REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT ON THE IMPLEMENTATION OF MACRO- FINANCIAL ASSISTANCE TO THIRD COUNTRIES IN 1995
Date: 1997-01-08
Institutions: European Commission
Subjects: Community loan, economic reform, financial aid, political reform, third country

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  08.01.1997 
COM(96) 695 final 

REPORT FROM THE  COMMISSION 

TO THE COUNCIL AND THE EUROPEAN  PARLIAMENT 

ON THE IMPLEMENTATION  OF MACRO-FINANCIAL  ASSISTANCE 

TO THIRD COUNTRIES IN  1995 

4-

I. OVERVIEW 

1. Introduction 

2. Macro-financial  assistance in  1995 

3.  Trends  and tendencies in macro-financial  assistance 

4. Burden-sharing 

II. ALBANIA 

1. Introduction 

2. Macroeconomic  performance 

3.  Structural  reforms 

4. Macro-financial  assistance 

III. ALGERIA 

1. Introduction 

2. Macro-economic  performance 

3.  Structural  reforms 

4. Implementation  of macro-financial  assistance 

IV. BALTIC COUNTRIES 

1. Introduction 

2. Recent  economic  developments 

Estonia 

Latvia 

Lithuania 

3.  Implementation  of macro-financial  assistance 

V. BELARUS 

1. Introduction 

2. Macroeconomic  performance 

3. Structural  reform 

4. Implementation  of macro-financial  assistance 

-6-

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3 

4 

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30 

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35 

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41 

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43 

4  OL 

VI.  BULGARIA 

1. Introduction 

1. Macroeconomic performance 

3. Structural reforms 

4. Implementation of macro-financial  assistance 

VII. MOLDOVA 

1. Introduction 

2. Macroeconomic performance 

3. Structural  reforms 

4. Implementation of macro- financial assistance 

" 

VIII. ROMANIA 

1. Introduction 

2. Macroeconomic developments 

3. Structural reforms 

4. Implementation of macro-financial  assistance 

IX. THE SLOVAK  REPUBLIC 

1. Introduction 

2. Macroeconomic developments 

3. Structural  reforms 

4. Implementation of macro-financial  assistance 

X. UKRAINE 

1. Introduction 

2. Macroeconomic performance 

3. Structural  reforms 

4. Implementation  of macro-financial  assistance 

44 

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46 

48 

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dlr 

I.  OVERVIEW 

1. 

Introduction 

Initially  conceived  for  intra-Community  balance-of-payments  support,  macro-financial 
assistance  from  the  Community  has  been  extended  since  1990  to  third  countries,  mainly 
those  of  Central  and  Eastern  Europe,  but,  progressively,  also  to  other  countries,  in  the 
former  Soviet  Union  and  in  the  Mediterranean  area,  with  a  view  to  supporting  their 
political and economic reform efforts.  As they embarked on their process of transition to  a 
market economy, the countries of this region were faced with similar problems:  substantial 
costs  attached  to  the  first  steps  of  reform,  additional  external  shocks  (the  Gulf  War 
embargo,  the  collapse  of  the  COMECON),  insufficient  resources  available  from  the 
International Financial Institutions  (IFIs)  and virtually  non-existent flows from  the  private 
sector. 

Against  this  background,  the  European  Community  decided  to  extend  macro-financial 
assistance  to  the  countries  in  the  region  in  complement  to  the  financing  provided  by  the 
IFIs.  It  was  also  decided  that,  in  the  context  of  the  assistance  co-ordination  process 
agreed  among the 24 industrial countries (G-24) to help the Central  and Eastern  European 
Countries  (CEECs),  the  Commission  should  get  other  donors  to  contribute  in  a  similar 
way  to  support  the  economic  programmes  that  these  countries  were  implementing  in 
agreement with the IMF and World  Bank. 

A number  of  such  support  operations  by the  EU  and  the  G-24  took  place  in  1990-1994 
covering  most  central  and  eastern  European  countries  eligible  to  G-24  assistance 
(Tables  1  and 2). 

Outside  the  region  of  Central  and  Eastern  Europe,  several  other  Community  loan 
operations  were  decided  by the  Council  during  this  period.  In the  context  of  Community 
support  for  Mediterranean  countries  adversely  affected  by  the  Gulf  conflict,  the  Council 
made available to  Israel an ECU  160 million soft  loan in July  1991.  In September  1991,  a 
medium-term  loan  of ECU  400  million was  also  decided  in favour  of Algeria  to  help  the 
country  carry  through  the  political  and  economic  reforms  under  way1.  A further  loan  to 
Algeria for an amount  of up to ECU 200 million was decided in late 19942. 

Operations  in  favour  of  European  Newly  Independent  States  (NIS)  have  also  been 
decided  in  1994 comprising loans of up to ECU 45 million for  Moldova  and of up to  ECU 
85 million for  Ukraine. 

At the initiative of the European  Commission,  a set of principles was agreed  among the G-
24 to serve as guidelines for the implementation  of EU/G-24  macro-financial  assistance. 
These  principles  which  underline  the  exceptional  character  of  this  assistance,  its 
complementarity  to financing  from  the IFIs and its macro-economic  conditionality,  have 

See: Report on the implementation  of macro-financial  assistance to thud  countries,  COM(94)229  of 7 
June  1994. 

2 

See:  Report  on  the  implementation  of  macro-financial  assistance  to  third  countries,  COM(95)572  of 
27 November  1995. 

been  subsequently  endorsed  by the EU Council of Ministers  of Finance  (ECOFIN)  and 
are now applying to the Community's macro-financial  assistance to third countries. 

2.  Macro-financial  assistance in 1995 

In  1995,  focus  in  the  Community's  macro-financial  assistance  shifted  away  from  the 
Central  and  Eastern  European  group  which,  as a result  of  a generally  positive  economic 
performance,  is  relying  less  and  less  on  external  financial  support  from  official  sources. 
Instead,  an increasing  part  of  Community  loans  were  directed  towards  the  NIS  and  the 
Mediterranean  region. 

Within  the  Central  and  Eastern  European  group,  a first  tranche  of  ECU  15  million  of  a 
grant  to  Albania  totalling  ECU  35  million,  decided  in  December  1994,  was  actually 
disbursed  in May  1995.  The  second  tranche has, however,  been  delayed  due to  slippages 
in  policy  implementation  in  Albania.  For  similar  reasons,  disbursements  pertaining  to  a 
ECU  125 million  macro-financial  loan to  Romania  decided  in  1994 were  delayed  and  the 
actual  disbursement  of the first tranche  of ECU  55 million took  place  only  in  November 
1995.  In  the  case  of  Bulgaria,  serious  disturbances  in  the  economy  have  considerably 
delayed  the  resumption  of  external  assistance  from  the  international  financial  institutions, 
the  European  Union  and  bilateral  donors.  A  second  tranche  of ECU  40  million  which  is 
part  of a Community  loan of ECU  110 million to Bulgaria and which was initially  decided 
in  1992  and  reactivated  in  1994  is  expected  to  be  disbursed  in  1996.  In  the  case  of 
Slovakia,  no  disbursements  were  made  during  1995  under  the  ECU  130  million  loan 
facility  decided  in late  1994. To the contrary, in the absence of sufficient  progress  between 
the Commission  and the  Slovak  authorities in agreeing  on the economic policy  conditions 
to be attached  to  this facility  and  on account  of the improving  economic  conditions  in the 
country,  the  Commission  has proposed  to repeal the Council decision from  1994 to  grant 
further  macro-financial  assistance to  Slovakia. As regards all three Baltic  states  for  which 
the  Council  had  approved  in  1992  macro-financial  assistance,  second  tranches  pertaining 
to the loans in favour  of Latvia and Estonia have not been disbursed,  on account  mainly of 
the  good  record  of the  countries' balance  of payments.  In August  1995  the  Commission 
disbursed  an ECU  25  million instalment  on the  second  tranche  of the  Community  loan in 
favour  of Lithuania,  on account of the country's good record  of progress of reforms. 

Among  the NIS  (former  Soviet  Union), the Commission was,  for  Moldova,  in  a  position 
to release the  second  tranche of ECU 20 million pertaining to  a ECU 45 million loan  from 
1994  in  August  1995,  following  fulfilment  on  the  part  of  Moldova  of  the  agreed 
conditions for the release of this tranche. With a view to ensuring a sustainable balance-of-
payments  situation for  Moldova  also  during the  1995-1996  period  the international  donor 
community  recognised,  in  early  1995,  the  need  to  provide  further  macro-financial 
assistance  to  this  country.  The  Council  consequently  decided,  in  early  1996,  to  provide 
Moldova with  a further  loan  of up  to  ECU  15 million.  Belarus, which  has been  relatively 
late  in  embarking  on  economic  reform,  agreed  a  stand-by  arrangement  with  the  IMF  in 
1995.  In  the  circumstances,  the  Council,  after  assessing  the  economic  and  financial 
situation  of  the  country,  decided  in  April  1995  to  assist  Belarus  with  a  macro-financial 
loan  of up  to  ECU  75  million.  The  Commission  eventually  in October  set  the  amount  of 
the  loan  at  ECU  55  million  on the  basis  of  the  country's  revised  financing  needs.  A first 
tranche  of  this  loan  (ECU  30  million)  was  disbursed  in  December  1995.  Regarding 
Ukraine, finally,  the  Commission was, after  significant  delays on the part  of the  Ukrainian 
authorities,  in  a  position  to  disburse  a  macro-financial  loan  of  ECU  85  million  in 
December  of  1995.  In  the light  of the  continued  economic  difficulties  of  the  country  and 

renewed  efforts  by  the  Ukrainian  government  to  address  these  difficulties,  the  Council 
decided in October  1995 to provide further  macro-financial  assistance to Ukraine up to  an 
amount  of ECU  200  million.  The first disbursements under this loan facility  are  expected 
for the second half  of 1996. 

In  the  Mediterranean  region,  finally,  a  second  macro-financial  loan  to  Algeria,  of  the 
amount  of ECU  200 million,  was decided  by the Council in December  1994  and  the  first 
tranche - of ECU  100 million - was disbursed in November  1995. 

Each  Community  operation  has continued  to  respond  to  the  set  of principles  applying  to 
this type of assistance. In particular,  Community  macro-financial  assistance has  supported 
efforts  by recipient  countries to  bring  about  economic reforms  and  structural  changes.  In 
close co-ordination with the IMF and the World Bank,  it has promoted  policies tailored  to 
the  specific national  needs, designed  to  stabilize the financial situation  and  set up  market-
oriented  economies,  (macroeconomic  performance  and  progress  in reforms  in  beneficiary 
countries  are  summarized  in  Tables  4  and  5  and  discussed  country  by  country  in  the 
following  chapters). 

3. 

Trends and tendencies  in macro-financial  assistance 

As  indicated  earlier,  developments  in  1995 further  reinforced  a trend  that  could  be  seen 
already in  1994 with respect to the geographical focus  of the Community's  macro-financial 
assistance.  Simultaneously,  the  increasing  diversity  in  economic  conditions  among 
beneficiaries  led  to  increasingly  diverse demands, which  - in turn  - have made the  macro-
financial instrument,  as such,  evolve further.  A relevant  question for  the  future  is to  what 
extent  the  existing  instrument(s)  can  be  adapted  further  to  suit  the  goals  of  the  Union 
while at the same time meeting the evolving needs of beneficiary  countries. 

In  the  case  of  the  Central  and  East  European  countries,  macro-financial  support  has 
to  establish  closer  links  with  them. 
formed  part  of  a  broad  effort  by  the  Union 
Association  Agreements  have  been  signed  with  practically  all  these  countries.  In 
accepting,  in  Copenhagen  in  June  1993,  the  goal  of  Union  membership  for  them,  the 
European  Council  put  forward  political  and  economic  measures  to  promote  this  end, 
among  which  macro-financial  assistance  was  explicitly  mentioned  as  one  avenue.  Since 
then,  the  process  of  preparing  the  associated  states  of  Central  and  Eastern  Europe  for 
membership has  intensified. 

During  this  process,  the  links  between  macro-economic  stabilisation  and  structural 
adjustment  have  become  increasingly  clearer.  For  the  IMF,  it  translated  into  a  better 
integration  of  such  aspects  into  programmes  negotiated  with  these  countries  while  the 
World Bank  supported  national authorities to design specific  programmes focusing  on key 
structural reforms  to be supported  by policy-based lending. 

For  the  Union  as  well,  both  timing  and  content  of  programmes  have  been  affected. 
Community  lending  has  become  more  policy-oriented  while  at  the  same  time  achieving 
greater synergy with grant-based  instruments (mostly PHARE). 

The  countries  in  Central  and  Eastern  Europe  are  in  different  stages  of  economic 
transformation  and  some of them have clearly moved  to  a stage in their  economic  reform 
process where balance  of payments  assistance may  no longer  be needed.  The  Community 
macro-financial  assistance  in  its  original  form,  to  support  macro-economic  stabilisation 
and  the balance  of  payments,  is  still  fully  relevant  for  assisting  some  of them.  In  several 

other  countries  macro-financial  assistance  is  now  more  centred  on  supporting  the 
government's structural reform, programme in combination with PHARE, which whenever 
possible  can  contribute  to  strengthening  the  capacity  of relevant  national  institutions  to 
underpin  such  reforms.  In  general,  these  developments  have  also  led  to  increased  co 
operation between the Commission and the Bretton Woods institutions. At the same time, 
the dialogue with the authorities in the countries concerned has broadened  considerably. 

While  overall  amounts  of  resources  committed  have  fallen,  the  Community  macro-
financial assistance  has thus tended  to become geographically  more targeted  on  associate 
countries further  to the east and south in Europe. 

The  trend  towards  supporting  neighbouring  countries  further  away  from  the  immediate 
borders  of  the  Union 
is  reinforced  if  we  also  consider  the  three  European  New 
Independent  States  that  have  received  macro-financial  support  from  the  Community  -
Ukraine,  Belarus  and  Moldova.  Here  too,  focus  has  gradually  shifted  towards  more 
emphasis  on  structural  reform.  As  in  CEECs,  grant-based  instruments  (mainly  TACIS) 
have been relied upon  in parallel to support the countries  concerned. 

The  specific  examples  of  Ukraine  and  Belarus,  together  with  Bulgaria  and  Romania 
among the  CEECs,  also  serve to  illustrate  another  trend,  namely  that  countries  that  have 
either  embarked  late  on  economic  reform,  like  Belarus,  or  have  moved  slowly,  like 
Romania, or have lost time while hesitating  or  even partly reversing  reforms,  like Ukraine 
or Bulgaria,  all find themselves  in relatively  difficult  positions.  In this  respect,  the  macro-
financial assistance  provided  by  the  Community  seems  to  have  well  served  its  cause  by 
reinforcing  the  transition  efforts  in  those  countries  who  choose  to  embark  on  ambitious 
reform  programmes. 

4. 

Burden-sharing 

While  Community  macro-financial  assistance  has  been  evolving  towards  a  deepened 
policy-oriented  approach,  resources  mobilized  by  the  Union  in  this  context  have  been 
decreasing  substantially  (Tables  3  and  3.1).  Initially,  an important  feature  of  Community 
assistance was that very large sums of money were to be found  to support Bretton  Woods 
institutions  programmes.  The  Community  played  a  key  role  both  as  the  largest  single 
provider of these funds,  (mobilizing 54% of total balance of payments support to  Hungary 
in  1990) and through  its role as the co-ordinator  of bilateral  assistance  (the  G-24  process 
for  CEECs since  1991), which ensured a wide participation in this  effort. 

Eventually,  more  resources  were  mobilized  by  the  IFIs  (whose  contribution  increased 
from  21% of  balance  of payments  support  -  excluding  debt  relief-  in  1991  to  some  80 
percent  in  1995):  a  new  lending  instrument,  the  Systemic  Transformation  Facility  (STF) 
was  created  which,  together  with  the  increase  in  the  access  limits,  enabled  the  IMF  to 
increase  its  assistance  to  CEECs  and  countries  of  the  former  Soviet  Union.  The  World 
Bank,  for  its part,  developed  successive  generations  of policy-based  balance  of  payments 
operations  (Structural  Adjustment  loans  -SAL-,  followed  by  Enterprise  and  Financial 
Sectors Adjustment  loans -EFSAL3). 

Most EFSAL  operations discussed with beneficiary  countries could not be concluded  by end-1995  and 
arc  therefore  not  included  in  the  commiunents  recorded  in  Tables  3  and  3.1.  When  they  are, 
contribution  by the  World Bank will increase  accordingly. 

In parallel,  contributions by external  creditors, both  public and private,  were  mobilized in 
the framework  of  debt-relief  and  debt-reduction  operations  (Algeria,  Bulgaria,  Ukraine), 
accounting for  a substantial share of balance of payments support in  1991 and  1994. 

In this context, relative contributions4 from the European Union  and from  other bilaterals 
(beyond  debt relief operations)  declined  sharply from 54% and 25%, respectively  in  1990 
to  14% and 6%, respectively, in  1995 (or  6%  and 3%, respectively,  of total  commitments 
including debt relief operations). 

Only the countries for which macro-financial assistance from the EU has been mobilized are covered 
by these statistics. 

Table 1: COMMUNITY  MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES 
EXTENDED THROUGH END 1995 
Status of effective  disbursements as of April  1996 (in millions of ECU) 

Country 

Maximum «mount 
«Hthprfoed 

Pat; of 
Council 
Decision 

Disbursed 

Amounts and Pates  Undisbursed 
of disbursements 

A. Macro-financial assistance to CEECs 

Hungary I 
(Structural adjustment  loan) 

870 

22.02.90 

610 

350-Apr. 1990 
260-Feb. 1991 

260 

Czech and Slovak Federal Republic 
(Balance of payments loan) 

375 

25.02.91 

375 

Hungary II 
(Balance of payments loan) 

Bulgaria I 
(Balance of payments loan) 

Romania I 
(Balance of payments loan) 

Albania I 
(Balance of payments grant) 

Baltics 
(Balance of payments loans) 
of which : 
Estonia 
Latvia 
Lithuania 

Romania II 
(Balance of payments loan) 

Bulgaria  II 
(Balance of payments loan) 

Romania  III 
(Balance of payments loan) 

Albania II 
(Balance of payments grant) 

Slovakia 
(Balance of payments loan) 

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 

Mar. 1993 
Mar. 1993 
50-Jul.  1993 
25  - Aug.  1995 

180 

24.06.91 

180 

290 

24.06.91 

290 

375 

22.07.91 

375 

70 

28.09.92 

70 

220 

23.11.92 

135 

40 
80 
100 

80 

27.11.92 

80 

Feb.  1993 

110 

19.10.92 

70 

Dec.  1994 

125 

20.06.94 

55 

Nov. 1995 

35 

28.1194 

15 

Jun. 1995 

130 

22.12.94 

85 

20 
40 
25 

40 

70 

20 

130 

605 

TOTAL A 

2860 

2255 

B.  Macro-financial  assistance to other third  countries 

Israel (1) 
(Structural adjustment  soft  loan) 

187.5 

22.07.91 

187.5 

Mar. 1992 

Algeria I 
(Balance of payments loan) 

Moldova 
(Balance of payments loan) 

Algeria II 
(Balance of payments  loan) 

Ukraine I 
(Balance  of payments  loan) 

Belarus 
(Balance of payments loan) 

Ukraine II 
(Balance of payments loan) 

TOTAL B 

TOTALA+B 

400 

23.09.91 

400 

45 

13.06.94 

45 

250-Jan. 1992 
150-Aug. 1994 

25-Dec  1994 
20-Aug.  >r )S 

200 

22.12.94 

100 

Nov. 19 

85 

22.12.94 

85 

Dec 1995 

10.04.95 

30 

Dec 1995 

25 

200 

23.10.95 

1172.5 

4032.5 

847.5 

3102.5 

325 

930 

(1)  Assistance to Israel includes a loan principal  amount of ECU  160 million and grants of ECU  27.5 million 

in the form  of interest rates subsidies. 

Table 2: EU/G-24  macro-financial  assistance to Central  and  Eastern  Europe since  1991 (cumulative  amounts) 

(Status as of December  95) 

Country 
(Identified 
gaps) 

Community 
EFTA* 
United  States 
Japan 
Others 

ALBANIA 
(US $ 237  million) 

BALTIC  STATES 
(US $ 600 million) 

BULGARIA 
(USS  1130  million) 

Commitments 
%of 
gap 

% of 
commit. 

Mln 
US$ 

Disburs. 

Mln 
US$ 

% of 
disb. 

Commitments 
%of 
gap 

%of 
commit. 

Mln 
US$ 

Disburs. 

Mln 
US$ 

% of 
disb. 

Commitments 
% of 
gap 

%of 
commit. 

Mln 
US$ 

Disburs. 

Mln 
US$ 

% of 
disb. 

123.5 
14.2 

52.1 
6.0 

71.0 
8.2 

100.1 
4.2 

88.7 
3.7 

300.0 
123.1 

50.0 
20.5 

57.4 
23.5 

184.0 
67.9 

54.0 
19.9 

36.3 

15.3 

20.9 

8.5 

7.5 

100.0 

16.7 

19.1 

88.9 

26.1 

533.3 
126.0 
10.0 
228.1 
8.7 

47.2 
11.2 
0.9 
20.2 
0.8 

58.9 
13.9 
1.1 
25.2 
1.0 

487.7 
95.0 
10.0 
100.0 

70.4 
13.7 
1.4 
14.4 

Total 

174.0 

73.4 

100.0 

112.8 

100.0 

523.1 

87.2 

100.0 

340.8 

100.0 

906.1 

80.2 

100.0 

692.7 

100.0 

* ofwhich.  A, S, SF  [ 

11.7  | 

4.9  | 

6.7  | 

4.2  | 

3~7~  M 

13.5 

J5T[ 

67.9 

"19^1 

69.0 

I 

6.1  | 

7.6  | 

50.0  | 

7.2  || 

Country 
(Identified 
gaps) 

• 

Community 
EFTA * 
United  States 
Japan 
Others 

CSFR 
(USS  1000  million) 

HUNGARY (1) 
(US $ 500  million) 

ROMANIA 
(USS  1455  million) 

Commitments 
% of 
gap 

% of 
commit. 

Mln 
USS 

Disburs. 

Mln 
USS 

%of 
disb. 

Mln 
USS 

Commitments 
%of 

%of 
commit. 

Disburs. 

Mln 
USS 

%of 
disb. 

Commitments 
%of 
gap 

% of 
commit. 

Mln 
USS 

Disburs. 

Mln 
USS 

% of 
disb. 

500.0 
146.0 
15.0 
200.0 
26.0 

50.0 
14.6 
1.5 
20.0 
2.6 

56.4 
16.5 
1.7 
22.5 
2.9 

500.0 
146.0 
15.0 
200.0 
1.0 

58.0  1 
16.9  1 
1.7  1 
23.2  j 
0.1  1 

250.0 
95.0 
10.0 
150.0 
12.8 

48.3 
18.3 
1.9 
29.0 
2.5 

250.0 
95.0 
10.0 
125.0 
12.8 

50.7 
19.3 
2.0 
25.4 
2.6 

740.6 
162.2 

150.0 
22.0 

50.9 
11.1 

10.3 
1.5 

68.9 
15.1 

660.7 
143.3 

14.0 
2.0 

100.0 
22.0 

71.3 
15.5 

1.0.8 
2.4 

gap 

50.0 
19.0 
2.0 
30.0 
2.6 

Total 

887.0 

88.7 

100.0 

862.0 

100.0  i 

517.8 

103.6 

100.0 

492.8 

100.0 

1074.8 

73.9 

100.0 

926.0 

100.0 

* ofwhich.  A, S, SF  [ 

90.0  | 

9.0  1 

10.1  [ 

90.0 

10.4 

50 

10.0 

9.7  | 

50 

10.1 

87.3 

6.0 

78.4 

8.5  fl 

Country 
(Identified 
gaps) 

Community 
EFTA* 
United  States 
Japan 
Others 

SLOVAKIA 
(USS 300  million) 

TOTAL 
(USS  5222  million) 

Commitments 
%of 
gap 

%of 
commit. 

Mln 
USS 

Disburs. 

| 

Mln 
USS 

%of 
disb. 

Commitments 
%of 
gap 

%of 
commit. 

Mln 
USS 

Disburs. 

Mln 
USS 

%of 
disb. 

