Report from the Commission to the Council and the European Parliament on the implementation of macro- financial assistance to third countries in 1996
Date: 1998-01-13
Institutions: European Commission
Subjects: economic reform, financial aid, macroeconomics, structural policy, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  13.01.1998 
COM(98) 3  final 

REPORT FROM THE COMMISSION 

TO THE COUNCIL AND THE EUROPEAN  PARLIAMENT 

ON THE IMPLEMENTATION OF MACRO-FINANCIAL  ASSISTANCE 

TO THIRD COUNTRIES IN  1996 

OVERVIEW 

1. Introduction 

2. Macro-financial  assistance in  1996 

3.  Trends and tendencies in macro-financial  assistance 

4. Burden-sharing 

I.ALBANIA 

1. Introduction 

2. Macroeconomic performance 

3.  Structural  reform 

4. Implementation of macro-financial  assistance 

II. ALGERIA 

1. Introduction 

2. Macro-economic  performance 

3.  Structural  reforms 

4. Implementation of macro-financial  assistance 

III. BELARUS 

1. Introduction 

2. Macroeconomic  performance 

3. Structural  reform 

4. Implementation  of macro-financial  assistance 

IV. BULGARIA 

1. Introduction 

2.  Macroeconomic  performance 

3.  Structural  reform 

4.  Implementation  of macro-financial  assistance 

1 

1 

2 

3 

4 

24 

24 

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25 

26 

27 

27 

27 

28 

29 

31 

31 

31 

32 

33 

34 

34 

34 

36 

36 

il 

V.ESTONIA 

1. Introduction 

2. Recent economic  developments 

3. Implementation of macro-financial  assistance 

VI. LATVIA 

1. Introduction 

2. Recent economic  developments 

3.  Implementation  of macro-financial  assistance 

VII. LITHUANIA 

1. Introduction 

2. Recent  Economic  Developments 

3.  Implementation  of macro-financial  assistance 

VIII. MOLDOVA 

1. Introduction 

2. Macroeconomic  performance 

3.  Structural  reform 

4. Implementation of macro-financial  assistance 

IX. ROMANIA 

1. Introduction 

2. Macroeconomic  performance 

3. Structural  reform 

4. Implementation  of macro-financial  assistance 

X UKRAINE 

1. Introduction 

2. Macroeconomic  performance 

3.  Structural  reform 

4.  Implementation  of macro-financial  assistance 

37 

37 

37 

37 

39 

39 

39 

40 

42 

42 

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44 

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51 

51 

1. 

Introduction 

OVERVIEW 

Initially  conceived  for  intra-Community  balance-of-payments  support,  macro-financial 
assistance  from  the  Community  has  been  extended  since  1990  to  third  countries,  mainly 
those  of  Central  and  Eastern  Europe,  but  progressively  also  to  other  countries,  in  the 
former  Soviet  Union  and  in  the  Mediterranean  area,  with  a  view  to  supporting  their 
political and economic reform  efforts. 

As  the  Central  and  East  European  countries  (CEECs)  embarked  on  the  process  of 
transition  to  a  market  economy  they  were  faced  with  similar  problems:  substantial  costs 
attached  to  the  first  steps  of  reform,  additional  external  shocks  (the  Gulf  War  embargo, 
the  collapse  of  COMECON),  insufficient  resources  available  from  the  international 
financial  institutions (IFIs) and virtually non-existent flows from the private sector. 

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

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

Outside  the  region  of  Central  and  Eastern  Europe,  several  other  Community  loan 
operations  were decided  by the  Council  during this period.  In the  context  of  Community 
support  for  Mediterranean  countries  adversely  affected  by  the  Gulf  conflict,  the  Council 
made available a soft  loan to Israel in July  1991. In September of the same year a medium-
term  loan  was  decided  to  help  Algeria  carry  through  the  political  and  economic  reforms 
under way. ' A further  loan to Algeria was decided in late  1994.2  Operations for  European 
Newly  Independent  States  (NIS)  were  also  approved  in  1994,  comprising  loans  for 
Moldova and Ukraine. 

In  1995, the  focus  of the Community's  macro-financial  assistance  continued  to  shift  away 
from  the  Central  and  East  European  group,  which,  as  a  result  of  a  generally  positive 
economic  performance,  had  less  and  less need  to  rely  on  external  financial  support  from 
official  sources. Instead, an increasing part of Community loans were directed  towards the 
NIS  and  the  Mediterranean  region.  While  further  amounts  were  disbursed  to  Albania, 
Rorhania  and  Lithuania,  these  were  outweighed  by disbursements  of  a second  tranche  to 

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

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

27 November 1995. 

Moldova  and  of  new  loans  to  Belarus  and  Ukraine.  In  addition  the  first  tranche  of  a 
second macro-financial  loan to Algeria was disbursed.3 

The Community's  macro-financial  assistance to  all third  countries  is governed  by a set  of 
principles which were drawn up on the initiative of the European  Commission  and  agreed 
among the G-24 to serve as guidelines for the implementation of EU/G-24  macro-financial 
assistance.  These  principles,  which  were  subsequently  endorsed  by  the  EU  Council  of 
its 
Ministers  of  Finance,  underline  the  exceptional  character  of  this  assistance, 
complementarity to financing from the IFIs and its macro-economic conditionally. 

2.  Macro-financial  assistance in 1996 

The  shift  of emphasis  towards  the  NIS  and  away from  the  CEECs  which  was  evident  in 
1994 and  1995 was maintained  in  1996. There was only one new commitment,  which was 
a  loan  of  ECU  15  million  to  Moldova.  This  was  disbursed  in  December,  after  the  IMF 
Board  had  approved  a new three-year  economic  reform  programme  and  the  Commission 
services  had  confirmed  that  the  conditions  attached  to  the loan  were met.  The  other  NIS 
country to which a loan was disbursed  in  1996 was Ukraine, which received  a first tranche 
of ECU  100 million from  a ECU 200 million loan that  had  been  agreed  by the  Council  in 
October  1995 to  complement  assistance from  the IFIs and other  bilateral  donors  aimed  at 
supporting  the  efforts  of  the  Ukrainian  authorities  to  pursue  economic  reform.  The 
situation  in  Belarus  was  marked  by  a lack  of  progress  in  some  key  aspects  of  structural 
reform  and  the  reversal  of  some  measures  of  liberalization.  Consequently,  the  second 
tranche of the ECU 55 million loan approved  in  1995 was not disbursed.  At the end  of the 
year  consideration  was  being  given  to  providing  exceptional  financial  assistance  to 
Armenia  and  Georgia  and,  when  appropriate,  to  Tajikistan  to  enable  them  to  carry  out 
fundamental  political  and  economic  reforms  in  the  context  of  IMF  programmes.  An 
essential  pre-condition  for  such  assistance  will  be  full  settlement  of  these  countries' 
outstanding financial  obligations towards the Community. 

The  Commission,  after  consulting  the  Monetary  Committ 
decided  in  early  September 
1996  to  disburse  the  second  tranche  (ECU  20  million)  of  a  ECU  35  million  grant  to 
Albania,  after  the  new  government  took  measures  to  address  the  budgetary  imbalances, 
which  included  the  introduction  of  VAT,  and  on  the  basis  of  progress  in  implementing 
structural  reforms  stipulated  in the Memorandum  of Understanding.  The  second  ECU  40 
million  tranche  of Bulgaria's  loan  of ECU  110 million approved  in  1992 was  at  long  last 
disbursed  following  the approval  of a new IMF stand-by  loan.  In Lithuania  improvements 
in  the  procedures  adopted  by  the  authorities  for  consulting  and  reporting  to  the 
Commission  on the use  being  made  of the first ECU  25  million  instalment  of the  second 
ECU  50 million  tranche  of Community  assistance  led  to  the  lifting  of the  freeze  that  had 
been imposed  on the use of this assistance in 1995. 

i 

The  smaller  amounts  disbursed  in  1996  partly  reflected  the  tendency  for  CEECs  to  have 
less need  of  external  financing  as their  economies  strengthened.  Estonia  not  only  did  not 
draw  on  the  second  ECU  20  million  tranche  of  its  ECU  40  million  loan,  but  sought  to 
make  early  repayment  of  the  first  tranche.  Elsewhere  the  reasons  for  the  absence  of 

3  See: Report on the implementation of macro-financial  assistance to third countries, COM(96) 695 of 8 

January 1997. 

disbursements were less satisfactory.  The loan of ECU  130 million to  Slovakia decided in 
1994  was  cancelled  because  of  inadequate  progress  towards  agreement  between  the 
Slovak authorities and the Commission on the economic policy  conditions to be attached 
to it, and also because  improved financial circumstances  meant  Slovakia had less need  of 
this  support.  The  second  ECU  40  million tranche of  the  ECU  80  million  loan  to  Latvia 
approved in  1992 was not released, despite the IMF's approval of a stand-by arrangement 
in May  1996,  because  of the  Commission's  serious  reservations  about  the way  in which 
on-lending  of the proceeds  of the first tranche was  being  managed.  This  assistance  is in 
any case not necessary for balance-of-payments purposes. 

At the end of the year two requests for assistance were being actively examined.  The new 
government  elected  in  Romania  in  November  asked  for  the  Community's  and  G-24's 
macro-financial  assistance to be reactivated  in the context  of an ambitious  programme  of 
macroeconomic  stabilization  and  structural  reforms  supported  by the  IFIs.  At  about  the 
same time,  the Former Yugoslav  Republic of Macedonia,  in view  of  its difficult  external 
situation,  requested  macro-financial  assistance  to  complement  support  from the  IMF and 
the World Bank for its three-year stabilization and reform  programme.  In the light of the 
country's  urgent  needs  and  substantial  progress  in transition  to  a market  economy,  the 
Commission  initiated  internal  consultations  on  providing  Community  macro-financial 
assistance of up to ECU 40  million.  In view of the acute economic  crisis in Bulgaria, the 
Commission began to examine the possibility of further macro-financial  assistance of up to 
ECU  250  million  which  would  complement  funding  from  the  IFIs  in  support  of  an 
anticipated economic stabilization and structural reform programme. 

No disbursements of macro-financial  assistance were made in the Mediterranean region in 
1996.  Discussions  took  place  between  the  Algerian  authorities  and  the  Commission 
services  on  disbursing  the  second  tranche  (up  to  ECU  100  million)  of  the  1994 macro-
financial  loan, but agreement was not reached on the conditions for its release, notably the 
calendar  for  implementing  a  programme  of  privatization  of  large  state  enterprises.  In 
December  1996,  however,  the Commission decided  as part of the MED A programme to 
s  A port  Algeria's  stn 
jral  reform  programme through  a Structural  Adjustment  Facility 
of ECU  125 million. 

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

3. 

Trends and tendencies  in macro-financial  assistance 

Two  related  trends  present  in  1995  were  again  in  evidence  in  1996.  Both  the  range  of 
(potential)  beneficiary  countries  and  the  range  of  needs  widened.  The  spectrum  of 
(potential)  beneficiary  countries  now  runs from  Armenia,  Georgia  and  Tajikistan,  which 
have  need  of  assistance  for  humanitarian reasons,  through to  Central  and East  European 
countries  which  have  applied  for  membership  of  the  European  Union  and  on  whose 
readiness for accession the Commission has prepared opinions. At the same time, the shift 

in the geographical  focus  of the Community's macro-financial  assistance  already  observed 
in  1994 and  1995 extended into  1996. 

The  Community's  macro-financial  assistance  was  originally  intended  to  support  macro-
economic  stabilization  and  the  balance  of  payments.  Over  the  years  the  number  of 
countries  to  which  it  was  appropriate  for  the  Community  to  extend  such  support 
expanded,  as  a  growing  number  of  countries  neighbouring  the  Community  committed 
themselves  to  rigorous  programmes  of  economic  reform.  This  led  to  a  change  in  the 
geographic  balance  of  assistance  from  the  early  years,  when  most  beneficiary  countries 
were  in  the  immediate  vicinity  of  the  Community,  to  the  present,  when  assistance  is 
increasingly flowing to somewhat more distant countries. 

It also became clear that,  while macro-financial  assistance geared  to the original  objective 
of  supporting  macro-economic  stabilization  and  the  balance  of  payments  was  still 
necessary  for  some countries,  in the case  of others  macro-financial  assistance  could  more 
usefully  be directed  to supporting the government's  programme  of structural  reform.  This 
tendency  emerged  first  in  some  Central  and  East  European  countries,  where  macro-
financial assistance  for  structural  reform  could  be  effectively  combined  with  technical 
assistance from  the  Phare  programme  to  strengthen  the  capacity  of  institutions  that  were 
essential to the success of the structural  reform  programmes.  The complementarity  of the 
different  forms  of  Community  assistance  was  enhanced  by  broadening  the  dialogue  with 
each  beneficiary  country  to  encompass  the  totality  of  assistance  to  reform  efforts.  More 
recently,  similar  developments  have  occurred  in  the  context  of  assistance  to  some  NIS 
countries.  A comparable  evolution  has  taken  place  in  the  programmes  supported  by  the 
IMF and the World  Bank,  and this has led to closer co-operation between the  Commission 
and these institutions. 

For the CEECs the focus  on structural  reform  will be further  emphasised  in the context  of 
their preparation  for  accession  to  the  EU.  The  European  Council  in Copenhagen  in  June 
1993  agreed  that  any  associated  country  in  Central  and  Eastern  Europe  that  so  desired 
should  become a member  state as soon  as it was  able to  satisfy  the requisite  political  and 
economic  conditions.  The  process  of  drawing  up  opinions  on whether  the  ten  associated 
countries  of  Central  and  Eastern  Europe  satisfy  these  conditions  began  in  1996  and  has 
since been completed. 

The  associated  countries  in  preparing  for  accession  to  the  EU  will  need  substantial 
investment  in  areas  such  as  environmental  protection,  transport,  energy,  industrial 
restructuring,  agricultural  infrastructure  and  rural  society.  Policy-based  financial  support 
will  also  continue  to  be  necessary  to  facilitate  the  acceleration  of  structural  adjustment. 
Careful  consideration will therefore  have to be given to  how the Union's various  forms  of 
assistance  and  instruments  can be used  most  effectively  to  contribute to this effort.  It will 
also be necessary to intensify  co-operation with the IFIs so as to  achieve as much  synergy 
as  possible  with  their  lending  in  support  of  structural  reform  and  to  ensure  consistency 
between  EU conditionality  related  to accession and conditionality  associated  with the  IFIs 
operations. 

4. 

Burden-sharing 

Since the  inception  of macro-financial  assistance,  the absolute  amounts  committed  by the 
EU have fluctuated  substantially  (Tables  3 and  3.1),  but  as a proportion  of total  balance-
of-payments  support,  Community macro-financial  assistance has showed a steady decline. 

Initially, an important feature of Community assistance was that very large sums of money 
were  found  to  support  the  programmes  of  the  Bretton  Woods  institutions.  The 
Community  played a key role, both as a major provider of these funds  and from  1991  as 
the co-ordinator of bilateral assistance for the CEECs through the G-24. 

The  IFIs,  however,  were  progressively  able  to  mobilize  more  resources:  a new  lending 
instrument, the Systemic Transformation Facility (STF) was created which, together with 
the increase in the access limits, enabled the IMF to increase its assistance to CEECs and 
countries of the former Soviet Union. The World Bank,  for its part, developed  successive 
generations  of policy-based  balance-of-payments operations (Structural  Adjustment  loans 
-  SAL -,  followed  by Enterprise  and Financial  Sector  Adjustment  loans  -  EFSAL).  As a 
result, the share of the IFIs in the financing packages has risen substantially (Table 3). 

At  the  same  time,  contributions  oy  external  creditors,  both  public  and  private,  were 
mobilized  in  the  form  of  debt-relief  and  debt-reduction  operations  (Algeria,  Bulgaria, 
Ukraine),  which  accounted  for  a  substantial  share  of  balance-of-payments  support  in 
1991,  1994 and  1995.  In  1996 debt relief  (to Moldova) accounted  for a smaller share of 
balance-of-payments  support. 

The increase in the resources provided by the IFIs resulted in the lending of the EU and of 
other bilateral  donors (excluding  debt relief operations)  declining  sharply as a proportion 
of  total  commitments,  from  54%  and  25%,  respectively,  in  1990  to  7%  and  4%, 
respectively,  in  1996  (or  6% and 3%, respectively,  of  total  commitments  including  debt 
relief  operations).4  While  the  EU's  share  of  total  balance-of-payments  support  has 
declined,  its share of bilateral balance-of-payments  support has remained roughly constant 
on average at around 60 per cent throughout the period  1990-96 (Table 2). 

These statistics cover only the countries to which the EU has provided macro-financial assistance. 

