 
5.8% in 1995. For the second year in a row since the beginning of the transition process, 
industrial output increased slightly, by 0.8%. Production in state-owned industries 
continued to fall, while output in the newly established private enterprises in the textiles 
and clothing sector grew. According to official Albanian figures, unemployment in 1996 
was 12.1%, down from 13% in 1995. 
Fiscal policy slackened in 1996, mainly because of the pre-electoral measures enacted in 
the first months of the year. In particular, the agricultural land tax was suspended, tax 
collection was less vigorously enforced and the introduction of the VAT to replace tfoe 
turnover tax was delayed. Moreover, public sector wages were increased by 20% in April. 
However, soon after the elections the new government took a series of corrective fiscal 
measures. On 1 July, the VAT was introduced and exemptions were limited to bread, 
kerosene and bottled gas. Price controls for some food staples (wheat, flour and bread) 
were removed. In October, in an additional effort to control the budget deficit, the 
government froze spending on new investment projects. The reduction of expenditure 
from the equivalent of 30.8% of GDP in 1995 to 29.4 % in 1996, was nevertheless 
insufficient to offset a shortfall in revenue of 19% of GDP in 1996, compared with 24% in 
1995, and the overall fiscal deficit for 1996 reached 11.4% of GDP. 
5 Council Decision of 28 September 1992 (92/482/EC). 
6 Council Decision of 28 November 1994 (94/773/EC). 
25 
The pressures exerted by the fiscal deficit and wage increases resulted in faster inflation, 
reversing a downward trend that had begun in 1993. Consumer price inflation was 17.4% 
in 1996, up from 6% in 1995. Broad money growth was 40% in 1996. 
Imports increased substantially in 1996, and the trade deficit rose to 25% of GDP, up 
from 19.6% of GDP in 1995. The deterioration of the trade balance was, however, offset 
by the inflow of workers' remittances, which grew during the second half of the year in 
response to the increasingly high returns offered in the informal financial sector. The 
current account deficit remained relatively stable at 7.7% of GDP (7.5% in 1995). Foreign 
exchange reserves grew to US$ 280 million (equivalent to 3.2 months' imports ). 
The exchange rate against the dollar had been stable since the autumn of 1992. During the 
six months leading up to the 1996 general elections, the lek depreciated by around 15% 
against major currencies, but during the second half of the year it recovered most of the 
ground it had lost. In general, the Bank of Albania refrained from intervening, except 
during brief episodes of high volatility. 
The most significant adverse development in the Albanian economy in 1996 was the 
increasing instability of the expanding informal financial sector. The sector started to 
develop from the very beginning of the transition process, spurred by the weakness of the 
banking system and the ensuing tight controls on bank credit. Acting like deposit-takers 
and operating de facto like pyramid schemes, the companies offered higher interest rates 
than those offered in the banking sector. Until the end of 1995, monthly interest rates 
offered by these institutions were in the range of 4-5 %. However, in 1996 new companies 
began offering monthly rates which in some cases exceeded 40%. As a result, the larger 
incumbents also increased their rates and at the end of the year they were offering monthly 
rates of 10%. 
Following warnings from the IMF in October 1996, the government started to voice 
doubts as to the soundness of the savings schemes. In November and December 1996 two 
pyramid schemes collapsed. Despite redistribution to investors of the frozen sums of the 
two collapsed schemes as partial compensation for losses, turmoil escalated in February 
1997 into a major political and security crisis. Several more schemes were shut down. All 
existing schemes have now suspended interest payments and some are reimbursing 
principal, albeit on a piecemeal basis. 
3. Structural reform 
Following considerable progress in 1994 and 1995, the pace of structural reform slowed 
down during 1996. Nevertheless some important measures were taken. 
Tax reform progressed thanks to the introduction of the VAT in July. However, the 
system still presents a number of weaknesses owing to a high number of exemptions. 
Moreover, the tax administration needs to be substantially improved. 
Price liberalization was virtually completed in 1996 and controls remained only on the 
prices of a small number of goods and services (health care, urban transport, rail fares, 
energy and water). Wheat and flour prices were decontrolled. The ceiling on the price of 
bread was removed (but special bread allowances were granted to government workers). 
Under the Mass Privatization Programme (MPP), the privatization of small and medium-
sized service and production enterprises was actively pursued and almost completed. 
26 
Some 30 larger enterprises were also sold. For the large enterprises (mostly mining 
companies and public utilities) the authorities decided to give priority to sales to strategic 
investors, reserving a minority for sale through the MPP. The liquidation of some twenty 
enterprises that had been transferred to the Enterprise Restructuring Agency (ERA) has 
also continued, albeit slowly. 
Some steps were taken to reform the banking system. In February 1996, the Parliament 
adopted two laws determining the role and responsibilities of the Bank of Albania, 
including its relations with the government regarding the financing of the budget deficit. 
Simultaneously, the law on the banking system was adopted, streamlining the licensing 
procedures and establishing the regulatory framework for banking activity. However, the 
regulations relating to the Bank of Albania and the Banking Law were not adequately 
enforced. Moreover, the regulatory framework for financial activity in Albania remains 
seriously inadequate. Supervisory regulations that accord with international standards 
have yet to be developed. 
In September 1996 the government announced a strategy to privatize Albania's three 
state-owned banks within three years. In December most of the branches of the Rural 
Commercial Bank and of the National Commercial Bank were transferred to the Savings 
Bank, which the government intends to privatize last. The Savings Bank was left free to 
close down or restructure the branches. 
4. Implementation of macro-financial assistance 
The grant of ECU 35 million decided by the Council in November 1994 was disbursed in 
two tranches. The first tranche (ECU 15 million) was disbursed in May 1995, following 
signature of the Memorandum of Understanding laying down the macroeconomic and 
structural conditions attached to the grant. In early September 1996 the Commission 
decided to disburse the second tranche (ECU 20 million), in view of the measures taken 
by the new Albanian government to address the budgetary imbalances, including the 
introduction of the VAT, and of the progress in implementing structural reforms 
mentioned in the Memorandum of Understanding. 
27 
O. ALGERIA 
1. Introduction 
In 1996, Algeria completed an important stage of the economic and structural reform 
programme that was launched in the early 1990s. The programme was aimed at 
transforming an administratively regulated economy into a market economy with a 
liberalized domestic price system and external trade and payments regimes. A strong track 
record of policy implementation and stabilization has been established, despite mounting 
difficulties in the political and security situation. 
Positive real economic growth was restored, inflation declined towards a single-digit rate, 
the current-account and fiscal balances turned into surpluses, and the external and 
domestic debts were reduced. This performance reflected both favourable exogenous 
developments, in particular in the hydrocarbon and agriculture sectors, and the continued 
steadfast implementation of important institutional reforms. During 1990-96, domestic 
prices were liberalized, together with the trade and payment systems; the restructuring of 
public enterprises was launched; a programme of privatization/liquidation of small public 
enterprises was implemented; the banking sector was deregulated; and a managed float 
exchange rate regime and an interbank foreign exchange market were introduced. On the 
social front, housing reforms were initiated and the social safety net was modernized. 
Algeria's economic and structural reform programme continued to receive strong financial 
support from the Bretton Woods institutions. Following two stand-by arrangements, in 
1991 and 1994, the IMF approved a three-year Extended Fund Facility (EFF) in May 
1995 for a total amount of SDR 1,169 million. Algeria has met all the quarterly 
performance criteria set under the EFF since its inception. In addition, in June 1996, the 
IMF approved a purchase under the Compensatory and Contingency Financing Facility on 
account of excess cereal import costs. The World Bank approved a Structural Adjustment 
Loan (SAL) of US$ 300 million in support of a private sector development programme in 
April 1996. The first tranche of US$ 150 million was disbursed in June 1996. Reforms of 
the . jcial safety net we.. also supported by a US$ 50 million loan. 