156.0 
27.4 

52.0 
9.1 

64.1 
11.2 

60.0 

20.0 

24.7 

60.0 

100.0 

2603.5 
693.8 
35.0 
924.4 
69.5 

49.9 
13.3 
0.7 
17.7 
1.3 

60.2 
16.0 
0.8 
21.4 
1.6 

2182.5 
551.4 
35.0 
682.4 
35.8 

62.6 
15.8 
1.0 
19.6 
1.0 

Total 

243.4 

81.1 

100.0 

60.0 

100.0 

4326.2 

82.8 

100.0 

3487.1 

100.0 

* of which. A, S, SF  | 

16.4  | 

5.5  | 

6.7  | 

I 

405.3  | 

7.8 1 

9.4 

340.5 

9.8 

(I) 

In  1990, the Community  committed  in favour  of Hungary  an additional  870 MECU  loan  which  is not taken  into consideration  in this  table 
since  it took  place outside  the G-24  process. 

Source: 

European  Commission 

8 

Table 3: Balance of payments support to recipients of EU 
macro-financial  assistance by contributor,  1990-1995 (1) 
(in percent of total  commitments) 

Including debt relief 

"~" 

I 

Î99Ô 

Ï99Î 

Ï992 

Ï994 

Ï995 

ÏFTs 

IMF 
World Bank 

Bilaterals 

EU (2) 
Other bilaterals (3) 

ofwhich 

USA 
Japan 

Debt relief 

Paris Club 
London Club 
Other (4) 

Excluding debt relief 

IFFs 

IMF 
World Bank 

Bilaterals 

EU (2) 
Other bilaterals (3) 

ofwhich 

USA 
Japan 

21 
11 
10 
79 
54 
25 

0 
10 
0 

69 
40 
29 
31 
19 
13 

.*  0 
5 
0 

50 
37 
13 
50 
20 
13 

0 
8 
18 
5 

13 

27 
21 
6 
73 
6 
5 

1 
2 
63 
32 
28 
2 

33~ 
26 
7 
67 
6 
3 

0 
3 
59 
0 
0 
59 

I 

Î 9 9 Ô Ï 9 9 Ï

Ï 9 9 2 Ï 9 94 

Ï995 

21 
11 
10 
79 
54 
25 

0 
10 

61 
45 
16 
39 
24 
15 

0 
9 

69 
40 
29 
31 
19 
13 

0 
5 

71 
56 
15 
29 
17 
12 

2 
6 

80" 
63 
17 
20 
14 
6 

0 
6_ 

(1) 

(2) 
(3) 
(4) 

Based on Council  Decisions for  EU operations. 
No operation was decided in  1993. 
EU macro-financial  assistance. 
Including EU Member  States. 
Syndicated commercial banks loan in favour of Algeria in  1991, 
debt relief in favour  of Ukraine by Russia and Turkmenistan  in  1994 and in  1995. 

Table 3.1.: Balance of payments support to recipients of EU 

macro-financial  assistance by contributor,  1990-1995 

(in millions of USS and in percent of total commitments and  disbursements) 

Balance of payments support -  1990 

Total 

Hungary I 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

IFI's 

IMF 

WB (policy  based) 

Bilaterals 

EU 

USA 

Japan 

Germany 

Other bilaterals 

419 

219 

200 

1618 

1108 

0 

200 

311 

375 

175 

200 

1288 

777 

0 

200 

•311 

21 

11 

10 

79 

54 

0 

10 

15 

0 

23 

11 

12 

77 

47 

0 

12 

19 

0 

419 

219 

200 

1618 

1108 

0 

200 

311 

0 

21 

11 

10 

79 

54 

0 

10 

15 

0 

375 

175 

200 

1288 

777 

0 

200 

311 

0 

23 

11 

12 

77 

47 

0 

12 

19 

0 

Total 

2037 

100 

1663 

100 

2037 

100 

1663 

100 

Balance of payments  support-1991 

Total 

Algeria I 

Bulgaria I 

« 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio US$ 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

IFI's 

IMF 

WB (policy  based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

Paris Club 

Syndicated loan 

5607 

4177 

1430 

5600 

2190 

35 

850 

521 

2004 

554 

1450 

50 

37 

13 

50 

20 

0 

8 

5 

18 

5 

13 

3930 

2825 

1105 

5147 

1988 

35 

633 

487 

2004 

554 

1450 

43 

31 

12 

57 

22 

0 

7 

5 

22 

6 

16 

690 

390 

300 

2290 

540 

0 

300 

0 

1450 

23 

13 

10 

77 

18 

0 

10 

0 

49 

443 

293 

150 

1938 

338 

0 

150 

0 

1450 

1450 

49 

1450 

640 

390 

250 

1168 

400 

10 

100 

104 

554 

554 

19 

12 

6 

81 

14 

0 

6 

0 

61 

61 

35 

22 

14 

65 

22 

1 

6 

6 

31 

31 

540 

390 

150 

1117 

400 

10 

58 

95 

554 

554 

33 

24 

9 

67 

24 

1 

4 

6 

33 

33 

Total 

11207 

100 

9077 

100 

2980 

100 

2381 

100 

1808 

100 

1657 

100 

CSFR 

Hungary 

Romania I 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

1302 

852 

450 

887 

500 

15 

200 

172 

59 

39 

21 

41 

23 

1 

9 

8 

1302 

852 

450 

862 

500 

15 

200 

147 

60 

39 

21 

40 

23 

1 

9 

7 

2262 

2012 

250 

51&. 

250 

10 

150 

108 

81 

72 

9 

19 

9 

0 

5 

4 

1020 

845 

175 

493 

250 

10 

125 

108 

67 

56 

12 

33 

17 

1 

8 

7 

713 

533 

180 

737 

500 

100 

137 

49 

37 

12 

51 

34 

7 

9 

625 

445 

180 

737 

500 

100 

137 

46 

33 

13 

54 

37 

7 

10 

IFI's 

IMF 

WB (policy  based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

Paris Club 

Syndicated  loan 

Total 

2189 

100 

2164 

100 

2780 

100 

1513 

100 

1450 

100 

1362 

100 

10 

Table 3.1. (cont.) 

Balance of payments support -  1992 

Albania 1 

Commitments 

mio  USS 

% 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 

mio USS 

% 

IFPs 

IMF 

WB (policy based 

Bilaterals 

EU 
USA 
Japan 
Other bilaterals 

1564 
909 

655 

708 
423 
0 
120 
165 

1193 
768 

426 

476 
298 

48 

28 

20 

115 

83 
0 
20 
12 

109 

83 

26 

48 

23 

0 

13 

13 

1670 

100 

123 

100 

204 

100 

Commitments 
% 

mio US$ 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 

mio  USS 

% 

IFI's 
IMF 
WB (policy based 

Bilaterals 

EU 
USA 
Japan 
Other bilaterals 

215 

170 

45 

169 

91 

0 

35 

43 

196 

151 

45 

94 

46 

0 

23 

25 

245 

185 

60 

217 

114 

0 

45 

58 

194 

149 

45 

666 

366 

300 

119 

90 

940 

440 

500 

29 

1059 

Balance of payments support 1994 

Total 

Albania II 

Algeria II 

Bulcaria II 

Commitments 

mio  USS 

% 

Disbursements 
% 

mio USS 

Commitments 

mio USS 

% 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 

mio USS 

% 

Commitments 
% 

mio USS 

Disbursements 
% 

mio USS 

IFI's 

IMF 

WB (policy based 

4086 

3206 

880 

27 

21 

6 

2772 
2072 
700 

Bilaterals 

11299 

73 

10357 

EU 
USA 

Japan 

Other bilaterals 
Debt relief 

London Club 
Paris Club' 
Other 

952 
100 

350 

252 

9645 
4920 
4380 

345 

336 

90 

185 

101 

9645 

4920 
4380 

6 
1 

2 

2 

63 
32 
28 

2 

21 
16 
5 

79 

3 

1 

1 

1 

73 

37 
33 

75 
60 
15 

45 
41 
0 
0 
4 

63 
50 
13 

37 
34 
0 
0 
3 

42 
34 
8 

18 

18 

0 

0 

0 

70 
58 
13 

30 

30 

0 

0 

0 

1397 
1097 
300 

5920 

335 

0 

150 
135 

'  5300 

1120 
4180 

19 
15 
4 

81 

5 

0 

2 
2 

72 

15 
57 

1182 

882 
300 

5666 

201 

0 

95 

70 
5300 

1120 

4180 

17 

13 
4 

83 

3 

0 

1 

1 
77 

16 

61 

646 

521 
125 

4214 

125 

0 

50 

39 
4000 

3800 
200 

195 

195 

13 

11 
3 

5 

5 
0 

87 

4088 

95 

3 

0 

1 

1 
82 

78 
4 

88 
0 

0 

0 

4000 

3800 
200 

2 
0 

0 

0 

93 

89 
5 

Total 

15385 

100 

13129 

100 

120 

100 

59 

100 

7317 

100 

6848 

100 

4860 

100 

4283 

100 

Moldova I 

Romania III 

Slovak Republic 

Ukraine 

Commitments 
% 

mio USS 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 
% 

mio  USS 

Commitments 

mio USS 

% 

Disbursements 
% 

mio USS 

Commitments 
% 

mio USS 

Disbursements 

mio USS 

% 

164 

104 

60 

130 

54 
30 
40 
6 

56 

35 

20 

44 

18 
10 
14 
2 

133 

121 

12 

106 

30 
20 
30 
26 

56 

51 

5 

44 

12 
8 
13 
11 

913 
713 
200 

218 

143 
0 
50 
26 

81 
63 
18 

19 

13 
0 
4 
2 

447 
247 
200 

0 

0 
0 
0 
0 

100 
55 
45 

0 

0 
0 
0 
0 

426 

346 

80 

242 

155 

60 
27 

64 

52 

12 

36 

23 
0 
9 
4 

308 

228 

80 

60 
0 
0 
60 
0 

IFI's 

IMF 

WB (policy based 

Bilaterals 

EU 
USA 
Japan 

Other bilaterals 
Debt relief 

London Club 
Paris Club 
Other 

84 

62 

22 

16 
0 
0 
16 
0 

465 
365 
100 

530 

100 
70 
0 
15 

345 

47 
37 
10 

53 

10 
7 
0 
2 

35 

465 
365 
100 

420 
0 

70 
0 

5 
345 

53 
41 
11 

47 
0 

8 
0 

1 
39 

345 

35 

345 

39 

Total 

294 

100 

239 

100 

1131 

100 

447 

100 

668 

100 

368 

100 

995 

100 

885 

100 

T1 

Table 3.1 (cone) 

Balance of payments support 1995 

Total 

Belarus 

Ukraine IJ 

Commitments 
% 

mio  USS 

Disbursements 

mio USS 

% 

Commitments 
% 

mio USS 

Disbursements 
% 

mio USS 

Commitments 

mio USS 

% 

Disbursements; 
% 

mio USS 

163 
163 

3 

2 

IFI's 
IMF 
WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

London Club 

Paris Club 

Other 

1877 

1477 

400 

3885 

330 

0 

150 

0 

3405 

0 

0 

3405 

1770 

1370 

400 

3443 

38 

0 

0 

0 

3405 

0 

0 

33 

26 
7 

67 

6 

0 

3 

0 

59 

0 

0 

59 

270 

270 

70 

70 

0 

0 

0 

0 

79 
79 
0 

21 

21 

0 

0 

0 

0 

0 

0 

0 

81 

81 

0 

19 

19 

0 

0 

0 

0 

0 

0 

0 

1607 

1207 

400 

3815 
260 

150 

3405 

3405 

30 

22 

7 

1607 

1207 

400 

70 

3405 

5 

0 

3 

0 

63 

0 

0 

63 

3405 

3405 

32 

24 

68 

0 

0 

0 

0 

68 

0 

0 

68 

Total 

5762 

100 

5213 

100 

340 

100 

201 

100 

5422 

100 

5012 

100 

12 

Table 4: Selected economic indicators 

1992 

1993 

1994 

1995 

Programme  (1) 

Estimates 

GDP at constant prices 

(Percent change) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine 

-9.7 
2.2 

-7.3 
-19.3 
-35.0 
-37.7 
-29.1 
-13.6 
-7.0 
-17.0 

9.6 
-1.8 
•11.6 
-2.4 
-3.5 
•15.0 
•16.2 
-8.7 
1.3 
-4.1 
•17.1 

9.4 
1.1 
-20.0 
1.8 
4.0 
2.0 
1.5 
-31.0 
3.9 
4.8 
-23.0 

Consumer  price (end  year) 

(Percent change) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine 

236.6 
31.7 

79.4 
942.0 
958.0 
246.0 
2198.0 
198.5 
9.1 
2000.0 

30.9 
20.5 
1990.0 
63.8 
36.0 
35.0 
163.0 
837.0 
295.0 
25.0 
10155.0 

15.8 
28.0 
2220.0 
122.0 
42.0 
26.0 
45.0 
116.0 
62.0 
11.7 
401.0 

Fiscal  balance 

(Percent of GDP) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine 

-21.3 
-1.3 

-15.0 
0.2 
-0.8 
0.5 
-23.4 
-4.6 
-12.8 
-30.4 

-15.9 
-9.2 
-8.3 
-15.7 
-0.7 
0.6 
-5.1 
-6.8 
-0.1 
-7.6 
-10.1 

•13.6 
-4.4 
-1.7 
-6.6 
0.0 
-4.1 
-4.2 
-9.0 
-1.0 
-1.4 
-8.2 

6.0 

2.0 
•10.0 

10.0 

10.0 

8.0 
138.0 

-140 

-3.5 

-3.0 
-4.6 

9.0 
4.3 
-7.0 
2.6 
4.0 
0.0 
3.0 
-3.0 
6.9 
7.4 
•12.0 

6.0 
22.0 
290.0 
32.9 
28.0 
23.0 
35.0 
24.0 
33.3 
7.2 
182.0 

-8.4 
-1.4 
-3.2 
-6.7 
0.3 
-4.4 
-33.4 
-5.5 
-2.8 
0.5 
-5.0 

13 

Table 4: Selected economic indicators (continued) 

1992 

1993 

1994 

Programme 

1995 
(1) 

Estimates 

Current  account 

(Percent of GDP) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak  Republic 
Ukraine 

-65.7 
2.9 

-9.3 
7.6 
2.3 
3.4 
-3.0 
-8.6 
0.4(2) 
-3.5 

-33.4 
2.1 
-8.7 
-7.9 
-5.7 
6.7 
-6.2 
-9.3 
-5.5 
-5.4 
-5.9 

-13.5 
-4.3 
-11.4 
-0.3 
-9.0 
-4.6 
-4.3 
-9.2 
-1.4 
5.7 
-6.0 

Official  foreign  exchange  reserves 
(end  year) 

(Months of imports) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Slovak Republic 
Ukraine 

0.7 
2.2 

3.5 
4.5 
2.0 
2.6 
0.0 
0.2 
1.1 

2.2 
2.3 
0.3 
2.4 
4.0 
5.6 
2.4 
1.5 
0.1 
1.2 
0.2 

3.3 
2.6 
0.3 
3.2 
3.2 
5.5 
2.7 
3.1 
4.0 
1.4 
2.3 

11.1 

-2.3 

3.3 

3.0 

2.4 
4.3 

9.7 
-5.6 
-4.1 
2.3 
-10.6 
-4.0 
-3.4 
-6.0 
-4.4 
4.3 
-4.4 

3.8 
1.8 
1.5 
3.3 
2.8 
4.8 
3.5 
4.0 
1.9 
3.8 
3.7 

(1)  Programme targets as set in : July 93 (and revised in Aug 94) for Albania, May 94 for  Algeria, 
March 95 for  Moldova, May 94 for Romania, July 94 for Slovakia, April 95 for Ukraine. 

(2)  After fiscal transfers  from  the Czech  lands, estimated at about 7% of Slovak GDP. 

Sources: National authorities and IMF 

14 

TABLE  5 
STATUS  OF  ECONOMIC  REFORM 

5.1  ALBANIA 

Price liberalisation 

Most  price  controls  and  subsidies  eliminated,  with 
the 
exception  of  bread  and  flour.  Electricity  prices  will  soon  be 
fixed by a regulatory body. 

Trade liberalisation 

No  quantitative  restrictions  on  imports.  Export  restrictions 
limited to scrap metals and wood. 

Exchange regime 

Free  float  since  July  1992  within  a  unified  exchange  market. 
Early  licensing  of  foreign  exchange  dealers  and  exchange 
bureaux.  Current  account  convertibility.  Agreement  on  the 
large  external  debt  arrears  to  commercial  banks  reached  in 
August 1995. 

Foreign direct investment 

Liberal  legislation.  Liberalisation  of  land  sale  to  foreigners. 
Creation of economic free zones. 

Monetary policy 

Public finances 

Tight  monetary  policy.  Use  of  bank-by-bank  credit  ceilings. 
Administrative  guidance  to  ensure  that  interest  rates  remain 
positive in real terms. Treasury bill auctions  (3,6,  12 months). 

Tight  fiscal  policy  until  October  1995.  VAT  introduction 
delayed  until  July  1996.  Removal  of  tariff  exemptions,  new 
classification,  new  tariff  rates  approved 
in  May  1995. 
Revenue: 24.6 % of GDP in  1995. 

Privatisation and enterprise 
restructuring 

in  trade  and  services  completed. 

96 % of total arable land privatized.  Distribution  of temporary 
titles  nearly  completed  in  March  1996.  Laws  on  land  market, 
mortgage,  collateral,  leasing,  subleasing,  bankruptcy.  Small 
Industrial 
privatisation 
enterprises:  privatisation  of 
and  medium-sized 
enterprises  largely  completed;  progress  with  biggest  state-
owned  enterprises.  Mass  privatisation  process.  Strategic 
enterprises  and  utilitie  offered  for  sale  to  foreign  investors. 
Stock exchange. 

small 

8. 

Financial  sector  reform 

Two-tier  banking  system.  State-owned  banks  to  be  privatized 
in the course of  1996 and  1997 with majority  share  offered  for 
sale to  foreign  investors.  Audits  completed  in  1996.  New  law 
on  the  role  and  responsibilities  of the  Bank  of  Albania.  New 
law  on  the  banking  system  with  streamlining 
licensing 
procedures to facilitate  the entry of new private banks.  Several 
applicants.  Important  informal  banking  system.  End  of  the 
state monopoly in the insurance sector. 

15 

5.2 ALGERIA 

1. 

Price  liberalization 

Trade  liberalization 

3. 

Exchange regime 

Foreign direct investment 

5.  Monetary policy 

Public  finances 

Privatisation  and enterprise 
restructuring 

8. 

Financial  sector  reform 

Major  price liberalisation and subsidies elimination in  1994. In 
1995,  more  "sensitive"  products  (public  utilities,  basic  food 
staples  etc.)  moved  closer 
liberalization.  The 
Competition  Law enacted in January  1995 institutionalised  the 
principle  of  free  pricing  while  providing  safeguards  against 
monopolist practices. 

total 

to 

Further  strengthening  of  the  reforms  initiated  in  1994.  No 
quantitative  restrictions  on  imports  left  apart  from  a  few 
products  for  religious  reasons.  Import  restrictions  on ten  basic 
commodities abolished in May  1995. 

Following  two  devaluations  in  1994,  the  foreign  exchange 
allocation  system  has  been  substantially  liberalised.  In  1994, 
the  Dinar  was  moved  from  a  fixed  peg  to  a  managed  float.  A 
full-fledged  interbank foreign  exchange market was  established 
as of end-December  1995. The premium on the parallel  market 
has  dropped  considerably  but  remained  substantial  at  20%  at 
end  1995.  Total  current  account  convertibility  of  the  Dinar 
expected in the near  future. 

A  liberal  foreign  investment  regime,  including  the  banking 
sector,  was  adopted  in  1993.  However,  apart  from 
the 
hydrocarbon  sector,  no  significant  foreign  investments  have 
taken place in view of the security situation. 

Interest  rates  have  been  liberalised  and  the  temporary  ceiling 
on  the  commercial  banks'  spread  was  abolished  in  December 
1995. Real rates, however, remained negative in  1995. The use 
for  monetary  management  was 
of 
strengthened.  Repurchase-auctions  and  a  formal  auction 
system for  the  sale of negotiable treasury  bonds  on the  money 
market were established in 1995. 

instruments 

indirect 

The  overall  fiscal  deficit  in  1995  dropped  further  to  1.4%  of 
GDP,  mainly  due  to  expenditure  reductions  (strict  wage 
rate 
controls  and 
depreciation also contributing to the budgetary  improvement. 

reductions)  with  exchange 

subsidy 

Hardening  of  budget  constraint,  financial  restructuring  and 
signing of management contracts  for the 23 largest  loss-making 
enterprises. Interruption of all on-lending to autonomous  public 
enterprises  from  the  Treasury.  Launching  of  a  restructuring 
programme for  all public construction  enterprises.  Initiation  of 
a divestiture programme for  103 small  and medium  enterprises 
with  World  Bank  support.  Enactment  of  a  new  privatisation 
law. 

Commercial banks are almost exclusively  state-owned.  Signing 
of  performance  contracts  and  recapitalisation  of  four  public 
banks 
ratio 
requirements gradually increasing. 

in  1995.  Capital  adequacy 

(out  of  five) 

16 

5.3  BELARUS 

1. 

Price liberalisation 

First price liberalisation in  1993. Most prices  (except  for  state 
monopolies)  freed  by  end-1994-early  1995.  Phased  increases 
of public utilities  prices  up to  80% of  cost  recovery  levels  by 
end-1995. 

Trade liberalisation 

In  1994 abolition  of most  import licences  and  export taxes,  as 
well  as  surrender  requirements  for  exporters.  (However 
reintroduction in early  1996 of surrender requirements). 

Exchange regime 

Early  1995  entry  into  force  of a  Customs  Union  with  Russia. 
As a result, increase of import taxes up to the Russian  external 
tariff.  Partnership  and  Co-operation  Agreement  with  the 
European Union (not yet ratified). 

In  1994  departure  from  Russian  rouble  zone.  Only  partial 
current  account  convertibility.  Limitations  on 
inter-bank 
currency operations. Managed  exchange  rate  (informal  peg) to 
the dollar at  11500 rbl/US$ over the year  1995. 

4. 

Foreign direct investment 

Free  repatriation  of  capital  and  profits.  Owing  to  political 
uncertainties, only minor flows  of foreign  direct investment. 

Monetary policy 

Two  tier  banking  system  with  Central  Bank  conduct  of 
monetary  policy.  In  1995  tightening  of  monetary  policy. 
Weekly  auctions  for  a  large  share  of  credits  to  the  banking 
sector  (60%).  Restrictive* monetary  policy  and  positive  real 
interest  rates  proved  successful  to  bring  inflation  down  from 
hyper-inflationary  levels to below 5% per month in second half 
1995. 

Public  finances 

Introduction  of  VAT  in  1993.  General  government  budget  in 
deficit  in  1994  (2%)  and  1995  (2.3%).  General  government 
revenue: 48.9% of GDP (1995). 

Privatisation  and .enterprise 
restructuring 

Slow  and  delayed  privatisation  process.  Only  6%  of  state 
assets  and  12% of  small  firms  privatised  by  end  1995.  Free 
distribution of vouchers to the population not yet completed. 

8. 

Financial sector  reform 

A large share of the banking sector privately owned.  Prudential 
regulations 
capital 
requirement recently increased to 2 million ECU. Banks  remain 
burdened with bad loans weakening their financial  position. 

tightened,  minimum 

progressively 

17 

5.4 BULGARIA 

1. 

Price liberalisation 

Trade liberalisation 

3. 

Exchange regime 

4. 

Foreign direct investment 

Monetary policy 

Public finances 

Privatisation  and  enterprise 
restructuring 

8. 

Financial sector  reform 

At  present  some  50%  of  goods  are  subject  to  monitoring  or 
control. Price controls  still maintained  on some public  services 
(energy, telecommunications, water supply and transports). 

Export prohibitions  have been removed.  Average  import  tariff 
on  industrial  goods:  22%.  Some  import  protection  measures 
are still in place.. 

Since  1991,  unified  and  quasi-free  floating  exchange  rate 
regime. Internal current account convertibility  established  (few 
restrictions).  Limited  BNB  interventions  in  support  of the  lev. 
Official  (Paris  Club)  debt rescheduling  reached  in April  1994. 
This  was  followed  by  the  finalization  of  DDSR  Arrangement 
with (London Club) commercial creditors in July. 