Table  1: COMMUNITY  MACRO-FINANCIAL  ASSISTANCE TO THIRD  COUNTRIES 

Status of effective  disbursements as of December  1996 (in millions of ECU) 

Conntrv 

Maiimom  amount 
authorized 

Pate of 
Council 

Decision 

Pilburttti 

Amounts «id  Pates 
of disbursements 

Undisbursed 

A. Macro-financial  • 

tsistance to CEECi 

Hungary I 
(structural adjustment 

loan) 

870 

22  02 90 

610 

Czech and Slovak  Federal  Republic 
(BOP loan) 

375 

25 0291 

350-Apr  1990 
260-Feb  1991 

185-Mar  1991 
190-Mar  1992 

100-Aug  1991 

80-Jan  1993 

150-Aug  1991 
140-Mar  1992 

190 -Jan  1992 
185-Apr  1992 

35-Dec  1992 
35-Aug  1993 

180 

240691 

180 

290 

24  06 91 

375 

22 07 91 

375 

70 

28  09 92 

220 

23  II  92 

40 
80 
100 

20 
40 
75 

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

20 
40 
25 

80 

27  11  92 

80 

Feb  1993 

110 

19  1092 

110 

70-Dec  1994 

40-Aug  1996 

125 

20  (>6  *J 

35 

28  11  94 

130 

22  12 94 

Cancelled 

2860 

2315 

I5-Jun  1995 
20-Oct  1996 

Hungary II 

(BOP loan) 

Bulgaria I 
(BOP loan) 

RouMnia I 
(BOP loan) 

Albaaial 
(BOP grant) 

Baltics 

(BOP loans) 
of which : 
Estonia 
Latvia 
Lithuania 

Romania II 
(BOP loan) 

Bulgarian 
(BOP loan) 

Romania  III 
(BOP loan) 

Albania  II 
(BOP grant) 

Slovakia 
(BOP loan) 

TOTAL A 

B. Macro-financial  assistance to other  third  countries 

Israel  (1) 
(structural  adjustment soft  loan) 

187.5 

22.0791 

187.5 

Algeria I 
(BOP loan) 

Moldova I 
(BOP  loan) 

Algeria  II 
(BOP  loan) 

Ukraine I 
(BOP loan) 

Belarus 
(BOP  loan) 

Ukraine II 
(BOP loan) 

Moldova  II 
(BOP  loan) 

TOTAL  B 

TOTAL  A+B 

23  09 91 

400 

13  06 94 

45 

250-Jan  1992 
150-Aug  1994 

25-Dec  1994 
20-Auu  1995 

200 

221294 

100 

Nov  1995 

22  12  94 

85 

Dec  1995 

55 

10  04  95 

30 

Dec  1995 

23  1095 

100 

50-Aug  1996 

50-Oct  1996 

15 

25  03  96 

15 

Dec  1996 

1187.5 

4047.5 

962.5 

3277.5 

225 

770 

(1)  Assistance to Israël includes a loan principal amount of ECU  160 million and grants of ECU 27 5 million 

in the form of interest rates subsidies. 

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

(Status as of December 96) 

ALBANIA 
(US $ 237 mi 

lion) 

BALTIC STATES 
(US $ 600 million) 

BULGARIA 
(USS  1130 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. 

Commitments 
%of 
gap 

Mln 
USS 

%of 
commit. 

Disburs. 

Mln 
USS 

%of 
disb. 

123.5 
14.2 

52.1 
6.0 

71.0 
8.2 

123.5 
10.1 

86.9 
7.1 

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 

6.0 

100.0 

16.7 

19.1 

88.9 

26.1 

533.3 
129.5 
10.0 
150.0 
8.7 

47.2 
11.5 
0.9 
13.3 
0.8 

64.1 
15.6 
1.2 
18.0 
1.0 

533.3 
98.5 
10.0 
100.0 

71.9 
13.3 
1.3 
13.5 

Country 
(Identified 
gaps) 

Community 
EFTA* 
United States 
Japan 
Others 

Total 

174.0 

73.4 

100.0 

142.1 

100.0 

523.1 

87.2 

100.0 

340.8 

too.o 

831.5 

73.6 

100.0 

741.8 

100.0 

«ofwfaichA.S.SF  | 

11.7 | 

4.9  | 

6.7  | 

10.1  | 

7.1 | 

8l| 

13.5  | 

15.5  | 

67.9| 

Ï9^9~ 

69.0 

6.1 

8.3 

50.0 

HI 

Country 
(Identified 
gaps) 

CSFR 
(USS  1000  m 

Dion) 

HUNGARY (1) 
on) 

(US $ 500 mill 

ROMANIA 

(USS  1455  m 

liion) 

Commitments 
% of 
gap 

%of 
commit. 

Min 
USS 

Disburs. 

Mln 
USS 

%of 
disb. 

Commitments 
%of 
gap 

%of 
commit. 

Mln 
USS 

Disburs. 

Mln 
USS 

%of 
disb. 

Commitments 
%of 
gap 

%of 
commit. 

Mln 
USS 

Disburs. 

Mln 
USS 

% of 
disb. 

Community 
EFTA* 
United States 
Japan 
Others 

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 
150 
2000 
1.0 

58.0 
16.9 
1.7 
23  2 
0.1 

250.0 
95.0 
10.0 
150.0 
12.8 

50.0 
19.0 
2.0 
300 
2.6 

48.3 
18.3 
1.9 
290 
2.5 

250.0 
95.0 
100 
125.0 
12.8 

50.7 
193 
2.0 
254 
2.6 

740.6 
162.2 

150.0 
22.0 

50.9 
111 

10.3 
1.5 

68.9 
15.1 

14.0 
2.0 

660.7 
146.3 

100.0 
22.0 

71.1 
15.7 

10.8 
2.4 

Total 

887.0 

88.7 

100.0 

862.0 

100.0 

517.8 

103.6 

100.0 

492.8 

100.0 

1074.8 

73.9 

100.0 

929.0 

100.0 

|«ofwhich.A,S,SF  | 

90.0  | 

9.0  | 

10.1  | 

90 0  | 

10.4 j 

S0| 

10.0 | 

9 7  j 

50| 

10.1 | 

87.TT 

6.0 

8.1 

81.4 

Country 
(Identified 
gaps) 

Community 
EFTA* 
United States 
Japan 
Others 

SLOVAKIA 
(USS 300 mil 

ion) 

TOTAL 

(US S 5222 mil 

ion) 

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 
697.3 
35.0 
846.3 
69.5 

499 
13.4 
0.7 
16.2 
1.3 

61.2 
16.4 
0.8 
19.9 
1.6 

2251.5 
563.8 
35.0 
682.4 
35.8 

63.1 
158 
1.0 
19.1 
1.0 

Total 

j 

243.4 

81.1 

100.0 

60.0 

100.0 

4251.6 

81.4 

100.0 

3568.5 

100.0 

|*ofwhich.A,S,SF  | 

16.4  [ 

5.5  [ 

6.7  | 

| 

\ 

405.3  | 

7.8  | 

9.5  | 

349.4  | 

9.8  | 

(1)  In 1990, the Community committed in favour of Hungary an additional 870 MECU loan which is not taken into consideration in this table 

since it took place outside the G-24 process. 

Source. 

European Commission 

8 

Table 3: Balance of payments support to recipients of EU 
macro-financial assistance by contributor, 1990-1996 (1) 
(in percent of total commitments) 

Including debt relief 

IFFs 

IMF 
World Bank 

Bilaterals 

EU(2) 
Other bilaterals (3) 

of which 
USA 
Japan 

Debt relief 

Paris Club 
London Club 
Other (4) 

Excluding debt relief 

IFI's 

IMF 
World Bank 

Bilaterals 

EU(2) 
Other bilaterals (3) 

of which 
USA 
Japan 

1990 

1991 

1992 

1994 

1995 

1996 

21 
11 
10 
79 
54 
25 

10 

69 
40 
29 
31 
19 
13 

5 

50 
37 
13 
50 
20 
13 

0 
8 
18 
5 

13 

27 
21 
6 
73 
6 
5 

j 

1 
2 
63 
32 
28 
2 

33 
26 
7 
67 
6 
3 

3 
59 

59 

79 
62 
17 
21 
6 
3 

3 

12 

12 

1990 

1991 

1992 

1994 

1995 

1996 

21 
11 
10 
79 
54 
25 

10 

61 
45 
16 
39 
24 
15 

0 
9 

69 
40 
29 
31 
19 
13 

5 

71 
56 
15 
29 
17 
12 

2 
6 

80 
63 
17 
20 
14 
6 

6 

90 
70 
20 
10 
7 
4 

4 

(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, 
debt rescheduling  in favour of Moldova by Russia in 1996. 

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

macro-financial assistance by contributor, 1990-1996 

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

Balance of payments support - 1990 

Total 

Hungary 1 

Commitments 
% 

mio USS 

P'siMwrnems 

Commitments 

Disbursements 

mio USS 

•/. 

mio USS 

•/. 

mio USS 

'/• 

419 

219 

200 

1618 

1108 

200 

311 

21 

II 

10 

79 

54 

10 

15 

375 

175 

200 

1288 

777 

200 

311 

23 

II 

12 

77 

47 

12 

19 

419 

219 

200 

1618 

1108 

200 

311 

21 

II 

10 

79 

54 

10 

15 

375 

175 

200 

1288 

777 

200 

311 

23 

II 

12 

77 

47 

12 

19 

IFTs 

IMF 

WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Germany 

Other bilaterals 

Total 

2037 

100 

1663 

100 

2037 

100 

1663 

100 

Balance of payments support  - 1991 

Total 

Aiusna 1 

Bukaria 1 

Commitments 

Disbursements 

Commitments 

Disbursements 

CommiiTients 

Disbursements 

mio USS 

% 

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 

514" 

1088 

35 

633 

487 

2004 

554 

1450 

43 

31 

12 

5T 

22 

0 

7 

5 

22 

6 

16 

690 

390 

300 

2290 

540 

23 

13 

10 

IS 

443 

293 

150 

1938 

338 

300 

10 

150 

19 

12 

6 

81 

14 

6 

1450 

49 

1450 

61 

1450 

49 

1450 

61 

640 

390 

250 

1168 

400 

10 

100 

104 

554 

554 

35 

22 

14 

65 

22 

1 

6 

6 

31 

31 

540 

390 

150 

I IP 

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 1 

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 

518 

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 

1 

Total 

2189 

100 

2164 

100 

2780 

100 

1513 

100 

1450 

100 

1362 

100 

10 

Table 3.1.  ( m l) 

Balance »f payments support -1992 

Total 

Albania 1 

Estonia 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Pisblirsemerits 

mio  USS 

•/. 

mio USS 

•/. 

mio  USS 

% 

mio USS 

% 

mio  USS 

'/. 

mm  USS 

% 

IFI's 

I MF 

WB (policy based) 

Hlaierab 

EU 

USA 

Japan 

Other bilaterals 

1564 

909 

655 

708 

423 

120 

165 

69 

40 

29 

31 

19 

5 

7 

1193 

768 

426 

476 

298 

79 

100 

71 

46 

26 

29 

18 

5 

6 

48 

28 

20 

115 

83 

20 

12 

29 

17 

12 

71 

51 

12 

8 

28 

18 

10 

95 

83 

9 

4 

23 

15 

8 

77 

67 

7 

3 

116 

86 

30 

87 

46 

20 

22 

S7 

42 

15 

43 

22 

10 

II 

109 

83 

26 

48 

23 

13 

13 

69 

53 

17 

31 

14 

8 

8 

T t t al 

2272 

100 

1670 

100 

162 

100 

123 

100 

204 

100 

IS8 

100 

Latvia 

Lithuania 

Romania  II 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio  USS 

% 

mio USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

IFI's 

I MF 

WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

215 

170 

45 

169 

91 

3$ 

43 

56 

44 

12 

44 

24 

9 

11 

196 

151 

45 

94 

46 

23 

25 

68 

52 

16 

32 

16 

8 

9 

245 

185 

60 

217 

114 

45 

58 

53 

40 

13 

47 

25 

10 

13 

194 

149 

45 

120 

57 

34 

29 

62 

48 

14 

38 

18 

II 

9 

940 

440 

500 

119 

90 

89 

42 

47 

11 

8 

666 

366 

300 

119 

90 

85 

47 

38 

15 

II 

29 

3 

29 

4 

Total 

384 

100 

290 

100 

462 

100 

314 

100 

1059 

100 

785 

100 

Balance or payments support 1994 

Total 

Albania  11 

A|Ker,a  II 

BMls*nall 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio USS 

% 

mio  USS 

°o 

mio  USS 

'.', 

mio  USS 

•/. 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

I F I 'i 

I MF 

WB  (policy based) 

4086 

3206 

880 

27 

21 

6 

2772 

2072 

700 

Bilaterals 

11299 

73 

10591 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

London Club 

Paris Club 

Other 

952 

100 

350 

252 

9645 

4920 

4380 

345 

6 

1 

2 

2 

63 

32 

28 

2 

560 

90 

185 

HI 

9645 

4920 

4380 

34< 

21 

16 

5 

79 

4 

1 

1 

1 

72 

37 

33 

3 

42 

34 

8 

41 

41 

SO 

41 

9 

SO 

50 

75 

60 

15 

45 

41 

63 

50 

13 

37 

34 

4 

3 

1397 

1097 

300 

5920 

335 

150 

135 

5300 

1120 

4180 

19 

15 

4 

81 

5 

2 

2 

72 

15 

57 

1182 

882 

300 

'  6 

-ul 

95 

70 

5300 

1120 

4180 

17 

13 

4 

83 

3 

1 

1 

77 

16 

61 

646 

521 

125 

4214 

125 

50 

39 

4000 

3800 

200 

13 

11 

3 

87 

3 

1 

1 

82 

78 

4 

195 

195 

4125 

125 

4000 

3800 

200 

5 

5 

95 

3 

93 

88 

5 

Total 

15385 

100 

13363 

100 

120 

100 

83 

100 

7317 

100 

6848 

100 

4860 

100 

4320 

100 

Moldova  1 

Romania III 

Slovak Reoublic 

Ukraine 

Commitments 

Disbursements 

Cpmmirments 

Disbursements 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

mio  USS 

% 

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 

50 

26 

81 

63 

18 

19 

13 

4 

2 

447 

247 

200 

73 

63 

86 

48 

38 

14 

12 

10 

2 

426 

346 

80 

242 

155 

60 

27 

64 

52 

12 

36 

23 

9 

4 

308 

228 

80 

84 

62 

22 

60 

16 

60 

16 

I F I 'i 

I MF 

WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

London Club 

Pans Club 

Other 

465 

365 

100 

530 

100 

70 

15 

345 

47 

37 

10 

53 

10 

7 

2 

35 

465 

365 

100 

520 

100 

70 

5 

345 

47 

37 

10 

53 

10 

7 

1 

35 

345 

35 

345 

35 

Total 

294 

100 

239 

100 

1131 

100 

520 

100 

668 

100 

368 

100 

995 

100 

985 

100 

IFI's 

IMF 

WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

London Club 

Paris Club 

11 

Table 3.1 (com) 

Balance of payments support 1995 

Iojaj 

Belarus 

Ukraine II 

Commitments 
% 

mio USS 

1877 

1477 

400 

3885 

330 

150 

33 

26 

7 

67 

6 

3 

mio USS 

1770 

1370 

400 

3573 

168 

Pisbursem 

ems 
•/• 

Commitments 

Disbursements 

Commitments 

Disbursements 

mio USS 

% 

mio USS 

% 

mio USS 

% 

mio USS 

% 

33 

26 

7 

67 

3 

270 

270 

70 

70 

79 

79 

21 

21 

163 

163 

38 

38 

81 

81 

1607 

1207 

400 

19 

19 

3815 

260 

150 

30 

22 

7 

70 

5 

3 

1607 

1207 

400 

3535 

130 

31 

23 

8 

69 

3 

3405 

59 

3405 

64 

3405 

63 

3405 

66 

•« 

Other 

3405 

59 

3405 

64 

3405 

63 

3405 

66 

Total 

5762 

100 

5343 

100 

340 

100 

201 

100 

5422 

100 

5142 

100 

Balance of payments support 1996 

Total 

Moldova II 

Commitments 
% 

mio USS 

Disbursements 

Commitments 

Disbursements 

mio  USS 

% 

mio USS 

•/• 

mio USS 

% 

250 

195 

55 

67 

19 

10 

79 

62 

17 

21 

6 

3 

32 

32 

67 

19 

10 

33 

33 

67 

19 

10 

250 

195 

55 

67 

19 

10 

79 

62 

17 

21 

6 

3 

32 

32 

67 

19 

10 

33 

33 

67 

19 

10 

38 

12 

38 

38 

38 

12 

38 

38 

38 

12 

38 

38 

38 

12 

38 

38 

IFTs 

IMF 

WB (policy based) 

Bilaterals 

EU 

USA 

Japan 

Other bilaterals 

Debt relief 

London Club 

Paris Club 

Other 

Total 

317 

100 

100 

100 

317 

100 

100 

100 

a) Disbursements are shown  under the year of corresponding  commitments 

There are no data for  1993 as no  EU operation  was decided  that year 

12 

Table 4: Selected economic indicators 

1993 

1994 

1995 

1996 

Programme  (1) 

Estimates 

GDP at constant prices 

(Percent change) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 

9.6 
-2.2 
11.6 
-1.5 
-8.5 
16.0 
16.2 
-8.7 
1.5 
17.1 

9.4 
-0.9 
-20.0 
1.8 
-1.8 
2.0 
1.0 
-31.0 
3.9 
-23.0 

8.9 
3.9 
-7.0 ~ 
2.1 
4.3 
-0.8 
3.0 
-3.0 
7.1 
-12.0 

Consumer price (end  year) 