The Community also supported Algeria's reform process. The Council decided in 1991 to 
grant Algeria a first loan of ECU 400 million7, which was disbursed in 1992 (ECU 250 
million) and 1994 (ECU 150 million). In 1994, following a request for further macro-
financial assistance from the Algerian authorities, the Council adopted a second macro-
financial operation (up to ECU 200 million) to be disbursed in two tranches8. A first 
tranche (ECU 100 million) was released in November 1995. 
2. Macro-economic performance 
Thé recovery in output growth registered in 1995 was sustained in 1996, when real GDP 
rose by 4 per cent. The overall contraction of domestic demand was more than offset by 
the expansion of the export sector. Agriculture, the hydrocarbon sector, construction, and 
public works were the main engines of growth. By contrast, industrial production 
continued to decline, by about 4 per cent in real terms, reflecting the poor productivity 
7 Council Decision 91/510/EEC. 
8 Council Decision 94/938/EEC. 
28 
and tightened credit constraints in the large public enterprise sector. Despite the rebound 
in economic activity, the unemployment rate continued to increase in 1996 to reach 28.3 
per cent at end-year, as economic growth was not sufficient to generate enough 
employment opportunities. 
The pursuit of a tight monetary policy resulted in a further decline of the inflation rate 
(December-on-December), from 21.9 per cent in 1995 to 15.1 per cent in 1996. Since the 
central bank repurchase rate was reduced by 2 percentage points to 20%, real interest 
rates became positive. In addition, bank credits to the less productive sectors of the 
economy, such as the food importing agencies and some public enterprises, were curbed 
so as to make room for more profitable and productive investments. The inflation 
performance was also facilitated by a good harvest, a moderate increase in administered 
prices, and a small appreciation of the real effective exchange rate of the dinar. 
Higher international oil prices and strong fiscal management resulted in an exceptional 
fiscal performance in 1996. The overall fiscal balance reached a surplus of 3 per cent of 
GDP, a turnaround equivalent to 7.4 and 4.4 per cent of GDP compared to 1994 and 
1995, respectively. While non-hydrocarbon receipts remained unchanged as a proportion 
of GDP, hydrocarbon receipts increased by about 2 percentage points of GDP in 1996. 
On the expenditure side, wage containment and continued tight policies on transfers and 
subsidies allowed for a reduction in current expenditure (as a ratio to GDP) for the third 
consecutive year. As a result of sustained fiscal consolidation, the outstanding domestic 
debt was halved during the period 1993-96 to 22.2 per cent of GDP. 
Algeria's external position improved considerably in 1996, mainly as a result of the 
increase of the international crude oil price by US$ 2 per barrel (corresponding to a 23.4 
per cent increase in Algeria's crude oil export unit value). The current account balance 
swung from a deficit of US$ 2.2 billion in 1995 to a surplus of US$ 1.2 billion in 1996 
(2.8 per cent of GDP). Hydrocarbon exports, which represented more than 95 per cent of 
total Algerian exports, increased in value by about 30 per cent to US$ 12.6 billion. Total 
imports, at US$ 9.1 billion, declined by 10 per cent in the wake of the good harvest, the 
overall contraction of domestic demand, and the recession in the industrial sector. The 
capital account balance, though negative, improved by about 2.5 per cent of GDP, owing 
in part to a pick-up in foreign direct investment in the energy sector. In addition, Algeria 
continued to benefit from large exceptional financing in the form of public and commercial 
debt reschedulings. As a result, gross foreign exchange reserves doubled in 1996 to reach 
US$ 4.2 billion at end-year, equivalent to 4.5 months1 imports. Algeria's outstanding 
external debt declined slightly to 74.2 per cent of GDP at end-1996. 
3. Structural reforms 
In 1996, the process of liberalizing the economy and establishing market mechanisms was 
further consolidated, except for the restructuring and privatization of large public 
enterprises, where the social consensus needed to underpin the reforms was more difficult 
to sustain in view of rising unemployment and labour unrest. 
Domestic price liberalization was almost completed with the abolition of the generalized 
food subsidies, including those on the most sensitive products, such as powdered milk, 
semolina, and regular flour. The only remaining controls on profit margins and prices 
applied to medicine and energy products. Prices for gas and electricity were gradually 
adjusted in 1996 with a view to covering economic cost by end-1997. The maximum 
29 
import tariff was lowered from 60 per cent to 50 per cent in early 1996. As of end-1996, 
Algeria's trade system was free of import restrictions (except for a short list of goods 
permanently banned for social and religious reasons). Some restrictions remained on 
invisible current account transactions. 
Following the adoption of the Privatization Law, a first privatization/liquidation 
programme covering 274 enterprises, units of enterprises, and activities in small-scale 
industry, commerce, services, construction, and transport was launched in April 1996. 
However, effective transfers to the private sector or liquidation were constrained by the 
need to restructure loss-making companies, strong social resistance to the inevitable 
redundancies and some technical and legal delays, as well as the need to ensure 
transparency. An amendment to the Privatization Law was prepared in late 1996 in order 
to increase flexibility in privatization procedures, including equity participation by 
employees, auctions and mass privatization, with a view to launching, in 1997, a second 
programme of privatization/liquidation involving some larger public enterprises in the 
manufacturing sector. In addition, a draft law allowing the sale of all state-owned 
agricultural land was adopted in 1996. 
The restructuring of the large public enterprises made some progress, in particular for the 
23 largest loss-making companies which had not been granted legal and financial 
autonomy, and thus remained protected against bankruptcy. By end-1996, in the 
framework of the World Bank's Enterprise and Financial Structural Adjustment Loan 
approved in 1991, one enterprise had been liquidated and the other 22 had been granted 
autonomy and were required to meet performance contracts relating to restructuring 
measures. All public enterprises had been made subject to hard budget constraints. 
In conjunction with the restructuring of public enterprises, an overhaul of commercial 
banks' practices was implemented with the aim of introducing greater autonomy in credit 
allocation and applying new prudential regulations on portfolio concentration and loan 
classification and provisioning. As a result, all banks improved their capital/risk weighted 
ratio, which was expected to reach the BIS standard of 8 per cent by 1999. Other banking 
reforms included a further move towards indirect monetary controls and the establishment 
of a fully fledged interbank foreign exchange market. 
4. Implementation of macro-financial assistance 
In 1996, discussions took place between the Algerian authorities and the Commission 
services on the appropriateness of and conditions for the disbursement of the second 
tranche of the 1994 macro-financial loan (up to ECU 100 million). However, agreement 
was not reached on the conditions attached to its release, in particular with respect to the 
calendar for the implementation of a programme of privatization of large public 
enterprises. Moreover, Algeria's residual financing gap vanished in 1996 as a result of the 
strong current account performance. In December 1996, the Commission decided, as part 
of the MED A programme, and after consulting the Member States9, to support Algeria's 
structural reform programme through a Structural Adjustment Facility (SAP) for an 
amount of ECU 125 million to be disbursed in two tranches of ECU 60 million and ECU 
65 million. This grant-based assistance, which is intended to complement the World 
Bank's SAL, will be disbursed on condition that specific reforms in the area of 
In accordance with Council Regulation N° 1488/96. 
30 
international trade, housing, agriculture, privatization of small enterprises, and the social 
safety net are implemented. 
31 
m. BELARUS 
1. Introduction 
Economic and political developments in Belarus were a matter of grave concern in 1996. 
The moderate progress made towards stabilization in the past faltered: inflation 
accelerated substantially in the last quarter, and the external sector was particularly fragile. 
The growth officially recorded in 1996 appears to be mostly the result of state orders, 
which were financed by cheap credit from the banking system, and led to a major surge of 
stocks. State interference in the economy intensified, progress with structural reforms was 
minimal, and privatization was halted. 
In 1996 Belarus failed to meet the basic requirements for transition to a market economy, 
including: a well-defined and guaranteed system of property rights; and legal and 
administrative institutions to ensure that the rule of law is enforced in a transparent and 
coherent way. Furthermore, the political will was lacking to make concerted efforts to 
proceed with the necessary democratic and economic reforms. 