Liberal  foreign  investment  legislation  adopted  in  early  1992. 
Small amounts  of foreign  investment  so far  recorded  owing  to 
external  debt  problems,  policy  slippages  and  political 
uncertainty. 

Bank  credit  ceilings  were  discontinued  in  mid-1994.  In  1994 
monetary  and  credit  indicators  used  as  nominal  anchor. 
Limited open market operations. 

New rules on tax administration adopted  in  1994. VAT entered 
into  force  in  April,  same  year.  Revenue/GDP  ratio  in  1995: 
38% - budget deficit/GDP  ratio: 6.7. 

Property  restitution  programme  well  advanced.  A  financial 
rescue plan  for  enterprises  was  initiated  in  1994 but  important 
problems  remain.  Privatization,  although  having  been  delayed, 
is now proceeding in a more rapid pace. 

Banking  supervision  remains  weak.  Despite  an  early  bank 
consolidation  effort, " substantial  non-performing  loans  have 
been  accumulated  undermining  credibility  in  the  banking 
system necessitating tough structural action.. 

5.5  ESTONIA 

Price liberalisation 

Major  price  liberalisation  in  1991.  By  end  1992,  virtual 
completion of price liberalisation, including in energy sector. 

Trade  liberalisation 

In  early  1992,  abolition  of  most  import  tariffs  (except  few 
luxury  goods),  and  of  most  remaining  quotas  and  licensing 
requirements  except for  oil shale, clay,  quartz.  Import  subject 
to  a  0.5%  administrative  fee  plus  18%  VAT.  Few  exports 
tariffs.  Free trade agreement with Baltic  and Nordic  countries, 
and with the European Union (as of 1.1.95). 

Exchange regime 

Current  account  convertibility.  In  1992  departure  from  rouble 
zone. Since  1992, Estonian Kroon pegged to the  DM,  at  a  rate 
of eight Kroons to one DM, under a currency board  system. 

4. 

Foreign direct investment 

Free  repatriation  of  profits  and  proceeds  of  liquidation  of 
investment by non-residents. 

Monetary policy 

6. 

Public finances 

Central  bank  responsible  for  operation  of  currency  board 
(Issue  Department)  and,  in  exceptional  cases,  for  emergency 
lending  to  banking  system  (Banking  Department,  responsible 
for  managing  reserves  in  excess  of  currency  board  cover). 
Restrictive  monetary  policy  proved  successful 
to  bring 
inflation  down from hyper-inflationary  levels to two digit levels 
(29%,  1994 year-end  figures).  Central  Bank  does  not  interfere 
with the commercial banks' setting of interest rates. 

Already  in  1991,  personal  income  tax  and  VAT  introduced, 
turnover tax replaced  by corporate  income tax;  social  security, 
natural  resource  and  specific  excise  taxes.  Balanced  general 
government  budget  in  1995. General  Government  expenditure 
at40%ofGDPinl995. 

Privatisation  and  enterprise 
restructuring 

Small-scale  privatisation  virtually  completed  (about  1000 
SMEs  privatised).  Wide  distribution  of  vouchers,  large-scale 
privatisation  already  advanced 
in  1995  (400  enterprises 
privatised by year-end, out of 500 to be privatised). 

8. 

Financial sector  reform 

Two-tier  banking  system. 
Increased  pressure  on  state 
enterprises  to  restructure  through  hard  budget  constraints  and 
selective  application  of  the  bankruptcy  law.  Reduction  of 
number  of  commercial  banks  from  40  to  24  through  regular 
increases  in minimum  capital  requirement  following  a  banking 
crisis  in  Winter  92/93.  Stock  exchange  introduced.  Credit 
Institutions Act enhanced supervision  and prudential  regulation 
powers of Central Bank. 

19 

5.6  LATVIA 

1. 

Price liberalisation 

2. 

Trade liberalisation 

Exchange regime 

4. 

Foreign direct investment 

5.  Monetary policy 

6. 

Public finances 

Privatisation  and  enterprise 
restructuring 

8. 

Financial sector  reform 

Major  price  liberalisation  in  1991  and  1992  including  for 
energy  products.  By  end-1992,  price  liberalisation  essentially 
completed, excluding utility prices and rents. 

All trade limitations  abolished  in  1992.  Free trade  agreements 
with Baltic States and Nordic countries, and with the  European 
Union (as of 1.1.95). 

In  July  1992  departure  from  rouble  zone.  Current  account 
convertibility.  Exchange  rate  of  lats  stabilised  under  managed 
floating  system, informally pegged to the  SDR. 

Free  repatriation  of  profits  and  proceeds  of  liquidation  of 
investment by non-residents.  Substantial flows  of foreign  direct 
investment (165 million US$ in 1995). 

Independent  central  bank.  Strict  monetary  policy  resulted  in 
lowest inflation  rate among Baltic States. Credit policy through 
indirect instruments.  Exceptional  Central  Bank  6-month  credit 
line to the Government in 1995. 

VAT introduced in February  1992. In  1993 introduction of  flat 
rate  income  tax  (25%)  plus  a  10%  surcharge  on  annual 
income. General government  expenditure  at  38% of GDP,  and 
budget in deficit  in  1995 (3.3%% of GDP). 

Well  advanced  small-scale  privatisation.  Privatisation  agency 
established  in  1994.  Auctions  of  large  enterprises  started  in 
November  1994.  State  enterprises  not  ready  for  immediate 
privatisation transformed  into stock companies, to be managed 
by a State Property Fund established in  1994. 

Two-tier  banking  system.  49  former  branches  of  the  Bank  of 
Latvia  either  merged  into  a  core  bank  (21  now  forming  the 
Universal  Bank  to  be  restructured  and  privatised  later)  or 
privatised,  except  for  one  which  was  liquidated.  Capital 
adequacy  ratio  increased  in  January  1994.  Balance  sheets  of 
Universal  Bank  of  Latvia  and  of  Latvian  Savings  Bank 
recently  strengthened.  Nine  bank  licences  withdrawn  in  1994. 
Stock exchange already introduced. 

20 

5.7  LITHUANIA 

1. 

Price liberalisation 

Trade liberalisation 

3. 

Exchange regime 

Major  price  liberalisation  in  1991,  1992  and  1993,  including 
for  most  energy  products.  Level  of  subsidisation  reduced  for 
household  heating  (prices  raised  50%  in  October  1994), 
electricity (prices raised 33% in October  1994), and transport. 

Export quotas and licensing removed partially  in the course  of 
1992  and  completely  in  June  1993.  All  import  controls  and 
licenses  removed.  Since  May  1994  import  tariffs  for  a  broad 
range of goods, representing two thirds of imports,  suppressed. 
In July  1994 import tariffs  on several agricultural goods  raised 
to average 40%, and lowered to average  30% in October.  Free 
Trade  Agreement  with  EU  entered  into  force  on  1  January 
1995. 

Current  account  convertibility.  Lithuania  left  rouble  zone  in 
Spring  1992.  Since April  1994, Litas pegged to US dollar at  a 
fixed rate four litas to one dollar. 

Foreign direct investment 

Free  repatriation  of  profits  and  proceeds  of  liquidation  of 
investment by non-residents. 

Monetary policy 

Public  finances 

Privatisation  and  enterprise 
restructuring 

8. 

Financial sector  reform 

Independent  central  bank  (new  central  bank  law  enacted  in 
December  1994).  In  April  1994,  introduction  of  a  currency 
board  arrangement,  according 
in 
circulation is limited to the amount of foreign  exchange held in 
the central bank.  Monetary  expansion moderate  in  1994  (45% 
year average growth). 

the  money 

to  which 

The  tax  system  was  reformed  and  now  includes  personal 
income  and  profit  taxes,  property  tax,  natural  resource  tax, 
individual excise taxes, as well as general sales tax. New value 
added tax  replacing  previous  general  excise  tax.  State  budget 
in deficit in 1995 (3.4% of GDP). 

Substantial  progress  on  small  and  large-scale  privatisation 
through  auctions,  public  shares  subscriptions  and  voucher 
system.  By  January  1995,  76%  of  all  companies  eligible  for 
privatisation  (1/3 of state capital) privatised.  Little progress on 
land  privatisation.  Autonomous  r^-ation  of  state  enterprises 
promotes  efficiency. 

Creation  of  two-tier  banking  system  established  in  1992. 
Central  Bank  and  Commercial  banking  act  enacted  in  early 
1995,  tightening  prudential  rules.  International  auditing  of 
banks now compulsory.  Stock  exchange already introduced.  In 
June  1996 new  law  denationalizing  bankrupt  Innovation  Bank 
and  establishing  a  bad 
loans  agency.  Foreign  banks' 
subsidiaries allowed as of 4 June 1996. 

Price liberalization 

Trade liberalization 

Exchange regime 

4. 

Foreign direct investment 

Monetary policy 

Public  finances 

21 

5.8 MOLDOVA 

Full  liberalisation  of  prices  of  goods  and  services  with  some 
exceptions (mainly energy products). 

All export quotas  removed,  including those on grain  and  grain 
products  abolished  on  1  December  1995.  Maximum  import 
tariff  lowered  to  20  %  by  end  November  95,  with  a  few 
exceptions.  Excise  taxes  on  exports  to  non-CIS  countries 
introduced  in late  1995, but to  be  suppressed  before  adoption 
of the new IMF programme. 

New currency introduced  in November  93. Freely  floating  and 
rather  stable  against  the  US$  in  1995.  Daily  operated  FX 
auctions  at  the  Chisinau  Inter  bank  Foreign  Currency 
Exchange.  Current  account  convertibility.  Acceptance  in  June 
1995 of IMF Article VIII. 

Liberal  regime:  free  repatriation  of  profits  and  proceeds  of 
liquidation  of  investments  within three  months  of  the  closure. 
Agency  for  Foreign  Investment  Promotion  established 
in 
January  1995.  Partnership  and  co-operation  agreement  with 
the  EU  signed  in  November  1994.  Conference  on  foreign 
investments in Moldova held in Chisinau  in September  1995 to 
attract foreign investors. 

Relying  on  credit  ceilings.  Key  objective:  rapid  reduction  of 
inflation,  based  on  introduction  of  new  currency,  enforced 
financial discipline and enhanced central bank independence. 

VAT introduced in  1992. Tax administration improved.  Strong 
VAT  receipts,  including  arrears.  Receipts  of  privatisation  far 
below expectations, because  of a  lack  of  domestic  capital.  On 
expenditure  side,  overruns  due  to  higher-than-programmed 
spending 
the 
Government,  owing  to  the  assumption  by  the  Government  of 
guaranteed loans to enterprises in default. 

in  social  sphere  and 

lending  by 

to  net 

Privatisation and enterprise 
restructuring 

8. 

Financial sector  reform 

New  programme  for  95/96  adopted  in  March  95.  2200 
enterprises, representing  about  70% of the  economy  privatised 
through  the  voucher  programme,  concluded  in  November 
1995.  Privatisation  for  cash not  successful,  because  of  a  lack 
of  domestic  capital.  Liquidation  proceedings  initiated  against 
20 state enterprises. 

Two-tier  banking  system  with  National  Bank  responsible  for 
monetary  policy  and  bank  supervision.  Regulation  imposing 
provisions  for  bad  loans  approved  in  1995.  Starting  from  1 
January  1996, all banks  failing  to keep their  reserve  level  at  a 
minimum  of  Mdl  4  million  (about  US$  900.000)  forced  to 
close or to merge into a larger bank. 

1. 

Price liberalisation 

Trade liberalisation 

Exchange regime 

Foreign direct investment 

Monetary policy 

Public finances 

Privatization and enterprise 
restructuring 

8. 

Financial sector  reform 

22 

5.9  ROMANIA 

The  process  of  price  liberalisation  began  in  November  1990. 
By  the  middle  of  1995,  only  3"%  of  all  prices  on  consumer 
goods  and  services  were  administered  (down  from  90%  in 
In  the  cases  of  industrial  producer  prices  and 
1989). 
procurement prices on raw materials, the share of  administered 
prices was equal to 7% and 27%, respectively. 

liberalization  apart 

Full 
limited  number  of 
import/export quota/bans still in force, either for health  reasons 
or  for  subsidised  goods.  Europe  agreement  with  the  EU  in 
force since  1 February  1995. MFN status in the US. 

from  a 

individuals 

Limited  current  account  convertibility.  A  market-based 
exchange  rate  regime  was  established  in  April  1994  but 
multiple  exchange  rates  persist.  Foreign  exchange  is  available 
to 
through  private  exchange  bureaux.  The 
authorities,  however,  have  a  history  of  backtracking  on  their 
measures  to  liberalise  the  foreign  exchange  market.  After 
dropping  considerably  in the  middle  of the  year,  the  premium 
in the bureau  de change market had risen above  20% again  by 
end  1995. 

Free  legal  environment  for  equity  participation  and  profit 
repatriation by non-residents.  Lack  of progress  with  respect to 
privatization has limited the volume of investment  inflows. 

The Central  Bank uses both direct and indirect  instruments  for 
monetary  policy  management.  Central  Bank  financing  of 
Treasury  deficits  has  almost  ceased. Weak  financial  discipline 
of state companies. 

Gc )d  progress  with  fiscal  reform  and  introduction  of  new 
taxation  systems,  including  VAT.  Overhaul  of the  income  tax 
system is expected by end  1996.  Fiscal  deficit  is  relatively  low 
and under control. 

Little  progress  with  medium-  and  large  scale  enterprises 
privatization through the State Ownership  Fund.  Some  success 
with  small-scale  privatization  through  buy-outs.  Large  inter-
enterprise  arrears  hamper  financial  restructuring  of 
loss 
makers  which  are  ?  source  of  considerable  quasi-fiscal 
pressure. A new atte  tpt at  restructuring  the most  problematic 
enterprises was launched at the end of  1995 with the support of 
the World Bank. 

In  1995,  a  reform  programme  for  the  banking  system  was 
agreed with the World Bank, a number of prudential  rules  were 
adopted  and  the  interbank  clearing  system  was  reformed. 
Progress  with the privatisation  of state-owned  banks  remained 
very slow with only one bank  in the process  of being  divested. 
In November  1995,  trading began on the  Bucharest  Securities 
Exchange. 

23 

5.10  THE SLOVAK  REPUBLIC 

1. 

Price liberalization 

Trade liberalization 

Exchange regime 

4. 

Foreign direct investment 

Monetary policy 

Public finances 

Privatisation and enterprise 
restructuring 

8. 

Financial sector  reform 

95% of total turnover based on free prices, with regulation  still 
in  force  in  the  areas  of  energy,  public  transportation,  rents, 
telephone, telegraph and pharmaceutical products. 

Imports  liberalized  except  for  a  few  sensitive  items  subject  to 
import licences. Export  licensing remains  for  a limited  number 
of  products.  Free  trade  agreements  with  the  EC,  the  EFTA 
countries  and  the  Visegrad  countries.  Customs  union  with 
Czech  Republic  since  dissolution  of  the  CSFR.  A  10% 
surcharge on consumer imports was introduced  in March  1994 
and reduced to 7.5% in mid-1996. 

In  October  1996,  remaining  restrictions  on  current  account 
convertibility  lifted  and  clearing  system  with  Czech  Republic 
terminated.  Exchange  rate  pegged  to  a  basket  of  Western 
currencies since February 1993. 

No  limits  on  equity  participation  in  enterprises  by  non 
residents,  except  in  the  case  of  a  few  sensitive  or  defence-
related  sectors.  Free  repatriation  of profits  and  proceeds  from 
the liquidation of investment. 

independently 

National  Bank  of  Slovakia,  established  in  January  1993. 
operates 
from  government.  Slovak  crown 
introduced  in  February  1993.  Increasing  reliance  on  indirect 
instruments  of monetary  control  : remaining  credit  ceilings  on 
banks abolished in January  1996. 

VAT  reformed,  excise  tax  system  and  personal  income  tax 
introduced  in  January  1993.  General  government  revenues 
estimated at 51% of GDP in 1995. 

First  wave  of  large  scale  privatization  completed  by  Spring 
1993. Second voucher privatization  scheme, launched  in  1994, 
cancelled 
strategy 
in  mid-1995.  Current  privatization 
emphasizes  traditional  methods  (in  particular,  direct  sales  to 
managers  and  employees).  Bankruptcy  law came  into effect  in 
June  1993 but few companies have filed for  bankruptcy. 

Two-tier  banking  system  established  in  January  1990.  Partial 
privatization  of major  financial  institutions  under  first  wave  of 
large-scale  privatization.  State  stakes  in  State  Savings  Bank, 
two  largest  commercial  banks  and  largest  insurance  company 
to  be  sold  off  in  1996.  Since  1991,  several  measures  to 
strengthen 
for 
balance-sheets. 
classification  and provisioning  of bad  loans  introduced  in mid-
1995.  Bratislava  Stock  Exchange  in  operation  since  1993  but 
financial  markets remain underdeveloped. 

Stricter 

banks' 

rules 

1. 

Price liberalization 

Trade  liberalization 

Foreign exchange regime 

4. 

Foreign direct investment 

Monetary policy 

Public finances 

Privatisation and enterprise 
restructuring 

8. 

Financial sector  reform 

24 

5.11  UKRAINE 

Limits  on  profit  margins  abolished.  Reduction  in  number  of 
goods  for  which price  changes  must  be  approved  in  advance. 
Increases  in  coal,  electricity,  gas,  transportation  and  housing 
prices for households  aiming at achieving cost recovery during 
1996. 

System  of  state  orders  abolished.  All  domestic 
trade 
restrictions  abolished.  1995  budget  allocations  for  state 
procurement  of  agricultural  products  limited  to  needs  of 
budgetary organizations and at market deterrnined prices. 

Import  regime  free  of  quantitative  restrictions,  with  few 
exceptions  primarily  for  health  and  safety  reasons.  Maximum 
import tariff  lowered to  30%. Elimination  of all export  quotas 
and licences except for exports subject to VERs. 

Abolition of official  exchange rate and unification  of  exchange 
rate  determined  at  interbank  auction  market.  High  degree  of 
current account convertibility  reinstated. 

Decree of May  1993 grants tax relief  (exemption  from  income 
and profit tax for  5 years)  for  certain  investments  constituting 
at least 20% of a enterprise's charter capital. 

Allocation  of all  Central  Bank  credit  to  commercial  banks  by 
issued.  Central  Bank 
auction.  No  more  directed  credits 
refinance  rate adjusted  to ensure that it remains positive in real 
terms. 

Since  1992  gradual  tightening  and  rationalization  of  budget 
including  reform  of  VAT,  enterprise  and  income  taxes. 
Reduction  of  public  expenditure  from  72%  in  %  of  GDP  in 
1992 to some 45% in  1995. Ratio revenue/GDP: 40% in 1995. 

Mass  voucher  privatization  programme  launched  at  beginning 
of  1995.  Some  1500 medium  and  large  enterprises  privatized. 
Programme  will  be  accelerated  in  1996.  Progress  with  small-
scale privatization. Decision to close some  15 loss-making  coal 
mines. Bankruptcy procedures simplified  in 1995. 

Central bank law  submitted to  Parliament.  Plans to  strengthen 
supervision  and  regulation  of the  banking  sector.  Provisioning 
against  bad  loans  to  be  made  tax  deductible.  Auditing  in 
process.  Profit  tax  for  banks  reduced  to  40%.  Deposit 
insurance scheme to be introduced. 

25 

II.  ALBANIA 

1. 

Introduction 

Supported  by  an  IMF  Stand-By  Arrangement  (SBA)  and  by  complementary  financial 
assistance  from  the  EC5  (ECU  70  million)  as  well  as  from  G-24  bilateral  members, 
Albania's  macroeconomic  and  structural  adjustment  efforts  were  initiated  in  1992  and 
have  largely  been  successful.  Following  the  decision  by  the  IMF  to  provide  further 
assistance  in  the  form  of  a  3-year  (August  1993  -  July  1996)  Enhanced  Structural 
Adjustment  Facility (ESAF), the Council decided  on 28 November  19946 to grant Albania 
renewed macro-financial  assistance up to a maximum amount  of ECU 35 million, with the 
same  aim  of  ensuring  a  sustainable  balance  of  payments  situation  and  strengthening  the 
reserve position of the country. 

Albania had so far  fulfilled  the policy conditions attached  to the present  IMF ESAF when, 
in  September  1995,  the  IMF  could  not  complete  the  second  review  under  this  facility, 
because  of  disagreement  over  budgetary  policies.  The  ESAF  is  currently  not  operative 
but,  with  the proviso  that  a strong financial package  would  be  implemented  immediately 
after  the May  1996 general elections, ESAF discussions could resume relatively quickly. 

2\  Macroeconomic  performance 

GDP growth  of 9 % was  achieved  in  1995. Agriculture  has  led  the  recovery,  responding 
favourably  to price reform  and privatization. However,  marketable surpluses still represent 
a  small  fraction  of  the  production  (12-20  %)  and  marketing  channels  are  improving 
slowly.  Construction, 
transport,  and  other  (private)  services  have  made  strong 
contributions to growth. Albania's industrial output has begun to  recover. 

The  target  for  the  domestically-financed  budget  deficit  had  been  set  at  7 %  of  GDP  for 
1995.  However,  wage  increases  in the public  sector  in the  second  part  of  the  year  made 
this goal unattainable  and the  deficit  instead  reached  8.1  % of GDP.  Starting in  1995, the 
central bank's financing  of the deficit  will be strictly limited to  a maximum amount  of  10% 
of  government  revenues  of  the  previous  year  (for  1995:  Leks  4.6  billion  or  2.8  %  of 
GDP).  Therefore,  the  government  and  the  central  bank  have  recently  taken  measures  to 
support  the  development  of  the  treasury  bill  market.  Six-month  and  more  recently  12 
month  treasury  bills  have  been  introduced,  and  the  government  has  started 
the 
securitization of its outstanding debt. 

The total  fiscal  deficit,  at  13 %  of  GDP,  was  still  high  in  1995.  All  categories  of  public 
expenditure have been reduced in relation to GDP: public spending was equivalent to 33% 
of GDP in  1995, whereas  in  1991 it represented  over  60 %.  The  structure  of  expenditure 
has  been  improved,  shifting  away  from  subsidies  and  social  benefits  towards  public 
investment.  Employment  in  the  budgetary  institutions  has  also  been  sharply  reduced,  by 
over one-quarter between mid-1992 and end-1994. Further  reductions have been  achieved 
in  1995  but  failed  to  offset  the  impact  on  expenditure  of  a  20  %  wage  increase  in  the 

5  Council Decision of 28 September  1992 (92/482/EC) 

6  Council Decision of 28 November 1994 (94/773/EC) 

26 

public sector.  The tax base has been widened by the introduction  of personal income, land 
and property taxes. VAT implementation at a  12.5 % rate was delayed until July  1996. 

As  a  result  of  tight  fiscal  and  monetary  policies,  year  on  year  inflation  had  fallen 
considerably, from  over 300 % in late  1992, to around  15 % by spring  1995 and to  6 % in 
December  1995.  However,  wage  pressures  in  the  public  sector  stopped  this  downward 
trend  in the first months of  1996. Unemployment  is also reported  to have been reduced  to 
15 % of the labour force,  substantially lower than its peak of 36 % in early  1993. 

The  exchange  rate  against  the  dollar  has been  stable  since the  autumn  of  1992  and  even 
appreciated  somewhat  in  late  1995  (94  Leks/US$  in  December  1995),  reflecting  in  part 
the international weakness  of the dollar.  The renascent  inflation  in early  1996 put  the Lek 
under pressure (104 Leks/US$ in April  1996), but interest rates were raised  to reverse the 
tendency.  Payments  for  current 
from 
restrictions. 

international  transactions  are  virtually  free 

Exports grew rapidly in  1993 and  1994, albeit from  extremely low levels: in  1995,  exports 
(at  US$  200  million)  corresponded  to  about  one-third  of  the  value  of  imports.  The 
resulting deficit  was financed  by foreign  aid and emigrants' remittances, the latter  normally 
amounting  to  roughly  twice  the  value  of  exports  in  recent  years.  The  current  account 
deficit,  at US$  21 million, fell  considerably  in  1995. However,  this was  mainly  due to  the 
level  of  remittances,  whose  sustainability  is  questionable.  Foreign  exchange  reserves 
improved  (US$  240  million  or  3.8  months  of imports  at year-end)  even  though  the  Bank 
of  Albania  had  carried  out  the  upfront  cost  of  the  foreign  debt  agreement  (US$  96.4 
million). 