(Percent change) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 

30.9 
16.1 
1990.0 
63.8 
35.6 
35.0 
163.0 
837.0 
295.0 
10155.0 

15.8 
38.6 
2220.0 
122.0 
41.7 
26.0 
72.2 
116.0 
61.7 
401.0 

Fiscal balance 

(Percent of GDP) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 

14.4 
-8.7 
-8.3 
10.9 
-0.7 
0.6 
-5.1 
-6.8 
-0.4 
10.1 

-12.4 
-4.4 
-1.7 
-5.8 
1.3 
-4.1 
-1.7 
-9.0 
-1.9 
-8.2 

6.0 
21.9 
290.0 
32.9 
28.9 
23.0 
35.7 
24.0 
27.8 
182.0 

-10.4 
-1.4 
-3.2 
-5.7 
-1.2 
-4.4 
-1.8 
-5.5 
-2.6 
-5.0 

4.2 
-
-
3.1 
2.0 
-
4.0 
4.0 
-8.0 

15.0 
-
-
23.7 
16.0 
-
15.0 
19.0 
47.0 

0.3 
-
-
-1.4 
-1.8 
-
-3,4 
-2.2 
-3.0 

8.2 
4.0 
2.6 
-10.9 
4.0 
2.8 
3.6 
-8.0 
4.1 
-10.0 

17.4 
15.1 
39.0 
310.8 
14.8 
13.0 
13.1 
26.5 
56.9 
39.7 

-11.4 
3.0 
1.9 
-11.0 
-1.5 
-1.2 
-2.5 
-7.2 
-3.9 
-3.2 

13 

Table 4: Selected economic indicators (continued) 

1993 

1994 

1995 

Programme 

1996 
(1) 

Estimates 

Current  account 

(Percent of GDP) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 

•29.7 
1.6 
-8.7 
12.8 
1.3 
6.7 
-6.2 
-9.3 
-4.7 
-5.9 

-14.3 
-4.4 
-11.4 
-2.1 
-7.1 
-4.6 
-2.1 
-9.2 
-1.7 
-6.0 

-7.5 
-5.3 
-4.1 
-0.5  ^ 
-5.1 
-4.0 
-10.3 
-6.7 
-4.9 
-5.0 

Official  foreign exchange  reserves 
(end year) 

(Months of  imports) 

Albania 
Algeria 
Belarus 
Bulgaria 
Estonia 
Latvia 
Lithuania 
Moldova 
Romania 
Ukraine 

2.3 
2.3 
0.3 
2.0 
4.0 
5.6 
2.4 
1.5 
0.1 
0.2 

3.2 
2.9 
0.3 
3.0 
3.2 
5.5 
3.1 
3.1 
1.1 
2.3 

3.5 
2.1 
0.7 
2.8 
2.7 
4.8 
3.9 
4.0 
0.4 
3.7 

-4.7 
-4.3 
-
-6.9 
-4.4 
-
-6.8 
-3.2 
-3.8 

-
2.5 
na 
-
2.7 
3.1 
-
3.4 
1.0 
1.2 

-7.7 
2.8 
-9.0 
0.0 
-10.2 
-6.8 
-8.2 
-14.4 
-6.6 
-3.9 

3.2 
4.5 
na 
1.6 
2.4 
2.9 
2.4 
4.0 
0.6 
1.3 

(1)  Programme targets as set in : June 96 for Algeria, September  1995 for  Belarus, July 96 for  Estonia, 

April 96 for  Latvia,  May 96 for  Moldova, December 95 for  Romania, May 96 for  Ukraine. 

Sources: National  authorities and  IMF 

1. 

Price liberalization 

Trade liberalization 

Exchange regime 

Foreign direct investment 

Monetary policy 

Public  finances 

Privatization and enterprise 
restructuring 

Financial sector  reform 

14 

ALBANIA 

Prices  mostly  market-determined,  with 
the  exception  of 
medicines  and  some  publicly  provided  goods  and  services 
(health care, urban transport, rail, energy and water). 

No  quantitative  restrictions  on  imports.  Export  restrictions 
limited  to  scrap  metal  and  unprocessed  wood.  Removal  of 
tariff  exemptions, new classification,  new tariff  rates  approved 
in May  1995. Average tariff  rate about  12%.  Lower tariffs  for 
some  capital  goods.  Request  for  accession  to  WTO  still  at 
early stage. 

Since  July  1992  free  float  within  a  unified  exchange  market. 
Exchange system largely free  of restrictions on current  account 
transactions,  including  profit  repatriation.  Controls  remain  on 
some capital  transactions 

Liberal  legislation.  Sale  of  land  to  foreigners  permitted,  but 
owing  to  delays  in  land  registration  process  no  sale  of 
agricultural land. Economic free zones set up. 

Bank-by-bank  credit  ceilings.  Banks  free  to  determine  lending 
rates,  but  central  bank  sets  minimum  deposit  rates  to  ensure 
that  real  interest  rates  remain  positive.  Treasury  bill  auctions 
(3. 6.  12 months). 

VAT introduced  in July  1996.  Budgetary  revenue  estimated  at 
19% of GDP in  1996; expenditure estimated at 29.4% of GDP. 

96% of total  arable  land  privatized.  Distribution  of  temporary 
in  trade  and 
titles  nearly  completed.  Small  privatization 
services  completed.  Substantial  progress  in  privatization  of 
small and medium-sized  industrial  enterprises.  Privatization  of 
large  state-owned  enterprises  slower.  Strategic  enterprises 
offered  for  sale  to  foreign  investors.  Voucher-based  mass 
privatization  programme  launched 
in  mid-1995  aimed  at 
privatizing 400 medium-sized or large enterprises  by end-1998. 
Only 97 enterprises sold by July  1996 because of difficulties  in 
implementation  (including  vouchers  issued  at  too  high  a 
nominal value).  Stock exchange  set up  in  March  1996; trading 
so far limited to Treasury bills and privatization  vouchers. 

Two-tier  banking  system  dominated  by  three  large  inefficient 
state-owned  banks.  Bad  loans  account  for  more than  one-third 
of all credit. With a view to privatizing two state-owned  banks, 
in  December  1996  the  government  transferred  28  of  their 
branches to the third one. 

Inefficient  banking  system caused  informal  financial  market  to 
expand.  Several  pyramid  schemes,  offering  very  high  interest 
rates, collapsed  late  1996. 

1. 

Price liberalization 

Trade liberalization 

Exchange regime 

Foreign direct  investment 

Monetary policy 

Public  finances 

Privatization  and enterprise 
restructuring 

15 

ALGERIA 

liberalization  almost  completed  with  abolition  of 
Price 
the  most  sensitive 
including 
generalized  food  subsidies, 
products  (powdered  milk,  semolina,  and  regular 
flour). 
Controls  remain  on  profit  margins  and  prices  of medicine  and 
energy products, though prices for gas and electricity gradually 
adjusted  in  1996  with  a  view  to  covering  economic  cost  by 
end-1997.  Competition  Law  adopted  in  1995  institutionalized 
free  pricing,  provided  safeguards  against 
principle  of 
monopolistic  practices  and  ©bliged  all  suppliers  to  publish 
prices. 

Reforms  initiated  in  1994  were  further  strengthened.  At  end-
1996,  no  import  restrictions  (except  for  goods  permanently 
banned  for  social  and  religious  reasons).  Maximum  import 
tariff  lowered from  60% to 50% in January  1996. 

Some restrictions  on availability  of foreign  exchange  for  some 
current 
invisible  payments  and  for  remittances  by  non 
residents. Government made clear  its intention to introduce  full 
current  account  convertibility  by  end-1997.  Managed  float 
regime  further  enhanced  following  establishment  of  fully 
fledged  interbank foreign  exchange market in December  1995. 

Liberal  foreign  investment  regime,  including  banking  sector, 
but  apart  from  hydrocarbon  sector,  no  significant  foreign 
investments have taken place owing to the security situation. 

Deregulation  of  interest  rates,  including  elimination  of  cap  on 
banks'  spreads,  in  December  1995, together  with  deceleration 
of inflation,  allowed  positive  real  interest  rates to emerge  from 
beginning  of  1996.  Use  of  indirect  instruments  of  monetary 
control  further  strengthened  with  a  view 
facilitating 
development of open-market operations by central bank. 

to 

Continued 
containment and tight policies on transfers  and subsidies. 

fiscal  management, 

strong 

including  wage 

in 

Law 

enacted 

First 
Privatization 
privatization/liquidation  programme  covering  274 
small 
enterprises  launched.  Implementation  constrained  by  need  to 
restructure  loss-making  companies,  strong  social  resistance 
and  some technical  and  legal  delays.  Law  allowing  sale  of  all 
state-owned agricultural land adopted  in  1996. 

1996. 

8. 

Financial sector  reform 

Public  enterprise  restructuring  made  further  progress,  in 
particular for the 23 largest loss-making enterprises. All public 
enterprises subject to hard budget constraints. 

Commercial  banks  almost  exclusively  s'ate-owned.  In  1996, 
authorities  launched  overhaul  of  commercial  banks'  practices 
aimed at establishing greater  autonomy  in credit allocation  and 
implementing new prudential regulations. As a result, all banks 
improved their capital/risk weighted ratio. 

16 

BELARUS 

1. 

Price liberalization 

Trade liberalization 

First price liberalisation  in  1993.  Most prices  (except  for  state 
monopolies) freed  by end-1994/early  1995. Phased increases of 
public utilities prices up to 80% of cost-recovery  levels delayed 
to  mid-1997.  Price  ceilings  administered  by  local  authorities 
introduced  for  a  number  of  products  (bread,  dairy  products, 
baby  food,  etc.)  in  mid-1996.  Central  authorities  (directly) 
control  the price  of alcohol;  profit  margins  for  agriculture  are 
regulated. 

Most  import  licences  and  export  taxes  abolished  in  1994. 
Requirements  for  exporters  to  surrender  foreign  exchange 
reintroduced  in early  1996, as well as a  10% tax on  purchases 
of foreign exchange. 

Customs union with Russia entered  into force early  1995. As a 
result,  import  taxes  rose  to  level  of  Russian  external  tariff. 
Ratification  of  Partnership  and  Co-operation  Agreement  with 
the European  Union on hold. 

Exchange regime 

Left  Russian rouble zone in  1994. Only partial  current  account 
convertibility.  Limitations on inter-bank currency operations. 

Foreign direct investment 

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

Monetary policy 

6. 

Public  finances 

Two-tier  banking  system.  Central  Bank  determines  monetary 
policy.  Since  second  half  of  1996,  expansionary  monetary 
policy.  Weekly  auctions  for  a  large  share  (60%)  of  credits  to 
the banking sector. Mounting inflationary  pressures. 

Introduction  of  VAT  in  1993.  General  government  budget 
showed small (1.9%) deficit  in  1996, but quasi-fiscal  activities 
and arrears not properly accounted  for. 

7. 

Privatization  and  enterprise 
restructuring 

Slow  and  delayed  privatization  process.  Only  10%  of  state 
assets  privatized  by  end  1996.  Mass  privatization  cancelled 
despite free distribution of vouchers to the population. 

8. 

Financial sector  reform 

progressively 

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

loans,  which  weaken 

tightened,  minimum 

their 

17 

BULGARIA 

1. 

Price liberalization 

2. 

Trade liberalization 

3. 

Exchange regime 

Systems  of  control  or  monitoring  of  approximately  50%  of 
goods  (weighted  by  their  share  in  the  consumer  price  index) 
remained in force up to end-1996. 

The  regime is generally  liberal, though  an  import  surcharge  at 
a rate of 5% was imposed in mid-1996. 

A  unified  and  quasi-free  floating  exchange  regime  was 
introduced  in  1991.  This  has  been  subject  intermittently  to 
substantial intervention by the central  bank trying to defend  the 
currency. 

4. 

Foreign direct investment 

Liberal foreign  investment legislation was adopted  in  1992, but 
was partly tightened in late  1996. 

5.  Monetary policy 

6. 

Public  finances 

Privatization and enterprise 
restructuring 

8. 

Financial sector  reform 

Although  nominally  independent,  the  central  bank  has  had  on 
occasion to provide considerable volumes of direct credit to the 
budget. 

In  common  with  the  economy  as  a  whole,  public  finances 
suffered  a  severe  crisis  in  1996.  as  the  deficit  reached  over 
10%  of  GDP  owing  to  the  burden  of  interest  payments  on 
domestic  and  foreign  debt.  A  large  primary  balance  was, 
however,  recorded.  Tax  collection  is  poor,  and  a  reform  of 
taxation  is planned. 

A  mass  (voucher)  privatization  programme  got  under  way  in 
1996.  Enterprise  restructuring  accelerated  somewhat  as  the 
government initiated action to deal with the largest  loss-making 
state enterprises. 

Approximately one-third of the banks were closed in  1996. The 
sector  is  now  dominated  by  5  state-owned  banks.  Banking 
supervision remains poor. 

18 

ESTONIA 

1. 

Price liberalization 

2. 

Trade liberalization 

3. 

Exchange regime 

Major  price  liberalization  in  1991.  At  end  of  1996,  remaining 
price  controls  affected  land  and  forestry,  oil  shale,  medicines 
and utilities.  Prices of a  limited number  of services  (e.g.,  rents 
and public transport) controlled at municipal level. 

No import duties, except for a very limited number of products 
(furs,  sea-  and  snow-scooters,  and  small  vessels).  Export 
quotas/licences  for  clay  and  gravel.  Flat  fee  of  EEK  200 
trade 
charged  per 
agreement with  EU in force  since  1 January  1995.  Estonia has 
free trade agreements with the EFTA countries  and with  Latvia 
and  Lithuania  (since  1 April  1996).  Estonia  has  applied  for 
membership of the Central European  Free Trade Agreement. 

import  and  export  declaration.  Free 

Full current  account convertibility.  Kroon pegged to DM  since 
1992  (1DM=8EEK)  under  a  currency  board  regime,  with  a 
technical fluctuation  limit of 3 per cent. 

4. 

Foreign direct investment 

Non-residents  may  freely  repatriate  profits  and  proceeds  of 
liquidation of investment. 

5.  Monetary policy 

Public  finances 

7. 

Privatization and enterprise 
restructuring 

8. 

Financial sector  reform 

Central  Bank  responsible  for  operating  currency  board  and,  in 
exceptional  cases,  for  emergency  lending  to  the  banking 
system. Inflation  fell  in  1996 to  14.8% (year-end  figure). 

Tax  reform  completed  by  early  1994.  Indirect  taxes  (VAT  in 
particular)  represent  more  than  50% of  government  revenues. 
Excise taxes  raised  in  1996. General  government  expenditures 
represented 42% of GDP. 

Small-scale  privatization  virtually  completed.  At  the  end  of 
1996,  more  than  450  of  the  500  medium-sized  and  large 
companies had been privau~~d. 

Two-tier  banking  system.  Consolidation  of  the  banking  sector 
continued: at the end of  1996, there were  15 commercial banks. 
The Tallinn stock exchange was successfully  launched  in  1996 
and volumes have increased steadily. 

19 

LATVIA 

1. 

Price liberalization 

2. 

Trade  liberalization 

3. 

Exchange regime 

4. 

Foreign direct investment 

5.  Monetary policy 

6. 

Public  finances 

Privatization  and enterprise 
restructuring 

8. 

Financial sector  reform 

liberalization  essentially  completed, 
By  end-1992,  price 
excluding utility prices and rents. In  1996, there was continued 
progress  in  bringing  the  remaining  regulated  prices  into  line 
with world prices. 

All trade restrictions abolished  in  1992.  Free trade  agreements 
with EU, Baltic States and EFTA countries.  Latvia has applied 
for WTO membership. 

rouble  zone 

in  July  1992.  Full  current  account 
Left 
convertibility.  Exchange  rat&jof  lats  stabilized  under  managed 
floating  system, informally  pegged to the SDR. 

Non-residents  may  freely  repatriate  profits  and  proceeds  of 
liquidation  of  investment.  Substantial  flows  of  foreign  direct 
investment (US$  171 million in  1996). 

Independent  central  bank.  Credit  policy  conducted  through 
indirect instruments. Interest rates fully  liberalized. 

VAT introduced  in February  1992. Flat rate income tax  (25%) 
plus  a  10% surcharge  on  annual  income  introduced  in  1993. 
Tight control  of public finances in  1996; budget  deficit  turned 
out lower than expected. 

Latvian  Privatization  Agency  set  up  in  February  1996  and 
procedures  for  privatization  made more transparent  and  quick. 
Sell-off  of Latvian energy  supplier and  shipping company well 
under way by end of  1996. 

Two-tier  banking  system  set  up  in  1992.  Banking  crisis  in 
1995  reduced  number  of  banks  to  33,  of  which  only  16  can 
accept  household  deposits.  75% of  banking  sector  in  private 
hands,  of  which  39%  in  foreign  ownership.  Capital  of  state-
owned  banks  strengthened  in  preparation  for  privatization. 
Stock exchange started to operate in July  1995. 

21 

MOLDOVA 

1. 

Price liberalization 

2. 

Trade liberalization 

3. 

Exchange regime 

4. 

Foreign direct investmenl 

Monetary policy 

Public  finances 

Prices  of  goods  and  services  fully  liberalized  with  some 
exceptions (mainly energy products). 

All  export  quotas  removed.  Maximum  import  tariff  of  20%, 
with a few exceptions. 

New  currency  introduced  in  November  1993.  Managed  float, 
with  slow  nominal  depreciation  against  USD.  Daily  foreign 
exchange auctions at the Chisinau  Inter-bank Foreign Currency 
Exchange. Current account  convertibility. 

Liberal  regime:  free  repatriation  of  profits  and  proceeds  of 
liquidation  of  investments  within  three  months  of  closure. 
in 
Agency  for  Foreign  Investment  Promotion  established 
January  1995.  Partnership  and  co-operation  agreement  with 
EU signed in November  1994. 

Relies  on credit  ceilings.  Policy  geared  to  further  reduction  of 
inflation,  enforced  financial  discipline  and  enhanced  central 
bank independence. 

in  1992.  Tax  administration 

improved. 
VAT  introduced 
Privatization receipts far  below expectations, because of a lack 
of  domestic  capital.  On  expenditure  side,  overruns  resulted 
from  higher-than-programmed  social  spending  and  from  net 
lending by the government, which assumed guaranteed  loans to 
enterprises in default. 