Under those circumstances, the international financial institutions interrupted all major 
programmes of financial assistance. Since 1993, multilateral donors had assisted and 
encouraged the reform process in Belarus. The IMF had intervened with two tranches of 
a Systemic Transformation Facility in July 1993 and in 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 the government's economic 
programme for 1995/96. The IMF board eventually approved the stand-by arrangement 
on 12 September 1995. The Commission disbursed in December 1995 ECU 30 million of 
the ECU 55 million balance-of-payments assistance approved in support of the IMF 
stand-by arrangement. However, the IMF programme soon went off track. The second 
tranche of the Community loan has consequently not been disbursed, and there are no 
plans to reactivate it. 
The resumption of international financial assistance would require a major effort on the 
part of the authorities to accomplish an effective liberalization of the economy, to 
accelerate structural reform, and to implement tight monetary and fiscal policies, so as to 
ensure that macroeconomic stabilization is sustained and the efforts made so far, entailing 
major social costs, are not wasted. Until those conditions are met, in line with the position 
of the Council10, the EU will encourage the international financial institutions to maintain 
a case-by-case approach to new lending proposals, observing strict economic 
conditionality. 
2. Macroeconomic performance 
The economic picture which emerges from the official statistics is quite mixed. GDP 
growth for 1996 is reported at 2.6% with respect to the previous year, and accelerating. 
The increase in GDP is driven by major increases in industrial production. However, 
economic growth appears to be mostly the result of state orders, which were financed by 
cheap credit from the banking system, and led to a major surge of stocks. A barter 
agreement with Russia allowed the use of the stocks accumulated during 1996 to be used 
in payment for gas arrears to RAO Gazprom. 
10 Council Conclusions of 24/2/97 and Council Declaration of 29/4/97. 
32 
Moreover, there were clear signs that the moderate progress made towards stabilization in 
1995 and in the first half of 1996 were in jeopardy, and serious threats to a low-
inflationary environment surfaced. After a period of relative stability, inflation accelerated 
substantially in the last quarter of 1996. 
The situation of the external sector deteriorated markedly in 1996. Imports surged as a 
result of the extremely overvalued exchange rate and caused a sharp deterioration of the 
current account. The deficit increased from $370 million in 1995 to an estimated $1,220 
million, i.e., about 9% of GDP, at the end of 1996. 
Economic policy in 1996 was erratic. Monetary policy, relatively restrictive in the first half 
of the year, suffered a severe blow in the second half. In April President Lukashenko 
placed the central bank under the authority of the president Father than the parliament. 
This shift in supervisory powers, together with the suspension of multilateral lending and 
supervision by the IMF, led to a relaxation of monetary policy, and money emission 
increased by 64% over the full year. This expansionary monetary policy was inconsistent 
with the de facto fixed exchange rate regime, as became very clear in the second half of 
1996, when pressures increased for a sizeable devaluation of the exchange rate of the 
rubel. 
Fiscal policy, at least on paper, remained more restrictive. Officially, the state budget 
recorded a modest deficit for 1996, equal to 1.9% of GDP. However, this figure does not 
take fully into account the rapid build-up of arrears, estimated at 1% of GDP; the 
existence of quasi-fiscal activities; and extra-budgetary funds. Independent estimates put 
the deficit for 1996 at about 4% of GDP. Furthermore, the way in which the deficit was 
financed had major negative consequences for the financial stability of the country. In the 
second half of 1996, the government resorted increasingly to credits issued by the central 
bank. 
Exchange rate policy was arguably the clearest example of reversal in the process of 
liberalization. At the beginning of 1995 the authorities decided to peg the rubel against the 
US dollar with the aim of helping to control inflation. A sizeable real appreciation and 
growing expectations of a devaluation imposed a major drain on the reserves of the 
central bank. From November 1995, the authorities resorted to a succession of 
administrative controls, which included the prohibition of inter-bank trading and major 
restrictions on the purchase of foreign currency. In April 1996 the Inter-bank Currency 
Exchange was nationalized and put under the direct control of the central bank. In the 
mean time, the fixed rate regime was replaced by a currency corridor. The corridor 
sharply overvalued the rubel, which regularly traded at a 30-50% discount on parallel 
markets. This prompted the authorities to introduce further administrative controls, 
including a 10% tax on purchases of foreign exchange introduced in January 1996 and a 
requirement that exporters surrender 100% of their foreign exchange earnings. Those 
measures, which were subject to frequent changes and arbitrarily applied, led de facto to 
the establishment of a multiple exchange regime. 
3. Structural reform 
The Belarus economy remained unreformed in many areas, and the state continued to play 
a major role in the production and distribution of goods. Indeed, the authorities' response 
to growing financial instability was to increase the degree of state interference in the 
economy. 
33 
Liberalization suffered some reversal, both in the case of the exchange rate, and in the 
case of prices. Most prices were liberalized as early as 1992, and the process of price 
liberalization was mostly completed at the beginning of 1995. The central authorities 
continued to control directly the price of alcohol, while administered prices were set for 
transport, energy and communications. Profit margins for agriculture were regulated. On 
30 August, 1996 a presidential decree reintroduced direct price ceilings administered by 
the local authorities on a number of products (bread, dairy products, baby food, etc.). 
Weak commitment in the areas of privatization and enterprise restructuring virtually 
halted the structural reform process from 1995. Small-scale privatization has been 
relatively successful, the most noticeable progress being made in the housing sector and 
retail trade. Large-scale privatization faltered. During 1996 only 164 state-owned 
enterprises were transformed into joint-stock companies, compared with an original target 
of 549. A voucher scheme for mass privatization was cancelled, under the pretext of 
rooting out tax evasion and corruption. As a result only about 10% of Belarus' firms are 
in private hands. 
4. Implementation of macro-financial assistance 
On 10 April 1995 the Council approved11 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. After approval in September 1995 by the IMF board of a first stand-by 
arrangement with Belarus, the Commission services visited Belarus to assess the economic 
and financial situation and to set terms and conditions for the Community macro-financial 
assistance. 
In a Memorandum of Understanding attached to the Community loan, the Belarus 
authorities undertook significant commitments in several areas of structural reform (price 
liberalization, privatization, financial discipline of enterprises, and banking reform), as well 
as compliance with the performance criteria foreseen in the IMF stand-by arrangement. 
The Community contribution was set at ECU 55 million on the basis of external financial 
needs estimated at about $600 million over the period of the IMF stand-by arrangement. 
The amount of the first tranche of the Community loan was set at ECU 30 million. It was 
disbursed in December 1995. 
Given the lack of progress in several areas of structural reform and the reversal of some 
measures of liberalization, the second tranche has not been disbursed. Furthermore, all 
Community assistance to Belarus, except for a limited number of TACIS actions, has been 
suspended indefinitely. 
11 Council Decision 95/132/EC (O.J. L89 of 21 April 1995). 
34 
IV. BULGARIA 
1. Introduction 
In 1996, Bulgaria underwent a deep economic crisis. This was the consequence of 
inconsistent macroeconomic policies and poor progress in structural reform In the final 
days of the year the economic crisis had political repercussions, as the Prime Minister Mr. 
Videnov resigned. 
Bulgaria started its transition to a market economy later and under more unfavourable 
conditions than most central European countries. In March 1990, the country had 
declared a moratorium on the servicing of its foreign currency debt, effectively cutting 
itself off from international finance. Bulgaria had conducted a-particularly large share of 
its foreign trade with the CMEA, and so was especially badly hit by its break-up. A further 
external shock came with the disintegration of Yugoslavia and the subsequent embargo on 
Serbia-Montenegro, which cut Bulgaria's main overland transit route to western markets. 
Economic reforms Were launched in February 1991. Prices of most goods were 
liberalized, subsidies were sharply reduced, a unified floating exchange rate was 
introduced, a two-tier banking system was set up, and the state monopoly on foreign trade 
was abolished. Good progress was made also in establishing the legislative basis for a 
market economy: by mid-1992 much of the legal framework was in place. 
However, the momentum of structural reform was not maintained. Practical 
implementation did not match the progress made in establishing the legal base of a market 
economy. Moreover, there were a number of reversals: price controls were reintroduced 
on a wide range of goods. 