3. 

Structural  reforms 

Although  most  prices  have  been  liberalized,  price  controls  remain  in  place  for  a  small 
number  of goods  and  services.  This is the case of flour  and bread  for  which,  respectively, 
subsidies  and  price  ceilings  are  in place.  Further  action  will become  necessary,  but  given 
the political  sensitivity  of this matter  in a pre-election  context,  no  moves  are  envisaged  in 
the  short  run.  In the  case  of electricity,  the pricing  policy  is to  be reassessed  in the  more 
global perspective  of the reform  of the energy sector. No more subsidies are scheduled  for 
electricity in the  1996 Albanian state budget. 

With  regard  to  external  debt,  Albania  reached  a  satisfactory  agreement  (fixed  price 
buyback  at  20  %  and  a  par  bond  option)  with  its  external  commercial  creditors  in  late 
August  1995. The upfront  cost of this agreement has been paid. 

A new  system  of  customs  tariffs  entered  into  force  on  1 July,  eliminating  the  exemptions 
on investment  machinery,  equipment,  agricultural  machinery  and  medical  equipment,  and 
introducing  a  new  classification  (six-digit  harmonized  classification)  and  new  tariff  rates 
(7/25/40 percent). These changes had a limited impact on the  1995 budget revenue,  owing 
to a late introduction  (July) and the low rate (7 %) applied  to previously  exempted  goods. 
Moreover,  medicines  as  well  as  imports  of  materials  that  are  re-exported  have  been 
exempted  from  tariffs.  A  backward  move  has  been  observed:  the  export  of  all  kind  of 
wood  products, except furniture  and charcoal, has been banned from  early  1996. 

Since  1992,  Albania  has  applied  a  market-determined  floating  exchange  rate  regime.  In 
practice,  current  account  convertibility  of the  Lek  has been  achieved,  and  the  authorities 
envisage  progressively  lifting  restrictions  on  capital  transactions.  The  Bank  of  Albania's 

27 

interventions  in  the  foreign  exchange  market  are  guided  primarily  by  its  targets  for  net 
international reserves. 

With  regard  to  fiscal  and  budgetary  reform,  VAT  implementation  (at  a  single  rate  of 
12.5%)  was  delayed  because  of  both  technical  and  political  difficulties.  However,  the 
VAT law was amended  in March  1996 and the introduction has now been fixed for  1 July 
1996. Employment  in the budgetary  institutions  has continued  to be reduced  and  its level 
has  fallen  below  the  requested  level  of  160,000  at  end-June  1995,  against  174,000  in 
August  1994. 

Concerning  the  privatization  of  state-owned  enterprises,  the government  decided  in early 
1995  to  implement  a  broad  mass  privatization  programme  (MPP)  for  the  medium  and 
large-sized  enterprises.  This  MPP  has  started  and  vouchers  are  being  distributed;  three 
rounds  of auctions  have  already been held  comprising  69 enterprises  and  creating  15,000 
shareholders. Moreover,  over 3,000  small and medium-sized  enterprises have already been 
privatized  through  normal  auctions  and  the  remaining  few  have  been  transferred  to  the 
MPP  program. 

In the  case of public utilities and resource-based  enterprises,  the Government  has decided 
to  give priority to  sales to  strategic investors. Legislation  enabling the privatization  of the 
electricity  company  (KESH)  has  been  approved  by  the  Parliament.  Legislation  also 
envisages a framework  for the regulatory body  entitled to  formulate  the pricing policy  for 
electricity.  Privatization  is starting with the electricity  distribution  system,  with pilot  sales 
of  three  regional  networks.  30  %  of  these  distribution  units  are  sold  through  the  mass 
privatization  programme,  while  for  the  remaining  70  % the  Government  is preparing  the 
bidding  documents  allowing  strategic  foreign  investors  to  become  shareholders.  Similar 
legislation  for  other  sectors  has  been  approved  (mining  and  telecommunications  sectors) 
or is under  preparation  (water  supply sector). New investments in these  sectors have been 
planned with the support  of international donors. 

A' law covering  private investment  funds  and which sets out  the legal framework  for  their 
establishment,  licensing, operation  and governance was approved  in July  1995. Parliament 
adopted  a  law  on  sales  of  shares  in  October  and  an  Albanian  stock  exchange  came  into 
operation in early May  1996. 

With regard  to incentives for  foreign  investments, the creation  of free  economic  areas has 
been adopted  and foreigners  have been allowed to buy land in Albania. 

Concerning  the liquidation  or privatization of the 32 problematic  Enterprise  Restructuring 
Agency (ERA) enterprises,  5 of these have been privatized through mass privatization.  Six 
of them  are in the process  of liquidation,  while for  the  others  a strategy  of  splitting  them 
into  smaller units before  privatization  in the MPP  is being  followed.  Total  employment  in 
ERA enterprises was  in the  order  of  10,000 in late  1995 against  49,000  a few  years  ago, 
with  a  majority  of  the  enterprises  ceasing  activity  and  the  remaining  ones  drastically 
reducing their  workforce. 

In the key agricultural  sector, the Parliament approved in August  1995 the law on a "Land 
Market"  allowing,  in  particular,  the  sale  and  purchase  of  land.  Moreover,  laws  on 
mortgages,  collateral, land leasing and  administrative  mechanisms to  resolve land  disputes 
were  approved  during  1995. With regard  to the former  state farm  land,  land  "users" have 
received  the  full  ownership  rights,  whereas,  with  regard  to  the  former  cooperative  land, 
the  right  to  lease,  sublease  and  mortgage  land  has  been  established  for  those  who  have 

28 

already  received  temporary  certificates  of  land  ownership.  These  temporary  certificates 
have been issued  covering  approximately  85 % of agricultural land.  Their  distribution  has 
been  continuing  and  will  be  completed  shortly.  Through  the  Land  Market  Action  Plan 
supported  by PHARE,  the  authorities  have been  accelerating  the  establishment  of  a  land 
registry,  a necessary  condition  for  the  issuing  of  ownership  permanent  titles.  Concerning 
the  agro-industrial  sector,  the  privatization  process  is  well  under  way:  2/3  of  the  "small 
and  medium"  state-owned  agro-enterprises  and  50  %  of  the  "large"  ones  have  been 
privatized.  The  remaining  50  %  of  "large"  ones will be  privatized  later  during  the  Mass 
Privatization Programme. 

In the financial  sector,  several major  steps have been taken: 

-  concerning  the  privatization  of  the  state-owned  banks,  Parliament  adopted  on  16 
November  1995  the  law  on  transforming  the  state  banks  into  commercial  companies. 
Business  plans  were  completed,  but  their  scope  was  rather  limited.  With  a  more 
ambitious  objective,  a  privatization  feasibility  study  for  the  Rural  Commercial  Bank 
(RCB) and an external independent audit on the two other state-banks were carried  out. 
Moreover,  privatization  advisors  for  the Rural  Commercial  Bank  (RCB)  have  recently 
been  appointed  whereas  those  for  the  National  Commercial  Bank  (NCB)  will  be 
appointed  by June  1996. Based  on bank external audits already  completed,  viable  parts 
of these banks will be  offered  for  sale to  foreign  strategic  investors  before  the  end  of 
1996. Negotiations  are already under way for the RCB. The  Savings Bank  (SB)  should 
be offered  to private investors by July  1997. The objective is to attract foreign  investors 
to  take  over  a  majority  share,  whereas  the  remaining  state  share  will  be  sold  on  the 
domestic  market.  10 %  of  the  banks  capital  will  be  sold  in  the  form  of  privatization 
vouchers; 

-  concerning  banking  regulation  and  legislation,  a  system  of  clearance  and  a  chart  of 
accounts  are  being  prepared  in  line  with  international  standards,  with  the  aim  of 
replacing  the  existing  system  during  1997.  In  February  1996,  Parliament  adopted  the 
law  determining  the  role  and  responsibilities  of  the  Bank  of  Albania,  including  its 
relationship  with  the  Government  in terms  of  lending.  Simultaneously,  the  law  on  the 
banking  system was  adopted,  streamlining the licensing  procedures  and  regulations  for 
banking  activity  in  Albania  (in  particular  for  co-operative  banks  and  other  financial 
institutions).  Since  then,  several  foreign  and  two  Albanian  private  banks  have  lodged 
requests  to  open  subsidiaries  in  Albania;  three  of  them  have  already  been  licensed.  A 
modern law on procedures on bankruptcy,  including specific  provisions for  banking and 
insurance  institutions,  was  adopted  by the Parliament  in Octob^r  1995. A  new  law  on 
insurance, allowing private firms to operate, has ended the state monopoly in this area. 

4.  Macro-financial  assistance 

On 28 November  1994, the Council  of Ministers  decided  to  grant  Albania  further  macro-
financial assistance up to  a maximum amount  of ECU 35 million in the form  of  a grant  in 
the  context  of  an  initiative  of the  Group  of Twenty-Four,  aiming  at  mobilizing  a total  of 
US$ 72 million. This grant is complementary to assistance provided by the IMF under  a 3-
year  Enhanced  Structural  Adjustment  Facility  (ESAF)  initiated  in mid-1993,  with  a  view 
to  ensuring  a  sustainable  balance  of  payments  situation  and  strengthening  the  reserve 
position of the country. 

29 

The Community  grant was to  be disbursed  in two  tranches.  The disbursement  of the first 
tranche  (ECU  15  million)  was  effected  in  May  1995,  following  signature  of  the 
Memorandum  of  Understanding  (MoU)  laying  down  the  macroeconomic  and  structural 
conditions attached to the grant. 

The  approval  by  the  General  Affairs  Council  of  10-11  April  1995  of  the  Commission's 
report  on  progress  in Human  Rights  in  Albania  allowed  the  Commission  services  to  go 
ahead with the implementation  of the  second tranche  (ECU  20 million)  of this  assistance. 
The  Commission  concluded  in  July  1995  that  the  Albanian  authorities  had  achieved 
satisfactory  progress 
that  Albania, 
consequently,  was  complying  with  the  conditions  attached  to  the  grant.  Nevertheless, 
owing to  Albanian difficulties  in reaching the  1995 budgetary targets  and in agreeing  new 
budgetary  objectives  in the pre-electoral context  of  1996, the conclusion  of a third  annual 
programme  under  the  current  ESAF  had  been  delayed  and,  as  a  result,  the  Commission 
decided to postpone the disbursement of its second tranche. 

in  their  adjustment  and  reform  process  and 

Since  then,  the  Albanian  authorities  have irrevocably  fixed  the  date  for  the  beginning  of 
VAT implementation for  1st July  1996. Moreover,  further  significant  progress in the areas 
of  reform  where  delays  had  been  experienced  (privatization  of  state-owned  enterprises, 
banking  sector  reform,  land  ownership  certificates)  have  been  achieved.  These  positive 
developments, in addition to  Albanian assurances  about  corrective measures which would 
be  implemented  to  cope  with  the  worsening  budgetary  situation,  have  cleared  the  way 
towards the disbursement of the grant. 

30 

EH.  ALGERIA 

1. 

Introduction 

Despite  a  favourable 
track  record  of  policy  implementation  and  some  signs  of 
macroeconomic  stabilization,  Algeria's pace of structural reform  and the development  of a 
dynamic private sector in  1995 were seriously hindered by continuing political  uncertainty 
and  security  problems  which  negatively  affected  growth,  employment  and  domestic  as 
well as foreign investment projects.  Thus, the development of a political dialogue with the 
opposition is an essential prerequisite for  progress in macroeconomic  stabilization  and  for 
more decisive reform  measures. 

A  major  turnaround  occurred  in  1994,  in  light  of  a  further  serious  degradation  of  the 
socio-economic  situation  of the  country.  The Algerian Dinar was devalued  by some 45% 
and  the  fixed  exchange  rate  regime  was  replaced  by  a  managed  float,  aiming  at  a 
stabilization  of  the  real  effective  exchange  rate.  Prices,  imports  and  access  to  foreign 
currency were  substantially  liberalized.  Consumer  subsidies were gradually  reduced  and  a 
more  effective  social  safety  net  was  put  in  place.  Financial  discipline  for  state-owned 
enterprises  has  since  been  tightened  and  the  first  steps  towards  privatization  have  been 
taken.  Despite  diversification  efforts,  the  country's  economy  is  still heavily  dependent  on 
hydrocarbons  (20% of GDP,  60% of fiscal  revenue  and  95% of exports).  In this  respect, 
Algeria is a  "policy-taker"  country,  in the sense that  its economic  development  prospects 
in  the  medium-term  still  rely  heavily  upon  the  development  of  oil  prices  in  the  world 
market which in  1995 stabilized at a low level (approximately  15 dollars a barrel). 

The  ambitious  policy  programme  launched  during  1994  was  confirmed  by  the  new 
government  which  was  formed  in  the  aftermath  of  presidential  elections  in  November 
1995.  Algeria's  renewed  reform  efforts  were  supported  by  the  International  Financial 
Institutions  and  the  Community  throughout  1994  and  1995.  In  May  1994  the  IMF 
approved  a  one-year  Stand-by  arrangement  of US$  1 bn.  This was  followed  by  a three-
year  Extended  Fund  Facility  (EFF)  of  US$  1.8  bn  in  May  1995.  The  first  Fund  review 
occurred  in December  and it was  concluded  satisfactorily,  leading to  a new  "purchase"  of 
funds by Algeria in 1996. 

In January  1995, the World  Bank  approved  a US$  150 million Emergency  Rehabilitation 
Loan.  In late  1995 the World  Bank  finalized  a Financial Enterprise  Structural  Adjustment 
Loan  (FESAL),  which  was  actually  approved  by  the  Board  in  April  1996.  The  total 
lending envisaged  is US$ 400 million ofwhich  300 million for  adjustment  support  and  the 
rest  for  supporting  agricultural  and  housing  sectors.  Arrangements  on  external  debt 
rescheduling were  also reached  with both the Paris and London Clubs in  1994 and  1995, 
respectively. 

In August  1994 the Community released the remaining second tranche (MECU  150) of its 
first  macroeconomic  loan  in  favour  of  Algeria,  decided  in  1991. In  December  1994  the 
Council  adopted  the  European  Commission's  proposal  for  an  additional  MECU  200 
macro-financial  assistance, to be disbursed in two tranches. 

The  conditions  attached  to  the  disbursement  of  the  first  tranche  (notably  further 
liberalization of imports, reforms  in the financial  sector and progress towards  restructuring 
the  Memorandum  of 
and  privatization  of  public  enterprises)  are  contained 

in 

31 

Understanding  negotiated  with  the Algerian  authorities  in January  1995.  After  reviewing 
the  fulfilment  of  these  conditions,  the  first  tranche  (MECU  100)  was  disbursed  in 
November  1995. 

It was agreed with the Algerian authorities that the conditions related  to the  disbursement 
of  the  second  tranche  would  be  negotiated  at  a  later  stage  in  a  Supplemental 
Memorandum  of  Understanding.  Furthermore,  agreement  has  been  reached  for  a  fast 
mobilization  of existing grants under various  co-operation  protocols.  Reinforced  bilateral 
assistance is also envisaged under the Community's  1996-1998 MED A programme. 

2.  Macro-economic  performance 

Despite  some  encouraging  first  results  and  the  mobilization  of  generous  external 
assistance,  Algeria's  overall  economic  situation  in  1995  remained  quite  fragile,  reflecting 
the  impact  of  a  number  of  internal  and  external  shocks,  a  small  non-hydrocarbons 
production  base,  modest job  creation  capacity,  growing  security  problems,  a  backward 
financial  system and administrative resistance to  reforms. 

In  1995, real GDP growth is estimated  at 4.3%. This result was the first positive change in 
per  capita  GDP  in more  than five years.  The increase  in real  GDP  was  driven  mainly  by 
strong  hydrocarbon  exports  and  by  a  rebound  in  agricultural  production  following  two 
drought  years.  Growth,  however,  remained  insufficient  to  have  a  positive  impact  on  the 
high  unemployment  rate  (25%  at  the  end  of  1995).  Despite  progressive  (but  still 
incomplete)  price  liberalization,  the Dinar  devaluation  and  subsidy  reduction  in  1995  the 
government  managed  to  keep  the  annual  inflation  rate  below  30%  through  the  use  of  a 
mix  of  administrative  price  control  measures  on basic  commodities  (which  constitute  the 
core  of  the  basket  upon  which  inflation  rate  is  calculated)  and  moderately  restrictive 
monetary, fiscal  and incomes policies. 

The  fiscal  deficit  dropped  further  from  4.4%  in  1994  to  1.4%  in  1995,  reflecting  the 
implementation  of  a  number  of  restrictive  measures  aimed  at  compressing  the  upward 
dynamics  of public wages  and  salaries, the reduction  of subsidies  and  transfers  as well  as 
the increase in fiscal and duty revenues. 

The exchange rate  system is presently based upon a sort of managed  floating  with limited 
Central  Bank  interventions  in  support  of  the  Dinar,  compatible  with  the  availability  of 
foreign  currency  reserves  (which  at  the  end  of  1995  were  equivalent  to  1.8  months  of 
imports, down from  2.6 months at the end of the previous year). 

The  substantial  devaluation  of the Dinar  in  1994  coupled  with  a floating  rate  mechanism 
led to a sharp reduction in the gap between the official  and parallel exchange rate. In early 
1994  this  gap  was  250%  and  this  contracted  to  around  50%  as  of  mid-1995.  However, 
the  persistence  of  this  gap  (albeit  declining)  reflects  an  imperfect  implementation  of 
current  account  convertibility  announced  in  1994  and  the  continuing  use  of  practices 
restricting  the  access  to  foreign  currency  by  residents,  particularly  for  tourism  and  small 
cross  border  trade  purposes.  The  gap  also  fuels  further  devaluation  expectations, 
unrecorded  (and potentially destabilizing) foreign  currency dealings and capital  outflows. 

Interest  rates  are  still negative  in real terms which  has a depressive  effect  on  savings  and 
weakens  the  confidence  in  the  Dinar  by  encouraging  a  shift  from  Dinar  to  dollar 
denominated  accounts and holdings by residents. 

32 

The overall balance of payments situation deteriorated  in  1995. During the first half of the 
year,  a  considerable  external  shock  (due  to  adverse  exchange  rate  movements  and 
deteriorating  terms  of  trade)  compounded  the  negative  short  term  impact  expected  to 
result  from  external  liberalisation.  Faced  by  these  challenges,  the  authorities  chose  to 
adjust,  tightening  demand  management  and  increasing  the  rate  of  depreciation  of  the 
Algerian Dinar under the managed float,  thus actually managing to  achieve a small surplus 
in the trade balance (US$ 0.06 bn). However, this  was more than outweighed  by a 27.7% 
increase  in  interest  payments.  As  a  result,  the  current  account  continued  to  deteriorate, 
showing a deficit  of 5.6% of GDP for  1995 against a deficit of 4.3% the previous year. 

On capital account,  some FDI went into the hydrocarbon  sector.  The country has virtually 
no  access  to  the  international  capital  market  and  despite  London  and  Paris  Club  debt 
arrangements  leading  to  the  normalization  of  relations  vis-à-vis  Western  creditors, 
virtually no new bank lending was made available to Algeria in  1995. 

Following  the  above-mentioned  debt  relief  arrangements,  debt  service  as  percentage  of 
exports dropped  from  82% in  1993 to around 49% in  1995. But  servicing residual  debt is 
still a heavy burden for  Algeria given weak  oil revenues,  higher prices  in the world  grain 
market and declining foreign  currency reserves. 

3. 

Structural  reforms 

Stringent  administrative  import  controls  and  foreign  currency  allocation  have  been 
abolished  in April  1994  and were  replaced  by  a more  liberal regime  comprising  a  system 
of professional  criteria for  importers and a limited list of prohibited  imports. The latter list 
has been gradually  reduced  and was  abolished  end  1994, except  for  goods  prohibited  for 
religious  and  security  reasons.  The  list  of  goods  subject  to  professional  criteria  is  also 
being reduced.  State monopolies  on certain imports have also been eliminated.  According 
to  the  new  legislation,  access  to  foreign  currency  has  been  completely  liberalised  for  all 
visible  current  account  transactions  by  private  and  public  enterprises.  Only  imports 
financed through foreign  credits are still subject to  authorization. 

However,  the  implementation  of  these  liberalization  measures  is  imperfect  and  is 
delivering  only  mixed  results,  given,  in particular,  the  presence  of  a  growing  number  of 
unlicensed,  informal  traders  who  have  no  access  to  banks'  foreign  currency.  Therefore 
they fuel  informal  foreign  currency  deals via private (tolerated)  bureaux  thus  encouraging 
market  segmentation  and  a  persistent  gap  between  official  and  parallel  exchange  rates. 
Compulsory  surrender  requirements  have  been  lifted.  Residents  ^r^  allowed  to  open 
foreign  currency accounts at local banks. There is no limit on the amount held and  interest 
is offered  at more attractive rates than for Dinar deposits. 

The legal environment for  enterprises has improved considerably. A Competition Law was 
adopted  in  January  1995  which  liberalizes  the  price  regime  and  puts  stringent  limits  on 
cartels  and  monopolies.  A  Commercial  Code,  introduced  in  1993,  has  put  private  and 
public  enterprises  on  an  equal  legal  footing.  The  Investment  Code  on  Joint  Ventures 
provides for full repatriation of profits. 

The  restructuring  of  the  public  enterprise  sector  is  based  upon  two  strategies,  financial 
and  administrative  restructuring  and  privatization.  However,  the reform  process  of  public 
enterprises moved  only slowly in 1995. 

33 

In  1995, five public enterprises were granted financial  autonomy and the Treasury  stopped 
all on-lending  to  autonomous  public  enterprises.  The  authorities  imposed  a ceiling  on  the 
access to  commercial  bank  credit  for  the  23  largest  loss-making  enterprises  and  initiated 
their  financial  restructuring  under  World  Bank  guidance  and  support.  Performance  and 
"management"  contracts have been signed with 7 other public enterprises in April  1995. A 
restructuring  programme  for  all  94  public  construction  enterprises  was  also  launched  in 
order  to  strengthen  the  housing  sector  with  a  view  to  shifting  construction  activity  in 
housing  to  the  private  sector,  while reorienting  public  enterprises  to  public works.  Some 
88 local public utilities have been closed down. 

A  Privatization  Law  was  adopted  in July  1995  and  in August  the  authorities  announced 
the intention to privatize over 500 public enterprises. The same legislation also restored  to 
the  original  owners  some previously  nationalized  land.  A pilot programme  for  privatizing 
5  hotels has  been  launched  but  results  have  been  short  of  initial  expectations,  given  that 
the present political and security situation is not conducive to private sector investments in 
Algeria,  domestic or  foreign. 

As  part  of  the  reform  of  the  banking  and  financial  system,  the  Bank  of  Algeria  has 
strengthened  its supervisory  capacity and established  more effective  prudential  regulations 
and  controls.  The  five  state-owned  commercial  banks  have  been  audited  regularly  since 
1992,  institutional  development  plans  put  in place  and  performance  contracts  signed.  On 
the basis of the  audits,  four  banks were  recapitalized  with  a view to  increase their  capital 
adequacy ratio (which is expected to rise to the BIS norm of 8% by  1999). Banks are now 
free  to  set  their  own  creditor  and  debtor  interest  rates  as  a  temporary  ceiling  on  their 
spread was eliminated in December  1995. A new private bank was chartered  in  September 
1995 but private involvement  in the banking  sector  remains extremely limited  in spite of a 
liberal investment regime. 

4. 

Implementation  of macro-financial  assistance 

Following  the  agreement  in  principle  between  the  Algerian  authorities  and  the  IMF  in 
April  1994  and  a  request  for  further  macro-financial  assistance  from  the  Algerian 
authorities,  the  Council  endorsed  the  Commission's  intention  to  release  the  remaining 
second  tranche  of  the  1991  programme  and  agreed  in  principle  on  additional  macro-
financial  assistance for  an amount of ECU 200 million. 

