Proposal for a COUNCIL DECISION Providing further macro- financial assistance for Albania
Date: 1994-03-29
Institutions: European Commission
Subjects: Albania, Community loan, EU aid, balance of payments, donation, economic stabilisation

• r i* 

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

COM(94) 112 final 

Brussels, 29.03.1994 

94/0102  (CNS) 

Proposal for a 

COUNCIL DECISION 

Providing further macro-financial  assistance 

for Albania 

(Presented  by the Commission) 

EXPLANATORY  MEMORANDUM 

Albania's request for further  macro-financial  assistance 

On  28  September  1992,  the  Council  of  Ministers  decided  to  grant  Albania  a  macro-
financial  assistance up to a maximum amount  of ecu  70 million in the form  of a grant in 
the context  of an initiative  of the  Group  of Twenty-Four  (G-24)  aiming at mobilizing a 
total of US$  165 million in assistance complementary to that provided  by the IMF under 
a twelve-month stand-by arrangement approved in August  1992. 

The Community grant was disbursed  in two  tranches.  A first tranche  of ecu  35 million 
was disbursed  in December  1992, and, following  a positive assessment  of the  economic 
situation  and progress in the reform  process in Albania,  and a favourable  opinion  of the 
Monetary  Committee,  the  disbursement  of  the  second  tranche  was  effected  in  August 
1993. 

The  Albanian  authorities  have  requested  further  macro-financial  assistance  from  the 
EC/G-24  in  the  context  of  a  new  programme  covering  the  first  year  of  an  ESAF 
arrangement  that  was  approved  by  the  IMF  on  14  July.  Financing  from  the  IMF 
amounts  to  the  equivalent  of  US$  22  million  for  the  first  annual  arrangement.  The 
assistance  requested  from  the  EC/G-24  in this  context  amounts  to  US$  72  million  for 
1993-94 (down from US$  165 million for  1992-93).  Albania's strong adjustment  efforts 
merit  continued  financial  support  from  the  international  community.  The  success  of 
Albania's  programme  hinges  crucially  on  external  assistance  in  view  of  the  country's 
precarious external position.  However, in the context of the new programme, Albania is 
committed to normalise its relation with external creditors and to facilitate foreign  direct 
investment,  in  order  to  allow  an  orderly  phasing  out  of  exceptional  macro-economic 
assistance. 

At  the  High  Level  meeting  of  the  G-24  on  Albania  held  on  16-17  November  1993, 
Senior  Officials  of the  G-24  agreed  with  the  assessment  of the  economic  and  financial 
situation in Albania given by the international  financial  institutions; and they  recognized 
that  Albania  continued  to  face  a very  difficult  external  financing  situation  and  to  need 
balance of payments assistance from the G-24.  In view of the weak  creditworthiness  of 
the country, they also agreed  that  assistance should  continue to be made available in the 
form of grants or highly concessional loans. 

Macro-economic programme and  performance 

Against  a  background  of  severe  economic,  social,  and  administrative  dislocation,  with 
fiscal and  external  imbalances  much  larger  than  in  other  countries  in  the  region,  the 
government  of Albania has undertaken  since mid-1992 the daunting task  of stabilization 
and reform in the framework of an economic programme. Covering the period mid-1992 
-  mid-1993,  the  programme  was  supported  by  an  IMF  stand-by  arrangement  and 
complementary financial assistance from EC/G-24. 

In  view  of  the  great  difficulties  and  risks  under  which  Albania  embarked  in  its 
programme  in  mid  1992,  achievements  on  the  macroeconomic  front  have  been 
remarkable.  The slide into hyperinflation  has been reversed,  and the downward  spiral of 
output  has  been  corrected.  By  the  first  half  of  1993,  government  domestic financing 

requirement  dropped  (to  12 percent  of GDP from 41  percent  of  GDP  m the first half  of 
1992),  while  credit  expansion  was  reduced  sharply,  weH  within  the  credit  ceilings,  and 
redirected  in  favour  of  the  incipient  private  sector.  Credit  to  non-performing  public 
enterprises  and  state  farms  has been  substantially  curtailed  since  the  beginning  of  1993. 
In# sharp  contrast  with  the  situation  prevailing  up  to  the  end  of  1992,  state  enterprise 
financial discipline  has  been  enforced  in  1993,  and  the  sharp  rise  in  inter-enterprise 
arrears  that  threatened  the  stabilization  effort  has  been  arrested,  as  the  system  of 
receivable  orders  has  been  abolished  and  the  banks  have  been  instructed  not  to  accept 
any payment  order not backed by sufficient  funds.  As  a result  of the tight budgetary  and 
monetary  policies,  inflation  was  curbed  (to  a monthly  rate  of  1 percent  during  the first 
semester  of  1993).  Reflecting  the  strong  domestic  effort  as  well  as  large  external 
support,  foreign  reserves  were  built  up  as  planned  (amounting  to  some  $  80  million 
equivalent to  1 1/2 months of imports at end-June  1993) and the (floating)  exchange  rate 
remained fundamentally  stable,  hovering  around leks  100-105  per US  dollar.  The  fall  in 
production  seems  to  have  bottomed  out  since  the  end  of  1992,  albeit  from  a  very  low 
base,  thanks to  the  good  performance  of the  private  sector  (in  agriculture,  services  and 
construction),  whereas  state-sector  industrial  output  has  continued  to  drop  in  1993 
owing to the imposition  of financial  discipline. 