Privatization and enterprise  2200  enterprises,  representing  about  70%  of  the  economy, 
privatized through the voucher programme.  Mass  privatization 
restructuring 
process  concluded  in October  1996.  Privatization  for  cash  not 
successful,  because of a lack of domestic capital. 

8. 

Financial sector  reform 

Two-tier  banking  system.  National  Bank  responsible  for 
monetary  policy  and  bank  supervision.  Regulation  imposing 
provisions  for  bad  loans  approved  in  1995.  From  1 January 
1996,  banks  with  reserve  level  below  Mdl  4  million  (about 
US$ 900,000) forced to close or to merge with a larger bank. 

22 

ROMANIA 

1. 

Price liberalization 

Trade liberalization 

Exchange regime 

Phased programme of price liberalization  introduced  at the end 
of  1990. In  1993, most  consumer  subsidies  eliminated  and the 
number  of  consumer  goods  under  direct  price  control  greatly 
reduced. 

Liberalization of foreign  trade regime  largely completed  by the 
end of  1992. though in  1995, around half of Romania's  imports 
were  subject 
trade 
restrictions  were  introduced  in  1996  in  an  attempt  to  curb 
rising trade  deficit. 

to  special  arrangements.  Substantial 

Almost 
full  current  account  convertibility.  Remaining 
restrictions concern maximum amounts that residents  may take 
out of the country.  In early  1996, significant  controls  imposed 
on  enterprises*  and  banks'  foreign  exchange  operations; 
number  of  banks  licensed  to  operate  on  foreign  exchange 
market restricted to four. 

4. 

Foreign direct investment 

FDI  and  portfolio  investment  regulated  by  law.  FDI  inflows 
dropped in  1996 and are small for the size of the country 

5.  Monetary policy 

Public  finances 

Privatization and enterprise 
restructuring 

8. 

Financial sector  reform 

National  Bank  is independent, though  in  1996 it contributed  to 
budget  deficit  financing  and  extended  directed  credits  to  state-
owned enterprises and agricultural  sector. 

Basic tax  reform  completed.  VAT and  wage  tax  main  sources 
of government  revenue. Budget deficit  soared  in  1996, because 
of increase in subsidies. 

Little progress  on restructuring  of inefficient  and  large energy-
intensive enterprises,  in particular  because  of overvaluation  of 
exchange rate and low energy prices. By October  57% of small 
enterprises  privatized,  but  privatization  of  large  and  medium-
sized enterprises progressed slowly. 

Two  large  private  banks  collapsed  in  1996.  Limited  deposit 
in  August  1996.  In  1996, 
insurance  scheme  introduced 
secondary OTC market (RASDAQ) launched  successfully. 

1. 

Price liberalization 

Trade liberalization 

23 

UKRAINE 

Limits  set  by  local  governments  on  profit  margins  for  bread 
and oil products abolished  in May  1996. Most goods no longer 
subject  to  price  declaration  (only  energy  and  transport  prices 
have to be declared). Increases for households in prices of coal, 
electricity, gas and transport,  but still below full  cost  recovery. 
Also, increases in rents. 

System  of  state  orders  abolished,  except  for  grain  for 
budgetary reasons. Budget allocations  for  state procurement  of 
agricultural  products 
to  needs  of  budgetary 
organizations and based on market-deterred prices. 

limited 

Import  regime  free  of  quantitative  restrictions,  with  few 
exceptions,  which  are  primarily  for  health  and  safety  reasons. 
Maximum  import  tariff  30%.  No  export  quotas  and  licences 
(except  for  hides  and  skins).  Partnership  and  Cooperation 
Agreement with EU signed June  1994. 

Foreign exchange regime 

Exchange rate determined at interbank auction market. 

Foreign direct investment 

Monetary policy 

Public  finances 

Privatization and enterprise 
restructuring 

relief  granted 

to  some  foreign  direct 

Tax 
investments 
constituting at least 20% of an enterprise's charter capital. This 
relief  was  granted  by  a  1993  decree  and  provided  for 
exemption from  income and profit  tax for 5 years. 

Central  bank  credit  to  commercial  banks  allocated  mostly 
through  the  Lombard  facility,  and  to  a  lesser  extent  through 
auction.  Directed  credits  no  longer  issued.  Central  Bank 
refinance  rate adjusted  to ensure that  it remains positive  in real 
terms. 

Since  1992  gradual  tightening  and  rationalization  of  budget, 
including  reform  of  VAT,  enterprise  and 
income  taxes. 
Reduction  of public expenditure  from  72% of GDP  in  1992 to 
some 40% in  1996. Ratio revenue/GDP: 37% in 1996. 

Mass  voucher  privatization  programme  launched  at  beginning 
of  1995.  By  end-1996,  about  80%  of  small  enterprises  and 
large  enterprises  had  been 
50%  of  medium-sized  and 
privatized.  Coal  sector  reform  programme  implemented  with 
the help of the World  Bank. 

8. 

Financial  sector  reform 

Measures  to  strengthen  supervision  and  regulation  of  the 
banking sector  implemented. 

24 

I. ALBANIA 

1. 

Introduction 

Albania's macroeconomic  and  structural  adjustment  efforts  were  initiated  in  1992  against 
a backdrop  of severe economic,  social  and  administrative  deficiencies.  The country  made 
considerable  progress  towards  macroeconomic  stabilization,  supported  by  an  SDR  20 
million stand-by arrangement  from  the IMF, complementary  assistance from  the EC  in the 
form of an ECU 70 million grant5 and  bilateral assistance from  G-24 members. 

Following  the  IMF's  decision  to  back  Albania's  medium-term  programme  of  structural 
reforms  with  a SDR  42.4  million  Enhanced  Structural  Adjustment  Facility  for  the  period 
from  mid-1993  to  mid-1996,  the  Council  of  the  European  Union  decided  in  November 
1994 to grant the country renewed macro-financial  assistance up to a maximum amount  of 
ECU 35 million6. 

Performance  from  1993  until  mid-1995  was  satisfactory:  yearly  GDP  growth  averaged 
9%,  tight  budgetary  and  monetary  policies  were  implemented,  external  imbalances  were 
reduced,  foreign  reserves  were  built  up  to  the  equivalent  of  over  3 months'  imports  and 
structural  reforms  progressed.  Subsequently,  however,  the  pace  of  reform  slowed  down 
and  important  budgetary  policy  slippages  appeared,  which  were  only  partially  corrected 
after  the May  1996 general elections. 

2.  Macroeconomic  performance 

In  1996,  real  GDP  grew  by  8.2  %,  continuing  the  positive  performance  of  the  three 
previous years. Agriculture, which accounts for  over half of GDP, grew 4.5%, down  from 
5.8% in  1995. For  the  second  year in a row  since the beginning  of the transition  process, 
industrial  output  increased  slightly,  by  0.8%.  Production  in  state-owned  industries 
continued  to  fall,  while output  in the  newly  established  private  enterprises  in the  textiles 
and  clothing  sector  grew.  According  to  official  Albanian figures, unemployment  in  1996 
was  12.1%, down from  13% in 1995. 

Fiscal  policy  slackened  in  1996,  mainly because  of  the  pre-electoral  measures  enacted  in 
the  first  months  of  the  year.  In  particular,  the  agricultural  land  tax  was  suspended,  tax 
collection  was  less  vigorously  enforced  and  the  introduction  of  the  VAT  to  replace  tfoe 
turnover tax was delayed. Moreover,  public sector wages were increased  by 20% in April. 
However,  soon  after  the  elections  the  new  government  took  a  series  of  corrective  fiscal 
measures.  On  1 July,  the  VAT  was  introduced  and  exemptions  were  limited  to  bread, 
kerosene  and  bottled  gas.  Price  controls  for  some  food  staples  (wheat,  flour  and  bread) 
were  removed.  In  October,  in  an  additional  effort  to  control  the  budget  deficit,  the 
government  froze  spending  on  new  investment  projects.  The  reduction  of  expenditure 
from  the  equivalent  of  30.8%  of  GDP  in  1995  to  29.4  %  in  1996,  was  nevertheless 
insufficient  to offset  a shortfall  in revenue of  19% of GDP in  1996, compared  with  24% in 
1995, and the overall fiscal  deficit  for  1996 reached  11.4% of GDP. 

5  Council Decision of 28 September  1992 (92/482/EC). 
6  Council Decision of 28 November  1994 (94/773/EC). 

25 

The pressures  exerted  by the fiscal deficit  and  wage  increases  resulted  in faster  inflation, 
reversing a downward  trend that  had begun in  1993. Consumer  price inflation  was  17.4% 
in  1996, up from  6% in  1995. Broad money growth was 40% in  1996. 

Imports  increased  substantially  in  1996,  and  the  trade  deficit  rose  to  25%  of  GDP,  up 
from  19.6%  of GDP in  1995. The deterioration  of the trade balance was, however,  offset 
by the  inflow  of workers'  remittances,  which  grew  during  the  second  half  of  the  year in 
response  to  the  increasingly  high  returns  offered  in  the  informal  financial  sector.  The 
current  account deficit  remained relatively stable at 7.7% of GDP (7.5% in  1995). Foreign 
exchange reserves grew to US$ 280 million (equivalent to 3.2 months'  imports ). 

The exchange rate against the dollar had been stable since the autumn of  1992. During the 
six months  leading  up  to  the  1996 general  elections,  the  lek  depreciated  by  around  15% 
against  major  currencies,  but  during  the  second  half of the  year  it  recovered  most  of  the 
ground  it  had  lost.  In  general,  the  Bank  of  Albania  refrained  from  intervening,  except 
during brief episodes of high volatility. 

The  most  significant  adverse  development  in  the  Albanian  economy  in  1996  was  the 
increasing  instability  of  the  expanding  informal  financial  sector.  The  sector  started  to 
develop from  the very beginning of the transition  process,  spurred  by the weakness of the 
banking  system  and  the  ensuing  tight  controls  on  bank  credit.  Acting  like  deposit-takers 
and  operating  de  facto  like pyramid  schemes,  the  companies  offered  higher  interest  rates 
than  those  offered  in  the  banking  sector.  Until  the  end  of  1995,  monthly  interest  rates 
offered  by these institutions were in the range of 4-5 %. However,  in  1996 new companies 
began  offering  monthly  rates  which  in  some cases  exceeded  40%.  As  a result,  the  larger 
incumbents also increased  their rates and at the end of the year they were offering  monthly 
rates of 10%. 

Following  warnings  from  the  IMF  in  October  1996,  the  government  started  to  voice 
doubts as to the soundness of the savings schemes. In November and December  1996 two 
pyramid  schemes  collapsed.  Despite  redistribution  to  investors  of the  frozen  sums  of  the 
two  collapsed  schemes  as  partial  compensation  for  losses,  turmoil  escalated  in  February 
1997 into a major  political  and  security  crisis. Several more schemes were  shut  down. All 
existing  schemes  have  now  suspended  interest  payments  and  some  are  reimbursing 
principal, albeit on a piecemeal basis. 

3. 

Structural  reform 

Following  considerable  progress  in  1994  and  1995, the  pace  of  structural  reform  slowed 
down during  1996. Nevertheless some important measures were taken. 

Tax  reform  progressed  thanks  to  the  introduction  of  the  VAT  in  July.  However,  the 
system  still  presents  a  number  of  weaknesses  owing  to  a  high  number  of  exemptions. 
Moreover,  the tax administration needs to be substantially  improved. 

Price  liberalization  was  virtually  completed  in  1996  and  controls  remained  only  on  the 
prices  of  a  small  number  of  goods  and  services  (health  care,  urban  transport,  rail  fares, 
energy  and  water).  Wheat  and flour prices were  decontrolled.  The  ceiling  on the  price of 
bread was removed  (but  special bread allowances were granted to government  workers). 

Under  the Mass Privatization  Programme  (MPP), the privatization  of  small  and  medium-
sized  service  and  production  enterprises  was  actively  pursued  and  almost  completed. 

26 

Some  30  larger  enterprises  were  also  sold.  For  the  large  enterprises  (mostly  mining 
companies and public utilities) the authorities  decided  to give priority to  sales to  strategic 
investors,  reserving  a minority for  sale through  the MPP.  The liquidation  of some  twenty 
enterprises  that  had  been transferred  to  the  Enterprise  Restructuring  Agency  (ERA)  has 
also continued,  albeit slowly. 

Some  steps  were  taken  to  reform  the  banking  system.  In  February  1996,  the  Parliament 
adopted  two  laws  determining  the  role  and  responsibilities  of  the  Bank  of  Albania, 
including  its relations  with  the government  regarding  the financing of  the  budget  deficit. 
Simultaneously,  the  law  on  the  banking  system  was  adopted,  streamlining  the  licensing 
procedures  and  establishing  the  regulatory framework for  banking  activity.  However,  the 
regulations  relating  to  the  Bank  of  Albania  and  the  Banking  Law  were  not  adequately 
enforced.  Moreover,  the  regulatory  framework  for  financial  activity  in  Albania  remains 
seriously  inadequate.  Supervisory  regulations  that  accord  with  international  standards 
have yet to be developed. 

In  September  1996  the  government  announced  a  strategy  to  privatize  Albania's  three 
state-owned  banks  within  three  years.  In  December  most  of  the  branches  of  the  Rural 
Commercial  Bank  and  of the National  Commercial  Bank  were  transferred  to  the  Savings 
Bank,  which  the  government  intends to  privatize  last.  The  Savings Bank  was  left  free  to 
close down or restructure the branches. 

4. 

Implementation  of macro-financial  assistance 

The grant  of ECU  35 million decided  by the Council  in November  1994 was  disbursed  in 
two  tranches.  The first tranche  (ECU  15 million)  was  disbursed  in  May  1995,  following 
signature  of  the  Memorandum  of  Understanding  laying  down  the  macroeconomic  and 
structural  conditions  attached  to  the  grant.  In  early  September  1996  the  Commission 
decided  to  disburse  the  second  tranche  (ECU  20  million),  in view  of the  measures  taken 
by  the  new  Albanian  government  to  address  the  budgetary  imbalances,  including  the 
introduction  of  the  VAT,  and  of  the  progress  in  implementing  structural  reforms 
mentioned  in the Memorandum  of Understanding. 

27 

O. ALGERIA 

1. 

Introduction 

In  1996,  Algeria  completed  an  important  stage  of  the  economic  and  structural  reform 
programme  that  was  launched  in  the  early  1990s.  The  programme  was  aimed  at 
transforming  an  administratively  regulated  economy  into  a  market  economy  with  a 
liberalized domestic price system and external trade and payments regimes. A strong track 
record  of  policy  implementation  and  stabilization  has been  established,  despite  mounting 
difficulties  in the political and security situation. 

Positive real economic growth was restored,  inflation  declined  towards a single-digit  rate, 
the  current-account  and  fiscal  balances  turned  into  surpluses,  and  the  external  and 
domestic  debts  were  reduced.  This  performance  reflected  both  favourable  exogenous 
developments,  in particular  in the hydrocarbon  and  agriculture  sectors,  and the  continued 
steadfast  implementation  of  important  institutional  reforms.  During  1990-96,  domestic 
prices were liberalized,  together  with the trade and payment  systems; the restructuring  of 
public enterprises  was  launched;  a programme  of privatization/liquidation of  small  public 
enterprises  was  implemented;  the  banking  sector  was  deregulated;  and  a  managed  float 
exchange rate regime and  an interbank  foreign  exchange  market  were  introduced.  On the 
social front,  housing reforms were initiated and the social safety  net was modernized. 

Algeria's economic and structural  reform  programme continued  to receive strong  financial 
support  from  the  Bretton  Woods  institutions.  Following  two  stand-by  arrangements,  in 
1991  and  1994,  the  IMF  approved  a  three-year  Extended  Fund  Facility  (EFF)  in  May 
1995  for  a  total  amount  of  SDR  1,169  million.  Algeria  has  met  all  the  quarterly 
performance  criteria  set  under  the EFF  since its  inception.  In addition,  in June  1996,  the 
IMF approved  a purchase under the Compensatory  and Contingency Financing Facility on 
account of excess cereal import  costs. The World Bank approved  a Structural  Adjustment 
Loan (SAL) of US$ 300 million in support of a private sector  development  programme in 
April  1996. The first tranche  of US$  150 million was disbursed  in June  1996. Reforms  of 
the . jcial safety  net we..  also supported  by a US$ 50 million loan. 

The Community  also supported  Algeria's reform  process. The Council decided in  1991 to 
grant  Algeria  a  first  loan  of  ECU  400  million7,  which  was  disbursed  in  1992  (ECU  250 
million)  and  1994  (ECU  150  million).  In  1994,  following  a  request  for  further  macro-
financial assistance  from  the  Algerian  authorities,  the  Council  adopted  a  second  macro-
financial operation  (up  to  ECU  200  million)  to  be  disbursed  in  two  tranches8.  A  first 
tranche (ECU  100 million) was released in November  1995. 

2.  Macro-economic  performance 

Thé recovery  in output  growth  registered  in  1995 was sustained  in  1996, when  real  GDP 
rose  by 4 per  cent.  The  overall  contraction  of domestic  demand  was  more  than  offset  by 
the expansion  of the export  sector. Agriculture, the hydrocarbon  sector,  construction,  and 
public  works  were  the  main  engines  of  growth.  By  contrast,  industrial  production 
continued  to  decline,  by  about  4  per  cent  in  real  terms,  reflecting  the  poor  productivity 

7  Council Decision 91/510/EEC. 
8  Council Decision 94/938/EEC. 

28 

and tightened  credit  constraints  in the large public enterprise  sector.  Despite the  rebound 
in economic  activity,  the unemployment  rate continued  to  increase  in  1996 to  reach  28.3 
per  cent  at  end-year,  as  economic  growth  was  not  sufficient  to  generate  enough 
employment  opportunities. 