The  second  tranche  of  ECU  150  million  was  effectively  disbursed  in  August  and  the 
Commission  proposal  for  an additional ECU 200 million macro-financial  assistance,  to  be 
disbursed  in  two  tranches,  was  adopted  by  the  Council  on  22  December  19947.  A 
Memorandum  of  Understanding  specifying  the  conditions  related  to  the  disbursement  of 
the  first  tranche  of  ECU  100  million  was  agreed  with  the  Algerian  authorities  in  early 
1995.  The  structural  reform  conditions  relate  to  further  liberalisation  of  the  imports  and 
exchange rate  regimes,  reforms  in the financial sector  and progress  towards  restructuring 
and  privatization  of  public  enterprises.  Furthermore,  the  Memorandum  emphasizes 
Community  concerns  in  the  social  sector  and  the  synergy  between  macro-financial 
the 
assistance  and  other  Community  aid  instruments,  with  a  view  to  facilitate 

Council Decision  94/936/EEC 

34 

implementation  of  economic  reforms  in Algeria.  After  reviewing  the  fulfilment  of  these 
conditions,  the  Community  decided  the  disbursement  of  the first tranche  in  November 
1995. 

The  conditions  related to  the  release  of the  second  tranche will  be negotiated  at  a later 
stage  in  a  Supplemental  Memorandum  of  Understanding  provided  the  IMF  programme 
remains on-track. 

35 

IV.  BALTIC COUNTRIES 

1. 

Introduction 

The  three  Baltic  states,  who  recovered  their  sovereignty  in  August  1991,  had  already 
initiated  reforms  under  the  past  regime  after  the  adoption  by the  Supreme  Soviet  of  the 
bill  on  their  economic  independence  in  November  1989.  In  1992,  as  they  were  already 
actively  engaged  on  the  way  of  reforms  to  a  market  economy,  economic  prospects 
worsened.  The  dismantling  of  trade  relations  among  former  Soviet  republics  and  the 
increase of prices on energy imports from Russia to world levels resulted  in a trade shock. 
External  accounts  deficits  were  expected  to  be  unsustainable  without  international 
support.  The  three  countries  defined  stabilisation  and  reform  programmes  covering  the 
period  mid-1992 to  mid-1993  and  concluded  stand-by  arrangements  with  the  IMF.  G-24 
donors were  called  to  contribute  to fill the  remaining  expected  balance  of  payments  gap 
for  the  programme  period,  estimated  at  a level  of US  dollar  105 million for  Estonia,  US 
dollar  210  million  for  Latvia  and  US  dollar  285  million  in the  case  of  Lithuania.  On  the 
basis  of  favourable  prospects  of  support  within  the  G-24,  the  IMF  board  approved  the 
respective stand-by arrangements in September and October  1992 

In November  1992,  the  EC  Council8  approved  macro-financial  assistance  of up  to  ECU 
220  million  for  the  three  countries  (ECU  40  million  for  Estonia,  ECU  80  million  for 
Latvia  and  ECU  100  million  for  Latvia)  in  support  of  the  countries'  programmes, 
corresponding  to  about  50%  of  the  estimated  balance  of payments  gap.  The  bulk  of  the 
remaining bilateral  support within the G-24 group  came from  Japan  and  EFTA  countries. 
Loan  agreements  and  memoranda  of  understanding  between  the  Community  and  each 
beneficiary  were  signed  in early  1993. The  Commission  disbursed  the  first  tranche  (50% 
of  the  loan  amounts)  in  March  1993  for  Estonia  and  Latvia,  and  in  July  1993  for 
Lithuania.  The release of the  second tranche was made subject  to  a positive  evaluation  of 
performance  criteria,  regarding both macroeconomic  stabilisation  aspects  and  progress  of 
structural reforms,  as set out in the memoranda of understanding. 

2. 

Recent  economic  developments 

Estonia 

After  a  sharp  decline  in  1992  and  early  1993  the  Estonian  economy  was  emerging  from 
recession by the end  of  1993. GDP grew by 4% in  1994 and about the same level in  1995 
(4.5%>). Unemployment,  at  about  5%, remained  moderate.  Macro-economic  stabilisation, 
after  price increases  which  reached  hyper-inflationary  levels  in  1992  and  1993,  was  to  a 
large extent  achieved  after  the introduction in June  1992 of a currency board  arrangement 
under  which  the  monetary  base  is  limited  by  the  amount  of  hard  currencies  and  gold 
detained  by the central bank.  A new currency, the Estonian Kroon, was  introduced  at thc 
same  time.  This  proved  successful  in  stabilising  the  economy:  inflation  dropped  ar 
continued  to  decline  from  42%  in  1994  to  29%  in  1995  (year-end  figures).  Inflationa 
pressures  remained  strong,  however,  in  1995, particularly  in the  area  of  services.  Under 
the  currency  board  arrangement  central  bank  lending  to  the  state  is  prohibited,  which 
contributes  to  budgetary  discipline.  In  1995 government  expenditure  increased  above  the 
programmed  budget,  but this increase was counter-balanced  by growing tax revenues  and 

Council Decision 92/542/EEC (O.J. L351 of 2 December 1992) 

36 

social  security  contributions.  The  financial  balance  was  in  surplus  (0.8%  of  GDP). 
Increased  government  deposits  in  the  banking  sector  resulted  in  a  slightly  lower  fiscal 
balance surplus (0.3% of GDP). The  1996 budget envisages an almost balanced  budget. 

Estonia  has  already  implemented  the  bulk  of  structural  reforms  leading  to  a  market 
economy.  Prices  and  foreign  trade  are  completely  free.  The  small  scale  privatisation 
covering  some  1000  small enterprises is now virtually  completed.  Out  of the  500  medium 
and  large  scale  enterprises  about  100 remain  in the  state's  hands  and  are  expected  to  be 
privatised  in  1996,  with  the  exception  of  natural  monopolies.  Land  privatisation,  which 
was  slow  to  start,  is  being  accelerated.  Financial  sector  reform  appears  as  the  most 
sensitive area. The Bank of Estonia has increased its supervision capacities and reduced  its 
share  of assets  in the  Savings Bank  to  25% of the  capital.  The  state  also  reduced  below 
10%) its  minority  shareholding  in  commercial  banks.  Capital  adequacy  requirements  are 
being  gradually  increased.  An  action  plan  was  set  up  to  restructure  a  virtually  insolvent 
bank, the North Estonian Bank. 

The Free Trade Agreement with the European Community entered into force  on  1 January 
1995.  External  trade  continued  to  grow  at  a  high  pace,  particularly  imports  which 
increased  in  1995  by  33% over  1994.  Estonia's  external  trade  with  the  European  Union 
increased  markedly  after  independence  and  is  characterised  by  a  large  deficit  on  the 
Estonian  side.  The  overall  trade  deficit  considerably  increased  to  an  estimated  US$  690 
million,  or  20%  of  GDP.  Owing  to  a  positive  services  balance,  particularly  growing 
tourism  receipts  which  grew  to,  about  US$  150  million,  the  current  account  deficit 
remained  below  this  level  (285  million  dollars  or  about  8%  of  GDP,  excluding  official 
transfers).  Estonia  however  succeeded  in financing  this substantial  current  account  deficit 
with a large capital account  surplus: for the third consecutive year the capital account  was 
in  surplus,  due  principally  to  high inflows  of foreign  direct  investment  of  about  US$  200 
million.  Official  foreign  exchange  reserves  continued  to  grow  and,  at  US  dollars  580 
million  at  end-1995,  covered  approximately  3  months  of  imports.  Under  the  currency 
board  arrangement  the Estonian  Kroon  is pegged  to  the DM  at  a fixed 8 to  1 rate.  This 
has  led,  given  the  two  digit  inflation  level,  to  a  relative  loss  of  external  competitiveness 
which remains  sustainable given  the low initial rate  of peg  of the  Estonian  Kroon  to  the 
Deutsche Mark and the moderate rate of industrial price increases. 

In March  1995 the IMF approved  a new fifteen-month stand-by arrangement  for  SDR  14 
million (US$ 21 million), on which the authorities did not make any purchases. 

Latvia 

After  a  sharp  deterioration  in  1992  and  1993,  Latvia's  overall  economic  situation  had 
stabilised  in  1994:  growth  was  at  about  1%, inflation  continued  to  slow  down,  falling  to 
26%  at year-end,  and  the budget  deficit  remained  within  2%  of  GDP.  In  April  1995,  the 
IMF  confirmed  its  support  of  the  authorities'  policy  by  approving  a  second  stand-by 
arrangement  for  a  13-month period. 

In  1995, the budget  deficit  had  initially been programmed  to  remain  at  2%  of  GDP  as in 
1994. However,  Latvia's budget  situation deteriorated  in early  1995 and  the budget  deficit 
rose  to  92  million  lats  (US$  184 million)  in  1995,  or  4%  of  GDP.  Additionally,  a  major 
crisis  in  the  banking  sector  occurred  in  April  1995  with  the  main  Latvian  commercial 
bank,  Banka  Baltija,  being  declared  insolvent,  which  alone  accounted  for  20%  of  the 
country's  deposits.  By  mid-1995  eight  other  banks  had  been  declared  insolvent  and  a 

37 

number of others were no longer allowed to take deposits. Altogether,  the insolvent  banks 
represented  a  total  assets  value  of  one  third  of  the  total  bank  assets  in  the  country,  or 
about US$  1.2 billion. 

As a result of the crisis, broad money dropped  by  10% over the second  quarter.  However, 
the  high  percentage  of  savings  held  in cash  in foreign  currencies  obviously  dampened  its 
contractionary  effect.  GDP  overall  declined  by  1.5%  in  1995.  Unemployment  remained 
stable  at  about  6.3%  by  end-1995.  The  Bank  of  Latvia  maintained  its  conservative 
monetary  policy  stance,  and  inflation  thus  continued  to  slow  down,  falling  from  26%  in 
1994 to about 23% in  1995. 

In the  Summer  the  authorities  adopted  a package  of measures  to  address  immediate  and 
long term needs of the financial  sector, by enhancing prudential regulations  and  setting up 
a deposit insurance  scheme. Other  structural reforms  continued  in  1995. The  Privatisation 
Agency  became  fully  operational  and  230  additional firms were  privatised  in  1995.  The 
sale  of  shares  of  the  Universal  Bank,  one  of  the  three  main  public  banks,  started  in  the 
third  quarter  of  the  year.  The  Free  Trade  Agreement  signed  with  the  European  Union 
came into force  on  1  January  1995. 

Imports and exports increased markedly in  1995, and reflected  the continued  shift  of trade 
towards  the  West.  As  in  1994,  the  trade  balance  remained  negative  over  the  year  (440 
million  US$  deficit,  or  10%  of  GDP).  The  positive  services  balance,  mainly  due  to  the 
transport  sector,  allowed  for  a  current  account  deficit  of about  half  the  size  of  the  trade 
deficit  (180 million US$, or 4% of GDP, excluding official  transfers). 

The  authorities  have  successfully  pursued  a stable  exchange  rate  policy  with  an  informal 
peg  to  the  SDR  and,  despite  speculative  attacks  which  led  to  a loss  of  foreign  exchange 
amounting to  90 million US dollars in Spring, the Lats  exchange rate  remained  broadly  at 
its  previous  level  in  1995.  Under  a  two-digit  inflation  this  translates  into  a  real 
appreciation  in the  exchange  rate.  The  overall  competitiveness  of the  economy  however 
seems to have been maintained. 

In  order  to  cover  its  current  account  deficit  Latvia  is  dependant  upon  private  capital 
inflows,  which  remained  substantial  in  1995  in  spite  of  the  financial  crisis.  Thus,  the 
damage  of  the  crisis  was  contained  and  Latvia's  reserves  position  remained  relatively 
strong,  with  approximately  US$  600  million  net  reserves  at year-end,  which  corresponds 
to around  5 months of imports. The IMF programme went-off  track  after  the  Spring crisis 
and  its  Summer  review  could  not  be  completed.  In early  1996 the  IMF  staff  concluded  a 
new  stand-by  arrangement  with the  authorities which the IMF board  approved  in May  of 
this year. 

Lithuania 

After  four  years  of  recession,  Lithuania's  economy  began  to  show  signs  of  recovery  in 
1994,  with  a  2%  increase  in  GDP.  Growth  for  1995,  despite  a  drop  in  GDP  in the first 
quarter  of  the  year,  is  estimated  at  2.5%.  The  fundamental  growth  trend  is  now 
considered  to  be  solid  and  is  expected  to  be  fuelled  by  investment  and  export  growth. 
Unemployment,  however,  significantly  rose in  1995 to  about  7% of the  active  population, 
against 2% at the end of 1994. 

Inflation,  which had peaked  at hyper-inflationary  levels in  1992, slowed  down in  1993 and 
early  1994.  On  1 April  1994,  a currency  board  arrangement  was  introduced  under  which 

38 

monetary  growth  is limited  by the  market  value  of gold  and  hard  currencies  held  by  the 
Bank  of Lithuania.  The reduction  in inflation  after  the introduction  of the  currency  board 
has  been  striking:  price  increases  fell  substantially  in  1994,  at  a  year-end  rate  of 45%. 
Inflationary  pressures however remained in  1995, fuelled  by the low foreign  exchange rate 
of  the  litas  and  increases  of  public  prices.  As  a result,  inflation,  with  an  estimated  35% 
(year-end  rate),  remained  above  the  authorities'  initial  target  (25%)  in  1995.  The  fiscal 
deficit  target  (GDP  3.4%)  for  1995 was broadly met,  despite weak  revenue  performance 
in early  1995 which forced  the government to cut expenditure. 

Structural  reforms  have  been  further  implemented.  Prices  had  already  been  liberalised  in 
1993.  The  only  items with  prices  remaining  under  government  control  relate  to  cases  of 
monopolistic  situations.  The  bankruptcy  law,  which  has  started  to  be  implemented,  was 
redrafted  in  early  1996  in  order  to  make  it  more  operational.  Housing  and  small-scale 
privatisation  are now virtually  completed  but,  owing to  delays in the  establishment  of the 
Privatisation  Agency,  large  scale  privatisation  has been  delayed  until  1996.  The  financial 
sector  reform  is  the  most  sensitive  area.  After  the  enactment  of  the  Central  Bank  and 
Commercial  Bank  laws  in  early  1995  and  the  subsequent  tightening  of  prudential 
regulations, the banking sector went through drastic adjustments  and 4 small banks (out of 
initially  28)  were  declared  insolvent  and  will  in  most  cases  eventually  be  liquidated.  In 
December  the  crisis  worsened  when  two  medium-sized  banks,  Litimpeks  and  Innovative 
Bank,  were  also  declared  insolvent.  The  authorities,  with  IMF  and  World  Bank  support, 
prepared  a  new  set  of  measures  to  consolidate  the  three  major  state-owned  banks,  to 
create  a  depositors  insurance  scheme  and  to  review  the  commercial  banking  law. 
Compensation  to  depositors  of the  insolvent  banks  amounted  to  30 million  litas  (i.e.  half 
the  total  of  their  estimated  losses),  of  which  20  million  were  programmed  in  the  1996 
Budget.  Parliament  eventually  approved,  in June  1996,  a law to  re-nationalise  Innovation 
Bank and to recapitalize it with resources collected from new issues of government  bonds, 
amounting  to  the  equivalent  of  250  million  US  dollars.  Bad  loans  from  the  Innovation 
bank as well as from  the state-owned  Commercial bank and Savings bank were  transferred 
to a newly established  ad hoc bad loans agency. 

For the third  consecutive year the trade balance was in deficit  (US$  335  million,  or 4.5% 
of  GDP), with  exports  increasing  slightly  faster  than imports  (respectively  15%  and  13% 
increases).  The  shift  of  trade  towards  the  West  continued,  and  was  reflected  in  higher 
growth  rates  of west-oriented  trade flows (more  than  20%).  The weak  point  of  external 
trade  remains  the  energy  balance  (deficit:  5.7%  of  GDP),  with  imports  of  energy 
representing  40% of the total imports. The current account  deficit  remained  near the level 
of  1994  (US$  250  million,  or  about  2.3%  of  GDP,  excluding  official  transfers).  On  1 
January  1995, the Free Trade Agreement with the European Union entered into  force. 

The  uncertainties  in  the  area  of  the  local  banking  sector  translated  into  lower  private 
capital  inflows  than  in the  previous  years  (US$  135 million),  and  which  did  not  counter 
balance the  current  account  deficit.  In December the Central Bank  lost  US$ 45  million  of 
reserves  as  a result  of the  crisis  of  confidence  after  Litimpex  Bank  and  Innovation  Bank 
were  declared  insolvent.  Significant  medium- and long-term borrowing  (US$  230  million) 
was necessary  to  cover the remaining  financing  needs,  out  of which  US$  60  million  were 
borrowed  on  the  private  capital  market  in  December.  At  year-end  official  reserves  were 
estimated  at about US$ 800 million, or 3.5  months of imports. 

The  IMF  Board  approved  in  June  1996  the  third  review  of  the  current  programme,  an 
SDR  134.55  million  three-year  (1994-1997)  Extended  Fund  Facility  fEFF).  This  will 

39 

contribute to  consolidate the reserves and help finance  key  energy  and  investment  related 
imports. 

3. 

Implementation  of macro-financial  assistance 

Owing  to  the  expected  increasing  demand  for  investment  related  hard  currency  finance, 
and  to  the  track  record  of  surplus  of  the  three  countries'  external  capital  account,  the 
Commission,  after  consulting  Member  States  exceptionally  agreed  in  supplemental 
memoranda  of understanding  signed with the authorities in  1994 and  1995 to  channel  the 
bulk  of the loans' second  tranche through the banking  sector,  for  sound  bankable  projects 
in need of hard  currency  financing. 

Economic  stabilisation  and  progress  of  structural  reforms  conditionality  criteria  attached 
to  the  Community  macro-financial  assistance  have been  satisfactorily  met  in Estonia.  The 
Estonian  authorities  however,  after  having  considered  drawing  the  loan's  second  tranche 
in  1994, eventually did not request its disbursement in 1995. 

In  Latvia  the  IMF  programme  went  off-track  after  the  financial  and  budgetary  crisis  in 
Spring  1995,  and  the  normal  Autumn  review  of  the  stand-by  programme  could  not  be 
completed.  In June the Latvian  authorities  requested  the release  of the  Community  loan's 
second  tranche  (ECU  40  million).  Commission  services  subsequently  went  on  mission  in 
July  to  assess  the  situation  and  seek  explanations  from  the  authorities  on  their  intended 
use  of  the  funds.  The  authorities  made  it  clear  that  the  funds  would  be  channelled  to 
refund  small  depositors  which  had  lost  their  savings  in the  bankruptcy  of  Banka  Baltija. 
The  Commission  considered  that  this  would  be  inconsistent  with  the  general  aim  of  the 
EC  macro-financial  assistance,  which  is  to  finance  balance-of-payments  external  related 
needs and not to cover internal budgetary financing  needs. This would  also be inconsistent 
with the normal  conditionality  criteria of the loan (including  a satisfactory  track  record  of 
the  IMF  programme)  and  with  the  undertaking  of  the  Memorandum  of  Understanding 
signed  in  1994  relating  to  the  loan's  second  tranche.  Accordingly,  the  Commission,  after 
having consulted the Member  States, declined the authorities' request  to release the loan's 
second tranche in October  1995. 

In the case of Lithuania, the Authorities requested  the disbursement  of the  second  tranche 
(ECU  50  million)  of  Community  assistance  in  early  1995.  On  account  of  progress  of 
stabilisation  and  reforms,  particularly  in  the  areas  of  privatisation  and  of  the  banking 
sector  prudential  regulations,  Lithuania  complied  with  the  conditionality  criteria  attached 
to the release of the second tranche. A Memorandum  of Understanding  relative to the use 
of  proceeds  under  this  second  tranche  was  signed  in July.  As  already  foreseen  in  Latvia 
and  Estonia,  it  was  agreed  that  the  use  of  proceeds  of  the  second  tranche  would  be 
earmarked  for  sound  bankable  projects  and  channelled  through  banks  complying  with 
Central  Bank  prudential  regulations.  Owing  to  the  local  banking  sector's  limited 
absorption  capacity,  it  was  agreed  to  split  the  second  tranche  in  two  separate  ECU  25 
million  instalments  and  to  release  the  first  one,  which  the  Commission  disbursed  in 
August.  The  authorities  decided  to  channel  the  bulk  of  the  funds  through  two  medium-
sized  banks  complying  with  central  bank  sound  banking  criteria.  In  September  however 
the  Commission  requested  a  freeze  in  the  use  of  proceeds  of  Community  assistance 
pending  improvements  in the  envisaged  consultation  process.  In November,  Commission 
services  went  on  mission  to  Vilnius  and  requested  further 
improvements  in  the 
management  of the Community macro-financial  assistance. 

40 

In spite of internal tensions, particularly in the financial  sector area, the Baltic economies 
have  successfully  implemented  the core reforms  leading to  a market  economy  and have 
overall been performing remarkably well. The growth trend is now considered to be solid, 
and  the  level  of  external  financing  needs  which  had  been  anticipated  when  the  IMF 
concluded the first generation of stand-by arrangements in late  1992 has eventually, to a 
large  extent,  been  covered  by  private  capital  inflows.  The  scope  for  external  official 
macro-financial  assistance  has  been  more  limited  than  initially  anticipated,  and  the 
Commission thus did not release the full amount of Community macro-financial  assistance 
initially approved.  External tensions on the Baltic countries' balance of payments remain 
possible on account of growth-driven increasing trade deficits. The Commission will keep 
the situation under regular review. 

41 

V.  BELARUS 

1. 

Introduction 

Belarus,  which  had  been  one  of  the  most  developed  republics  under  the  command 
economy regime of the Former  Soviet Union (FSU), embarked  on reforms  later than most 
countries  in the  region.  A  first  limited  set  of  reforms  were  launched 
in  1993  and  were 
IMF  with  a  Systemic  Transformation  Facility  (STF)  first  tranche. 
supported  by  the 
Following  the  Presidential  elections  in  July  1994,  the  authorities  launched  stabilisation 
reforms  in the  second  part  of  1994 and in early  1995. The IMF  released  the  second  STF 
tranche by end-January  1995. The conclusion of a more ambitious programme in the  form 
of a stand-by  arrangement,  initially envisaged  for March  1995 was postponed  pending  the 
adoption of new reforms.  The IMF board  eventually  approved  a stand-by  arrangement  on 
12 September  1995. 

On  10 April  1995  the  Council  of  the  European  Union9  approved  a  Community  macro-
financial  assistance  to  Belarus  in  the  form  of  a  10-year  loan,  conditional  upon  the 
conclusion  of  an  IMF  stand-by  arrangement,  to  support  the  country's  programme  of 
macro-economic  adjustment  and  structural  reforms.  On the basis of preliminary  estimates 
from  the IMF  of the country's residual  external financing  gap for  1995, the  amount  of the 
Community  assistance  was  set  at  a  maximum  of  ECU  75  million.  In  addition,  it  was 
understood  that  the  mobilisation  of  Community  macro-financial  assistance  to  Belarus 
would  require  that  the  country  fully  met  its  financial  obligations  to  the  Community  in  a 
timely manner. 

2.  Macroeconomic  performance 

The drop of production in Belarus was in the initial stage  of transition lower than in other 
FSU countries, with GDP  down by about  10% per year in  1992 and  1993, which was  less 
than  in  Russia.  However,  a  considerable  drop  (-20%) was  recorded  in  1994,  one  of  the 
most  severe  in  the  countries  in  transition,  followed  by  a  further  10%  decrease  in  1995. 
Investment  dramatically  declined  over  the  last  five  years  below  50%  of  its  1990  level. 
Inter-republican  payments  and  trade  in the  FSU  collapsed  in  1993  resulting  in  a  general 
deterioration of enterprises' situation in Belarus. Inter-enterprise  and bank credits piled up, 
with  Central  Bank  unlimited  refinancing  of  the  banking  system,  which  triggered  price 
increases  reaching  hyper-inflationary  levels  in  1993  and  1994.  The  general  government 
deficit  remained under control, however,  below 2% of GDP in both  1993 and  1994. 