Clear political support for enterprise restructuring and privatization was lacking. State 
enterprises continued to face "soft budget constraints", and were thus able to build up 
large stocks of bad debts with state-owned banks. These banks were in turn able to obtain 
uncollateralized loans from the central bank. The central L^K'S ability to refuse such 
loans was constrained, first because it was not clear that it had the powers to close 
commercial banks; and second because it was unwilling to take the initiative of forcing 
widespread enterprise restructuring, which would have been the consequence of imposing 
restrictions on commercial banks' access to central bank credit. 
Excessively large budget deficits, financed in part directly by the central bank, contributed 
to persistent inflation, which the central bank tried to moderate by regular intervention in 
the foreign exchange market to stabilize the exchange rate. This inconsistency between 
fiscal, monetary and exchange rate policies caused exchange rate tensions whenever 
financial markets perceived that the central bank did not have adequate foreign reserves to 
continue supporting the currency. While the precise timing of these tensions, in Spring 
1994 and again from early 1996, has been influenced by Bulgaria's external obligations, 
they were an inevitable consequence of weaknesses in domestic policies. 
2. Macroeconomic performance 
Following the signature of a debt and debt-service reduction agreement (DDSR) with 
foreign commercial creditors in July 1994, Bulgaria enjoyed a period of relatively good 
economic performance. Modest growth in GDP was recorded in 1994 and 1995. By early 
1996 annual inflation had fallen to under 30%. The reduction in inflation was greatly 
35 
helped by the remarkable stability of the exchange rate during 1995. However, the 
combination of a stable exchange rate and inflation which, although slowing, remained 
high relative to Bulgaria's trade partners in western Europe, resulted in a strong real 
appreciation of the lev. In the absence of any substantive structural reforms this led to a 
gradual weakening of the country's balance of payments from mid-1995. 
Developments in 1996 clearly revealed that Bulgaria's economic recovery in 1994 and 
1995 had not been based on solid foundations. GDP fell by over 10%. December-on-
December inflation reached over 300%, reflecting a massive depreciation of the currency. 
The,exchange rate fell from approximately 70 leva per dollar at the start of the year to 
almost 500 leva per dollar by the end of 1996. 
As awareness spread in the early months of 1996 that the ceritral bank's foreign reserves 
were only barely adequate to meet foreign debt-service payments, the lev came under 
increasing pressure. For some months, the central bank sought to attenuate the 
depreciation by a combination of interest rate increases and direct intervention in the 
foreign exchange market. This merely delayed matters, and when the central bank 
eventually withdrew from the market, its foreign currency reserves substantially depleted, 
a massive depreciation got under way. This was temporarily halted in the autumn when 
the central bank raised its monthly interest rate to 25% (equivalent to an annual rate of 
over 1000%>), but the central bank's scope to use interest rates as a means to support the 
lev was severely restricted by the effect of high interest rates on the real economy. 
Because of the lack of structural reform, the banking system was burdened with a high 
proportion of bad debts from enterprises. Raising interest rates in these circumstances 
merely increased the share of loans which could not be repaid. This further weakened the 
banking system, the operations of some 15 banks were suspended during the year. The 
other main victim of high nominal interest rates was the state budget. Several years of 
unduly large budget deficits resulted in the state accumulating a large domestic debt. High 
interest rates raised the cost of servicing this debt. 
For these reasons, the central bank lowered interest rates after a few weeks, while 
maintaining them at a relatively high level of 15% per month. This level of interest rate, 
while inadequate to support the lev, still added to the burden of interest payments. 
Moreover, tax revenues fell as a result of the reduction in economic activity. During the 
second half of 1996, the government had to turn almost exclusively to the central bank to 
finance its rapidly widening budget deficit. The resultant increase in the money supply led 
to an acceleration both in the rate of currency depreciation and in inflation. 
These developments reduced the dollar value of wages and pensions to extremely low 
levels. Data on household income and expenditure for the first nine months of 1996 show 
how the fall in real income affected living standards. The share of income spent on food 
increased throughout the period, accounting for over half of household purchases in 
September. While people were spending relatively more on food, they were eating less: 
compared with the same period of 1995, in the third quarter of 1996 per capita 
consumption of meat, eggs, fruit and vegetables was some 15% lower; only milk and 
potatoes were eaten in quantities little changed compared with 1995. 
Government attempts to reverse the slide and stabilize the economy during the second half 
of 1996 were largely unsuccessful. A stand-by arrangement with the IMF ran off track 
soon after it had been approved. Attempts to agree a revised economic programme were 
36 
thwarted by a difficult political situation, following the victory of the opposition candidate 
in the presidential elections in November. The Prime Minister narrowly survived a 
subsequent no-confidence motion, but his position had been sufficiently weakened that he 
resigned, along with his government, at an extraordinary plenum of the Socialist Party in 
late December. 
The country was then effectively without a government at a critical time. No credible 
budget could be adopted for 1997. The opposition initiated a boycott of parliament, and 
called for immediate elections. There were daily protest marches in the capital Sofia and in 
other towns. The economic and social situation continued to deteriorate. Strikes and civil 
unrest spread, as trade unions called for weekly pay increases and for monthly 
negotiations on wage levels. The situation was resolved in February 1997 when early 
elections were called and an interim government was appointed. This had an immediately 
beneficial impact on both political and economic stability. 
3. Structural reform 
The authorities attempted to relaunch structural reform in mid-1996. This was at the 
prompting of the Bretton Woods institutions, which insisted on such measures as a 
condition of their renewed support to Bulgaria. The authorities sought assistance from the 
IMF and World Bank following unsuccessful attempts in the first months of 1996 to 
prevent a rapid exchange rate depreciation, which had eroded the central bank's foreign 
exchange reserves and raised the prospect that Bulgaria would default on its restructured 
foreign debt. A degree of success was achieved in liquidating large loss-making state 
enterprises, and in isolating from the banking system loss-making companies which could 
not be closed down (eg utilities). In addition, some 15 insolvent banks were closed. 
However, the authorities lacked sufficient credibility, and were unable to arrest the 
economic downturn. It was not until there was a change of government in the early 
months of 1997 that prospects of economic stabilization and recovery emerged. 
4. Implementation of macro-financial assistance 
A first macro-financial loan of some ECU 290 million to Bulgaria was decided by the 
Council in 1991,12 and disbursed in two instalments in 1991 and 1992. This loan is to be 
repaid in December 1997 and March 1998. 
A further ECU 110 million loan was approved in 1992,13 but because of repeated policy 
slippages, its disbursement was much delayed. A first instalment of ECU 70 million was 
disbursed in 1994 in the framework of the stand-by arrangement agreed with the IMF in 
May of that year. Disbursement of the outstanding ECU 40 million instalment did not take 
place until the second half of 1996, following the approval by the IMF of a new stand-by 
arrangement. 
Bulgaria is currently implementing economic reforms with the support of a new IMF 
stand-by arrangement. The possibility of additional Community macro-financial lending is 
presently being examined. 
12 Council Decision 91/311/EEC of 24 June 1991. 
13 Council Decision 92/511/EEC of 19 October 1992. 
37 
V. ESTONIA 
1. Introduction 
After the sharp contraction of output which followed independence, economic recovery 
started in the second half of 1993. Revised data on the evolution of real GDP suggest that 
Estonia experienced fairly rapid improvement thereafter. For 1994, the decline of GDP is 
now estimated to have been only 1.8% compared to the earlier figure of 2.7%. Growth for 
1995 was revised upwards from 2.9% to 4.3%, and for 1996 the first estimates show a 
4% real increase. For the last quarter of 1996, real growth of GDP is estimated to have 
been 7.3%, a clear acceleration of the trend observed in the second and third quarters. 
2. Recent economic developments 
At the same time, inflation has fallen sharply. In December 1996, year-on-year inflation 
was 14.8% while a year before the corresponding figure was 28.9%. The fall in inflation 
was accompanied by a decline in interest rates. The weighted average interest rates on 
kroon loans of more than one year fell from an average of 16.06% per annum in March 
1996, to 13.88% in December 1996. Moreover, these figures underestimate the fall in 
interest costs incurred by Estonian customers, since a growing share of loans were made 
in foreign currencies (DM and US$), for which interest rates are lower than for kroon 
loans. However, real interest rates became positive, as the decline in nominal interest rates 
was less rapid than the fall in inflation,. 