The  pursuit  of  a  tight  monetary  policy  resulted  in  a  further  decline  of  the  inflation  rate 
(December-on-December),  from  21.9 per cent in  1995 to  15.1 per cent  in  1996.  Since the 
central  bank  repurchase  rate  was  reduced  by  2  percentage  points  to  20%,  real  interest 
rates  became  positive.  In  addition,  bank  credits  to  the  less  productive  sectors  of  the 
economy,  such  as the  food  importing  agencies  and  some  public  enterprises,  were  curbed 
so  as  to  make  room  for  more  profitable  and  productive  investments.  The  inflation 
performance  was  also  facilitated  by  a good  harvest,  a moderate  increase  in  administered 
prices, and a small appreciation  of the real effective  exchange rate of the dinar. 

Higher  international  oil  prices  and  strong  fiscal  management  resulted  in  an  exceptional 
fiscal  performance  in  1996. The  overall  fiscal  balance  reached  a  surplus  of  3  per  cent  of 
GDP,  a  turnaround  equivalent  to  7.4  and  4.4  per  cent  of  GDP  compared  to  1994  and 
1995,  respectively.  While  non-hydrocarbon  receipts  remained  unchanged  as  a  proportion 
of  GDP,  hydrocarbon  receipts  increased  by  about  2  percentage  points  of  GDP  in  1996. 
On the  expenditure  side, wage  containment  and  continued  tight  policies  on  transfers  and 
subsidies  allowed  for  a reduction  in current  expenditure  (as a ratio  to  GDP)  for  the  third 
consecutive  year.  As  a  result  of  sustained  fiscal  consolidation,  the  outstanding  domestic 
debt was halved during the period  1993-96 to 22.2 per cent of GDP. 

Algeria's  external  position  improved  considerably  in  1996,  mainly  as  a  result  of  the 
increase of the  international  crude oil  price by  US$ 2 per  barrel  (corresponding  to  a 23.4 
per  cent  increase  in  Algeria's  crude  oil  export  unit  value).  The  current  account  balance 
swung  from  a deficit  of US$  2.2  billion  in  1995  to  a  surplus  of US$  1.2  billion  in  1996 
(2.8 per cent of GDP). Hydrocarbon  exports, which represented  more than  95 per  cent  of 
total  Algerian  exports,  increased  in value by about  30 per  cent to  US$  12.6 billion.  Total 
imports,  at  US$  9.1  billion,  declined  by  10 per  cent  in the wake of the  good  harvest,  the 
overall  contraction  of  domestic  demand,  and  the  recession  in  the  industrial  sector.  The 
capital  account  balance, though  negative, improved  by about  2.5  per  cent  of GDP,  owing 
in part to  a pick-up  in foreign  direct  investment  in the  energy  sector.  In  addition,  Algeria 
continued to benefit from large exceptional financing  in the form  of public and  commercial 
debt reschedulings.  As a result,  gross foreign  exchange  reserves doubled  in  1996 to  reach 
US$  4.2  billion  at  end-year,  equivalent  to  4.5  months1  imports.  Algeria's  outstanding 
external debt declined  slightly to 74.2 per cent of GDP at end-1996. 

3. 

Structural  reforms 

In  1996, the process  of liberalizing the economy  and  establishing  market  mechanisms  was 
further  consolidated,  except  for  the  restructuring  and  privatization  of  large  public 
enterprises, where the social consensus needed to underpin the reforms was more  difficult 
to sustain in view of rising unemployment  and labour unrest. 

Domestic  price  liberalization  was  almost  completed  with  the  abolition  of  the  generalized 
food  subsidies,  including  those  on  the  most  sensitive  products,  such  as  powdered  milk, 
semolina,  and  regular  flour.  The  only  remaining  controls  on  profit  margins  and  prices 
applied  to  medicine  and  energy  products.  Prices  for  gas  and  electricity  were  gradually 
adjusted  in  1996  with  a  view  to  covering  economic  cost  by  end-1997.  The  maximum 

29 

import tariff was lowered from 60 per cent to  50 per cent in early  1996. As of end-1996, 
Algeria's  trade  system  was  free  of  import  restrictions  (except  for  a  short  list  of  goods 
permanently  banned  for  social  and  religious  reasons).  Some  restrictions  remained  on 
invisible current  account transactions. 

Following  the  adoption  of  the  Privatization  Law,  a  first  privatization/liquidation 
programme  covering  274  enterprises,  units  of  enterprises,  and  activities  in  small-scale 
industry,  commerce,  services,  construction,  and  transport  was  launched  in  April  1996. 
However,  effective  transfers  to  the  private  sector  or  liquidation  were  constrained  by  the 
need  to  restructure  loss-making  companies,  strong  social  resistance  to  the  inevitable 
redundancies  and  some  technical  and  legal  delays,  as  well  as  the  need  to  ensure 
transparency.  An amendment  to the Privatization  Law was prepared  in late  1996 in order 
to  increase  flexibility  in  privatization  procedures,  including  equity  participation  by 
employees,  auctions  and  mass  privatization,  with  a view  to  launching,  in  1997,  a  second 
programme  of  privatization/liquidation  involving  some  larger  public  enterprises  in  the 
manufacturing  sector.  In  addition,  a  draft  law  allowing  the  sale  of  all  state-owned 
agricultural  land was adopted  in 1996. 

The restructuring  of the large public enterprises  made some progress,  in particular  for  the 
23  largest  loss-making  companies  which  had  not  been  granted  legal  and  financial 
autonomy,  and  thus  remained  protected  against  bankruptcy.  By  end-1996,  in  the 
framework  of  the  World  Bank's  Enterprise  and  Financial  Structural  Adjustment  Loan 
approved  in  1991,  one  enterprise  had  been  liquidated  and  the  other  22  had  been  granted 
autonomy  and  were  required  to  meet  performance  contracts  relating  to  restructuring 
measures. All public enterprises had been made subject  to hard budget  constraints. 

In  conjunction  with  the  restructuring  of  public  enterprises,  an  overhaul  of  commercial 
banks'  practices was implemented  with the aim of introducing  greater  autonomy  in  credit 
allocation  and  applying  new  prudential  regulations  on  portfolio  concentration  and  loan 
classification  and  provisioning.  As a result,  all banks improved  their  capital/risk  weighted 
ratio, which was expected to reach the BIS standard  of 8 per cent by  1999. Other banking 
reforms  included  a further  move towards indirect monetary  controls and the establishment 
of a fully fledged interbank foreign  exchange market. 

4. 

Implementation  of macro-financial  assistance 

In  1996,  discussions  took  place  between  the  Algerian  authorities  and  the  Commission 
services  on  the  appropriateness  of  and  conditions  for  the  disbursement  of  the  second 
tranche  of the  1994  macro-financial  loan  (up  to  ECU  100  million).  However,  agreement 
was not  reached  on the conditions attached  to  its release,  in particular with respect  to the 
calendar  for  the  implementation  of  a  programme  of  privatization  of  large  public 
enterprises. Moreover,  Algeria's residual financing  gap vanished  in  1996 as a result  of the 
strong current  account  performance.  In December  1996, the Commission  decided,  as part 
of the MED A programme,  and  after  consulting  the Member  States9,  to  support  Algeria's 
structural  reform  programme  through  a  Structural  Adjustment  Facility  (SAP)  for  an 
amount  of ECU  125 million to be disbursed  in two tranches of ECU  60 million  and  ECU 
65  million.  This  grant-based  assistance,  which  is  intended  to  complement  the  World 
Bank's  SAL,  will  be  disbursed  on  condition  that  specific  reforms  in  the  area  of 

In accordance with Council Regulation N°  1488/96. 

30 

international  trade,  housing,  agriculture,  privatization  of  small  enterprises,  and  the  social 
safety net are implemented. 

31 

m.  BELARUS 

1. 

Introduction 

Economic  and  political  developments  in Belarus  were a matter  of grave  concern  in  1996. 
The  moderate  progress  made  towards  stabilization  in  the  past  faltered: 
inflation 
accelerated  substantially in the last quarter, and the external sector was particularly  fragile. 
The  growth  officially  recorded  in  1996  appears  to  be  mostly  the  result  of  state  orders, 
which were financed  by cheap credit from  the banking system, and led to a major  surge of 
stocks.  State interference  in the economy intensified,  progress with structural reforms  was 
minimal, and privatization was halted. 

In  1996 Belarus failed  to meet the basic requirements for  transition  to a market  economy, 
including:  a  well-defined  and  guaranteed  system  of  property  rights;  and  legal  and 
administrative  institutions  to  ensure  that  the  rule  of  law  is  enforced  in  a transparent  and 
coherent  way.  Furthermore,  the  political  will  was  lacking  to  make  concerted  efforts  to 
proceed with the necessary democratic and economic reforms. 

Under those  circumstances,  the  international  financial  institutions  interrupted  all  major 
programmes  of  financial  assistance.  Since  1993,  multilateral  donors  had  assisted  and 
encouraged the reform  process in Belarus. The IMF had intervened with two tranches of 
a Systemic Transformation  Facility in July  1993 and in January  1995. The conclusion of 
a more ambitious programme in the form  of a stand-by arrangement,  initially  envisaged 
for  March  1995,  was  postponed  pending  the  adoption  of  the  government's  economic 
programme  for  1995/96. The IMF board  eventually  approved  the stand-by  arrangement 
on 12 September  1995. The Commission disbursed in December  1995 ECU 30 million of 
the  ECU  55  million  balance-of-payments  assistance  approved  in  support  of  the  IMF 
stand-by  arrangement.  However,  the  IMF programme  soon  went  off  track.  The  second 
tranche  of the  Community  loan  has  consequently  not  been  disbursed,  and  there  are no 
plans to reactivate it. 

The  resumption  of  international  financial  assistance  would  require  a  major  effort  on  the 
part  of  the  authorities  to  accomplish  an  effective  liberalization  of  the  economy,  to 
accelerate  structural  reform,  and to  implement  tight  monetary  and fiscal policies,  so as to 
ensure that  macroeconomic  stabilization  is sustained  and the efforts  made so far,  entailing 
major  social costs, are not wasted.  Until those conditions are met, in line with the position 
of the Council10,  the EU will  encourage  the international financial institutions  to  maintain 
a  case-by-case  approach 
lending  proposals,  observing  strict  economic 
conditionality. 

to  new 

2.  Macroeconomic  performance 

The  economic  picture  which  emerges  from  the  official  statistics  is  quite  mixed.  GDP 
growth  for  1996  is reported  at  2.6% with  respect  to  the  previous  year,  and  accelerating. 
The  increase  in  GDP  is  driven  by  major  increases  in  industrial  production.  However, 
economic growth  appears to be mostly the result  of state  orders, which were  financed  by 
cheap  credit  from  the  banking  system,  and  led  to  a  major  surge  of  stocks.  A  barter 
agreement with Russia allowed  the use of the stocks accumulated  during  1996 to be used 
in payment for gas arrears to RAO Gazprom. 

10  Council Conclusions of 24/2/97 and Council Declaration of 29/4/97. 

32 

Moreover, there were clear signs that the moderate progress made towards stabilization in 
1995  and  in  the  first  half  of  1996  were  in  jeopardy,  and  serious  threats  to  a  low-
inflationary  environment  surfaced.  After  a period  of relative  stability,  inflation  accelerated 
substantially in the last quarter of 1996. 

The  situation  of  the  external  sector  deteriorated  markedly  in  1996.  Imports  surged  as  a 
result  of the  extremely  overvalued  exchange  rate  and  caused  a sharp  deterioration  of the 
current  account.  The  deficit  increased  from  $370  million  in  1995 to  an  estimated  $1,220 
million, i.e., about 9% of GDP, at the end of 1996. 

Economic policy in  1996 was erratic. Monetary policy, relatively restrictive in the first half 
of  the  year,  suffered  a  severe  blow  in  the  second  half.  In  April  President  Lukashenko 
placed  the  central  bank  under  the  authority  of  the  president  Father  than  the  parliament. 
This shift  in supervisory  powers,  together  with the  suspension  of multilateral  lending  and 
supervision  by  the  IMF,  led  to  a  relaxation  of  monetary  policy,  and  money  emission 
increased  by 64% over the full  year.  This  expansionary  monetary  policy  was  inconsistent 
with  the  de  facto fixed exchange  rate  regime,  as became  very  clear  in the  second  half  of 
1996,  when  pressures  increased  for  a  sizeable  devaluation  of  the  exchange  rate  of  the 
rubel. 

Fiscal  policy,  at  least  on  paper,  remained  more  restrictive.  Officially,  the  state  budget 
recorded  a modest  deficit  for  1996, equal to  1.9%  of GDP. However,  this figure  does not 
take  fully  into  account  the  rapid  build-up  of  arrears,  estimated  at  1%  of  GDP;  the 
existence  of  quasi-fiscal  activities;  and  extra-budgetary  funds.  Independent  estimates  put 
the  deficit  for  1996 at  about  4% of GDP.  Furthermore,  the  way  in which  the  deficit  was 
financed had  major  negative consequences  for  the financial stability  of the  country.  In the 
second  half of  1996, the government  resorted  increasingly  to  credits  issued  by the  central 
bank. 

Exchange  rate  policy  was  arguably  the  clearest  example  of  reversal  in  the  process  of 
liberalization.  At the beginning of  1995 the authorities decided to peg the rubel against  the 
US  dollar  with  the  aim  of  helping  to  control  inflation.  A  sizeable  real  appreciation  and 
growing  expectations  of  a  devaluation  imposed  a  major  drain  on  the  reserves  of  the 
central  bank.  From  November  1995,  the  authorities  resorted  to  a  succession  of 
administrative  controls,  which  included  the  prohibition  of  inter-bank  trading  and  major 
restrictions  on  the  purchase  of  foreign  currency.  In  April  1996  the  Inter-bank  Currency 
Exchange  was  nationalized  and  put  under  the  direct  control  of  the  central  bank.  In  the 
mean  time,  the  fixed  rate  regime  was  replaced  by  a  currency  corridor.  The  corridor 
sharply  overvalued  the  rubel,  which  regularly  traded  at  a  30-50%  discount  on  parallel 
markets.  This  prompted  the  authorities  to  introduce  further  administrative  controls, 
including  a  10% tax  on purchases  of foreign  exchange  introduced  in January  1996  and  a 
requirement  that  exporters  surrender  100%  of  their  foreign  exchange  earnings.  Those 
measures,  which  were  subject  to  frequent  changes  and  arbitrarily  applied,  led  de  facto  to 
the establishment  of a multiple exchange regime. 

3. 

Structural  reform 

The Belarus economy remained unreformed  in many areas, and the state continued  to play 
a major  role in the production  and  distribution  of goods.  Indeed, the authorities'  response 
to  growing  financial  instability  was  to  increase  the  degree  of  state  interference  in  the 
economy. 

33 

Liberalization  suffered  some  reversal,  both  in  the  case  of  the  exchange  rate,  and  in  the 
case  of  prices.  Most  prices  were  liberalized  as  early  as  1992,  and  the  process  of  price 
liberalization  was  mostly  completed  at  the  beginning  of  1995.  The  central  authorities 
continued  to  control  directly  the  price  of alcohol,  while  administered  prices  were  set  for 
transport,  energy  and  communications.  Profit  margins  for  agriculture  were  regulated.  On 
30  August,  1996  a  presidential  decree  reintroduced  direct  price  ceilings  administered  by 
the local authorities on a number of products (bread, dairy products, baby food,  etc.). 

Weak  commitment  in  the  areas  of  privatization  and  enterprise  restructuring  virtually 
halted  the  structural  reform  process  from  1995.  Small-scale  privatization  has  been 
relatively  successful,  the  most  noticeable  progress  being  made  in  the  housing  sector  and 
retail  trade.  Large-scale  privatization  faltered.  During  1996  only  164  state-owned 
enterprises were transformed  into joint-stock  companies, compared  with an original target 
of  549.  A  voucher  scheme  for  mass  privatization  was  cancelled,  under  the  pretext  of 
rooting out  tax  evasion  and  corruption.  As a result  only about  10% of Belarus' firms are 
in private hands. 

4. 

Implementation  of macro-financial  assistance 

On  10  April  1995  the  Council  approved11  Community  macro-financial  assistance  to 
Belarus in the form of a  10-year loan, conditional upon the conclusion  of an IMF stand-by 
arrangement,  to  support  the  country's  programme  of  macro-economic  adjustment  and 
structural  reforms.  After  approval  in September  1995 by the IMF board  of a first stand-by 
arrangement  with Belarus, the Commission  services visited Belarus to assess the economic 
and financial  situation  and  to  set  terms and  conditions for  the Community  macro-financial 
assistance. 

In  a  Memorandum  of  Understanding  attached  to  the  Community  loan,  the  Belarus 
authorities undertook  significant  commitments  in several  areas  of structural  reform  (price 
liberalization,  privatization, financial  discipline of enterprises, and banking reform),  as well 
as compliance with the performance  criteria foreseen  in the IMF stand-by  arrangement. 

The Community  contribution  was set at ECU  55 million on the basis of external  financial 
needs  estimated  at  about  $600  million over the  period  of the  IMF  stand-by  arrangement. 
The amount  of the first tranche of the Community  loan was set at ECU  30 million.  It was 
disbursed  in December  1995. 

Given  the  lack  of  progress  in  several  areas  of structural  reform  and  the  reversal  of  some 
measures  of  liberalization,  the  second  tranche  has  not  been  disbursed.  Furthermore,  all 
Community assistance to Belarus, except for a limited number of TACIS actions, has been 
suspended  indefinitely. 