The  stabilization  gains  of  recent  months  remain,  however,  fragile  and  tentative  and 
Albania  will  have  to  continue  to  rely  heavily  on  foreign  assistance  in  the  short  run. 
Exports  ($  70  million  in  1992;  $  105  million  in  1993)  cover  only  a  fraction  of  import 
needs  ($524  million  in  1992;  $  585  million  in  1993).  Furthermore,  the  external  outlook 
remains  clouded  by  Albania's  large  external  debt,  mainly with  commercial  banks  ($  834 
million  at end  1993,  including  accumulated  arrears of  $  621  million),  and  Albania's  very 
limited capacity to pay. Whether Albania is able to  attain external viability in the medium 
term will  depend  critically  on an early normalization  of relations with  commercial  banks 
as well  as with bilateral official  creditors. 

The Government  of Albania now  aims to  sustain the momentum  of stabilization process, 
promote  growth  and progress toward  external  viability.  To  that  end,  it has formulated  a 
comprehensive  medium-term  economic  strategy  for  1993-96  and  designed  a  detailed 
programme for the first year under this framework (mid-1993 to mid-1994). 

The  principal  macro-economic  objectives  of  the  programme  for  1993/94  are  :  a  real 
growth  of  3-4  percent;  a  reduction  of  the  12-month  rate  of  inflation  to  33  percent  by 
mid-1994;  and  a  further  strengthening  of  the  external  position,  including  a  build-up  of 
official  reserves  to  3  months  of  imports  by  mid-1994.  The  adjustment  strategy  will 
remain centred on tight  demand policies,  supported by adequate external  support  and an 
early solution of the arrears problem. 

In  order  to  reduce  macro-economic  imbalances,  fiscal  adjustment  remains  a  central 
element  of the  programme,  together  with  the  continuation  of  tight  monetary  and  state-
sector incomes policies.  In view of the expected  decline of food  aid counterpart  revenues 
and  the  need  to  attend  to  a number  of  critical  expenditure  needs  (including  investment 
and  structural  reforms)  that  can  no  longer  be  deferred,  the  commitment  to  reduce  the 
domestic financing of the budget  to  7 percent  of GDP will  constitute  a major  challenge. 
In support  of the  Albanian  programme,  the  IMF  approved  in July  1993  an  arrangement 
under  the  Enhanced  Structural  Adjustment  Facility  (ESAF),  and  the  authorities  have 
requested  complementary  assistance  from the EC/G-24  of  $  72  million  for  the first year 
of the programme. 

the  new  programme 

Macroeconomic  performance  under 
is  encouraging.  All 
performance  criteria for  end  1993 were met and the economic  situation has continued  to 
improve.  GDP  rose  by  an  estimated  11  percent  in  1993, albeit  from  a very  low  base. 
Inflation  was contained  to some 30 percent  for the whole of  1993, owing to a tight  fiscal 
and  monetary  policy.  Exchange  rate  has remained  stable  and  external  reserves  reached 
the equivalent of two months of imports by end-1993. 

Structural  reform 

While making significant  gains in macro-economic  stabilization, Albania initiated  in mid-
1992  profound  structural  changes  towards  a market  economy.  Critical  measures  under 
its programme  for  1992-93  included  major  reforms  of the  price  and  exchange  regimes, 
liberalization  of trade  and  foreign  investment,  and  the  start  of  other  structural  changes 
focusing  on  agriculture,  state  enterprises  and  the  financial  sector.  During  this  period, 
progress  was  made  in  imposing  financial  discipline  on  state-owned  enterprises  and 
privatizing  agriculture  and  small  scale  services  and  industry.  However,  reforms  have 
proceeded  at  a  slower  pace  in  the  fields  of  privatization  of  medium  and  large  sized 
industrial  enterprises  and  foreign  direct  investment.  A  new  momentum  of  structural 
reforms  has been built up in the wake of the preparation  of the comprehensive  medium-
term economic programme for  1993-96 formulated  in the Policy Framework Paper. 