The general government deficit for 1996 reached 1.5% of GDP, higher than in 1995. 
However, controls on local government borrowings were introduced in 1996 and some 
taxes were raised. 
Restructuring of the economy progressed further in 1996. Privatization advanced rapidly, 
and by the end of 1996 practically all large enterprises had been sold, with the exception 
of those in the transport, telecommunication and energy sectors. The consolidation of the 
financial sector continued through an uninterrupted process of mergers. Estonian banks 
are now among the largest and strongest banks in the Baltic states. 
Given that inflation in Estonia remained higher than in most of its trading partners, the real 
exchange rate of the kroon appreciated by 8.8 % in 1996. This was one of the causes of a 
sharp deterioration in the trade deficit, from 8.1 million kroons in 1995 to 13,6 million in 
1996 (on a customs basis), equivalent to more than 24% of GDP. Despite growing 
surpluses in services and net income, as well as a positive balance on transfers, the current 
account deficit increased in 1996 to 5.3 million kroons, just less than 10% of GDP. The 
financing of this deficit was less satisfactory in 1996 than in 1995: foreign direct 
investment decreased, and inflows of portfolio investment and foreign bond issues by 
banks went up. Also, Estonian foreign direct investment abroad increased sharply in 1996, 
in particular to the other Baltic countries and to Russia. Nevertheless, the overall balance 
of payments remained in surplus. 
3. Implementation of macro-financial assistance 
Official foreign debt remained small and stood at US$ 296 million on 1 January 1997. 
Gross international reserves continued to increase, reaching US$ 640 million at the end of 
1996. Net international reserves also increased. In July 1996, the IMF approved a new 13-
month stand-by arrangement for Estonia, of an amount equivalent to SDR 13.95 million. 
38 
Estonia has made no purchases under either the previous or the current stand-by 
arrangement. In 1996, as in 1995, Estonia did not request a drawing on the second 
tranche of the Community's macro-financial assistance. On the contrary, the Estonian 
authorities asked to repay early the first tranche, of ECU 20 million, which was disbursed 
in March 1993. 
39 
VI. LATVIA 
1. Introduction 
Although Latvia only gained independence in August 1991, it had already initiated some 
reforms under Soviet rule. In 1992, while the country was actively engaged in 
transformation to a market economy, economic prospects worsened. The dismantling of 
former trade relations, and the increases in prices of Russian energy exports resulted in a 
major trade shock. Deficits in the external accounts were considered to be unsustainable 
without international support. Latvia defined a stabilization and reform programme 
covering the period mid-1992 to mid-1993 and concluded a stand-by arrangement with 
the IMF. The Community and other G-24 donors were also called on to contribute to 
filling the remaining balance-of-payments gap for the programme period, estimated at US$ 
210 million. On the basis of favourable prospects of G-24 support, the IMF board 
approved a stand-by arrangement in late 1992. 
The first three years of independence were marked by a decline in output. In 1994 GDP 
started to grow again, but the incipient recovery was quickly brought to a halt by a 
banking crisis in 1995. Private and public sector deposits were frozen and interest rates 
rose. Together these led to a decline in consumption and investment, as well as a 
reduction in production; GDP contracted by 0.8%. There was also a budget crisis: the 
deficit was double the original target, as tax collection problems were compounded by the 
banking crisis. In 1996, the economy started to recover, with economic growth picking up 
and foreign reserves and banking assets up to pre-crisis levels. 
2. Recent economic developments 
GDP growth in 1996 reached 2.8%. The increase in activity was largely due to growth in 
transport and communications. However, the development of other macroeconomic 
indicators in 1996 was not so encouraging: industrial production growth was relatively 
modest at 1%; retail sales fell; real wages were flat; and bank lending was weak. Despite 
the resumption of growth, employment continued to decline, pushing the unemployment 
rate up to 7.2% in December 1996, compared with 6.6% at the end of 1995. 
Public finances were successfully brought under control in 1996, with the fiscal deficit 
lower than expected. In addition, inflation came down steadily throughout 1996. Year-end 
inflation was down to 13% from 23% in 1995. As inflation slowed, so interest rates 
continued to come down. 
On the external side, preliminary figures for 1996 show that the trade deficit continued to 
rise as export growth was outstripped by import growth. This led to a very high trade 
deficit, estimated at 16% of GDP. The surplus on services partly offset this, but the 
current account deficit rose to 6.8% of GDP. 
The authorities continued to pursue a stable exchange rate policy, with an informal peg to 
the SDR. The exchange rate of the lat against the dollar at the end of 1996 remained at 
approximately the same level as at the end of 1995. Since there was two-digit inflation, 
this represented a real appreciation of the currency, but overall the economy remained 
competitive. 
During 1996, the privatization process received a boost from the new government: 
responsibility for the work was centralized in the Latvian Privatization Agency and nearly 
40 
all the assets were transferred to it. As a result, the privatization process became more 
transparent and quick, as well as more accessible to foreign investors. 
The banking sector appeared to have recovered from the crisis of 1995: assets were back 
to pre-crisis levels and enterprise deposits were rising again. However, the banking sector 
continued to suffer from a low level of activity: bank lending was limited by the lack of 
liquid collateral, by insufficient skills in assessing business risk and by a scarcity of long-
term savings available for on-lending. 
3. Implementation of macro-financial assistance 
In November 1992, the Council14 approved macro-financial assistance of up to ECU 80 
million for Latvia, corresponding to about 50% of the balance-t>f-payments gap. The bulk 
of the bilateral support from the G-24 came from Japan and EFTA countries. The loan 
agreement and memorandum of understanding between the Community and Latvia was 
signed in early 1993, and the Commission disbursed the first tranche (50% of the loan 
amount) in March 1993. The first tranche was used mainly to on-lend to state and private 
enterprises in order to help them finance imports in priority areas. The release of the 
second tranche was to be made following a positive evaluation of performance criteria, 
regarding both macroeconomic stabilization and progress of structural reform, as set out 
in the memorandum of understanding. 
The Commission, after consulting Member States, exceptionally agreed in a supplemental 
memorandum of understanding, signed in 1994, to allow the proceeds of the second 
tranche of assistance to be channelled to profitable projects, through the banking sector. 
However, in 1994 and early 1995, the country's external accounts were in surplus owing 
to substantial private capital inflows, and the Latvian authorities did not request the 
release of the second tranche. 
In June 1995, after the financial and budgetary crises, the Latvian authorities requested the 
release of the second tranche of the Community loan (ECU 40 million), in order to 
channel the funds to refund small depositors who had lost their savings during the banking 
crisis. The Commission considered that such a use of the funds would be inconsistent first 
with the general aim of EC macro-financial assistance, and second with the undertakings 
of the supplemental memorandum of understanding relating to the second tranche. In 
addition, the conditionality criteria of the loan required that the IMF programme show a 
satisfactory track record, which was not the case: the normal autumn review of the stand­
by programme could not be completed. The Commission therefore declined the 
authorities' request, and the second tranche was not released. 
In May 1996, the IMF approved a 15-month stand-by arrangement for an amount of SDR 
30 million, and the associated IMF programme remains on track. In late 1995 and early 
1996 the Commission services asked the Latvian authorities to provide fvrther details of 
the use of the first tranche of the loan. This request was prompted by the high degree of 
government involvement in the process of allocating the first tranche, and the granting of 
government guarantees on the majority of the loan amount. The Commission subsequently 
requested thai the Latvian authorities suspend reuse of repayments on sub-loans, make 
14 Council Decision 92/542/EEC (O.J. L351 of 2 December 1992). 
41 
provisions for losses on re-lending, and improve assessment and monitoring of risks 
related to on-lending. 