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

34 

IV. BULGARIA 

1. 

Introduction 

In  1996,  Bulgaria  underwent  a  deep  economic  crisis.  This  was  the  consequence  of 
inconsistent  macroeconomic  policies  and  poor  progress  in  structural  reform  In  the final 
days of the year the economic crisis had political repercussions,  as the Prime Minister  Mr. 
Videnov resigned. 

Bulgaria  started  its  transition  to  a  market  economy  later  and  under  more  unfavourable 
conditions  than  most  central  European  countries.  In  March  1990,  the  country  had 
declared  a  moratorium  on  the  servicing  of  its  foreign  currency  debt,  effectively  cutting 
itself off  from  international  finance.  Bulgaria  had  conducted  a-particularly  large  share  of 
its foreign  trade with the CMEA, and so was especially badly hit by its break-up. A  further 
external shock came with the disintegration of Yugoslavia and the subsequent  embargo on 
Serbia-Montenegro, which cut Bulgaria's main overland transit route to western markets. 

Economic  reforms  Were  launched  in  February  1991.  Prices  of  most  goods  were 
liberalized,  subsidies  were  sharply  reduced,  a  unified  floating  exchange  rate  was 
introduced,  a two-tier banking system was set up, and the state monopoly on foreign  trade 
was  abolished.  Good  progress  was  made  also  in  establishing  the  legislative  basis  for  a 
market economy: by mid-1992 much of the legal framework  was in place. 

the  momentum  of  structural 

However, 
reform  was  not  maintained.  Practical 
implementation  did not  match the progress made in establishing the legal base of a market 
economy.  Moreover,  there  were  a number  of  reversals:  price  controls  were  reintroduced 
on a wide range of goods. 

Clear  political  support  for  enterprise  restructuring  and  privatization  was  lacking.  State 
enterprises  continued  to  face  "soft  budget  constraints",  and  were  thus  able  to  build  up 
large stocks of bad debts with state-owned  banks. These banks were in turn able to  obtain 
uncollateralized  loans  from  the  central  bank.  The  central  L ^ K 'S  ability  to  refuse  such 
loans  was  constrained,  first  because  it  was  not  clear  that  it  had  the  powers  to  close 
commercial  banks;  and  second  because  it  was  unwilling  to  take  the  initiative  of  forcing 
widespread  enterprise restructuring,  which would  have been the consequence  of imposing 
restrictions on commercial banks'  access to central bank credit. 

Excessively  large budget  deficits,  financed  in part  directly by the central  bank,  contributed 
to  persistent  inflation,  which the central  bank  tried  to  moderate  by regular  intervention  in 
the  foreign  exchange  market  to  stabilize  the  exchange  rate.  This  inconsistency  between 
fiscal,  monetary  and  exchange  rate  policies  caused  exchange  rate  tensions  whenever 
financial  markets perceived  that the central bank did not  have adequate foreign  reserves to 
continue  supporting  the  currency.  While  the  precise  timing  of  these  tensions,  in  Spring 
1994  and  again  from  early  1996,  has  been  influenced  by  Bulgaria's  external  obligations, 
they were an inevitable consequence of weaknesses in domestic policies. 

2.  Macroeconomic  performance 

Following  the  signature  of  a  debt  and  debt-service  reduction  agreement  (DDSR)  with 
foreign  commercial  creditors  in  July  1994,  Bulgaria  enjoyed  a  period  of  relatively  good 
economic performance.  Modest growth in GDP was recorded in  1994 and  1995. By early 
1996  annual  inflation  had  fallen  to  under  30%.  The  reduction  in  inflation  was  greatly 

35 

helped  by  the  remarkable  stability  of  the  exchange  rate  during  1995.  However,  the 
combination  of  a  stable  exchange  rate  and  inflation  which,  although  slowing,  remained 
high  relative  to  Bulgaria's  trade  partners  in  western  Europe,  resulted  in  a  strong  real 
appreciation  of the  lev.  In the  absence  of any substantive  structural  reforms  this  led  to  a 
gradual weakening of the country's balance of payments from  mid-1995. 

Developments  in  1996  clearly  revealed  that  Bulgaria's  economic  recovery  in  1994  and 
1995  had  not  been  based  on  solid  foundations.  GDP  fell  by  over  10%.  December-on-
December  inflation  reached  over 300%, reflecting  a massive depreciation  of the  currency. 
The,exchange  rate  fell  from  approximately  70  leva  per  dollar  at  the  start  of  the  year  to 
almost 500 leva per dollar by the end of 1996. 

As awareness  spread  in the  early  months  of  1996 that  the  ceritral  bank's  foreign  reserves 
were  only  barely  adequate  to  meet  foreign  debt-service  payments,  the  lev  came  under 
increasing  pressure.  For  some  months,  the  central  bank  sought  to  attenuate  the 
depreciation  by  a  combination  of  interest  rate  increases  and  direct  intervention  in  the 
foreign  exchange  market.  This  merely  delayed  matters,  and  when  the  central  bank 
eventually withdrew  from  the market,  its foreign  currency  reserves  substantially  depleted, 
a  massive  depreciation  got  under  way.  This was  temporarily  halted  in  the  autumn  when 
the  central  bank  raised  its  monthly  interest  rate  to  25% (equivalent  to  an  annual  rate  of 
over  1000%>), but the central  bank's scope to use interest  rates  as a means to  support  the 
lev was severely restricted by the effect  of high interest rates on the real economy. 

Because  of the  lack  of  structural  reform,  the  banking  system  was  burdened  with  a  high 
proportion  of  bad  debts  from  enterprises.  Raising  interest  rates  in  these  circumstances 
merely increased  the  share of loans which could  not  be repaid.  This further  weakened  the 
banking  system,  the  operations  of  some  15 banks  were  suspended  during  the  year.  The 
other  main  victim  of  high  nominal  interest  rates  was  the  state  budget.  Several  years  of 
unduly large budget  deficits  resulted  in the state accumulating a large domestic debt. High 
interest rates raised the cost of servicing this debt. 

For  these  reasons,  the  central  bank  lowered  interest  rates  after  a  few  weeks,  while 
maintaining  them  at  a relatively  high level  of  15%  per  month.  This  level  of  interest  rate, 
while  inadequate  to  support  the  lev,  still  added  to  the  burden  of  interest  payments. 
Moreover,  tax  revenues  fell  as  a result  of the  reduction  in economic  activity.  During  the 
second  half of  1996, the government  had to turn  almost  exclusively to the central  bank  to 
finance  its rapidly widening  budget  deficit.  The resultant  increase in the money  supply led 
to an acceleration  both in the rate of currency depreciation  and in inflation. 

These  developments  reduced  the  dollar  value  of  wages  and  pensions  to  extremely  low 
levels. Data on household  income and  expenditure  for  the first nine months of  1996 show 
how  the  fall  in  real  income  affected  living  standards.  The  share  of income  spent  on  food 
increased  throughout  the  period,  accounting  for  over  half  of  household  purchases  in 
September.  While  people  were  spending  relatively  more  on  food,  they  were  eating  less: 
compared  with  the  same  period  of  1995,  in  the  third  quarter  of  1996  per  capita 
consumption  of  meat,  eggs,  fruit  and  vegetables  was  some  15%  lower;  only  milk  and 
potatoes were eaten in quantities little changed compared with  1995. 

Government  attempts to reverse the slide and stabilize the economy during the second  half 
of  1996  were  largely  unsuccessful.  A  stand-by  arrangement  with  the  IMF  ran  off  track 
soon  after  it  had  been  approved.  Attempts to  agree  a revised  economic  programme  were 

36 

thwarted by a difficult  political situation, following  the victory of the opposition  candidate 
in  the  presidential  elections  in  November.  The  Prime  Minister  narrowly  survived  a 
subsequent  no-confidence  motion,  but  his position  had been  sufficiently  weakened  that he 
resigned,  along with  his government,  at  an extraordinary  plenum  of the  Socialist  Party  in 
late December. 

The  country  was  then  effectively  without  a  government  at  a  critical  time.  No  credible 
budget  could  be adopted  for  1997.  The  opposition  initiated  a boycott  of parliament,  and 
called for  immediate elections. There were daily protest marches in the capital  Sofia  and in 
other towns.  The economic and  social  situation continued  to deteriorate.  Strikes and  civil 
unrest  spread,  as  trade  unions  called  for  weekly  pay  increases  and  for  monthly 
negotiations  on  wage  levels.  The  situation  was  resolved  in  February  1997  when  early 
elections were called  and  an interim government  was  appointed.  This had  an  immediately 
beneficial impact on both political and economic stability. 

3. 

Structural  reform 

The  authorities  attempted  to  relaunch  structural  reform  in  mid-1996.  This  was  at  the 
prompting  of  the  Bretton  Woods  institutions,  which  insisted  on  such  measures  as  a 
condition of their renewed  support to Bulgaria.  The authorities sought  assistance from  the 
IMF  and  World  Bank  following  unsuccessful  attempts  in  the  first  months  of  1996  to 
prevent  a rapid  exchange  rate  depreciation,  which  had  eroded  the  central  bank's  foreign 
exchange  reserves and  raised  the prospect  that  Bulgaria  would  default  on  its  restructured 
foreign  debt.  A  degree  of  success  was  achieved  in  liquidating  large  loss-making  state 
enterprises,  and  in isolating  from  the banking  system  loss-making  companies  which  could 
not  be  closed  down  (eg  utilities).  In  addition,  some  15  insolvent  banks  were  closed. 
However,  the  authorities  lacked  sufficient  credibility,  and  were  unable  to  arrest  the 
economic  downturn.  It  was  not  until  there  was  a  change  of  government  in  the  early 
months of  1997 that prospects of economic stabilization and recovery  emerged. 

4. 

Implementation  of macro-financial  assistance 

A  first  macro-financial  loan  of  some  ECU  290  million  to  Bulgaria  was  decided  by  the 
Council  in  1991,12  and  disbursed  in two  instalments  in  1991 and  1992. This loan  is to  be 
repaid in December  1997 and March  1998. 

A further  ECU  110 million  loan was  approved  in  1992,13  but  because  of  repeated  policy 
slippages,  its  disbursement  was  much  delayed.  A first instalment  of  ECU  70  million  was 
disbursed  in  1994 in the  framework  of the  stand-by  arrangement  agreed  with  the  IMF in 
May of that year. Disbursement  of the outstanding ECU 40 million instalment  did not  take 
place until  the  second  half of  1996, following  the approval  by the  IMF  of a new  stand-by 
arrangement. 

Bulgaria  is  currently  implementing  economic  reforms  with  the  support  of  a  new  IMF 
stand-by  arrangement.  The possibility  of additional  Community  macro-financial  lending  is 
presently being examined. 

12  Council Decision 91/311/EEC of 24 June 1991. 
13  Council Decision 92/511/EEC of 19 October 1992. 

37 

V. ESTONIA 

1. 

Introduction 

After  the  sharp  contraction  of  output  which  followed  independence,  economic  recovery 
started  in the second  half of  1993. Revised  data on the evolution  of real GDP suggest  that 
Estonia  experienced  fairly  rapid  improvement  thereafter.  For  1994, the decline  of GDP is 
now estimated  to have been only  1.8%  compared to the earlier figure  of 2.7%. Growth  for 
1995  was  revised  upwards  from  2.9%  to  4.3%, and  for  1996  the  first  estimates  show  a 
4%  real  increase.  For  the  last  quarter  of  1996,  real  growth  of  GDP  is  estimated  to  have 
been 7.3%, a clear acceleration of the trend observed in the second and third quarters. 

2. 

Recent economic  developments 

At  the  same  time,  inflation  has  fallen  sharply.  In  December  1996,  year-on-year  inflation 
was  14.8% while a year  before  the  corresponding  figure  was  28.9%.  The  fall  in  inflation 
was  accompanied  by  a  decline  in  interest  rates.  The  weighted  average  interest  rates  on 
kroon  loans  of  more  than  one year  fell  from  an  average  of  16.06%  per  annum  in  March 
1996,  to  13.88%  in  December  1996.  Moreover,  these  figures  underestimate  the  fall  in 
interest  costs  incurred  by Estonian  customers,  since a growing  share  of loans were  made 
in  foreign  currencies  (DM  and  US$),  for  which  interest  rates  are  lower  than  for  kroon 
loans. However,  real interest  rates became positive, as the decline in nominal interest  rates 
was less rapid than the fall in inflation,. 

The  general  government  deficit  for  1996  reached  1.5%  of  GDP,  higher  than  in  1995. 
However,  controls  on  local  government  borrowings  were  introduced  in  1996  and  some 
taxes were raised. 

Restructuring  of the economy  progressed  further  in  1996.  Privatization  advanced  rapidly, 
and  by the  end  of  1996 practically  all large enterprises  had  been  sold,  with  the  exception 
of those in the transport,  telecommunication  and  energy sectors. The consolidation  of the 
financial sector  continued  through  an  uninterrupted  process  of  mergers.  Estonian  banks 
are now among the largest and strongest banks in the Baltic states. 

Given that inflation  in Estonia remained  higher than in most of its trading partners, the real 
exchange rate of the kroon  appreciated  by 8.8 % in  1996. This was one of the causes of a 
sharp  deterioration  in the trade  deficit,  from  8.1  million kroons  in  1995 to  13,6 million in 
1996  (on  a  customs  basis),  equivalent  to  more  than  24%  of  GDP.  Despite  growing 
surpluses in services and net  income, as well as a positive balance on transfers,  the current 
account  deficit  increased  in  1996 to  5.3  million  kroons, just  less than  10%  of  GDP.  The 
financing  of  this  deficit  was  less  satisfactory  in  1996  than  in  1995:  foreign  direct 
investment  decreased,  and  inflows  of  portfolio  investment  and  foreign  bond  issues  by 
banks went up. Also, Estonian foreign  direct  investment  abroad  increased  sharply in  1996, 
in particular  to the other  Baltic countries and to  Russia.  Nevertheless,  the overall  balance 
of payments remained  in surplus. 

3. 

Implementation  of macro-financial  assistance 

Official  foreign  debt  remained  small  and  stood  at  US$  296  million  on  1 January  1997. 
Gross international  reserves continued  to increase, reaching US$ 640 million at the end  of 
1996. Net international reserves also increased.  In July  1996, the IMF approved  a new 13-
month  stand-by  arrangement  for  Estonia,  of an amount  equivalent  to  SDR  13.95 million. 

38 

Estonia  has  made  no  purchases  under  either  the  previous  or  the  current  stand-by 
arrangement.  In  1996,  as  in  1995,  Estonia  did  not  request  a  drawing  on  the  second 
tranche  of  the  Community's  macro-financial  assistance.  On  the  contrary,  the  Estonian 
authorities asked to repay early the first tranche, of ECU 20 million, which was disbursed 
in March 1993. 

39 

VI. LATVIA 

1. 

Introduction 

Although  Latvia  only gained  independence  in August  1991,  it  had  already  initiated  some 
reforms  under  Soviet  rule.  In  1992,  while  the  country  was  actively  engaged  in 
transformation  to  a  market  economy,  economic  prospects  worsened.  The  dismantling  of 
former  trade  relations,  and  the  increases in prices  of Russian  energy  exports  resulted  in a 
major  trade  shock.  Deficits  in the  external  accounts  were  considered  to  be  unsustainable 
without  international  support.  Latvia  defined  a  stabilization  and  reform  programme 
covering  the  period  mid-1992  to  mid-1993  and  concluded  a  stand-by  arrangement  with 
the  IMF.  The  Community  and  other  G-24  donors  were  also  called  on  to  contribute  to 
filling  the remaining balance-of-payments gap for the programme period, estimated  at US$ 
210  million.  On  the  basis  of  favourable  prospects  of  G-24  support,  the  IMF  board 
approved  a stand-by arrangement  in late  1992. 

The first three  years  of  independence  were  marked  by a decline  in output.  In  1994 GDP 
started  to  grow  again,  but  the  incipient  recovery  was  quickly  brought  to  a  halt  by  a 
banking  crisis  in  1995.  Private  and  public  sector  deposits  were  frozen  and  interest  rates 
rose.  Together  these  led  to  a  decline  in  consumption  and  investment,  as  well  as  a 
reduction  in  production;  GDP  contracted  by  0.8%.  There  was  also  a  budget  crisis:  the 
deficit  was double the original target,  as tax collection  problems were compounded  by the 
banking crisis. In  1996, the economy started to recover, with economic growth  picking up 
and foreign  reserves and banking assets up to pre-crisis levels. 

2. 

Recent economic  developments 

GDP growth  in  1996 reached  2.8%. The increase in activity was largely due to growth in 
transport  and  communications.  However,  the  development  of  other  macroeconomic 
indicators  in  1996  was  not  so  encouraging:  industrial  production  growth  was  relatively 
modest  at  1%; retail  sales fell;  real wages were flat; and bank  lending was weak.  Despite 
the  resumption  of growth,  employment  continued  to  decline,  pushing  the  unemployment 
rate up to 7.2% in December  1996, compared with 6.6% at the end of 1995. 

Public  finances  were  successfully  brought  under  control  in  1996,  with  the  fiscal  deficit 
lower than expected.  In addition, inflation  came down steadily throughout  1996.  Year-end 
inflation  was  down  to  13%  from  23%  in  1995.  As  inflation  slowed,  so  interest  rates 
continued  to come down. 

On the external  side, preliminary figures  for  1996 show that  the trade deficit  continued  to 
rise  as  export  growth  was  outstripped  by  import  growth.  This  led  to  a  very  high  trade 
deficit,  estimated  at  16%  of  GDP.  The  surplus  on  services  partly  offset  this,  but  the 
current  account deficit  rose to 6.8% of GDP. 