In  the  area  of price  reform,  a new  series  of  price  rises  was  implemented  in  mid-1993, 
which included the doubling of the prices of wheat, flour  and bread,  a sensitive issue due 
to the importance of bread  in the local  diet  and the dependence of the country  on wheat 
imports. Other price rises initiated  in mid-1993 include the twofold  to  threefold  increase 
of public housing rents and household  energy. 

In agriculture,  a key  sector  of the economy which  accounts  for  half  of the value  added 
and employs around  60 per cent of the population,  about  80% of the land  area has been 
privatized  to  date,  including  nearly  all  former  co-operative  farms.  The  distribution  of 
titles should  be completed  by the end of  1994. In an effort  to  facilitate  the  consolidation 
of the small holdings, the government  plans to  complete the legal framework  concerning 
agricultural property, with rights to sell, lease and mortgage the land  ,thus leading to the 
creation of a land market. 

The  reform  of  the  public  enterprise  sector  poses  one  of  the  greatest  challenges  to 
Albania's  economic  programme.  At  first,  in  1992,  reform  was  mostly  confined  to  the 
privatization  through  direct  sales  to  employees  of  the  small  units  operating  in  the 
handicraft,  transport  and services sectors.  Privatization in the enterprise  sector had been 
delayed  by the  difficulty  to  establish  a restitution  policy.  The  passage  of  a law  on  the 
restitution  or compensation  for urban properties to  previous  owners  in April  1992 have 
paved  the way  for  the  rapid  implementation  of  a privatization  strategy,  to  complement 
those operated in 1992. 

The  government  is  currently  developing  a  multi-track  approach  that  involves  rapid 
privatization  of  small-  and  medium-sized  industrial  enterprises  as  well  as  longer-term 
procedures for large, more problematic enterprises. 

The  government  is  proceeding  with  the  estimated  1200-1500  small  and  medium-size 
enterprises 
revenue 
to  300  employees)  quickly,  without  allowing 
considerations to slow the process significantly.  Some 300 enterprises have already been 

fiscal 

(up 

identified  for this immediate privatization.  With regard  to the 300 larger  enterprises,  the 
government  is finalizing  a strategy  involving  rapid  privatization  or  liquidation  for  most 
enterprises. A small group of "strategic" firms will be sold by tender. Budgetary  support 
will  be  minimised,  focusing  mainly  on  about  30  "problem"  enterprises.  To  deal  with 
those,  the  government  has  established,  with  the  support  of  the  World  Bank,  an 
Enterprise  Restructuring  Agency  (ERA)  placed  under  the  authority  of  the  Council  of 
Ministers, 
liquidation  or 
restructuring  for  all enterprises under  its control  in order to  bring these  enterprises  into 
operating balance within  1-2 years. 

targets  regarding  privatization, 

that  should  formulate 

In view of the very weak enterprise sector and the extremely limited outside contacts that 
Albania had before  1991, it has a particular need for foreign  investment. Amendments to 
the  1992 Foreign  Investment  Law passed  in December  1993, which  eliminates  separate 
authorization requirements for foreign  investment  and  allows foreigners  to participate in 
privatization of state assets. 

Balance of payments and EC/G-24 macro-financial  assistance 

In  1992,  the  EC/G-24  acceded  to  the  Albanian  request  for  macro-financial  assistance 
complementary  to  the  twelve-month  stand-by  arrangement  for  US$  27  million  agreed 
with the  IMF.  A residual  gap  of US$  165 million was  to  be financed by the  G-24  on 
very  concessional  terms.  The  assistance  committed  by  the  G-24  under  the  1992-93 
programme  has reached  some  70 percent  of  the  original  gap,  despite  the  fact  that  the 
assistance initially committed  by Switzerland  and the US was eventually used  as tied aid 
(which does not fall within the G-24 macro-financial  assistance scheme). 

As  a  result  of  the  shortfall  in  external  assistance,  the  mix  between  domestic  policy 
restraint  and  external  support  has  differed  from  what  was  anticipated.  Net  domestic 
assets had to remain well below the programmed  ceiling to preserve the external position 
in the  face  of the  shortfall  in balance  of payments  support.  In  1992/93, imports  were 
lower  than  programmed,  despite  the  higher-than-expected  share  financed  by  private 
transfers;  and  the  external  current  account  deficit  (excluding  official  transfers)  is 
estimated  at  US$  450  million,  some  US$  150 million  lower  than  programmed.  Gross 
official  reserves  increased  to  the  equivalent  of  1  1/2  months  of  imports  by  mid-1993, 
notwithstanding the shortfall  in foreign aid. 