42 
VII. LITHUANIA 
1. Introduction 
Having recovered sovereignty in 1991, Lithuania faced the formidable task of establishing 
a market economy while setting up the institutional machinery of an independent state. 
Moreover, the problems of transition were compounded by the break-up of close input 
and output relations with the Soviet Union and by the increase of prices of energy imports 
from Russia to world levels. As a consequence of these shocks, hyper-inflationary 
conditions developed in 1992 and Lithuania suffered the most severe output contraction 
in Central and Eastern Europe. The economic downturn, however, was brought to an end 
in 1994 when the introduction of a currency board regime established the conditions for a 
return to macroeconomic stability. 
Since mid-1992, Lithuania's reforms have been supported by the IMF through two 
successive stand-by arrangements and a three-year Extended Fund Facility expiring in 
October 1997. Within the context of the first stand-by, the European Council15 made 
available complementary macro-financial assistance of up to ECU 100 million. 
2. Recent Economic Developments 
During 1996, the Lithuanian economy continued to grow in spite of the banking crisis 
which developed at the end of 1995, when two banks, representing more than 20% of the 
value of total deposits, were declared insolvent. This immediately led to capital outflows, 
which, together with the freezing of deposits in the insolvent banks, caused a sizeable 
monetary contraction and depressed domestic demand. In the second half of the year, 
however, confidence returned and growth picked up again, led by agriculture and exports; 
industrial production remained substantially flat. As a result, during 1996, GDP grew by 
3.6%o, marking a further acceleration of the economic recovery which had begun in 1994 
and gained momentum in 1995. 
Further significant progress towards price stabilization was achieved in 1996. After 
peaking at a hyper-inflationary level in 1992, December-on-December inflation fell sharply 
to roughly 56% by the end of 1995. This trend continued during 1996 when the year-on-
year rate decreased further to 13%. The worsening trend in the unemployment situation 
was reversed in 1996 as the rate of unemployment fell by roughly one percentage point to 
6.2%. 
The evolution of the trade balance is hard to assess because of important changes in 
statistical methods, which make comparisons with observations from before 1995 
impossible. Nevertheless, according to the available figures, during 1996, the deficits on 
the trade and current account deteriorated slightly in terms of US$ but improved in terms 
of percentage points of GDP. Export growth exceeded import growth, and there were no 
signs of any significant loss in international competitiveness. After falling at the beginning 
of the year, official reserves recovered to a level above two months' imports. 
In 1996 the budget stance was prudent again and the fiscal deficit equalled 2.5% of GDP. 
As in previous years, however, a revenue shortfall (of some 0.7% of GDP) forced the 
15 Council Decision 92/542/EEC taken on 23 November, 1992. 
43 
authorities to implement emergency expenditure cuts (affecting mainly public investment 
and agricultural subsidies). The decrease in tax receipts in 1996 was partly due to specific 
factors, such as the collateral effects of the banking crisis, but it also continued a trend: 
fiscal revenues have been declining continuously since independence, forcing public 
expenditures down to levels which are hardly compatible with long-term development. 
During 1996, the banking sector started to recover from the crisis of end-1995: most 
banks recorded good results and managed to improve the quality of their loan portfolio. 
After some initial indecision, the government began actively pursuing its three-pronged 
policy based upon a strengthening of the regulatory framework, a rapid clean-up of the 
troubled banks' balance sheets and eventual privatization. Exposure rules were tightened. 
International accounting standards and capital adequacy rules were introduced. A loan 
recovery unit for the cleaning up of non-performing loans was "set up, and a draft law for 
the compensation of deposit-holders in failed banks was submitted to Parliament. 
Structural reforms in other areas such as the energy sector, agriculture, the pension 
system and enterprise ownership also advanced during 1996. The pace of reform, 
however, remained somewhat disappointing, partly because of the considerable political 
uncertainty which followed the resignation of Prime Minister Slezevicius in February 1996 
and preceded the October general elections. Following the electoral victory of the centre-
right coalition, implementation of structural reforms accelerated. 
3. Implementation of macro-financial assistance 
The first tranche of Community assistance (ECU 50 million) was disbursed in July 1993. 
The first ECU 25 million instalment of the second tranche (ECU 50 million) was disbursed 
in August 1995, on the basis of a Supplemental Memorandum of Understanding. As in the 
case of Latvia and Estonia, the Memorandum earmarked the proceeds of the second 
tranche for sound bankable projects, on condition that the funds would be channelled 
through banks complying with prudential regulations and would follow a well-defined 
procedure for consulting the Commission. However, because of shortcomings in the 
implementation of this consultation process, the Commission requested a freeze in the use 
of proceeds of Community assistance in September 1995. During 1996, significant 
improvements in the consultation process were achieved. In April, the Lithuanian 
authorities sent an annual report on the status of the macro-financial operation. Moreover, 
they properly consulted the Commission when requesting the use of the frozen proceeds. 
In view of this satisfactory progress, the Commission was able to unblock ECU 0.6 
million for one financing proposal presented by the Lithuanian authorities which was 
compatible with the provisions of the Supplemental Memorandum of Understanding. 
44 
Vin. MOLDOVA 
1. Introduction 
By the end of 1996, Moldova had made substantial progress in macroeconomic 
stabilization. The authorities embarked on a comprehensive programme of financial 
stabilization at the beginning of 1993. A coherent and consistent set of policy measures 
allowed a marked reduction of the budget deficit and inflation. Interest rates declined to 
moderate levels, and the exchange rate remained stable. However, only limited success 
was achieved in enforcing hard budget constraints on enterprises and in developing a 
private agricultural sector. Output recovery did not materialize. Major progress was made 
towards creating a market economy, despite a severe deterioration of the terms of trade, 
the loss of traditional markets, and the disruption of trade and financial relations in the 
aftermath of the dissolution of the Soviet Union. 
Macro-financial assistance provided by the international community has helped to enhance 
the efforts of the Moldovan authorities. After two stand-by arrangements in 1993 and 
1995, the IMF Board in May 1996 approved a three-year credit under the extended fund 
facility in support of an economic and reform programme covering the period 1996-98. 
Those interventions were complemented by assistance from other multilateral and bilateral 
donors, including two loans from the European Union. 
2. Macroeconomic performance 
In 1996 GDP is estimated to have declined by 8%, thus continuing the negative trend 
which has characterized the Moldovan economy since 1991. Agricultural production 
declined by 13%. A precise estimate of the decline in industrial production is not yet 
available, but a sharp fall in the second half of the year more than offset some positive 
growth in the first months of 1996. These indicators, however, are likely to underestimate 
the amount of economic activity in the country, since the growing amount of private 
activity is not fully captured in the official statistics. 
Macroeconomic policy presented in 1996 some contradictory aspects: while monetary 
policy remained rather restrictive, Moldova experienced acute fiscal problems. At the end 
of 1996, the budget deficit amounted to 7.2% of GDP (10% of GDP if calculated 
according to the methodology used by the Moldovan authorities). The deficit resulted 
from an increase in expenditure combined with a substantial decline in revenue with 
respect to the previous year. The deficit was financed through a combination of internal 
financing and foreign loans. Increasing reliance on external financing contributed to a 
steady increase of the external debt, which increased from $ 16 million at the end of 1992 
to more than $818 million at the end of 1996. More than one third of the debt is short-
terrn, i.e., with maturities below 5 years. 
After a period of stability, inflation accelerated somewhat in the last quarter of 1996, 
reflecting the relaxation of economic policy. On average, consumer prices increased by 
23.5% during 1996. 
The nominal exchange rate of the leu depreciated very slowly after its introduction in 
November 1993. As the depreciation remained well below the inflation rate, the leu 
appreciated steadily in real terms. This real appreciation was one of the main causes of the 
sharp deterioration of the trade balance. The trade deficit for 1996 is estimated at about 
$ 180 million. It resulted from a sharp increase in imports of goods and services and a 
45 
decline of exports. The current account deficit for 1996 is estimated at $245 million. 