Belarus  left  the  Russian  rouble  zone  only  in  April  1994  when  the  Belarus  rouble  was 
declared  the only legal tender  in the country.  Stringent  monetary  policy was  implemented 
from  early  1995. As a result, inflation  dropped from  40% per month in January to  2.5% in 
June  and,  despite  high  increases  of  public  utilities  tariffs,  the  authorities  succeeded  in 
stabilising  inflation  which  remained  below  an  average  monthly  5%  until  the  end  of  the 
year.  Market  mechanisms  for  the  allocation  of  central  bank  credits  were  introduced  in 
early  1995. The  authorities  pursued  over the year  a flexible  interest  rate  policy  aiming  at 
maintaining  positive  and  attractive  real  interest  rates,  so  as  to  mobilise  rouble  deposits 
within  the  banking  system.  The  positive  real  interest  rates  and  a  tight  monetary  policy 
contributed to  stabilise the Belarus rouble in nominal terms at  11500 rouble per US  dollar, 

Council Decision 95/132/EC (O.J. L89 of 21 April 1995) 

42 

and led to  a significant  appreciation in real terms against the dollar (+340 % over the year 
1995).  The budget  deficit,  at  2.3% of GDP for  1995, was limited within  the level  agreed 
with the IMF. The bulk of this deficit was financed  internally. 

The  current  account  which  had  been  in  deficit  in  1993  and  1994  (about  -10%  of  GDP), 
remained  negative  in  1995  (-3.5%  of  GDP).  The  competitiveness  of  Belarus'  exports  to 
the west was reduced by raising import tariffs  to Russian levels as a result of the entry into 
force  of the  Customs  Union with Russia in early  1995. Despite fears  of a loss  of  external 
markets,  1995  recorded  a  high  growth  of  exports  (+75%).  Imports,  at  the  same  time, 
increased  by  65%, and  the  trade  balance,  as  a  consequence,  remained  in  deficit  (-6%  of 
GDP).  Belarus  progressively  lifted  restrictions  on foreign  exchange  transactions  in  1995 
and thus moved towards current account  convertibility. 

3. 

Structural  reform 

Initial  progress  in  the  area  of  structural  reform  had  only  recently  been  undertaken  and 
remain a weak point in Belarus.  Cross subsidisation of households by industry with regard 
to  energy  prices  was  high.  A  first  wave  of  adjustment  of  public  prices  took  place  in 
Autumn  1994,  when  prices  on  communal  services  were  increased.  Rents,  water  and 
heating increased  by factors  of 42,  24 and  9, respectively.  Further  increases  took  place in 
early  1995. The number of "monopolistic enterprises", for which prices are regulated,  was 
reduced  from  about  350  in  mid-1994  to  50  in  mid-1995.  As  a  result,  most  prices  have 
now  been  freed.  Public  sector  prices,  which  are  still  highly  subsidised,  were  increased  in 
July  to  60%  of  cost  recovery  levels  and  further  adjusted  in December  to  80%  of  these 
levels.  State  orders  in production  and  procurement  have been reduced  to  6%  of the  total 
output but remained  particularly high in the agricultural  sector. 

Most  import  licences  requirements  and  the  surrender  requirements  on  exports  had  been 
abolished  by end-1994  and  early  1995. External  trade however  remained  subject  to  some 
limitations.  Export  taxes which had  been  abolished  in December  1994 were  reintroduced 
in early  1995 as a result  of the entry into force  of the Customs Union with Russia.  (At the 
time  of  writing  this  report  the  authorities  have  reintroduced,  in  early  1996,  new 
administrative limitations on external trade and foreign  exchange transactions). 

The  banking  sector  is burdened  with  bad  loans  and  remains  globally  inefficient.  Progress 
was  made  recently  on  accounting  standards,  but  external  auditing  remains  scarce.  The 
authorities  recently  raised  capital  requirements  for  banks  from  ECU  1 million  to  ECU  2 
million.  It  was  further  decided  to  proceed  with  the  liquidation  of  two  small  insolvent 
banks.  Inter-enterprise  arrears  reportedly  accounted  for  more than  50%  of  GDP  by  end-
1995.  Actions  to  improve  enterprises'  financial  discipline were  adopted  but  seemed  to  be 
inefficient  in the  absence  of  effective  bankruptcy  sanctions,  owing  mainly  to  the  lack  of 
clear  mechanisms  to  declare  enterprises  insolvent  (a  revised  Bankruptcy  law  was  later 
approved  in  May  1996).  In  the  context  of  high  energy  prices,  loss  of  markets  and 
increasing  payments  arrears,  profitability  in  enterprises  has  been  cut  by  about  50%  over 
the last three years. The number of loss-making  enterprises  increased  significantly  in  1995 
up to 29% of the total (April  1996 figures,  on the basis of  1995 accounts). 

Privatisation  is  only  at  an  initial  stage.  Enterprises  representing  no  more  than  6%  of  the 
total  asset  value  had  been  privatised  by end-1995.  The  privatisation  of  small  enterprises, 
which  has  been  the  most  rapidly  conducted  part  of  privatization  in  countries  of  Central 
and  Eastern  Europe  was  delayed  in Belarus  due  to  rigid  auctioning  procedures,  and,  by 
the  end  of  1995,  only  12%  of  small  enterprises  had  been  privatised.  A  voucher 

43 

privatisation programme approved in 1994 was designed to cover the subscription  of 50% 
of  the  total  assets  to  be  privatised,  but  the  distribution  of  vouchers  to  the  population, 
which  was  to  be  completed  by  end-1995  was  substantially  delayed.  The  privatisation 
process overall slowed down in 1995. 

The  process  of  reforms  in  agriculture  has  also  been  slow.  Agricultural  prices  were  only 
freed  in  early  1995,  while  input  prices  of  the  agricultural  sector  had  been  liberalized 
earlier,  leading  to  a  squeeze  in  profitability  of  the  state-owned  farms  and  to  the 
accumulation  of  arrears,  in  particular  on  energy  supplies.  About  20%  of  the  sovkhozes 
and kolkhozes farms were transformed  into joint-stock  enterprises. However,  privatisation 
had  not  yet  started  by  end-1995  and  is  likely  to  be  particularly  complicated  under  such 
difficult  financial  circumstances.  There is further  scope for  reform  of the ownership  status 
of  agricultural  land,  which  by  law  is  the  state's  property  and  can  only  be  leased  for  99 
years, without possibility to sell or mortgage leases. 

4. 

Implementation  of macro-financial  assistance 

After  approval  on  12 September  1995 by the IMF board  of the first stand-by  arrangement 
with Belarus, in late September Commission services went  on mission to Belarus to  assess 
the  economic  and  financial  situation  and  discuss  with  the  authorities  of  the  country  the 
terms and conditions of the Community macro-financial assistance. 

A  Memorandum  of  Understanding  setting  out  the  macro-economic  and  structural 
transformation  conditions  attached  to  the  Community  assistance was  agreed.  Beyond  the 
respect  of  the  macro-economic  performance  criteria  foreseen  in  the  IMF  stand-by 
arrangement,  the  Belarus  authorities  undertook  significant  commitments  in  several  areas 
of  structural  reform  (price  liberalisation,  privatisation  and  enterprise  reform,  financial 
discipline  of  enterprises  and  banking  reform),  on which  progress  will be  essential  for  the 
disbursement  of the second tranche of the assistance. 

Over the programme period  of the IMF stand-by arrangement  (July  1995 - June  1996) the 
country's  external  financing  needs  have been  estimated  at  about  US$  600  million,  almost 
half  of  which  would  be  covered  by  the  IMF.  The  Community  contribution,  taking  into 
account  the  revised  residual  gap, was  set  at  ECU  55  million  and,  matched  together  with 
the other bilateral donors' contributions, contributed  to fully  cover the residual  balance-of-
payments  financing  gap.  The  amount  of the first tranche was  set  at  ECU  30  million,  and 
disbursement took place in December  1995. 

44 

VI.  BULGARIA 

1. 

Introduction 

In  1995,  the  Bulgarian  economy  witnessed  continued,  modest  progress  in  terms  of 
stabilization  and  growth  both  in  the  public  and  private  sector,  essentially  reflecting  a 
relatively unambitious  policy programme launched  by the new Government,  following  the 
December  1994  elections.  On  the  other  hand,  developments  in  the  area  of  structural 
reform  continued  to  disappoint,  particularly  as regards the adoption  of measures  aimed  at 
accelerating  privatization  and  addressing  significant  managerial  and  financial  problems  of 
the  domestic  banking  sector  which  continues  to  be  overburdened  by  a  huge  number  of 
non-performing  loans. 

The  insufficient  progress  on  overall  economic  reform  and  lack  of  credibility  in  the 
government's policy programme for  1995 led to a declining confidence  of the  International 
Financial Institutions, Western commercial banks and private investors. 

The  deterioration  in  the  western  perception  of  Bulgaria's  financial  risk  and  a  number  of 
fundamental  reserves  repeatedly  expressed  by  the  IFIs  on  the  pace  of  the  country's 
structural  adjustment  in  1995  was  a  major  setback  for  the  Bulgarian  authorities, 
particularly  if  one  takes  into  account  that  in  1994  both  the  IMF,  the  World  Bank  and 
western commercial creditor banks agreed  on a major,  global assistance package in favour 
of  Bulgaria.  In  fact,  in  April  1994  the  Fund  approved  a  twelve-month  Stand-by  facility 
worth  97  million  associated  with  a  Systemic Transformation  Facility for  US$  324  million 
and  in  September,  same  year,  it  decided,  together  with  the  World  Bank,  further  to 
augment  its  financial  contribution  by  US$  225  million.  Moreover,  in  April  1994  a  Paris 
Club  debt  rescheduling  arrangement  was  agreed  with  official  creditors  and  this  was 
followed  by  a debt  and  debt  service  reduction  programme  (DDSR)  agreed  with  Western 
commercial banks in July. 

In the event,  the Fund's  assistance was  suspended  in late  1994  and  failure  to  reach  a new 
agreement  for  further  funding  in  1995,  due  to  disagreements  on  the  compliance  of  the 
Bulgarian  government  with .the  Fund  and  the  World  Bank's  macro-economic  and 
structural  adjustment  conditions  led  to  a  further  worsening  of  the  country's  external 
financial  position  at  the  end  of  1995  and  during  the  beginning  of  1996.  Continuing 
absence  of  external  financial  assistance,  very  low  foreign  direct  investment  (FDI), 
(particularly  if  compared  with  other  central  and  Eastern  European  countries)  and  the 
steady  erosion  in  the  country's  foreign  currency  reserves  has  brought  Bulgaria  again  on 
the verge of an external payment  crisis. And this is particularly  disturbing,  in view of huge 
external  debt-related  obligations falling  due in  1996 and beyond  (in  excess  of US$  1 bn a 
year). 

In  the  framework  of  the  G-24  coordination  process,  the  Community  decided  in  April 
199410  to  reconfirm  its  commitment  of  a  loan  of  ECU  110  million,  decided  in  October 
1992. The release of a first tranche (ECU 70 million) took place in December  1994. 

10 COM(94)118 Final 94/0103 (CNS) of 21 April 1994 

45 

2.  Macroeconomic  performance 

The policy programme for  1995, approved  only in May by the newly elected  government, 
was  a rather  uncertain  and unclear  compromise  between  the demand  on the  one hand,  to 
rein in high inflation  via moderately  restrictive monetary,  income and fiscal, policies,  attain 
exchange  rate  stabilization,  sustain  output  growth,  investment  and  export  and,  on  the 
other,  to  minimize  the  social  costs  of  the  country's  economic  transformation  by 
postponing privatization and granting a generous social safety net. 

Key measures  aiming  at  enhancing  financial  discipline in selected  large  loss-making  state 
owned  enterprises  or,  if required,  liquidating them,  rehabilitating  banks  and  strengthening 
the 
bank  supervision  were  either  postponed  or  insufficient, 
sustainability of macroeconomic  stabilization. 

thereby  jeopardizing 

After five years  of recession,  the  economy began a recovery  in  1994. Real  GDP  grew by 
1.4%,  followed  by an increase of 2.6% in  1995. A sharp depreciation  of the lev in  Spring 
1994  boosted  exports  and  industrial  output,  while  imports  were  reduced.  The  foreign 
trade  balance  swung  from  a deficit  of  almost  US$  1 billion  in  1993  to  a  surplus  of  over 
US$ 400 million in  1995. Reserves of foreign  exchange held by the central bank rose  from 
US$ 0.6 billion at the start of  1994 to US$  1.5 billion by mid-1995. 

Industrial  production  increased  by  5%  in  1994.  The  rise  in  output  was  concentrated  in 
chemicals  and  basic  metallurgy.  These  sectors  were  able  to  expand  exports,  their 
competitive  advantage  deriving  from  the  currency  depreciation  and  also  from  cheap 
energy. Up until very recently,  energy prices remained below world levels. 

Other  macroeconomic  indicators  also  pointed  to  positive  economic  developments.  The 
budget  deficit,  which  had  been  in double  digits  as a percentage  of  GDP  during  the  early 
years of the  1990s, was  cut  to  7% in  1994 and  1995. Having peaked  at  over  16% of the 
labour  force  in  early  1994,  the  unemployment  rate  fell  to  under  11%  in  mid-1995.  The 
rate  of  inflation  slowed,  from  an  average  monthly  rate  in  the  range  of  4  to  6%  during 
1992-1994, to below 2% per month in Spring and Summer  1995. 

The  reduction  in  inflation  was  helped  by  a  prolonged  period  of  stability  in  the  nominal 
exchange rate, but  also by increased  Government intervention in markets, reversing  earlier 
liberalization  measures.  Weighted  by  their  share  in  the  consumer  price  index  "basket", 
approximately  50%  of  goods  are  now  subject  to  some  form  of  official  monitoring  or 
control.  One  consequence  of  these  measures,  combined  with  low  domestic  wheat 
purchase prices and ineffective  export controls, is the emergence of bread queues. 

In  general,  the  improvement  in  macroeconomic  performance  was  not  based  on  solid 
microeconomic,  or  structural  foundations.  In the financial  and  enterprise  sectors,  lack  of 
progress  in restructuring  and  privatization  contributed  to  the development  of  a  symbiotic 
relationship  between  banks  and  companies.  Unprofitable  enterprises  with  loan  arrears 
continued  to  have  access to  credit  from  banks. Banks  continued  lending  to  enterprises  in 
the expectation  - based  on past  experience  - that the state would ultimately bail them  out. 
The central bank implicitly colluded  with this situation by providing uncollateralized  loans 
to commercial banks. 

By  the  second  half  of  1995,  there  were  increasing  signs  that  the  economic  situation  was 
unsustainable. The growth in industrial output slowed to below 2% for  the year.  The price 
advantage  conferred  by  the  Spring  1994  currency  depreciation  was  eroded  by  the 

46 

subsequent  exchange  rate  stability  and the  differential  between  domestic  and  foreign  cost 
increases. Consumer price inflation  accelerated  somewhat,  and the exchange rate began to 
come under pressure. Foreign exchange reserves declined as the central bank intervened  in 
support  of the lev. 

The  country  is  regularly  meeting  its  external  debt-related  obligations  stemming  from  the 
implementation  of the Paris  Club  debt  rescheduling  arrangement  and  DDSR  arrangement 
with the London  Club  creditor  banks.  In  1995, debt-related  payments  amounted  to  some 
US$718  million. 

the  arrangements,  Bulgaria's  relations  with 

Following 
financial 
community  have  been  restored  but  the  recent  eruption  of  a  new  financial  crisis  in  the 
country's  banking  system  and  declining  confidence  in  the  currency  has  again  increased 
Bulgaria's financial  risk with depressive effects  on the value of "Brady bonds". 

international 

the 

3. 

Structural  reforms 

Despite a number  of constraints, policy slippages and weak management,  Bulgaria was  in 
1995  successful  in  preserving  previous  policy  achievements  such  as  trade  liberalization, 
current  account  convertibility  and  a  liberalized  exchange  rate  regime.  Undoubtedly, 
maintaining  this  "acquis"  may  become  more  problematic  particularly  in  view  of  the 
country's new financial  fragility,  exchange rate volatility,  loss of confidence  on the lev and 
the insufficient  speed in the structural adjustment  process. 

The  progress  in  trade  liberalization  has  been  encouraging  but  uneven.  In  1995,  Bulgaria 
implemented  a liberalized  customs  policy  (in  particular  in trade  with  the  EU)  but  at  the 
same  time  it  adopted  a  number  of  temporary  import  restrictions  aimed  at  protecting 
selected  domestic  industries  and  agriculture,  such  as  minimum  import  prices,  restrictive 
import licenses, tariff quotas etc. 

Bulgaria  still  operates  export  quotas,  export  fees  and  export  taxes  on  selected  goods. 
Occasional  export  bans were  imposed  in  1993  on industrial  products  but  were  eventually 
lifted  in  July  1995.  Bulgaria's  Interim  Association  Agreement  with  the  EU  entered  into 
force  on January  1, 1994. 

The  progressive  adoption  of  an  outward-oriented  trade  regime  has  been  associated  with 
efforts  aimed  at  further  liberalizing  the  exchange  rate  regime.  A  major  liberalization  was 
introduced  in  February  1994  whereby  foreign  exchange  ceilings  for  current  personal 
payments  (tourism  etc.)  by  residents  have  been  raised  significantly  and  current  account 
convertibility is ensured for trade related payments. Some restrictions on current  payments 
and  transfers  are  however  still  in force.  Residents  are  allowed  to  hold  foreign  currency 
deposit  accounts  (export  proceeds  are  subject  to  repatriation  but  not  a  surrender 
requirement).  Some  inter-governmental  clearing  and  barter  arrangements  with  third 
countries were also terminated  in 1995. 

As regards  the reform  of the  state  enterprise  sector,  the new government  has pursued  its 
strategy  based  upon  three  main  "pillars", i.e.  the  implementation  of financial rescue  plans 
for  state  enterprises  (SOEs),  enterprise  restructuring  and  privatization.  Moreover,  policy 
implementation  was  delayed  by political  conflict,  policy  and  administrative  shortcomings, 
lack of commitment  to harden budget  constraints on SOEs, insufficient  financial  resources 

47 

and  a  weak  banking  system.  In  this  respect,  1995  has  been  a  sort  of  transition  year 
towards  a  more  decisive  and  ambitious  reform  programme  which  presently  is  being 
prepared,  for implementation in 1996. 

The  financial  rescue  strategy  lays  its  foundation  on  a  law  passed  in  December  1993 
authorizing  the  government  to  issue  long-term  bonds  in  both  domestic  and  foreign 
currency  aimed  at  replacing  uncollectable  lev  and  dollar-denominated  loans  and  interest 
arrears  accumulated  in  banks'  portfolios  by  end  of  1991.  Loans  to  state  enterprises  will 
therefore  be  borne  by the  government  which  eventually  may  convert  them  into  equity  or 
decide  for  their  write-off  or  rescheduling  as  soon  as  companies  are  restructured  or 
privatized.  In the  end  of  1995 Bulgaria  had  concluded  some  77 privatization  deals  where 
domestic debt bonds were used in debt-equity  swaps amounting to  2.9 bn leva. Few  more 
privatizations  were  also  carried  out  through  debt-for-equity  swaps  with  the  use  of 
government  "Brady  bonds"  (issued  on  the  occasion  of  the  DDRS  arrangement)  held  by 
Western investors. 

In  the field of  restructuring,  steps  were  taken  late  in  1995  with  a  view  to  strengthening 
SOEs' financial  discipline.  Loss reduction  and  rationalization  plans were  prepared  as well 
as  a  list  for  closing  non  viable  enterprises  or  to  put  them  into  "financial  isolation", 
implying  that  all  banks  would  be  prohibited  from  extending  further  loans  to  them. 
However,  these plans were not implemented. 

The privatization  programme  approved  in June  1995 listed  some  600  eligible firms but  at 
the  same time it indicated  some key  sectors  (such  as energy,  railways,  mining  etc.)  which 
would  be  excluded  from  the  programme.  Large  SOEs  will  be  only  partly  privatized, 
reflecting  the  new  government  strategy  to  keep  a  significant  state  control  in  any  sizeable 
firm. In  1995  the  Privatization  Agency  completed  only 69 privatization  deals  (out  of  170 
deals originally  envisaged  for  1995) with total  proceeds  of  12.1 bn leva  (ofwhich  only 3 
bn  paid  in  cash  and  the  rest  by  swapping  government  foreign  and  domestic  debt  bonds 
into enterprise equity). 

Furthermore,  in  1995  a  mass  privatization  scheme  was  launched,  involving  some  1000 
public  enterprises.  Sale  of  vouchers  began  in  January  1996  and  sell-off  tenders  are 
expected to be issued by the autumn. 

The situation of the Bulgarian banking  system worsened  considerably  during  1995 and  the 
beginning  of  1996  reflecting  continuing  undercapitalization,  inadequate  management, 
insufficient  supervision  by  the  BNB,  lack  of  financial  discipline  ("easy  credit"), 
fragmentation  and  a  growing  amount  of  non  performing  loans  to  enterprises.  Despite 
some  measures  taken  in  1994  and  1995  focusing  on  the  strengthening  of  the  bank 
supervision  capability  at  the  BNB  and  implementing  a bank  consolidation  programme  by 
the Bank  Consolidation  Company  (BCC), the situation  deteriorated  so much  (particularly 
in two main banks, Mineralbank  and  Economicbank)  that  presently  the  country's  financial 
system is on the verge of collapse. 

In order to  address the problem of the banking system,  the Bulgarian  authorities  presently 
envisage  a  number  of  new,  wide-reaching  measures  such  as  limiting  new  credits  by  the 
BNB,  further  strengthening  of  bank  supervision,  removal  from  office  of  banks' 
licenses  revocation.  More  medium-term  strategies  being 
administrators  and  bank 

48 

considered  include the closure on financial  stabilization  of public enterprises which are the 
biggest  debtors  to  these  two  "ailing"  banks  and,  in  parallel,  their  financial  restructuring 
and recapitalization,  in view of their subsequent privatization. 

4. 

Implementation  of macro-financial  assistance 

The  disbursement  of  the  ECU  110  million  Community  loan  decided  in  October  1992  in 
the framework  of G-24,  as a complement  to the IMF assistance  to  Bulgaria,  was  delayed 
as the  1992  stand-by  arrangement  with the Fund  went  off  track.  For  the  same reason  no 
other  G-24  assistance  was  released  under  this  initial  package.  At  the  end  of  1993 
conditions were restored for the resumption of EU/G-24 assistance to Bulgaria.  Following 
the  adoption  of  a new  IMF  stand-by  arrangement,  on May  16,  1994, the  Council  agreed 
with the  Commission  that  the  1992 decision on Community  macro-financial  assistance  to 
Bulgaria could be re-activated  in the context of the new programme.  The release of a first 
tranche (ECU 70 million) took place in December  1994 on the basis of the approval of the 
new IMF  Stand-by  and the  debt relief arrangement  agreed between  creditors.  The  release 
of  the  second  tranche  is  conditional  upon  observance  by  Bulgaria  of  standard  macro-
economic performance  criteria including a satisfactory  track record  of the IMF  Stand  -by, 
a proper implementation of DDSR operation and progress with structural  reform. 

49 

VH.  MOLDOVA 

1. 

Introduction 

On  13  June  1994  the  Council  of  the  European  Union  decided  to  grant  the  Republic  of 
Moldova  a loan  of ECU  45  million with  a maximum  duration  often  years11 to  assist  the 
country in its efforts  to transform  its economy to a market economy and to  strengthen  the 
reserve position  of the central bank.  The Community loan was part  of an overall  package 
mobilised by the international  donor community in favour  of Moldova  to  complement  the 
resources  provided  by  the  IMF  and  the  World  Bank.  The  first  tranche  of  the  loan, 
amounting to ECU 25 million, was disbursed  in December  1994. The disbursement  of the 
second  tranche  which  was  subject  to  the  fulfilment  of  conditions  specified  in  the 
Memorandum  of  Understanding  (MOU)  attached  to  the  loan  agreement,  took  place  in 
August  1995. 

2.  Macroeconomic  performance 

Following  the  introduction,  in November  1993,  of  its  national  currency  -  the  Moldovan 
leu, Moldova has made a decisive turn towards financial  stabilisation in the context  of the 
15-month economic programme  supported  by an IMF stand-by arrangement  (approved  in 
December  1993)  and  complementary  assistance  from  the  international  community, 
including the ECU 45 million Community loan. 

In  March  1995,  a  new  stand-by  arrangement  was  approved  by  the  IMF  to  support  the 
1995  economic  programme  of  the  Moldovan  government.  The  objectives  of  this 
programme  were  the  consolidation  of  financial  stabilisation  and  the  implementation  of 
structural transformation  measures to restore economic growth. 