For  1993/94,  the  principal  external  policy  objectives,  as  outlined  before,  are to  reduce 
significantly  Albania's dependence on emergency  assistance and  strengthen reserves, and 
In  this  context,  balance  of  payments 
to  normalize  relations  with  external  creditors. 
projections  for  the programme  period  (July  1993-June  1994) indicate  a current  account 
deficit  of US$ 408 million (excluding official  transfer). 

In accordance with this, the Albanian  authorities have requested  further  macro-financial 
assistance from the G-24 in the context of a new programme covering the first year of an 
ESAF arrangement  that  has been approved  by the IMF on  14 July.  Financing from the 
IMF  amounts to  the  equivalent  of US$ 22 million for  the first annual  arrangement  and 
about US$ 38 million over the next two years.  The assistance requested from the  G-24 
in this context amounts to US$ 72 million for  1993-94 (down from  US$  165 million  for 
1992-93). 

Main features  of the proposed  operation 

Pursuant  to  Albania's  request,  to  preliminary  discussions  at  the  ECOFIN  on  13 
September  1993,  and  to  the  G-24  High  level  meeting,  the  Commission  proposes  a 
Community  macro-financial  assistance for  Albania up to  ecu  35 million  in the form  of a 
grant,  covering  approximately  half  of  the  residual  financing  gap,  in  line  with  practices 
regarding exceptional balance of payments assistance granted in the framework  of the G-
24.  This  initiative  is  consonant  with  the  conclusions  of  the  Council  meeting  in  June 
1993,  that  it  will  continue  to  recognize  the  opportunity  of  providing  further financial 
assistance  to  Albania,  a  position  that  was  endorsed  by  the  Copenhagen  European 
Council. 

The grant  would  be disbursed  in two  tranches,  with  a first tranche  of  ecu  17.5  million 
conditional  upon  the  successful  completion  of  the  mid-term  review  of  the  ESAF first-
year  arrangement.  The  second  tranche  would  be  made  available  not  before  the  fourth 
quarter  of  1994,  subject  to  compliance with  a number  of performance  criteria  including 
satisfactory  progress in the IMF ESAF arrangement to be assessed by the Commission in 
cooperation'with the Monetary Committee. 

The grant will be financed using the existing funds provided for under the budget line for 
economic restructuring of the countries of Central and Eastern Europe. 

Proposal for a 

COUNCIL DECISION 

Providing further macro-financial  assistance 

for Albania 

THE COUNCIL OF THE EUROPEAN UNION 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 235 thereof, 

Having regard  to  the proposal  from  the  Commission1,  submitted  following  consultation 
with the Monetary Committee, 

Having regard to the opinion of the European Parliament2, 

Whereas  Albania  is  undertaking  fundamental  political  and  economic  reforms  and  has 
decided to adopt a market economy model; 

Whereas the  said  reforms  are under  implementation  with the  financial  support  from  the 
Community and whereas the reform process needs to be strengthened and broadened; 

Whereas trade, commercial and economic links between the Community and Albania will 
develop within the framework  of the Cooperation Agreement; 

Whereas financial assistance from the Community will be instrumental  in supporting  the 
adjustment  and  reform  efforts  of  Albania,  will  strengthen  mutual  confidence  and  will 
bring Albania closer to the Community; 

Whereas, by Decision 92/482/EEC of 28 September  19923, the Council  decided to grant 
Albania  financial  assistance  of  a maximum  amount  of ECU  70  million,  with  a  view  to 
ensuring a sustainable balance of payments situation in that country; 

Whereas,  however,  despite  the  government  of Albania's  courageous  implementation  of 
adjustment  measures  and  structural  reforms,  the  stabilization  phase  of  the  Albanian 
economy  is still under way,  and  whereas  further  official  support  is required  in  order  to 
support the balance of payments and consolidate the reserve position; 

Whereas Albania is a low-income country eligible for highly concessional loans from the 
World Bank and the International Monetary Fund (IMF); 

OJN°L287)2.10.1992,p. 25 

? 