Trade data suggest that there has been a noticeable increase in imports of capital goods, 
which will add to productive capacity. However, the deterioration also stems from a 
marked increase in imports of consumer goods. This probably reflects the inability of most 
domestic firms, which in many cases have not undergone any substantial restructuring, to 
compete with imported goods. 
3. Structural reform 
Significant progress has been made with structural and institutional reforms in the past 
few years. However, the process is far from completed. In particular, the process of 
privatization seemed to lose much of its momentum after the end of mass privatization at 
the end of October 1996. The privatization by tender of a selected number of enterprises 
for cash was delayed several times. Furthermore, the significant transfer of property rights 
to private agents did not prompt significant changes in the behaviour of enterprises. 
Governance was still inadequate, insiders dominated firms, and the budget constraint was 
not hardened enough. There was little evidence of enterprise restructuring, as testified by, 
among other things, the low level of redundancies. There was no attempt by the 
authorities to isolate 'bad' firms from viable ones, or to develop a strategy for dealing with 
the worst loss-makers. 
Officially registered unemployment remained very low, with an unemployment rate of 
1.8%) at the end of 1996. However, there was widespread hidden unemployment - in the 
form of part-time work or unpaid leave - which, if properly accounted for, would bring 
the unemployment rate at the end of 1996 to approximately 15%. The effects of the 
transformation on living standards is not clear. On the one hand, income is increasingly 
generated from private trading or foreign exchange activities - forms which are unlikely to 
be captured accurately by official statistics - and less from wages, salaries and pensions. 
On the other hand, macro indicators - such as a significant fall in life expectancy - or 
sample surveys suggest an overall deterioration, which is especially severe for vulnerable 
sections of the population like pensioners or families with dependent children. 
4. Implementation of macro-financial assistance 
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 years 16 to assist the 
country in its efforts to transform its economy into a market economy and to strengthen 
the reserve position of the central bank. The Community loan was part of an overall 
package mobilized by the international donor community for 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, of ECU 20 million, took place in August 1995. 
The international donor community recognized that to ensure a sound balance of 
payments situation in the 1995-1996 period, further macro-financial assistance for 
Moldova was necessary to complement the resources provided by the IMF and the World 
Bank. In November 1995 the Commission formally adopted a proposal for further macro-
financial assistance to Moldova of up to ECU 15 million. 
16 Council Decision 94/346/EC. 
46 
On 25 March 1996, the Council decided to adopt the Commission proposal.17 Following 
this decision and the approval by the IMF Board, in May 1996, of a new 3-year economic 
reform programme, and after positive verification by the Commission services of the 
fulfilment of the conditions attached to this assistance, the disbursement of the ECU 15 
million took place in December 1996. 
17 Council Decision 96/242/EC. 
47 
IX. ROMANIA 
1. Introduction 
Despite positive growth in 1996, and progress on privatization, the new authorities 
elected in November 1996 inherited a fragile economic situation, the result of insufficient 
progress towards structural adjustment since 1989. In fact, between 1989 and 1996, 
successive governments repeatedly launched new reform programmes, only to abandon 
them a few months afterwards in the face of mounting political resistance. Public support 
for reform has fluctuated accordingly: it was substantial at the beginning of the 
transformation, then substantially diminished in the face of mounting costs brought by the 
transition, only to strengthen again when it became apparent that the path of partial 
reform followed between 1989 and 1996 was leading to an impasse. 
Although growth resumed in 1994, the relatively satisfactory macroeconomic performance 
registered up to 1996 masked insufficient progress in structural reform, including 
restructuring of enterprises and of the agricultural sector. In the run-up to the November 
1996 presidential and legislative elections, the authorities loosened macroeconomic policy 
and reintroduced numerous administrative controls (in particular on the exchange market 
and on foreign trade). The inherent contradictions of the economic policies of the 1989-96 
period were only fully addressed after the elections of November 1996, when the new 
government devised a radical programme of macroeconomic stabilization and structural 
reform, and began to implement it. 
In 1996, major policy slippages by the previous government led to a sharp deterioration in 
Romania's relations with the IMF, the World Bank and private investors. The previous 
IMF stand-by arrangement of $ 460 million went off track and then had to be cancelled. 
The World Bank made the first $80 million payment under its $280 million Financial and 
Enterprise Structural Adjustment Loan and then froze further disbursements. The 
Community also could not disburse the second tranche, of a maximum amount of ECU 70 
million, of the macro-financial assistance loan decided in 1994. After the November 
elections, the IFIs took an active role in advising the new government on its economic and 
social policies. 
2. Macroeconomic performance 
Despite declining unemployment, the macroeconomic performance in 1996 was less 
satisfactory than in the previous two years: growth slowed down to 4.1%, inflation 
accelerated to 56.9% at the end of December and the budget deficit of the general 
government soared to 3.9%) of GDP. In fact, economic activity continued to expand at the 
cost of increasing macro- and micro-economic disequilibria. 
t 
In 1996, industrial output rose by 9.9%. The situation of the agricultural sector was far 
less satisfactory, with estimates indicating a significant drop in the harvest (by as much as 
a quarter in tonnage), largely caused by adverse weather conditions. Exports also declined 
in the course of the year, and GDP growth slowed to 4.1%, a drop of three percentage 
points over 1995. Growth achieved in 1996 was sufficient to push down the rate of 
unemployment, from 8.9% in December 1995 to 6.1% a year later. However, since 
industry was still shedding workers, growth in employment was recorded mostly in the 
other sectors of the economy (services, construction, and also agriculture). 
48 
To a large extent, however, economic growth in 1996 was based on very unstable 
foundations. Many large state-owned industrial companies and state farms were not 
subject to a "hard budget constraint" (i.e. they did not face a real risk of bankruptcy even 
when they consistently made losses), because they were able to obtain cheap credits from 
state-owned commercial banks, which in turn refinanced themselves easily at the National 
Bank. In fact, refinancing from the National Bank more than doubled during 1996. This 
process artificially stimulated activity while maintaining widespread inefficiencies within 
the economy. 
In the run-up to the elections, the previous government embarked on a spending spree 
(credit to the government almost doubled in nominal terms between * August and 
November). As a result, the budget deficit soared dramatically. The general government 
deficit rose from 2.6 to 3.9% of GDP, and to 8.3% of GDP for the quasi-fiscal deficit, 
which includes a number of hidden expenditure items and quasi-fiscal subsidies from the 
National Bank of Romania. The year 1996 saw a significant increase in inflation, which 
jumped from an annual rate of 27.8% in 1995 to almost 57%. Inflation was particularly 
high in November (monthly rate of+5.8%) and December (+10.3%). 
External trade significantly worsened in 1996. Not only did exports and imports fall, in 
dollar terms, but the trade deficit for 1996 is estimated to have risen to $2.1 billion from 
$1.6 bn in 1995. Exports continued to suffer from the decline of some of the main export 
markets, as well as the poor competitiveness of domestic products. The current account 
deficit reached $2.3 billion (approximately 6.6% of GDP). Foreign direct investment 
increased slightly to $555 million according to EBRD estimates, a relatively low level for 
a country of Romania's size. In per capita terms, only Bulgaria has attracted less foreign 
direct investment among the 10 associated countries of eastern Europe. 
In 1996, the gross foreign reserves of the banking system grew significantly, which was 
largely the result of Romania's return to the international capital markets, where it raised 
$1.4 billion through syndicated loans and bond issues. Its issues on the Japanese market 
(so-called "Samurai bonds") met with considerable interest. While this was a positive vote 
of confidence by international investors, it helped push Romania's medium- and long-term 
external debt to a higher level ($6.9 billion, almost a one-third increase over 1995). Given 
that investment remains weak, the growth of the foreign debt could become a problem in 
the future. The debt service obligations (including short-term debt service) increased to 
20.2%) of exports of goods and services, from 14.5% in 1995. 
3. Structural reform 
Progress on structural reform remained ambivalent. On the one hand, little action was 
taken in 1996 to restructure the large loss-making state-owned companies (e.g., the 
electricity company RENEL lost 600 billion lei in the first ten months of 1996, equivalent 
to $183 million at the October exchange rate). Nor was anything done to rectify 
shortcomings in the agricultural sector: a normal market for buying and selling land was 
not functioning. Inter-enterprises arrears continued to expand: for the energy sector alone, 
it is estimated that, at the end of 1996, the stock of arrears to suppliers and the state 
amounted to 3.3% of GDP. 