After  a  31%  decline  in  GDP  in  1994,  due  to  severe  weather  conditions  and  to  the 
continuing  disruptions  to  output  and  trade  associated  with  the  collapse  of  central 
planning,  Moldova's  economic  recession  appeared  to  have bottomed  out  and  preliminary 
estimates  indicate  that  real  GDP,  including  that  of  the  region  of  Transnistria,  fell  by  3 
percent  in  1995,  which  suggests  a  modest  rise  in  activity  in  the  economy  excluding 
Transnistria.  This improvement was partly due to  a recovery  in the important  agricultural 
sector  with  the  return  of normal  climatic  conditions  -  a  rise  of  some  4%  was  registered, 
but also to a reduction in the rate of decline of industrial production,  which is estimated  to 
have dropped by "only"  10%. Official  unemployment  remained  relatively  low, i.e.  at  some 
2% by end-1995, but  a lot of workers were on unpaid leave and the actual  unemployment 
figure  far  exceeded  10%. Real wages rose in  1995 but  dollar wages, which  averaged  US$ 
32 per month, remained low compared to those of neighbouring countries. 

The  1995  programme's  key  monetary  objective  was  to  cut  inflation  to  a  sustainable,  low 
level  through  tight  credit  policy.  The  National  Bank  of  Moldova  (NBM)  successfully 
achieved  this  aim  in  the  first  half  of  1995:  monthly  rates  below  0.75%  were  registered, 
compared  to  annual  inflation  of  about  800%  in  1993  and  120%  in  1994.  However, 
inflationary  pressures  re-emerged  in  the  autumn  of  1995.  These  were  partly  due  to 
increases  in  administered  prices  and  seasonal  increases  in  food  prices,  but  also  to  strong 
capital inflows, which were unsterilized  since the NBM was reluctant to allow a  significant 

11  Council Decision  94/346/EC 

50 

appreciation  of  the  leu.  In  the  fourth  quarter,  as  the  inflationary  consequences  of  these 
policies were  becoming  apparent,  the  central bank  tightened  monetary  policy,  which  was 
reflected  in  upward  pressure  on  interest  rates.  With  an  average  monthly  rate  of  3.5%) 
between  September  and  December,  inflation  reached  24% for  the whole  year,  the  lowest 
in the CIS. 

The fiscal  performance  improved in  1995, with the general government  cash deficit  falling 
from 9%  of GDP  in  1994 to  5.5% in  1995, not  so far  from  the  3.5%  official  target.  The 
deficit  was financed  by higher-than-expected  net foreign  financing  - mainly  postponement 
of repayments due to Russia - and by higher-than-expected  sales of government  securities. 
A severe control  of expenditure  - falling  from  30.2% of GDP in  1994 to  28.5% in  1995 -
was  necessary  to  make  this  reduction  possible.  On  the  revenue  side,  VAT  receipts  and 
land  tax  collections  were  particularly  strong.  Revenue  collection  remained  insufficient, 
however - 24% of GDP against 23.5% in  1994 - and privatisation receipts were far  below 
expectations, because of a lack of domestic capital. Both revenue  and  expenditure  arrears 
- including almost  all wage arrears - were reduced  as a percentage of GDP. 

The  balance  of  payments  remained  under  severe  pressure  in  the  first  half  of  1995, 
primarily  because  of  the  continued  impact  of  the  terms-of-trade  shock  caused  by  the 
increase in imported  energy  prices to world  market  levels.  In the  second  half of the  year, 
however,  a better-than-expected  export performance  coupled with an important  reduction 
in energy imports resulted  in the trade balance showing only a small deficit.  For the whole 
year, the current  account  deficit  was just  over US$  100 million,  or 6%  of GDP.  Moldova 
was  still  highly  dependent  on  foreign  assistance,  medium-  and 
loans 
representing  an  important  part  of  capital  inflows  in  1995.  Disbursements  of  assistance 
came  from  the  EU,  the  USA,  Japan  and  the  Bretton  Woods  institutions  for  a  gross 
amount  of  some  US$  120 million.  Direct  investment  remained  low  at  US$  22  million  in 
1995,  to  be  compared  to  US$  18  million  in  1994.  Complementary  to  this  amount,  the 
balance  of  payments  recorded  in  1995  a US$  41  million  foreign  investment  representing 
equity  swapped  for  debt  to  the Russian  company  Gazprom.  Gross reserves  of the  central 
bank  reached  about  US$  260  million  by  end-1995,  or  the  equivalent  of  4  months  of 
imports, compared to 3 months at end-1994 and  1.4 months by the end of  1993. 

long-term 

By the end  of June  1995, Moldova  accepted  the  obligations  of Article  VIII,  sections  2, 3 
and  4  of  the  IMF's  Articles  of  Agreement  and  has  since  then  maintained  an  exchange 
system free  of restrictions on payments and transfers  for  current  international  transactions. 
The  Moldovan  leu,  introduced  in  November  1993,  was  remarkably  stable  during  the 
whole of  1995, having fluctuated in a narrow band around Mdl 4.5 per US$. 

All  quantitative  performance  criteria  under  the  SBA-supported  IMF  programme  were 
observed  for  all  quarters  of  1995.  A  new  3-year  programme  has  been  prepared  by  the 
Moldovan  authorities,  and  a  request  for  an  EFF  to  support  this  programme  will  be 
considered  by the  IMF  Board  in May  1996. Prior  actions will however  have to  be  taken, 
notably  in  the  area  of  energy  policy  (price  rise  to  provide  cost  recovery)  and  price  and 
trade liberalisation  (reduction of import tariffs,  abolition of excise taxes on exports to  non-
CIS, amendment  of the system of reference  prices for  exports). 

Arrears remained  a substantial problem in Moldova in  1995, despite the progress  made by 
the Government in reducing its own arrears, and even though  some progress were made in 
stabilising  the  situation.  Several  measures  have  already  been  implemented  to  tackle  the 
problem and further  measures are envisaged  in the new programme. 

51 

3. 

Structural  reforms 

Important  measures  were  initiated  in  1995.  The  privatisation  process  slowed  in  early 
1995,  owing  partly  to  a  "wait-and-see"  attitude  of  enterprise  managers  for  the  new 
1995/96  Privatisation  Programme,  finally  approved  by  Parliament  in  March  1995.  It 
gathered  momentum  in  the  following  months,  however,  and  according  to  Government 
estimates,  2200  enterprises,  representing  about  70%  of  the  economy  were  privatised 
through  the  voucher  programme,  concluded  in  November  1995.  Cash  privatisation 
revenues  were  however  disappointing:  44  enterprises  were  privatised  for  an  amount  of 
Mdl 22 million (about US$  5 million), to be compared  to  a schedule of 200  enterprises  to 
be privatised  for  an estimated  value of Mdl  140 million (about US$ 30 million).  Important 
to  note  is  the  role  of  fiduciary  companies  and  investment  funds  which,  following  first 
estimates,  subscribed  about  70%  of total  shares.  The  development  of  a  securities  market 
will however  be vital to  the final success  of the  privatisation  process.  In this respect,  the 
start  in  June  1995  of  the  Moldovan  Stock  Exchange  operations  was  an  important  step. 
Satisfactory  progress  has  been  registered  since then,  especially  when  compared  with  the 
experience  of  other  stock  exchanges  at  a  similar  stage  of  development.  Concerning 
apartments  and  housing,  roughly  70%  of  all  apartments  were  privatised,  and  housing 
privatisation  is  scheduled  to  be  completed  by  mid-96.  Progress  in  privatisation  of 
agriculture  has been  slow:  a number of  state farms  and  collectives  have been  transformed 
into joint  stock  companies  but  land  cannot  be  transferred  for  cash  -  and  this  will  remain 
the  case  until  2001  under  the  present  law,  which  represents  a  legal  impediment  to 
privatisation  of agriculture. 

Important  progress was recorded  in enterprise restructuring:  liquidation proceedings  were 
initiated  against  20  state  enterprises,  of  which  10  were  completed.  However,  much 
remains  to  be  done  to  enforce  financial  discipline.  Progress  in bankruptcy  and  collateral 
laws  has  been  slow:  the  bankruptcy  law,  still  under  discussion  in  Parliament,  will  need 
substantial revision to reach international  standards. 

The  maximum  import  tariff  was  lowered  to  20%  in  December  1995,  with  a  few 
exceptions,  and  the  remaining  export  quotas  - on  grain  and  grain  products  - was  lifted. 
However,  the  1996  draft  budget,  presented  by  the  Government  in  November  1995, 
included  provisions  on tariffs  and  export  taxation,  which  raised  fears  of  a reversal  of  the 
significant  trade  liberalisation  advances  made  over  the  past  two  years.  As  already 
indicated,  these trade  measures will haye to  be cancelled  to  allow for  the  adoption  of the 
new EFF-supported  IMF programme. 

4. 

Implementation  of macro- financial  assistance 

The Community loan of ECU 45 million, decided  on  13 June  1994, was to be disbursed  in 
two  tranches,  upon  the  fulfilment  of  conditions  specified  in  the  Memorandum  of 
Understanding  (MOU)  attached  to  the  loan  agreement.  The  first  tranche,  of  ECU  25 
million, was disbursed  in December  1994, on the basis of the successful  completion  of the 
first  programme  review  under  the  IMF  stand-by  arrangement.  The  disbursement  of  the 
second  tranche,  of ECU  20 million, was conditional upon  a successful  track  record  of the 
IMF  stand-by  arrangement  and  subject  to  a  positive  evaluation  by  the  Commission  of 
performance  criteria and of progress made with respect to structural  reform  in the areas of 
price,  trade  and  foreign  exchange  liberalisation,  privatisation,  and  financial  discipline  of 
enterprises and financial  sector. 

52 

In  view  of  the  measures  taken  and  the  commitments  provided  by  the  authorities,  the 
conditions  attached  to  the  disbursement  of  the  second  tranche  of  the  Community  loan 
were broadly met.  The disbursement  of the second tranche therefore  took place in August 
1995. 

In  order  to  ensure  a  sustainable  balance  of payments  situation  in  the  1995-1996  period, 
further  macro-financial  assistance  in  favour  of  Moldova,  to  complement  the  resources 
provided  by  the  IMF  and  the  World  Bank,  was  recognised  as  being  necessary  by  the 
international  donor  community,  in  the  framework  of  the  Consultative  Group  meeting 
organised  by  the  World  Bank  in  March  1995.  In  this  context,  the  ECOFIN  Council 
indicated  on 20 March  1995 that it would favourably  consider  a Commission proposal  for 
further  Community  assistance.  Following  the  disbursement  of  the  second  tranche  of  the 
first  macro-financial  assistance,  the  Commission  formally  adopted  in  November  1995  a 
proposal  for  further  macro-financial  assistance to Moldova  of up to  ECU  15 million.  The 
Council  decided  on  25  March  199612  to  adopt  the  Commission  proposal.  The 
implementation  of this new assistance is however subordinated to the adoption by the IMF 
of the  new three-year  programme  to  be  supported  by an EFF  and  will  also  be  subject  to 
the fulfilment  of conditions  still to be negotiated  with the Moldovan  authorities  and  to  be 
included in a new Memorandum of Understanding. 

12  Council  Decision  96/242/EC 

53 

Vffl.  ROMANIA 

1. 

Introduction 

Romania was a relatively latecomer  among Central and Eastern European  countries in the 
implementation  of the  adjustment  and  reform  process  required  for  the  establishment  of a 
market  economy.  Despite  a  number  of  exogenous  shocks  (collapse  of  the  traditional 
Soviet  market,  the  need  for  a  fast  trade  re-orientation,  the  negative  impact  of  the  UN 
imposed  embargo  on  Serbia  etc.),  Romania's  macroeconomic  performance  has  been 
encouraging in  1995. 

Available data point to  a very high real GDP  growth in  1995.  The  official  unemployment 
rate was brought  down  and  the  high inflation  rate  (1993:300%)  was  drastically  reduced. 
In  1995  the  estimated  budget  deficit/GDP  ratio  was  2.8%.  Consumer  prices  have  been 
liberalized,  trade  has  been  re-oriented  towards  the  West  and  exports  are  expanding 
vigorously.  The  role  of  private  enterprises  is  increasing  in  terms  of  added  value, 
employment,  capitalization, investment and exports. 

In  1995 the country regained  access to the international  capital market.  At  the  same time, 
Romania  experienced  growing  difficulties  with  implementing  tight  monetary  and  fiscal 
policies;  the  trade  balance  and  the  current  account  both  deteriorated,  the  exchange  rate 
failed  to  stabilize  and  a significant  divergence  (up to  20%)  re-appeared  by the  end  of last 
year between the interbank  exchange rate and the (relatively free)  exchange  bureaux  rate, 
reflecting  the government's  involvement  in the forex  market.  This means  that  Romania  is 
de  facto  under  a  dual  exchange  rate  regime.  The  government  continues  to  rely  heavily 
upon  administrative,  regulatory  and  restrictive  licensing  measures  particularly  vis-à-vis 
financial  intermediaries and commercial banks active on the foreign  exchange market. 

In  1995  foreign  currency  reserves  declined  substantially,  reflecting  the  Central  Bank's 
attempt to stabilize the leu exchange rate. 

Results  attained  so  far  with  structural  reform  appear  to  be mixed,  particularly  as  regards 
the  demonopolization  of  financial  services,  financial  restructuring  and  privatization  of 
state-owned  enterprises,  further  reductions  in  subsidies  and  further  trade  liberalization. 
Despite some delays and  "stop-and-go" policies, many decisions have finally been  adopted 
during  1995 and the legislative and administrative lay-out  is now  available for  programme 
implementation in  1996 and beyond. 

The  IMF  review  in  November-December  1995  led  to  the  approval  by  the  Fund  of  an 
extension  of the current  stand-by arrangement  to April  1997 and the increase  of it to  US$ 
750  million,  to  be  disbursed  in  several  tranches.  At  the  same  time,  the  World  Bank 
finalized  a  FESAL  loan  in  favour  of  Romania  worth  US$  280  million.  The  Community 
decided to disburse the first tranche (ECU 55 million) of its macroeconomic loan,  totalling 
ECU  125 million in November  1995. 

2.  Macroeconomic  developments 

The  main  objective  of  the  government's  macroeconomic  programme  for  1995  was  to 
bring annual inflation  down from  62% as of end of  1994 to  around  30%, reduce  the  fiscal 
deficit,  support  production  and  exports,  liberalize  the  foreign  exchange  market,  stabilize 
the  leu  exchange  rate,  and  improve  the  country's  external  position.  To  attain  these 

54 

ambitious  objectives,  the  government  committed  itself to  continue  implementing  a  rather 
restrictive monetary, fiscal and incomes policy and,  at the  same time, accelerate  structural 
reforms  and develop market-based  regulatory instruments in the financial  market. 

To  strengthen  the  overall  position  of the  country's  balance  of payments  and  stabilize  the 
leu,  adequate  external  financing  was  required,  under  the  form  of  IMF  and  WTB financial 
support,  FDI  investment  and  borrowing  on  the  international  capital  market.  In  this 
respect,  efforts  were made with a view to increasing  the Western  and  IFIs' confidence  on 
the  Romanian  policy  programme  and  in  the  country's  economic  perspectives  on  the 
medium-term. 

Moreover,  while  Romania's  economic  performance  continued  to  be  positive  in  1995  in 
several respects,  only a sluggish progress was recorded  in carrying out  structural  reforms. 
The  overall  situation  became  more  problematic  by  the  end  of  the  year  with  the  re 
appearance  of  a  major  spread  between  the  official  and  the  market-determined  exchange 
rates;  foreign  currency  reserves  further  contracted,  the  country's  external  position 
weakened  considerably and the confidence  on leu declined  sharply. 

GDP  real  growth  in  1995  reached  6.9%  (against  1.3%  and  3.9%  in  1993  and  1994 
respectively).  Industrial  production  increased  by  8.9%,  agriculture  by  4.9%  and 
construction  by  11.9%.  Hourly  labour  productivity  increased  by  15% in  1995,  compared 
to the same period  of the preceding year. The unemployment  rate contracted  from  11%  at 
the beginning of  1995 to  9.3% at the end of December.  This was caused in large part by a 
reallocation  of  employment  towards  the  agricultural  sector,  which  appears  to  have 
absorbed  a substantial portion of the labour force released  from  industry.  This trend  could 
hardly be seen as sustainable, given the low level of productivity  of the agricultural  sector, 
which  already  employs  above  30%  of  the  total  labour  force.  Inflation  has  been  reduced 
substantially  from  an  annual  rate  of 62% in  1994 to  33.3% in  1995. However,  consumer 
prices increases sharply accelerated  during the last quarter of the year, partly in the light of 
seasonal  factors  and  partly  reflecting  the  fact  that  non-inflationary  economic  growth 
cannot be sustained without major  structural  adjustment. 

In  1995, the budget  deficit  ratio was  contained  to  2.&% of GDP,  reflecting  administrative 
decisions  aimed  at  cutting  direct  current  public  expenditure,  limiting  public  financial 
transfers 
the 
implementation  of  a  tax  reform  in  1994.  A  considerable  quasi-fiscal  deficit  still  exists 
under the form  of preferential  lending by the Central Bank  and  state  owned  banks  to  loss 
making  SOEs.  Some autonomous  extra-budgetary  funds  have also been established. 

loss-making  enterprises  and 

following 

revenue, 

raising 

fiscal 

to 

In  1995, Romania's  external  position  deteriorated.  The trade  deficit  was  around  US$  1.3 
bn,  more  than  twice  the  deficit  recorded  in  1994  (US$  582  million).  The  deficit  rose  in 
spite of a rather promising expansion of exports, which increased  by about  22% compared 
to  1994.  Moreover,  the  increase  in  imports  was  much  higher,  slightly  above  32%, 
reflecting  a  surge  in the  demand  for  Western  manufactured  and  capital  goods  as well  as 
energy,  mainly  by  loss-making  public  enterprises.  In  line  with  the  weakening  current 
account  position  (which  recorded  a  deficit  of  4.4%  of  GDP)  in  1995,  foreign  exchange 
reserves declined,  to reach US$ 2.7 bn by the year-end  equivalent to less than two  months 
of  imports,  down  from  a  level  corresponding  to  about  four  months  of  imports  at  the 
beginning of the year. 

55 

FDI  through  joint  ventures  started  to  pick  up  in  the  third  quarter  of  1995.  However, 
foreign  investment performance  in  1995 was disappointing with new flows in the region of 
US$ 400  million  against  500  million witnessed  in  1994. In  1995, Romania  also  managed 
to  regain  access  to  the international  financial  market  through  a series  of  syndicated  loans 
which were  over-subscribed. 

Romania's  external  debt  remains relatively  low. At  the end  of  1995 the  medium  and  long 
term  external  debt  increased  moderately  to  US$  5.3  billion,  from  US$  4.5  billion  at  the 
end of the previous year. 

Monetary  and fiscal  policy has followed  a rather uneven path in  1995. Restrictive policies, 
responsible  for  most  of the positive  results particularly  as regards  the  decline  of  inflation 
rate and the leu's relative stability during the first half of the year were somewhat  loosened 
in  the  course  of  1995.  However,  in  view  of  negotiations  on  the  extension  of  the  IMF 
stand-by  arrangement,  the authorities  again tightened  monetary  policy  during the  last  two 
months  of  1995 mainly  through  a  sharp  increase  in the  refinancing  rate  and  introduced  a 
restrained  draft  budget  for  1996.  The  National  Bank  of  Romania  (NBR)  still  provides 
preferential  credit  ("directed  credit")  in  favour  of  the  agricultural  sector,  export  and 
energy at an interest rate of 35%. 

The  implementation  of  credit  control  measures  by  the  monetary  authorities  reduced 
commercial  banks'  access  to  the  Central  Bank  refinancing,  thus weakening  their  financial 
position.  The  subsequent  credit  squeeze  led  to  a  considerable  expansion  of  payment 
arrears at enterprise level. 

The  continuing  administrative  intervention  on  the  foreign  exchange  market  throughout 
1995  and  the  temporary  measures  taken  by  the  monetary  authorities  in  March  1996, 
limiting the number  of banks licensed to operate on the forex  market,  have been  causes  of 
serious  concern.  At present,  a dual exchange rate fixing mechanism is "de facto"  in place, 
and the volume of daily foreign  exchange transactions on the inter-bank  market  contracted 
sharply during the first quarter of 1996. 

3. 

Structural  reforms 

Eliminating  arrears  and  imposing  financial  discipline  on  loss-making  state-owned 
enterprises  constituted  key  objectives 
in  Romania's  economic  stabilization  and 
restructuring  programme  for  1995.  A  number  of  large  state-owned  companies  and 
"Regies  autonomes"  have  been  targeted  for  strict  financial  surveillance.  These  measures 
include  isolation  from  the  banking  system,  negotiation  of  conciliation  agreements  with 
their  creditors  as  well  as  elaboration  and  implementation  of  Financial  Recovery  Plans. 
Also  it  was  envisaged  to  accelerate  the  standard  and  mass  privatization  programmes. 
Results  attained  so  far  are  preliminary  and  difficult  to  assess  because  of  a  number  of 
delays  in  programme  implementation,  growing  financial  problems,  and  administrative 
inefficiency.  The  overall  picture,  however,  is  rather  disappointing.  Parliament  approved 
the  long-overdue  Commercial  Insolvency  Law  in  March  1995.  The  law  permits  out-of-
court  conciliation  procedures  and,  if  required,  the  initiation  of  bankruptcy  proceedings, 
while allowing sufficient flexibility for rescue operations. 

The  large  state  enterprises  which  still  dominate  the  economy  continue  to  benefit  from 
partially hidden quasi-subsidies  such as below-market  interest  rates and  directed  credits. If 
properly  accounted  for,  these  would  increase  the  public  deficit,  thus  clearly  making  the 

56 

fiscal  policy  stance  less  restrictive.  Furthermore,  state  companies  unable  to  service  their 
debts  are  rarely  forced  into  liquidation,  which  adds  to  the  inefficiency  of  the  financial 
sector. 

The  number  of  privatized  enterprises  has  increased,  but  by the  end  of  the  year  only  one 
third of small enterprises,  and merely 6% of large ones, had been privatized.  The response 
of the public to  the  mass privatization  programme  launched  in mid-1995  has  been  worse 
than  expected,  thus  obliging  the  authorities  to  postpone  the  deadline  for  registration. 
Citizens  may  now  invest  their  vouchers  directly  into  companies  until  the  end  of  March 
1996, or in the Private Ownership Fund until the end of April. 

The procedure for  privatising two of the five major  state-owned banks was  due to  start in 
1995  but  was  postponed  until  1996  and  only  one  bank  has  so  far  been  nominated,  the 
Romanian Development  Bank. 

4. 

Implementation  of macro-financial  assistance 

Following Romania's  agreement in principle with the IMF on a new programme  for  1994-
95,  the  authorities  requested  the  EU  and  the  G24  to  grant  further  macro-financial 
assistance  to  Romania  to  cover  the  residual  external  financing  gap  of  US$  275  million 
under  the  1994-95  programme.  Commitments  by  the  EU/G-24  reached  some  US$  219 
million  or  nearly  80%  of  the  residual  gap.  This  includes  further  EU  macro-financial 
assistance for  an amount up to ECU  125 million,  in two tranches,  decided  by the  Council 
on  20  June  199413.In  December  1994,  the  Commission  agreed  with  the  Romanian 
authorities  the  macro-economic  conditions  attached  to  the  disbursement  of  the  loan. 
However,  the  disbursement  of  the  first  tranche  (ECU  55  million)  was  delayed,  due  to 
policy  slippages  that  occurred  during  the  implementation  of  the  programme  in  the  first 
quarter of 1995. 

In early July the Romanian  authorities reached  an understanding  with  the  IMF  that  paved 
the way for  completion  of the first review of the programme, which eventually took  place 
in November/December  1995. The  disbursement  of the first tranche  of  the  EU  loan  took 
place in November  1995. 

The  disbursement  of  the  second  tranche  (70  MECU)  is  linked  to  the  effective 
implementation  of specific  structural  reform  measures, including progress in  privatization, 
financial restructuring of loss-making enterprises and banking sector reforms,  agreed  upon 
with the Romanian authorities in the Memorandum of Understanding. 

13  Council Decision 94/369/EC 

57 

IX. THE SLOVAK  REPUBLIC 

1. 