Whereas the Albanian  authorities  have requested  financial  assistance  from  the  IMF,  the 
G-24 countries and the Community; 

Whereas  the  IMF Executive  Board  has  approved  the first annual  arrangements  under a 
three-year  Enhanced  Structural  Adjustment  (ESAF)  on  14 July  1993,  and  whereas  the 
Group  of  24  industrial  countries  (G-24)  agreed  to  consider  complementary  financial 
assistance particularly through grants or loans on concessional terms; 

Whereas,  over  and  above the estimated financing which  could  be provided  by the IMF, 
the World Bank  and  official  bilateral  creditors,  a financing gap  of  some US$  72 million 
remains  to  be  covered  in  order  to  strengthen  Albania's  reserve  position  and  avoid  an 
additional degree of import  compression which would jeopardize the achievement  of the 
policy objectives underlying the Government's reform  effort; 

Whereas the Commission, as coordinator of assistance from the G-24 has invited them to 
provide  highly  concessional  financial  assistance  to  Albania  in  order  to  support  that 
country's adjustment  and reform  efforts; 

Whereas  taking  into  account  the  economic  and  financial  situation  of  Albania,  this 
financial  assistance  intended  to  support  that  country's  balance  of  payments  should  take 
the form of grants; 

Whereas the Community grant should be managed by the Commission; 

Whereas  the  Treaty  does  not  provide,  for  the  adoption  of  this  Decision,  powers  other 
than those of Article 235, 

HAS DECIDED AS FOLLOWS 

Article 1 

1.  The  Community  shall  grant  to  Albania  macro-financial  assistance  of  a  maximum 
amount  of  ECU  35  million  in  the  form  of  a  grant,  with  a  view  to  ensuring  a 
sustainable  balance  of  payments  situation  and  strengthening  the  reserve  position  of 
that country. 

2.  This  grant  will  be  managed  by  the  Commission  in  close  consultation  with  the 
Monetary  Committee  and  in  a  manner  consistent  with  any  Agreement  reached 
between the IMF and Albania. 

Article 2 

The  Commission  is  empowered  to  negotiate  with  the  Albanian  authorities,  after 
consultation  with the Monetary  Committee,  the economic policy  conditions  attached 
to the grant. These conditions shall be consistent with any agreement  as referred  to in 
Article  1  (2) and with arrangements made by the G-24. 

8 

The Commission  shall verify  at regular  intervals,  in collaboration  with  the  Monetary 
Committee  and  in close coordination  with the G-24  and the IMF, that  the  economic 
policy  In  Albania  is  in  accordance  with  the  objectives  of  this  grant  and  that  the 
conditions of the latter are being  fulfilled. 

Article 3 

1.  The  grant  shall  be  made  available  to  Albania  in  two  instalments.  Subject  to  the 
provisions of Article 2 (1), a first instalment  of ECU  17 million  shall be released  on 
the  basis  of  a  successful  completion  of  the  mid-term  review  of  the  First  Annual 
Arrangement  under the ESAF between Albania and the IMF. The  second  instalment 
shall be paid not before the fourth quarter of 1994, subject to the provisions of Article 
2  (2) and  subject  to  satisfactory  progress  being recorded  in Albania's application  of 
the ESAF. 

2.  The funds shall be paid to the National Bank of Albania. 

Article 4 

At least once a year the Commission shall address to the European Parliament and to the 
Council  a  report,  which  will  include  an  evaluation,  on  the  implementation  of  this 
Decision 

Done at Brussels, 

For the Council 

the President 

FINANCIAL  RECORD 

1.  Budget  lines concerned 

Article  (B7-600)  Aid  for  economic  restructuring  of  the  countries  of  Central  and 
Eastern Europe. 

2.  References  (legal base) 

Article 235  of the Treaty. 

3.  Classification  of the Expenditure 

Non  compulsory 

4.  Classification  and Justification  for the action 

a)  Description of the action 

Provision  of a grant from the  Community Budget  to  Albania in view  of  supporting 
its balance of payments and strengthening the country's reserve position. 

b)  Justification  for the action 

The  viability  of  Albania's  balance  of  payments  still  heavily  depends  on  external 
financial  assistance from official  sources. 

5.  Nature of the expenditure and method of calculation 

a)  Nature of the expenditure 

Straight  grant,  which  would  be  released  in two  tranches  not  before,  respectively, 
the second  quarter of  1994 and the 4th quarter of  1994. 

b)  Method  of calculation 

Approximately  50% of the residual  balance  of payments  financing  gap  of  Albania, 
as estimated in the  12-month IMF programme agreed in July  1993. 

6.  Effect  of the action on intervention credits 

The budget  entry will  be  activated  subject  to  compliance  with  a number  of  economic 
conditions including satisfactory progress of an IMF ESAF  arrangement. 

7.  Financing of intervention  expenditure 

35MECUonB7-600. 

ISSN 0254-1475 

COM(94) 112 final 

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