In March 1996, the authorities introduced significant curbs on the foreign exchange 
markets, restricting the number of official dealers to four Romanian banks, three of them 
state-owned. This led to an overvaluation of the national currency, which encouraged 
49 
cheap energy imports for the large and inefficient, energy-intensive, state-owned 
enterprises. The overvaluation of the leu also discouraged exports. The gap between the 
official rate and the rate of the private exchange bureaux rose to approximately 45% in 
mid-November, a clear sign of widespread distortions. 
The programme of "financial isolation" of a number of large state-owned "régies 
autonomes" failed to improve their financial situation and was subsequently abandoned in 
early 1997. Reform of the agricultural sector did not progress much either. On the 
contrary, support from explicit and implicit subsidies and transfers soared in 1996 from 
4.3%) to 5% of GDP. Subsidized credits from the National Bank of Romania to the 
agricultural sector were one of the main reasons why monetary policy was derailed. 
Moreover, the larger part of the financial support was captured by intermediaries and 
producers of agricultural inputs, at the expense of farmers themselves. 
Nevertheless, a few positive developments can be identified: mass privatization continued 
unabated (1300 operations had been carried out as of 10 December 1996, bringing the 
cumulative figure since 1993 to 2766 companies), although it concerned essentially small 
companies; some export bans were abolished while many export quotas were expanded; a 
new secondary stock market (the RASDAQ) opened in October with 1342 companies 
already listed. 
4. Implementation of macro-financial assistance 
In its decision of 20 June 1994, the Council had decided to grant to Romania a medium-
term balance-of-payments loan for a maximum amount of ECU 125 million, to be 
disbursed in two tranches18. The economic policy conditions for the release of this 
assistance were agreed by the Commission and the Romanian authorities in a 
Memorandum of Understanding signed in December 1994. A first tranche of ECU 55 
million was disbursed in November 1995. 
However, the release of the second tranche was not possible in 1996, because of 
persistent mal-functioning of the foreign exchange market and lack of progress on 
structural reforms. For the same reasons, the stand-by arrangement (SBA) with the 
International Monetary Fund (IMF) went off track and then had to be cancelled. The 
World Bank also froze disbursement of the second tranche of the Financial and Enterprise 
Structural Adjustment Loan (FESAL). 
Following the elections of November 1996, the new Romanian government requested the 
reactivation of the Community's and the G-24's macro-financial assistance, in the context 
of an ambitious economic programme of macroeconomic stabilization and structural 
reforms supported by the International Financial Institutions. 
18 Council Decision 94/369/EC. 
50 
X UKRAINE 
1. Introduction 
The Ukrainian authorities achieved considerable financial stabilization in 1996, but the 
economy continued to contract, though at a slower pace. The implementation of a 
relatively tight monetary policy set by the Ukrainian central bank was a determining factor 
in drastically reducing inflation, stabilizing the exchange rate and ensuring the successful 
introduction of a new national currency. 
Stabilization, however, became increasingly fragile, because of a slow-down in structural 
reform, especially with respect to privatization, the tax regime and the overhauling of the 
public administration. The 1997 budget and an accompanying programme of 
comprehensive tax and deregulation measures were stalled in Parliament from November 
1996. 
2. Macroeconomic performance 
Ukraine's transition to a market economy, which essentially started in late 1994 after the 
election of President Kuchma, continued in 1996, though against an uncertain economic 
background. 
The implementation of a tight monetary policy by the Ukrainian central bank paved the 
way for a dramatic reduction in inflation, the stabilization of the exchange rate and the 
smooth introduction of a new currency, the hryvnia, in September 1996. Inflation was 
reduced to 40% at end-1996 (December-on-December), down from 182% a year earlier. 
The fiscal balance was brought down to some -3.2% of GDP (1995: -5%), though in 
addition the accumulation of arrears in public wages, salaries and pensions amounted to 
some 3.5% of GDP. 
Although production continued to decline during 1996, the t of decline was lower than 
in previous years. Real GDP contracted by another 10% in 1996, but this does not take 
into account the increasing activity in the unofficial sector, which is estimated to equate 
more than 50% of official GDP. Agricultural production saw a further sharp reduction (by 
some 10%)) in 1996, which can be only partly attributed to poor weather conditions. 
Agriculture's share in GDP is now only 13% in a country which was once the "bread 
basket of the Soviet Union". Industrial production continued to decline in 1996 (by some 
5%), and machine-building especially suffered a sharp reduction. 
The trade statistics for Ukraine are very unreliable, but it seems that external trade 
continued to grow rapidly in 1996. Trade with other former Soviet Union countries, 
Ukraine's major trade partners, began to recover. Exports of goods are reported to have 
grown by almost 14% in 1996 to $ 15.5 billion, a notable achievement against a 
background of continuing recession. 
Because of significant increases in Russian gas prices, imports grew by 24% in 1996 to 
$ 19.8 billion. Because the higher energy import prices entailed higher transit fees for the 
transport of gas through the Ukrainian pipeline system to Central Europe, overall the 
current account deficit was not affected too seriously: it was $ 1.3 billion in 1996, 
equivalent to 3.9% of GDP. 
51 
Unemployment remained at artificially low levels. Official data indicate that 
unemployment was about 1-1.5% of the total labour force in 1996, but these figures do 
not take account of considerable hidden unemployment in Ukraine. 
3. Structural reform 
The main reason for the continuing economic decline in Ukraine lies in the lack of 
substantial industrial and enterprise restructuring. The need to restructure Ukraine's 
economy, which under Soviet control became disproportionately dependent on military 
production, was clear from the first days of independence. The government's efforts to 
launch serious restructuring programmes in both industry and agriculture have often faced 
the opposition of the sizeable conservative forces in Parliament. 
Against this adverse backdrop, some progress in structural reform was achieved in 1996. 
In the area of land reform, the issuing and registration of land titles proceeded well. In the 
banking sector, the assets of the thirty largest banks were assessed and the management of 
two troubled banks was closely monitored by the central bank. Privatization, however, 
slowed down markedly. While the privatization of small-scale enterprises was nearly 
complete, only 3,500 out of the 8,000 targeted large state enterprises had been privatized 
by September 1996. 
The authorities have identified some 400 large enterprises for privatization through 
international tender. The list of enterprises includes energy companies and other firms that 
performed well during Soviet times. Lack of progress in privatization and the uncertain 
credibility of the reform effort have limited the amount of foreign direct investment that 
Ukraine has been able to attract. Per capita foreign direct investment in Ukraine remained 
one of the lowest among all transition countries. 
In an attempt to combat negative trends in the economy and to move reforms forward, the 
government submitted to the Ukrainian parliament in November 1996, together with the 
19S-, oudget, a new prolamine of reforms. The programme, which included significant 
cuts in budget spending, a comprehensive tax reform and a further liberalization of the 
economy, was welcomed as the second stage of major liberal economic reforms in 
Ukraine, long awaited after the first serious reforms were launched at the end of 1994. 
However, it met strong opposition from the parliament. 
4. Implementation of macro-financial assistance 
In December 1994, the Council decided to provide a first macro-financial loan of ECU 85 
million to support Ukraine's adjustment and reform process.19 This long-term loan 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 on the part of Ukraine, it was finally disbursed 
in December 1995. 
In view of Ukraine's urgent financial needs and against the background of further efforts 
being made by the Ukrainian authorities to pursue economic reform, the Council decided 
in October 1995 to provide Ukraine with a second macro-financial loan of ECU 200 
19 Council Decision 94/940/EC. 
52 
million that would complement financial assistance from the international financial 
institutions and bilateral donors.20 The first tranche of ECU 100 million of this loan was 
released in the second half of 1996. 
20 Council Decision 95/442/EC. 
ISSN 0254-1475 
COM(98) 3 final 
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