The authorities continued  to pursue a stable exchange rate policy, with an informal  peg to 
the  SDR.  The  exchange  rate  of  the  lat  against  the  dollar  at  the  end  of  1996  remained  at 
approximately  the  same  level  as  at  the  end  of  1995.  Since  there  was  two-digit  inflation, 
this  represented  a  real  appreciation  of  the  currency,  but  overall  the  economy  remained 
competitive. 

During  1996,  the  privatization  process  received  a  boost  from  the  new  government: 
responsibility for  the work was centralized  in the Latvian Privatization  Agency and nearly 

40 

all  the  assets  were  transferred  to  it.  As  a  result,  the  privatization  process  became  more 
transparent  and quick, as well as more accessible to foreign investors. 

The banking  sector  appeared  to  have recovered  from  the crisis of  1995: assets were  back 
to pre-crisis levels and enterprise deposits were  rising again. However,  the banking  sector 
continued  to  suffer  from  a low  level  of  activity:  bank  lending  was  limited  by  the  lack  of 
liquid  collateral,  by insufficient  skills in assessing  business  risk  and  by a  scarcity  of long-
term savings available for on-lending. 

3. 

Implementation  of macro-financial  assistance 

In November  1992,  the  Council14  approved  macro-financial  assistance  of  up  to  ECU  80 
million for  Latvia,  corresponding to about  50% of the balance-t>f-payments gap.  The bulk 
of  the  bilateral  support  from  the  G-24  came  from  Japan  and  EFTA  countries.  The  loan 
agreement  and  memorandum  of  understanding  between  the  Community  and  Latvia  was 
signed  in  early  1993,  and  the  Commission  disbursed  the  first  tranche  (50%  of  the  loan 
amount) in March  1993. The first tranche was used mainly to  on-lend  to  state and  private 
enterprises  in  order  to  help  them  finance  imports  in  priority  areas.  The  release  of  the 
second  tranche  was  to  be  made  following  a  positive  evaluation  of  performance  criteria, 
regarding  both  macroeconomic  stabilization  and  progress  of  structural  reform,  as  set  out 
in the memorandum  of understanding. 

The Commission,  after  consulting  Member  States,  exceptionally  agreed  in a  supplemental 
memorandum  of  understanding,  signed  in  1994,  to  allow  the  proceeds  of  the  second 
tranche  of  assistance  to  be  channelled  to  profitable  projects,  through  the  banking  sector. 
However,  in  1994 and  early  1995, the  country's  external  accounts were  in surplus  owing 
to  substantial  private  capital  inflows,  and  the  Latvian  authorities  did  not  request  the 
release of the second tranche. 

In June  1995, after  the financial  and budgetary crises, the Latvian authorities requested  the 
release  of  the  second  tranche  of  the  Community  loan  (ECU  40  million),  in  order  to 
channel the funds  to refund  small depositors who had lost their savings during the banking 
crisis. The Commission  considered that  such a use of the funds  would  be inconsistent first 
with  the general  aim of  EC  macro-financial  assistance,  and  second  with  the  undertakings 
of  the  supplemental  memorandum  of  understanding  relating  to  the  second  tranche.  In 
addition,  the  conditionality  criteria  of the  loan  required  that  the  IMF  programme  show  a 
satisfactory  track  record,  which was not the case: the normal  autumn  review  of the  stand 
by  programme  could  not  be  completed.  The  Commission  therefore  declined 
the 
authorities'  request,  and the second tranche was not released. 

In May  1996, the IMF approved  a  15-month stand-by arrangement  for  an amount  of SDR 
30  million,  and  the  associated  IMF  programme  remains  on  track.  In  late  1995  and  early 
1996 the  Commission  services  asked  the  Latvian  authorities  to  provide  fvrther  details  of 
the use  of the first tranche  of the  loan.  This request  was  prompted  by the  high  degree  of 
government  involvement  in the process of allocating  the first tranche,  and the  granting  of 
government guarantees on the majority  of the loan amount.  The Commission  subsequently 
requested  thai  the  Latvian  authorities  suspend  reuse  of  repayments  on  sub-loans,  make 

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

41 

provisions  for  losses  on  re-lending,  and  improve  assessment  and  monitoring  of  risks 
related to on-lending. 

42 

VII.  LITHUANIA 

1. 

Introduction 

Having recovered  sovereignty  in  1991, Lithuania  faced  the formidable  task  of establishing 
a  market  economy  while  setting  up  the  institutional  machinery  of  an  independent  state. 
Moreover,  the  problems  of  transition  were  compounded  by  the  break-up  of  close  input 
and output  relations with the Soviet  Union and by the increase of prices of energy  imports 
from  Russia  to  world  levels.  As  a  consequence  of  these  shocks,  hyper-inflationary 
conditions  developed  in  1992 and  Lithuania  suffered  the most  severe  output  contraction 
in Central and Eastern Europe.  The economic downturn,  however,  was brought  to  an end 
in  1994 when the introduction  of a currency  board  regime established  the conditions for  a 
return to macroeconomic  stability. 

Since  mid-1992,  Lithuania's  reforms  have  been  supported  by  the  IMF  through  two 
successive  stand-by  arrangements  and  a  three-year  Extended  Fund  Facility  expiring  in 
October  1997.  Within  the  context  of  the  first  stand-by,  the  European  Council15  made 
available complementary  macro-financial  assistance of up to ECU  100 million. 

2. 

Recent  Economic  Developments 

During  1996,  the  Lithuanian  economy  continued  to  grow  in  spite  of  the  banking  crisis 
which developed  at the end of  1995, when two banks, representing  more than 20% of the 
value of total  deposits,  were declared  insolvent.  This  immediately  led  to  capital  outflows, 
which,  together  with  the  freezing  of  deposits  in  the  insolvent  banks,  caused  a  sizeable 
monetary  contraction  and  depressed  domestic  demand.  In  the  second  half  of  the  year, 
however,  confidence  returned  and growth  picked  up again,  led by agriculture and exports; 
industrial  production  remained  substantially  flat.  As  a result,  during  1996,  GDP  grew  by 
3.6%o, marking  a further  acceleration  of the  economic  recovery  which  had  begun  in  1994 
and gained momentum  in  1995. 

Further  significant  progress  towards  price  stabilization  was  achieved  in  1996.  After 
peaking at a hyper-inflationary  level in  1992, December-on-December  inflation  fell  sharply 
to  roughly  56% by the end  of  1995. This trend  continued  during  1996 when  the year-on-
year  rate  decreased  further  to  13%.  The  worsening  trend  in the  unemployment  situation 
was reversed  in  1996 as the rate of unemployment  fell by roughly one percentage  point  to 
6.2%. 

The  evolution  of  the  trade  balance  is  hard  to  assess  because  of  important  changes  in 
statistical  methods,  which  make  comparisons  with  observations  from  before  1995 
impossible.  Nevertheless,  according  to  the  available  figures,  during  1996,  the  deficits  on 
the trade  and  current  account  deteriorated  slightly in terms of US$ but  improved  in terms 
of percentage points of GDP. Export  growth  exceeded  import  growth,  and there were  no 
signs of any significant  loss in international  competitiveness.  After  falling  at the  beginning 
of the year, official  reserves recovered to a level above two months' imports. 

In  1996 the budget  stance was prudent  again and the fiscal  deficit  equalled  2.5% of GDP. 
As  in  previous  years,  however,  a  revenue  shortfall  (of  some  0.7%  of  GDP)  forced  the 

15  Council Decision 92/542/EEC taken on 23 November, 1992. 

43 

authorities  to  implement  emergency  expenditure  cuts  (affecting  mainly  public  investment 
and agricultural  subsidies). The decrease in tax receipts in  1996 was partly due to  specific 
factors,  such  as the  collateral  effects  of  the  banking  crisis,  but  it  also  continued  a trend: 
fiscal  revenues  have  been  declining  continuously  since  independence,  forcing  public 
expenditures down to levels which are hardly compatible with long-term  development. 

During  1996,  the  banking  sector  started  to  recover  from  the  crisis  of  end-1995:  most 
banks  recorded  good  results  and  managed  to  improve  the  quality  of  their  loan  portfolio. 
After  some  initial  indecision,  the  government  began  actively  pursuing  its  three-pronged 
policy  based  upon  a  strengthening  of  the  regulatory  framework,  a  rapid  clean-up  of  the 
troubled  banks' balance  sheets and  eventual  privatization.  Exposure  rules were  tightened. 
International  accounting  standards  and  capital  adequacy  rules  were  introduced.  A  loan 
recovery  unit  for  the cleaning up of non-performing  loans was "set up,  and  a draft  law  for 
the compensation  of deposit-holders in failed  banks was submitted  to Parliament. 

Structural  reforms  in  other  areas  such  as  the  energy  sector,  agriculture,  the  pension 
system  and  enterprise  ownership  also  advanced  during  1996.  The  pace  of  reform, 
however,  remained  somewhat  disappointing,  partly  because  of  the  considerable  political 
uncertainty which followed  the resignation  of Prime Minister  Slezevicius in February  1996 
and preceded  the October  general  elections. Following the electoral  victory of the centre-
right coalition,  implementation  of structural  reforms  accelerated. 

3. 

Implementation  of macro-financial  assistance 

The first tranche  of Community  assistance  (ECU  50 million)  was  disbursed  in July  1993. 
The first ECU 25 million instalment  of the second tranche (ECU 50 million) was disbursed 
in August  1995, on the basis of a Supplemental  Memorandum  of Understanding.  As in the 
case  of  Latvia  and  Estonia,  the  Memorandum  earmarked  the  proceeds  of  the  second 
tranche  for  sound  bankable  projects,  on  condition  that  the  funds  would  be  channelled 
through  banks  complying  with  prudential  regulations  and  would  follow  a  well-defined 
procedure  for  consulting  the  Commission.  However,  because  of  shortcomings  in  the 
implementation  of this consultation  process, the Commission  requested  a freeze  in the use 
of  proceeds  of  Community  assistance  in  September  1995.  During  1996,  significant 
improvements  in  the  consultation  process  were  achieved.  In  April,  the  Lithuanian 
authorities sent an annual report on the status of the macro-financial  operation.  Moreover, 
they properly  consulted  the  Commission  when  requesting  the use  of the  frozen  proceeds. 
In  view  of  this  satisfactory  progress,  the  Commission  was  able  to  unblock  ECU  0.6 
million  for  one  financing  proposal  presented  by  the  Lithuanian  authorities  which  was 
compatible with the provisions of the Supplemental  Memorandum  of Understanding. 

44 

Vin.  MOLDOVA 

1. 

Introduction 

By  the  end  of  1996,  Moldova  had  made  substantial  progress  in  macroeconomic 
stabilization.  The  authorities  embarked  on  a  comprehensive  programme  of  financial 
stabilization  at  the  beginning  of  1993.  A coherent  and  consistent  set  of  policy  measures 
allowed  a marked  reduction  of the  budget  deficit  and  inflation.  Interest  rates  declined  to 
moderate  levels,  and  the  exchange  rate  remained  stable.  However,  only  limited  success 
was  achieved  in  enforcing  hard  budget  constraints  on  enterprises  and  in  developing  a 
private agricultural  sector.  Output  recovery did not materialize. Major  progress was  made 
towards  creating  a market  economy,  despite  a severe  deterioration  of the  terms  of trade, 
the  loss  of  traditional  markets,  and  the  disruption  of  trade  and financial relations  in  the 
aftermath  of the dissolution of the Soviet Union. 

Macro-financial  assistance provided  by the international  community has helped to  enhance 
the  efforts  of  the  Moldovan  authorities.  After  two  stand-by  arrangements  in  1993  and 
1995, the IMF Board  in May  1996 approved  a three-year  credit  under  the  extended  fund 
facility  in  support  of  an  economic  and  reform  programme  covering  the  period  1996-98. 
Those interventions were complemented  by assistance from  other multilateral  and  bilateral 
donors, including two loans from  the European  Union. 

2.  Macroeconomic  performance 

In  1996  GDP  is  estimated  to  have  declined  by  8%,  thus  continuing  the  negative  trend 
which  has  characterized  the  Moldovan  economy  since  1991.  Agricultural  production 
declined  by  13%.  A  precise  estimate  of  the  decline  in  industrial  production  is  not  yet 
available,  but  a  sharp  fall  in  the  second  half  of  the  year  more  than  offset  some  positive 
growth  in the first months of  1996. These indicators, however,  are likely to  underestimate 
the  amount  of  economic  activity  in  the  country,  since  the  growing  amount  of  private 
activity is not fully captured  in the official  statistics. 

Macroeconomic  policy  presented  in  1996  some  contradictory  aspects:  while  monetary 
policy remained  rather  restrictive, Moldova experienced  acute fiscal  problems.  At the end 
of  1996,  the  budget  deficit  amounted  to  7.2%  of  GDP  (10%  of  GDP  if  calculated 
according  to  the  methodology  used  by  the  Moldovan  authorities).  The  deficit  resulted 
from  an  increase  in  expenditure  combined  with  a  substantial  decline  in  revenue  with 
respect  to  the  previous  year.  The  deficit  was  financed  through  a  combination  of  internal 
financing and  foreign  loans.  Increasing  reliance  on  external  financing  contributed  to  a 
steady  increase  of the external  debt,  which  increased  from  $ 16 million  at the  end  of  1992 
to  more  than  $818  million  at  the  end  of  1996.  More  than  one  third  of  the  debt  is  short-
terrn, i.e., with maturities below 5 years. 

After  a  period  of  stability,  inflation  accelerated  somewhat  in  the  last  quarter  of  1996, 
reflecting  the  relaxation  of  economic  policy.  On  average,  consumer  prices  increased  by 
23.5% during  1996. 

The  nominal  exchange  rate  of  the  leu  depreciated  very  slowly  after  its  introduction  in 
November  1993.  As  the  depreciation  remained  well  below  the  inflation  rate,  the  leu 
appreciated  steadily in real terms. This real appreciation was one of the main causes of the 
sharp  deterioration  of the  trade  balance.  The trade  deficit  for  1996  is  estimated  at  about 
$ 180  million.  It  resulted  from  a  sharp  increase  in  imports  of  goods  and  services  and  a 

45 

decline  of  exports.  The  current  account  deficit  for  1996  is  estimated  at  $245  million. 
Trade  data  suggest  that  there  has been  a noticeable  increase  in imports  of capital  goods, 
which  will  add  to  productive  capacity.  However,  the  deterioration  also  stems  from  a 
marked increase in imports of consumer goods. This probably reflects  the inability of most 
domestic firms, which in many cases have not undergone  any substantial  restructuring,  to 
compete with imported goods. 

3. 

Structural  reform 

Significant  progress  has  been  made  with  structural  and  institutional  reforms  in  the  past 
few  years.  However,  the  process  is  far  from  completed.  In  particular,  the  process  of 
privatization  seemed  to  lose much of its momentum  after  the end  of mass privatization  at 
the end  of October  1996. The privatization  by tender  of a selected  number  of  enterprises 
for  cash was delayed  several times. Furthermore, the significant  transfer  of property  rights 
to  private  agents  did  not  prompt  significant  changes  in  the  behaviour  of  enterprises. 
Governance  was still inadequate,  insiders dominated firms, and  the budget  constraint  was 
not hardened  enough. There was little evidence of enterprise  restructuring,  as testified  by, 
among  other  things,  the  low  level  of  redundancies.  There  was  no  attempt  by  the 
authorities to isolate 'bad' firms from  viable ones, or to develop a strategy for  dealing with 
the worst loss-makers. 

Officially  registered  unemployment  remained  very  low,  with  an  unemployment  rate  of 
1.8%)  at  the  end  of  1996. However,  there was widespread  hidden  unemployment  -  in the 
form  of  part-time  work  or  unpaid  leave  -  which,  if  properly  accounted  for,  would  bring 
the  unemployment  rate  at  the  end  of  1996  to  approximately  15%.  The  effects  of  the 
transformation  on  living  standards  is  not  clear.  On  the  one  hand,  income  is  increasingly 
generated  from  private trading or foreign  exchange activities - forms which are unlikely to 
be  captured  accurately  by official  statistics  -  and  less  from  wages,  salaries  and  pensions. 
On  the  other  hand,  macro  indicators  -  such  as  a  significant  fall  in  life  expectancy  -  or 
sample  surveys  suggest  an overall  deterioration,  which  is especially  severe  for  vulnerable 
sections of the population like pensioners or families with dependent  children. 

4. 

Implementation  of macro-financial  assistance 

On  13 June  1994  the  Council  of  the  European  Union  decided  to  grant  the  Republic  of 
Moldova  a loan  of ECU  45  million with  a maximum  duration  often  years  16 to  assist  the 
country  in its  efforts  to  transform  its  economy  into  a market  economy  and  to  strengthen 
the  reserve  position  of  the  central  bank.  The  Community  loan  was  part  of  an  overall 
package  mobilized  by the international  donor  community  for  Moldova  to  complement  the 
resources  provided  by  the  IMF  and  the  World  Bank.  The  first  tranche  of  the  loan, 
amounting to ECU 25 million, was disbursed  in December  1994. The disbursement  of the 
second tranche, of ECU 20 million, took  place in August  1995. 

The  international  donor  community  recognized  that  to  ensure  a  sound  balance  of 
payments  situation  in  the  1995-1996  period,  further  macro-financial  assistance  for 
Moldova was necessary to complement the resources provided  by the  IMF and the World 
Bank.  In November  1995 the Commission formally  adopted  a proposal  for  further  macro-
financial  assistance to Moldova of up to ECU  15 million. 