Introduction 

The dissolution of the Czech and  Slovak Federal Republic (CSFR) on  1 January  1993 had 
several negative implications for  the  Slovak economy  at  a time when  it was  still  suffering 
from  the  shock  associated  with  the  dismantling  of  the  Council  of  Mutual  Economic 
Assistance  and  from  the  difficulties  accompanying  the  transition  to  a  market  economy. 
The  dissolution  of  the  federation  implied  the  loss  of  substantial  fiscal  transfers  from  the 
Czech-lands,  disrupted  trade with the  Czech Republic,  restricted  Slovakia's  access  to  the 
international  capital  markets,  and  was  accompanied  by  speculation  against  the  Slovak 
crown that practically depleted its official  foreign  exchange reserves. 

In  this  context,  the  Slovak  government  agreed  with  the  IMF  in  mid-1993  on  a 
macroeconomic  stabilization programme for  the rest of that year, which was supported  by 
the'approval in July  1993 of a first purchase in the amount  of SDR 64.4 million under  the 
IMF's  Systemic  Transformation  Facility  (STF).  In  addition,  the  World  Bank  granted 
Slovakia a US $ 80 million Economic Recovery Loan (ERL) in November  1993. 

In July  1994, the IMF  approved  a 20-month  stand-by  credit  and  a second  purchase under 
the  STF  totalling  SDR  180  million,  in  support  of  a  more  comprehensive  economic 
programme  for  1994-95.  In  parallel,  the  World  Bank  began  discussions  on  a  possible 
Enterprise  and  Financial  Sector  Adjustment  Loan  (EFSAL).  In  support  of  this 
programme, the EU  Council adopted  on 22 December  199414 a decision making  available 
macro-financial  assistance to  Slovakia  amounting  up  to  ECU  130 million,  as part  of  a  G-
24  initiative  to  respond  to  the  request  by  the  Slovak  authorities  for  complementary 
assistance.  Other  members  of  the  G-24  made  further  commitments  amounting  to  US$ 
87.3 million. 

2.  Macroeconomic  developments 

The  improvement  in  macroeconomic  performance  that  started  in  1994  continued  and 
intensified  in  1995. The recovery of economic activity accelerated, with real GDP  growing 
by an impressive 7.4%  and industrial production by an estimated  8.4%.  Domestic  demand 
replaced net exports as the driving force  behind economic expansion.  The strengthening  of 
domestic  demand,  however,  largely  reflected  the  behaviour  of  private  consumption  and 
stock  building.  Fixed  investment,  which  had  been  declining  sharply  ever  since  the 
transition  process  began,  recorded  practically  no growth  in  1995.  The  economic  upswing 
has also been reflected  in a decline in the unemployment  rate from  15.2% in January  1995 
to  13.7% in February  1996. 

Despite  this  strong  growth  performance,  inflation  has  continued  to  show  a  downward 
trend.  Inflation,  as  measured  by  the  year-on-year  consumer  price  index  (CPI)  declined 
from  11.7%  in  December  1994  to  only  6.1% in  March  1996,  the  lowest  inflation  rate 
recorded  by any transition  country.  Real wage growth  remained  high in  1995  (real  wages 
in the  industrial  sector  increased  by about  6%)  but  is, to  a significant  extent,  being  offset 
by strong productivity gains. 

14  Council  Decision  94/939/EC. 

58 

The  reduction  in  inflation  has  continued  to  be  supported  by  restrictive  macroeconomic 
policies. Reflecting  larger  than  anticipated  revenues  from  VAT  and  income  tax,  the  state 
budget  finished  1995  with  a deficit  of  Sk  8.3  billion,  well below  the  Sk  21  billion  deficit 
that  had  been  programmed.  At  the  same  time,  the  general  government  surplus  was 
estimated  at  about  0.5%  of  GDP, which  compares  to  a  deficit  of  1.4%  of  GDP  in  1994 
and of 7.6% of GDP in  1993. Monetary policy has also remained  relatively tight,  although 
its  stance  has  been  somewhat  eased  compared  to  1994.  The  net  domestic  assets  of  the 
banking  system  expanded  by  5%  in  1995,  approximately  as  programmed.  The  money 
supply (M2), however,  grew faster than programmed, reflecting  the rapid expansion of net 
foreign  assets,  in turn  a consequence  of the  stronger  than  expected  balance  of  payments 
situation.  M2  is estimated  to  have increased  by 20.8%,  compared  to  a programme  target 
of  10%.  Consistent  with  its  policy  of  increasingly  relying  on  indirect  instruments  of 
monetary  control,  the  National  Bank  of  Slovakia  (NBS)  abolished  all  remaining  credit 
ceilings on banks in January  1996. 

After  the  remarkable  improvement  experienced  in  1994,  Slovakia's  balance  of  payments 
continued  to  strengthen  in  1995.  The current  account, which had  swung  from  a deficit  of 
5.4%  of  GDP  in  1993  to  a  surplus  of  5.7%  of GDP  in  1994,  recorded  a  new  surplus  of 
4.3%  of  GDP  in  1995.  The  evolution  of the  trade  balance  in  the  first  months  of  1996, 
however,  suggests  that  the  surplus will  continue  to  shrink  in  1996  reflecting  the  strength 
of domestic demand. 

The capital  account  also  improved  in  1995, with total  net  capital inflows  reaching  almost 
US$  1 billion,  compared  to  US$  130 million  in  1994.  The  main factor  behind  this rise in 
net  capital  inflows  has  been  the  substantial  increase  in  foreign  borrowing  by  Slovak 
enterprises  and  banks.  Also,  the  tight  management  of interbank  liquidity  by  the  NBS,  in 
combination  with the perceived  stability of the  Slovak  crown  (and,  during the first half of 
1995,  the  expectation  of  a revaluation  against  the  Czech  crown),  has  led  to  some  short-
term  capital  inflows.  Foreign  direct  investment  inflows,  however,  have  remained  low, 
partly  reflecting  uncertainty  over  the  government's  market-oriented  reforms  and,  in 
particular,  over privatization (see below). 

Slovakia's  access  to  the  international  capital  markets  has  been  facilitated  by  successive 
upgradings  of  Slovakia's  credit  ratings.  In  May  1995,  Moody's  assigned  to  Slovakia  an 
investment grade rating (Baa3).  Standard & Poor's, for its part, upgraded  Slovakia's  rating 
in April  1995  (from  BB" to BB+)  and  again in April  1996  (to BBB", an investment  grade 
mark).  Slovakia  has  thus  become  one  of  the  few  transition  countries  that  can  boast 
investment grade ratings from the leading US rating agencies. 

These favourable  trends in both the current  and  capital  accounts have been translated  into 
a substantial increase in international reserves. Official  reserves (including gold)  rose  from 
US$  1.75  billion at the end of  1994 to US$ 3.4  billion at the end  of  1995. This  represents 
a comfortable  level of about 4 months of imports. During the same period,  the reserves  of 
whole banking system have increased  from US$ 3.1 billion to US$ 5 billion. 

Following  a  10% devaluation  of the  Slovak  crown  in July  1993,  the  exchange rate  of the 
crown  has  been  kept  stable  against  a  basket  of  Western  currencies.  In  July  1994,  the 
number  of currencies  in the basket  was reduced  from five to two  (the Deutsche  mark  and 
the  US  dollar).  In view  of the termination  of the bilateral  clearing  system with  the  Czech 

59 

Republic  in  October  1995,  the  Slovak  crown  was  revalued  by  5%  against  the  Czech 
currency.  In  January  1996,  the  fluctuation  band  around  the  central  rate  was  increased 
from+-  1.5% t o + - 3 %. 

Slovakia  inherited  from  the  Czechoslovak  federation  a  relatively  low  . external  debt. 
Although  debt  and  debt  service  ratios  have  deteriorated  since  the  country  reached 
independence,  they  remain  at  reasonable  levels.  The  foreign  debt-over-GDP  ratio  has 
increased  from  25.7%  in  early  1993  to  33.8%  in  October  1995. The  debt  service-over-
exports ratio, for its part, has risen from  3.3% in  1992 to an estimated  9.5% in 1995. 

3. 

Structural  reforms 

In Spring  1994, the  Slovak authorities adopted  a plan to  accelerate privatization based  on 
a greater  reliance on voucher privatization.  By November  1994, about  3.5  million  citizens 
had  registered  to  buy vouchers.  The new  Slovak  government  formed  in December  1994, 
however,  decided  in  June  1995  to  cancel  the  voucher  privatization  scheme.  Instead  of 
shares  in  state  enterprises,  the  Slovak  citizens  that  bought  vouchers  have  been  given  5-
year  interest  bearing  bonds  issued  by  the  National  Property  Fund  (NPF).  NPF  bonds 
totalling  Sk  33.3  billion  (or  the  equivalent  of  about  8%  of  GDP)  were  issued  in  January 
1996. This new scheme not only implies a new delay in the privatization  process but  could 
have negative fiscal  implications,  particularly  given the fact  that  the total  market  value  of 
the shares that were earmarked  for voucher privatization is likely to be significantly  below 
the total face value of the bonds issued by the NPF. 

important  element  of  the  new  privatization  policy 

The decision to  cancel the voucher  scheme is part  of a more general  shift  in  privatization 
policy  announced  by  the  current  government.  The  new  privatization  policy  emphasizes 
standard  methods  of privatization.  Direct  sales (largely  sales to  managers  and  employees) 
have gathered  momentum  since mid-1995, but  (they)  are being  criticized  for  their  lack  of 
is  the 
transparency.  Another 
government's  decision,  incorporated  in  Law  No.  175  passed  in  July  1995,  to  keep 
permanent  state  ownership  in  29  so-called  "important  enterprises"  (including  the  big 
utilities  in  the  energy  sector,  telecommunications  and  armament  enterprises).  Since  the 
bulk  of  the  "important  enterprises"  had  initially  been  included  in  the  1994  voucher 
privatization  scheme,  this  measure  has  effectively  reduced  by  about  35%  the  total  book 
value  of  the  enterprises  slated  for  privatization  under  the  second  wave  of  large-scale 
privatization.  Law No.  175 also allows the  state veto  power  over key  decisions  in 45  so-
called  "strategic  enterprises"  (including  the  largest  industrial  enterprises)  and  shifts  the 
exercise  of the  state  ownership  rights  over  "strategic  enterprises"  back  from  the  NPF  to 
the founding  ministries.  These decisions regarding  "strategic enterprises"  could  slow  both 
the privatization  and the restructuring  of these enterprises. However,  the part  of Law No. 
175  allowing  the  state  to  maintain  (or  regain)  "golden  shares"  in  "strategic  enterprises" 
has been declared unconstitutional by the Slovak constitutional  court. 

Regarding  the  Slovak  financial  system,  substantial  progress  still  needs  to  be  made  with 
respect  to  the  problem  of  non-performing  loans,  privatization  and  the  promotion  of 
competition.  Stricter  regulations  on the  classification  and  provisioning  of bad  loans  came 
into  force  in  July  1995.  Government  concern  about  the  negative  fiscal  repercussions, 
however,  has so far  prevented  the passing  of tax law amendments temporarily  granting  to 
banks  full  tax  deductibility  for  bad-loan  provisions,  a  measure  that  the  authorities  had 
originally  envisaged  to  take  place  by  end-1994.  In  January  1996,  the  government 
announced  its intention to sell in 1996 its majority  holdings in the country's largest  savings 

60 

bank  (Slovenska  Sporitelna),  the  two  largest  commercial  banks  (VUB  and  IRB)  and  the 
largest  insurance  company  (Slovenska  Poistovna).  In  February  1996,  the  Parliament 
passed  a new banking law strengthening the supervisory powers of the NBS. 

Following  abuses  and  irregularities  by  certain  privatization  investment  funds  (PEFs)  and 
investment  companies,  the  Ministry  of  Finance,  in  the  first  half  of  1995,  restricted  the 
operations of several of them. In addition, new legislation was adopted  in July  1995 aimed 
at  increasing  the  transparency  and  control  of their  activities,  and  at  better  protecting  the 
shareholders  of  the  PIFs.  Unfortunately,  however,  the  new  regulations,  in  conjunction 
with the cancellation of the voucher privatization scheme, will also limit the role of PIFs in 
corporate  governance.  In  particular,  with  effect  from  the  end  of  1996,  the  limit  on  the 
maximum equity  stake an PIF may hold  in a given company will be reduced  from  20%  to 
10% of the company's capital. 

Under  pressure  from  the  EU  and  WTO,  the  Slovak  authorities  reduced  the  10%» import 
surcharge  on  consumer  goods  which  was introduced  in March  1994,  to  7.5%  from  mid-
July  1996.  Following  deliberations  in  the  WTO  Balance  of  Payments  Committee,  the 
Slovak  authorities  have  announced  that  they  would  abolish  the  surcharge  by  the  end  of 
1996. 

On  1 October  1995, a new foreign  exchange act  came into  effect.  The  Slovak  crown  was 
made  fully  convertible  for  current  account  purposes,  and  the  bilateral  clearing  system 
maintained with the Czech Republic, since early  1993 was terminated.  The  authorities  also 
intend gradually to relax certain restrictions on capital movements. 

Most  prices in Slovakia have been liberalized.  The  share  of items that  still have  regulated 
prices represents only about  5% of total turnover.  These items include  energy  (electricity, 
gas,  heating  and  petrol),  water,  pharmaceutical  products,  rents,  telephones  and  public 
transportation.  Electricity,  gas  and  heating  tariffs  paid  by households  remain  significantly 
below  their  economic  cost-recovery  levels.  The  upward  adjustment  of  these  tariffs 
envisaged  under  the  World  Bank  ERL's  and  the  IMF's  stand-by  programmes  have  not 
been implemented. 

4. 

Implementation  of macro-financial  assistance 

Slovakia met all the macroeconomic  targets and performance  criteria agreed  with the IMF 
in the context  of the  1994-95  stand-by programme. However,  the failure  to  implement  the 
structural  reform  conditions prevented  a successful  completion  of the mid-term  review  of 
the  programme,  which  had  initially  been  scheduled  for  March  1995.  The  main  factor 
preventing the approval of the mid-term review were the delays and the subsequent  policy 
shifts  in the area  of privatization,  including the unexpected  cancellation  of the  shares-for-
vouchers  scheme and  its replacement  by the  scheme based  on the issuance  of NPF bonds. 
The  authorities  also  failed  to  comply  with  the  conditions  regarding  the  granting  of 
temporary  full  tax  deductibility  for  bad  loan provisions  made  by banks,  the  adjustment  of 
energy  prices  and  the  elimination  of  the  import  surcharge.  The  slow  formulation  and 
instability  of  privatization  and  other  structural  policies  also  led  the  World  Bank  to 
discontinue discussions on an EFSAL operation in April  1995. 

In May  1995, the Commission  services held discussions with the Slovak  authorities  on the 
economic  policy  measures  to  be  attached  to  the  implementation  of  the  EU  loan  facility. 
During  the  discussions,  however,  insufficient  progress  was  made,  with  the  Slovak 
authorities  showing  little  flexibility  with  respect  to  the  measures  emphasized  by  the 

61 

Commission,  in  particular  the  early  phasing  out  of  the  10%  import  surcharge,  the 
adjustment  of  energy  prices  and  the  need  to  prevent  the  new  regulations  on  PJJFs  from 
weakening  their  role  in  corporate  governance.  The  resumption  of  the  discussions  was 
complicated  by  the  government's  decisions  on  privatization  announced  in  June  1995, 
including  in  particular  the  cancellation  of  the  shares-for-vouchers  privatization  scheme, 
which  was  considered  by  the  Commission  to  be  an  essential  condition  for  the  effective 
disbursement  of the assistance. 

Meanwhile,  and  as noted  above,  Slovakia's  macroeconomic  and,  in particular,  balance  of 
payments  situation  experienced  a remarkable  turnaround.  In view  of the  strengthening  of 
the external position, the Slovak government announced that they did not wish to  draw on 
the  remaining  tranches  of the  IMF  stand-by  credit.  In  the  event,  Slovakia  only  made  the 
first  two  purchases  (totalling  SDR  32.2  million)  under  this  stand-by  arrangement,  which 
expired in March  1996. 

In this  context,  on  23  January  1996, the  Commission  approved  a proposal  for  a  Council 
decision  repealing  the  1994  decision  granting  further  macro-financial  assistance  to 
Slovakia. This decision is expected to be adopted by the Council in 1996. 

Regarding the implementation of the complementary macro-financial  assistance  committed 
by  other  G-24  members,  Japan released  its US$  60 million  assistance  in early  May  1995, 
in the form  of an Exim Bank  co-financing  of the World Bank's ERL. No disbursements by 
other donors had taken place at the time of writing of this report. 

62 

X.  UKRAINE 

1. 

Introduction 

to 
The  on-going  struggle  between  reformers  and  conservative  forces,  continues 
characterize economic policy and slows down progress in economic reform  in Ukraine.  In 
the  second  half of  1995  several  slippages in policy implementation  led to  a weakening  of 
the exchange rate and to the budget and inflation targets being missed. Therefore,  the IMF 
suspended the execution of its Stand-By Arrangement (SB A) in December  (and  eventually 
let it expire in early  1996). Nevertheless, progress in stabilisation has been considerable in 
1995:  the  speed  of  decline  in  the  economy  was  halved  from  -23  %  in  1994  to  -11,8%, 
inflation  and  the  general  government  deficit  were  brought  down,  and  the  trade  balance 
improved.  Structural  reforms  were  started  in  the  end  of  1994  and  have  achieved  some 
results,  mainfy  in  price  and  trade  liberalisation  and  more  recently  in  small-scale 
privatization.  However,  progress  on  large-scale  privatization  and  restructuring  has  been 
slow  and  foreign  direct  investment  is  still  negligible.  As  a  consequence  of  erratic  policy 
implementation  and  slow  structural  reform  as  well  as  severe  weather  conditions,  it  is 
expected that economic growth will only recover in 1997. 

2.  Macroeconomic  performance 

It  took  three  years  after  the  independence  of the  country  before  economic  reforms  were 
finally  started  in  Ukraine  in  October  1994.  After  his  election,  President  Kuchma 
introduced  a  programme  of  price,  trade  and  exchange  liberalisation,  combined  with 
reductions  in  subsidies  and  state  intervention.  A  tighter  fiscal  policy  was  adopted, 
buttressed  by  a  restrictive  monetary  policy.  The  programme  was  able  to  slow  down  the 
rapid  economic deterioration.  By mid-1995, monthly inflation  was reduced  to  around  5%, 
the  exchange  rate  of  the  karbovanets  (Ukraine's  temporary  currency)  stabilised, 
international  reserves  accumulated  and  a  stabilisation  of  output  seemed  possible  in  the 
short-term. 

However,  President  Kuchma  and  Prime  Minister  Marchuk  continued  to  be  confronted 
with  a  conservative  majority,  in  Parliament  that  managed  to  delay  or  even  cancel  some 
reform  measures.  Furthermore,  during  the  summer  of  1995,  doubts  arose  over  the 
commitment  of the  government  to  continue  the  transformation  process.  The  government 
encouraged  the  commercial  banks  to  increase  their  credits  to  insolvent  enterprises, 
enterprise  subsidies  were  increased  and the budget  continued  to  pay for  accumulated  gas 
debts  of  the  enterprise  sector.  Monetary  financing  of  the  deficit  was  also  higher  than 
expected.  Consequently,  the karbovanets weakened  again and the end-of-year  budget  and 
inflation  targets  were  missed.  Because  structural  reform  was  also  lagging,  the  IMF 
decided  in  December  1995  to  postpone  a  decision  on  the  disbursement  of  the  fourth 
tranche of the SB A. 

Although Ukraine was not  able to  observe the objectives  of its stabilisation  programme in 
winter  1995/96,  progress  in  stabilisation  has  been  considerable  in  1995.  The  speed  of 
dc cline in the economy was halved  from  -23% in  1994 to -11,8% in  1995 with  even  some 
month-on-month improvements before  August.  It is now expected that  GDP will continue 
to  fall  in  1996  before  stabilising  in  1997  at  an  output  level  of  around  40%  of  the  pre-
transition  level.  However,  because  of  the  growing  importance  of  the  informal  sector, 
official  figures  might  underestimate  the  actual  progress  in  economic  activity.  Yearly 
inflation  was  brought  down  from  401%  in  December  1994  to  182%  one  year  later. 

63 

Further  improvement  is expected  for  1996.  Although  different  data  sources  differ  widely 
on  sign  and  level  of  the  trade  balance,  they  all  show  an  improvement  in  1995,  as  a 
consequence of growing exports, mainly to non-FSU countries and stagnating imports. 

Registered  unemployment  in Ukraine remains  extremely low at  about  one half percent  of 
the  labour  force.  Actual  unemployment,  however,  may  be  considerably  higher  since 
hidden  unemployment  in  large  state  firms  and  administration  remains  high  and  many 
enterprises  in  difficulty  maintain  their  personnel  but  send  them  on  unpaid  leave.  Wages 
generally  increased  quite rapidly in  1995. Real  wages increased  by  12% and  the  average 
wage  increase  in the  government  sector  in the  first  half  of  1995  was  about  50%  in  real 
terms,  bringing  wages  to  the  same  levels  as  in  the  enterprise  sector,  thereby  adding 
pressure on the budget and on inflation. 

The government budget for  1995 aimed at reducing the cash deficit  from  8.6%  of GDP in 
1994 to 3%. The actual outcome is more likely to have been around 4%, mainly due to  an 
overrun in public expenditures.  The  overrun  is even more important  when  it  is taken  into 
account  that the government  again accumulated  some payment  arrears  on  energy  imports 
which are not visible in the deficit figure on a cash basis. 

3. 

Structural  reforms 

Before  1994, Ukraine made little or no progress with structural reform.  After  his election, 
President  Kuchma  issued  a  decree,  in November  1994,  to  initiate  a  voucher-based  mass 
privatization  programme  and  set  a  target  of  8,000  (out  of  18,000)  medium  and  large 
enterprises to be privatised in  1995. However,  due to  organisational  problems,  opposition 
from  the Parliament  and local bureaucracies,  too  high reservation  prices,  the  exclusion  of 
foreign  investors  as  well  as  a  lack  of  confidence  on  the  part  of  the  general  public,  only 
2,700  enterprises were actually put up  for  sale and the majority  of shares in only  1,500  of 
these  enterprises  have  effectively  been  sold.  This  lack  of  progress  is  particularly 
preoccupying  in  the  important  agricultural  sector.  Continued  disagreement  between  the 
President  and  Parliament  on  the way  to  proceed  has  prevented  any  significant  progress. 
Until recently, progress with regard  to  small-scale privatization  has also remained  limited. 
The beneficial  effects  of new measures that were introduced  in late  1994  only appeared  in 
the third  quarter of  1995. Consequently,  an important  number of small businesses was  still 
to  be  privatised  in  1996,  although  it  was  originally  intended  to  end  this  operation  by  the 
end of 1995. 

Given the  limited  progress  on privatization  and  the  absence  of foreign  direct  investment, 
enterprise  restructuring  continues  to  be  weak.  The  old  monopolistic  structure  of  the 
economy  is  still  widely  present,  mainly  in  heavy  industries  and  in  the  chemical  and 
pharmaceutical  sectors. Because directed bank credits and important  subsidy flows  persist, 
the  budget  constraint  for  most  enterprises  remains  soft.  Furthermore,  inter-enterprise 
arrears  are  accumulating  rapidly  and  although  a  bankruptcy  legislation  exists,  its 
implementation is  ineffective. 

4. 

Implementation  of macro-financial  assistance 

The  EU  loan  of  ECU  85  million  decided  on  22  December  1994  (94/940/EC)  was  to  be 
disbursed  in  a  single  tranche  conditional  upon  an  IMF  stand-by  arrangement,  a  rapid 
implementation  of the EU/G-7 Nuclear  Safety  Action  Plan for  Ukraine  and  progress  with 
structural  reform.  After  significant  delays  oh the  part  of Ukraine,  it was  finally  disbuised 
in December  1995. 

64 

In view of Ukraine's urgent financial needs and against the background  of further  efforts 
being  made  by  the  Ukrainian  authorities  to  pursue  with  economic  reform,  the  Council 
decided  on  23  October  199515  to  provide  Ukraine  with  further  Community  macro-
financial  assistance  in the form  of  a  second  loan  of up  to  ECU  200  million that would 
complement financial assistance  from  the  international financial institutions  and  other 
bilateral donors. 

15  Council Decision 95/442/EC 

ISSN 0254-1475 

COM(96) 695  final 

DOCUMENTS 

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Catalogue  number  :  CB-CO-96-704-EN-C 

ISBN  92-78-13749-9 

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