16  Council Decision 94/346/EC. 

46 

On 25 March  1996, the Council  decided to adopt the Commission  proposal.17  Following 
this decision and the approval by the IMF Board, in May  1996, of a new 3-year economic 
reform  programme,  and  after  positive  verification  by  the  Commission  services  of  the 
fulfilment  of the  conditions  attached  to  this  assistance,  the  disbursement  of  the  ECU  15 
million took place in December  1996. 

17  Council Decision 96/242/EC. 

47 

IX. ROMANIA 

1. 

Introduction 

Despite  positive  growth  in  1996,  and  progress  on  privatization,  the  new  authorities 
elected  in November  1996 inherited  a fragile  economic  situation,  the result  of  insufficient 
progress  towards  structural  adjustment  since  1989.  In  fact,  between  1989  and  1996, 
successive  governments  repeatedly  launched  new  reform  programmes,  only  to  abandon 
them a few  months afterwards  in the face  of mounting  political  resistance.  Public  support 
for  reform  has  fluctuated  accordingly:  it  was  substantial  at  the  beginning  of  the 
transformation,  then substantially  diminished  in the face  of mounting  costs brought  by the 
transition,  only  to  strengthen  again  when  it  became  apparent  that  the  path  of  partial 
reform  followed  between  1989 and  1996 was leading to an impasse. 

Although growth resumed  in  1994, the relatively satisfactory  macroeconomic  performance 
registered  up  to  1996  masked  insufficient  progress  in  structural  reform,  including 
restructuring  of enterprises  and  of the agricultural  sector.  In the run-up  to  the  November 
1996 presidential  and legislative  elections, the authorities  loosened  macroeconomic  policy 
and  reintroduced  numerous  administrative  controls  (in particular  on the  exchange  market 
and on foreign  trade). The inherent contradictions of the economic policies of the  1989-96 
period  were  only  fully  addressed  after  the  elections  of  November  1996,  when  the  new 
government  devised  a  radical  programme  of  macroeconomic  stabilization  and  structural 
reform,  and began to implement  it. 

In  1996, major  policy slippages by the previous government  led to a sharp deterioration in 
Romania's  relations  with  the  IMF,  the  World  Bank  and  private  investors.  The  previous 
IMF  stand-by  arrangement  of  $ 460  million  went  off  track  and  then  had  to  be  cancelled. 
The World  Bank  made the first $80  million payment  under  its $280  million Financial  and 
Enterprise  Structural  Adjustment  Loan  and  then  froze  further  disbursements.  The 
Community also could not disburse the second tranche, of a maximum amount  of ECU 70 
million,  of  the  macro-financial  assistance  loan  decided  in  1994.  After  the  November 
elections, the IFIs took an active role in advising the new government  on its economic and 
social policies. 

2.  Macroeconomic  performance 

Despite  declining  unemployment,  the  macroeconomic  performance  in  1996  was  less 
satisfactory  than  in  the  previous  two  years:  growth  slowed  down  to  4.1%,  inflation 
accelerated  to  56.9%  at  the  end  of  December  and  the  budget  deficit  of  the  general 
government  soared to 3.9%) of GDP. In fact,  economic activity continued  to expand  at the 
cost of increasing macro- and micro-economic  disequilibria. 

t 

In  1996,  industrial  output  rose  by  9.9%.  The  situation  of the  agricultural  sector  was  far 
less satisfactory,  with estimates  indicating a significant  drop in the harvest  (by as much  as 
a quarter in tonnage), largely caused by adverse weather  conditions. Exports also declined 
in the  course  of the year,  and  GDP  growth  slowed  to  4.1%, a  drop  of  three  percentage 
points  over  1995.  Growth  achieved  in  1996  was  sufficient  to  push  down  the  rate  of 
unemployment,  from  8.9%  in  December  1995  to  6.1%  a  year  later.  However,  since 
industry  was  still  shedding  workers,  growth  in  employment  was  recorded  mostly  in  the 
other sectors of the economy (services, construction,  and also agriculture). 

48 

To  a  large  extent,  however,  economic  growth  in  1996  was  based  on  very  unstable 
foundations.  Many  large  state-owned  industrial  companies  and  state  farms  were  not 
subject to a "hard budget constraint" (i.e. they did not face a real risk of bankruptcy even 
when they consistently made losses), because they were able to obtain cheap credits from 
state-owned  commercial banks, which in turn refinanced  themselves easily at the National 
Bank.  In fact,  refinancing  from the National  Bank  more than doubled  during  1996.  This 
process  artificially  stimulated  activity  while  maintaining  widespread  inefficiencies  within 
the economy. 

In the  run-up  to  the  elections,  the  previous  government  embarked  on  a spending  spree 
(credit  to  the  government  almost  doubled  in  nominal  terms  between * August  and 
November).  As  a result,  the  budget  deficit  soared  dramatically.  The general  government 
deficit  rose  from  2.6  to  3.9% of  GDP,  and to  8.3% of  GDP  for  the  quasi-fiscal  deficit, 
which includes  a number of hidden expenditure  items and  quasi-fiscal  subsidies  from the 
National  Bank  of Romania.  The year  1996  saw  a significant  increase  in inflation,  which 
jumped  from  an annual  rate of  27.8% in  1995  to  almost  57%.  Inflation  was  particularly 
high in November (monthly rate of+5.8%) and December (+10.3%). 

External  trade  significantly  worsened  in  1996.  Not  only  did  exports  and  imports  fall,  in 
dollar terms, but the trade deficit  for  1996 is estimated to  have risen to  $2.1  billion from 
$1.6 bn in  1995. Exports continued to suffer from the decline of some of the main export 
markets,  as well  as the poor competitiveness  of domestic  products.  The  current  account 
deficit  reached  $2.3  billion  (approximately  6.6%  of  GDP).  Foreign  direct  investment 
increased  slightly to $555  million according to EBRD estimates,  a relatively  low  level  for 
a country  of Romania's size.  In per capita terms, only  Bulgaria  has attracted  less  foreign 
direct investment among the  10 associated countries of eastern Europe. 

In  1996,  the  gross  foreign  reserves  of the banking  system  grew  significantly,  which was 
largely the result of Romania's return to the international  capital  markets, where it raised 
$1.4  billion through  syndicated  loans  and bond issues.  Its  issues  on the  Japanese market 
(so-called "Samurai bonds") met with considerable interest. While this was a positive vote 
of confidence  by international investors, it helped push Romania's medium- and long-term 
external debt to a higher level ($6.9 billion, almost a one-third increase over  1995). Given 
that investment  remains weak,  the growth of the foreign debt could become  a problem in 
the  future.  The  debt  service  obligations  (including  short-term  debt  service)  increased  to 
20.2%) of exports of goods and services, from  14.5% in 1995. 

3. 

Structural  reform 

Progress  on  structural  reform  remained  ambivalent.  On  the  one  hand,  little  action  was 
taken  in  1996  to  restructure  the  large  loss-making  state-owned  companies  (e.g.,  the 
electricity company RENEL lost 600 billion lei in the first ten months of  1996,  equivalent 
to  $183  million  at  the  October  exchange  rate).  Nor  was  anything  done  to  rectify 
shortcomings  in the agricultural  sector:  a normal  market for buying  and  selling  land was 
not functioning.  Inter-enterprises arrears continued to expand: for the energy sector alone, 
it  is  estimated  that,  at  the  end  of  1996,  the  stock  of  arrears  to  suppliers  and  the  state 
amounted to 3.3% of GDP. 

In  March  1996,  the  authorities  introduced  significant  curbs  on  the  foreign  exchange 
markets,  restricting the number of official  dealers to four Romanian banks, three of them 
state-owned.  This  led  to  an  overvaluation  of  the  national  currency,  which  encouraged 

49 

cheap  energy  imports  for  the  large  and  inefficient,  energy-intensive,  state-owned 
enterprises.  The  overvaluation  of the  leu  also  discouraged  exports.  The gap  between  the 
official  rate  and  the  rate  of  the  private  exchange  bureaux  rose  to  approximately  45% in 
mid-November,  a clear sign of widespread  distortions. 

The  programme  of  "financial  isolation"  of  a  number  of  large  state-owned  "régies 
autonomes" failed  to  improve their financial  situation  and was  subsequently  abandoned  in 
early  1997.  Reform  of  the  agricultural  sector  did  not  progress  much  either.  On  the 
contrary,  support  from  explicit  and  implicit  subsidies  and  transfers  soared  in  1996  from 
4.3%)  to  5%  of  GDP.  Subsidized  credits  from  the  National  Bank  of  Romania  to  the 
agricultural  sector  were  one  of  the  main  reasons  why  monetary  policy  was  derailed. 
Moreover,  the  larger  part  of  the  financial  support  was  captured  by  intermediaries  and 
producers of agricultural  inputs, at the expense of farmers themselves. 

Nevertheless,  a few  positive developments  can be identified:  mass privatization  continued 
unabated  (1300  operations  had  been  carried  out  as  of  10  December  1996,  bringing  the 
cumulative figure  since  1993 to  2766  companies),  although  it  concerned  essentially  small 
companies; some export  bans were abolished while many export  quotas were expanded; a 
new  secondary  stock  market  (the  RASDAQ)  opened  in  October  with  1342  companies 
already listed. 

4. 

Implementation  of macro-financial  assistance 

In its decision  of  20 June  1994,  the Council  had  decided  to  grant  to  Romania  a medium-
term  balance-of-payments  loan  for  a  maximum  amount  of  ECU  125  million,  to  be 
disbursed  in  two  tranches18.  The  economic  policy  conditions  for  the  release  of  this 
assistance  were  agreed  by  the  Commission  and  the  Romanian  authorities 
in  a 
Memorandum  of  Understanding  signed  in  December  1994.  A  first  tranche  of  ECU  55 
million was disbursed  in November  1995. 

However,  the  release  of  the  second  tranche  was  not  possible  in  1996,  because  of 
persistent  mal-functioning  of  the  foreign  exchange  market  and  lack  of  progress  on 
structural  reforms.  For  the  same  reasons,  the  stand-by  arrangement  (SBA)  with  the 
International  Monetary  Fund  (IMF)  went  off  track  and  then  had  to  be  cancelled.  The 
World Bank  also froze  disbursement  of the second  tranche of the Financial and  Enterprise 
Structural  Adjustment  Loan (FESAL). 

Following  the elections  of November  1996, the new Romanian  government  requested  the 
reactivation  of the Community's  and the G-24's  macro-financial  assistance,  in the  context 
of  an  ambitious  economic  programme  of  macroeconomic  stabilization  and  structural 
reforms  supported  by the International Financial Institutions. 

18  Council Decision 94/369/EC. 

50 

X  UKRAINE 

1. 

Introduction 

The  Ukrainian  authorities  achieved  considerable  financial  stabilization  in  1996,  but  the 
economy  continued  to  contract,  though  at  a  slower  pace.  The  implementation  of  a 
relatively tight monetary policy set by the Ukrainian central bank was a determining  factor 
in drastically  reducing  inflation,  stabilizing  the  exchange  rate  and  ensuring  the  successful 
introduction of a new national currency. 

Stabilization,  however,  became increasingly  fragile,  because  of a slow-down  in  structural 
reform,  especially with respect  to  privatization,  the tax regime and  the overhauling  of the 
public  administration.  The  1997  budget  and  an  accompanying  programme  of 
comprehensive  tax  and  deregulation  measures were  stalled  in Parliament  from  November 
1996. 

2.  Macroeconomic  performance 

Ukraine's  transition  to  a market  economy,  which  essentially  started  in late  1994 after  the 
election  of President  Kuchma,  continued  in  1996,  though  against  an  uncertain  economic 
background. 

The  implementation  of  a tight  monetary  policy  by  the  Ukrainian  central  bank  paved  the 
way  for  a  dramatic  reduction  in  inflation,  the  stabilization  of  the  exchange  rate  and  the 
smooth  introduction  of  a  new  currency,  the  hryvnia,  in  September  1996.  Inflation  was 
reduced  to  40% at  end-1996 (December-on-December),  down  from  182%  a year  earlier. 
The  fiscal  balance  was  brought  down  to  some  -3.2%  of  GDP  (1995:  -5%),  though  in 
addition  the  accumulation  of  arrears  in  public  wages,  salaries  and  pensions  amounted  to 
some 3.5% of GDP. 

Although  production  continued  to decline during  1996, the 
t  of decline was lower  than 
in previous  years.  Real  GDP  contracted  by another  10% in  1996,  but  this  does  not  take 
into  account  the  increasing  activity  in the  unofficial  sector,  which  is  estimated  to  equate 
more than 50% of official  GDP. Agricultural production  saw a further  sharp reduction (by 
some  10%))  in  1996,  which  can  be  only  partly  attributed  to  poor  weather  conditions. 
Agriculture's  share  in  GDP  is  now  only  13% in  a  country  which  was  once  the  "bread 
basket  of the  Soviet  Union".  Industrial  production  continued  to  decline in  1996  (by  some 
5%), and machine-building especially suffered  a sharp reduction. 

The  trade  statistics  for  Ukraine  are  very  unreliable,  but  it  seems  that  external  trade 
continued  to  grow  rapidly  in  1996.  Trade  with  other  former  Soviet  Union  countries, 
Ukraine's  major  trade  partners,  began  to  recover.  Exports  of goods  are reported  to  have 
grown  by  almost  14%  in  1996  to  $  15.5  billion,  a  notable  achievement  against  a 
background  of continuing recession. 

Because  of  significant  increases  in Russian  gas  prices,  imports  grew  by  24% in  1996  to 
$  19.8 billion.  Because the higher  energy  import  prices  entailed  higher transit  fees  for  the 
transport  of  gas  through  the  Ukrainian  pipeline  system  to  Central  Europe,  overall  the 
current  account  deficit  was  not  affected  too  seriously:  it  was  $  1.3  billion  in  1996, 
equivalent to 3.9% of GDP. 

51 

remained  at  artificially 

that 
Unemployment 
unemployment  was  about  1-1.5% of the total  labour  force  in  1996,  but  these  figures  do 
not take account of considerable hidden unemployment  in Ukraine. 

levels.  Official  data 

indicate 

low 

3. 

Structural  reform 

The  main  reason  for  the  continuing  economic  decline  in  Ukraine  lies  in  the  lack  of 
substantial  industrial  and  enterprise  restructuring.  The  need  to  restructure  Ukraine's 
economy,  which  under  Soviet  control  became  disproportionately  dependent  on  military 
production,  was  clear  from  the  first  days  of  independence.  The  government's  efforts  to 
launch serious restructuring  programmes in both industry and agriculture  have often  faced 
the opposition of the sizeable conservative forces  in Parliament. 

Against  this adverse  backdrop,  some progress  in structural  reform  was achieved  in  1996. 
In the area of land reform,  the issuing and registration  of land titles proceeded  well. In the 
banking sector, the assets of the thirty largest banks were assessed  and the management  of 
two  troubled  banks  was  closely  monitored  by  the  central  bank.  Privatization,  however, 
slowed  down  markedly.  While  the  privatization  of  small-scale  enterprises  was  nearly 
complete,  only 3,500  out  of the 8,000 targeted  large state enterprises  had been  privatized 
by September  1996. 

The  authorities  have  identified  some  400  large  enterprises  for  privatization  through 
international  tender.  The list of enterprises  includes energy companies and other firms that 
performed  well  during  Soviet  times.  Lack  of  progress  in  privatization  and  the  uncertain 
credibility  of  the  reform  effort  have  limited  the  amount  of  foreign  direct  investment  that 
Ukraine has been  able to  attract.  Per capita foreign  direct  investment  in Ukraine  remained 
one of the lowest  among all transition countries. 

In an attempt to combat negative trends in the economy and to move reforms  forward,  the 
government  submitted  to  the  Ukrainian  parliament  in November  1996,  together  with  the 
19S-,  oudget,  a  new  prolamine  of reforms.  The  programme,  which  included  significant 
cuts  in  budget  spending,  a  comprehensive  tax  reform  and  a  further  liberalization  of  the 
economy,  was  welcomed  as  the  second  stage  of  major  liberal  economic  reforms  in 
Ukraine,  long  awaited  after  the  first  serious  reforms  were  launched  at  the  end  of  1994. 
However, it met strong opposition from  the parliament. 

4. 

Implementation  of macro-financial  assistance 

In December  1994, the Council decided  to provide a first macro-financial  loan of ECU 85 
million to  support  Ukraine's  adjustment  and reform  process.19 This long-term  loan was to 
be  disbursed  in  a  single  tranche  conditional  upon  an  IMF  stand-by  arrangement,  a  rapid 
implementation  of the EU/G-7 Nuclear  Safety  Action Plan for  Ukraine  and  progress  with 
structural  reform.  After  significant  delays on the  part  of  Ukraine,  it  was  finally  disbursed 
in December  1995. 

In view  of  Ukraine's  urgent  financial  needs and  against  the background  of further  efforts 
being made  by the  Ukrainian  authorities to  pursue  economic  reform,  the  Council  decided 
in  October  1995  to  provide  Ukraine  with  a  second  macro-financial  loan  of  ECU  200 

19  Council Decision 94/940/EC. 

52 

million  that  would  complement  financial  assistance  from  the  international financial 
institutions  and bilateral  donors.20  The first tranche of ECU  100 million of this loan was 
released in the second half of 1996. 

20  Council Decision 95/442/EC. 

ISSN 0254-1475 

COM(98)  3 final 

DOCUMENTS 

EN 

09  01  11 

Catalogue  number  :  CB-CO-98-003-EN-C 

ISBN  92-78-30026-8 

Office  for  Official  Publications of the European  Communities 

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