Report from the Commission to the European Parliament and to the Council on the implementation of macro-financial assistance to third countries in 1999
Date: 2000-10-27
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, third country

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 27.10.2000
COM(2000) 682 final

REPORT FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND TO THE COUNCIL

ON THE IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE
TO THIRD COUNTRIES IN 1999

List of abbreviations

Currency Board Arrangement

Consumer Price Index

German Mark

European Community

Extended Fund Facility

European Investment Bank

Enhanced Structural Adjustment Facility

European Union

Euro

Foreign Direct Investments

Financial and Enterprise Structural Adjustment Loan

Former Yugoslav Republic of Macedonia

General Agreement on Tariffs and Trade

Gross Domestic Product

International Financial Institutions

International Monetary Fund

Structural Adjustment Facility

Stand-By Arrangement

Dollar of the United States of America

Value Added Tax

World Trade Organisation

CBA

CPI

DM

EC

EFF

EIB

ESAF

EU

EUR

FDI

FESAL

FYROM

GATT

GDP

IFIs

IMF

SAF

SBA

USD

VAT

WTO

2

I.

INTRODUCTION .......................................................................................................6

II.

OVERVIEW ................................................................................................................6

1. Background..................................................................................................................6

2. Macro-financial assistance in 1999 ...............................................................................7

3. Trends and tendencies in macro-financial assistance.....................................................9

4. Burden-sharing...........................................................................................................14

III. ALBANIA .................................................................................................................15

1. Executive summary....................................................................................................15

2. Macroeconomic Performance .....................................................................................15

3. Structural reforms.......................................................................................................16

4. Implementation of the exceptional financial assistance ...............................................17

IV. ARMENIA.................................................................................................................18

1. Executive summary....................................................................................................18

2. Macroeconomic performance .....................................................................................18

3. Structural reforms.......................................................................................................19

4. Implementation of the exceptional financial assistance ...............................................20

V.

BOSNIA AND HERZEGOVINA ..............................................................................21

1. Executive summary....................................................................................................21

2. Macroeconomic performance .....................................................................................22

3. Structural reforms.......................................................................................................22

4. Implementation of the exceptional financial assistance ...............................................24

3

VI.

BULGARIA...............................................................................................................25

1. Executive summary....................................................................................................25

2. Macroeconomic performance .....................................................................................26

3. Structural reforms.......................................................................................................27

4. Implementation of Macro-Financial assistance ...........................................................28

VII. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA ..................................29

1. Executive summary....................................................................................................29

2. Macroeconomic performance .....................................................................................29

3. Structural reform........................................................................................................30

4. Implementation of Macro-Financial Assistance ..........................................................31

VIII. GEORGIA .................................................................................................................32

1. Executive summary....................................................................................................32

2. Macroeconomic performance .....................................................................................33

3. Structural reforms.......................................................................................................33

4. Implementation of exceptional financial assistance.....................................................34

IX.

ROMANIA ................................................................................................................35

1. Executive summary....................................................................................................35

2. Macroeconomic performance .....................................................................................36

3. Structural reforms.......................................................................................................37

4. Implementation of Macro-Financial Assistance ..........................................................37

X.

UKRAINE .................................................................................................................39

1. Executive summary....................................................................................................39

4

2. Macroeconomic performance .....................................................................................40

3. Structural reforms.......................................................................................................41

4. Implementation of Macro-Financial Assistance ..........................................................42

5

I.

INTRODUCTION

The present report assesses the economic situation, the progress of reforms and the
prospects of the countries recipient of macro-financial assistance in 1999, with
particular reference to the implementation of the conditions attached to it.

Chapter II provides an overview of the EC macroeconomic assistance to third countries,
with an historical background, a summary of the operations in 1999, and an analysis of
the burden-sharing among the international donors community.

The following chapters discuss relevant aspects of the transition process in the countries
for which either new macro-financial assistance operations have been decided by the
Council or disbursements of previously decided operations have been made in 1999.

The present report is submitted in accordance with the Council Decisions regarding
Community macro-financial assistance to third countries and follows on from the
reports presented in previous years1.

The complete list of macro-financial assistance operations decided by the Council with
the corresponding disbursements up to the end of 1999 appears in Annex 1. Annex 2
summarises the macro-financial assistance provided by bilateral and multilateral donors
in favour of the countries recipient of EC macro-financial assistance. Finally, selected
macroeconomic indicators are summarized in Annex 3.

II.

1.

OVERVIEW

Background

Initially conceived for intra-Community balance-of-payment 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.

Early in the 1990s,
the European Community decided to extend macro-financial
assistance to the Central and East European Countries (CEECs) with a view to support
their process of transition to a market economy. It was also decided that, in the context
of the assistance co-ordination process agreed among the 24 industrial countries (G-24),
the Commission should enlist other donors to contribute in a similar way to support the
the CEECs were implementing in agreement with the
economic programmes that
International Monetary Fund (IMF) and the World Bank.

1

See the following Communications from the Commission to the Council and the European
Parliament with the title 'Report on the implementation of macro-financial assistance to third
countries':
COM(92)400 of 16 September 1992
COM(94)229 of 7 June 1994
COM(95)572 of 27 November 1995
COM(96)695 of 8 January 1997
COM(98)3 of 13 January 1998
COM(1999)580 of 15 November 1999.

6

A number of balance-of-payment support operations by the EC and the G-24 took place
between 1990 and 1994 covering most CEECs. Since then, EC macro-financial
assistance in the region has been mainly concentrated in the Balkan countries, and more
particularly in the countries formally part of Yugoslavia. Outside the region of Central
and Eastern Europe, several other operations in favour of some Newly Independent
States and few Mediterranean countries have been decided by the Council since the
beginning of the 1990s. They also support the political and economic reform efforts of
the beneficiary countries and are to be implemented in connection with support
programmes from the IMF and the World Bank. Community operations have continued
to incorporate the set of principles applying to this type of assistance. These principles
underline the exceptional character of this assistance, its complementarity to financing
from the IFIs and its macroeconomic conditionality. 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. The Commission implements the assistance in consultation with the
Economic and Financial Committee.

2.

a)

Macro-financial assistance in 1999

New decisions

The enhanced macro-financial assistance to Balkan countries already evidenced in
1998, has been confirmed during the year 1999. Five operations for a maximum amount
of EUR 460 million have been decided by the Council in favour of Albania, Bosnia
and Herzegovina, Bulgaria, the former Yugolsav Republic of Macedonia (FYROM) and
Romania.

In April 1999, a third macro-financial assistance operation in favour of Albania has
been decided, consisting of a long-term loan facility of a maximum principal amount of
up to EUR 20 million with a maximum maturity of 15 years and a grace period of
10 years. The assistance is made available with a view to ensuring a sustainable balance
of payments situation and consolidating the country's reserve position. Contrary to
previous operations,
this assistance would take the form of a loan. Albania is
undertaking fundamental actions to promote economic reform and to build modern
institutions, supported by the IMF and the World Bank. The macro-financial assistance
adopted is consistent and in line with the macroeconomic and reform programmes
agreed by the Albanian authorities with the IMF and the World Bank.

Bosnia and Herzegovina has achieved some progress in the implementation of
structural reforms and in improving the economic policy framework. Macroeconomic
stability has been achieved, and for the first
the Council has decided an
exceptional macro-financial assistance operation, totalling EUR 60 million in favour of
Bosnia and Herzegovina. The loan component of the assistance shall amount to a
maximum of EUR 20 million, while the grant component shall amount to a maximum
of EUR 40 million. The implementation of the assistance is conditional upon the full
clearance of its outstanding due obligations to the Community and the EIB. Following
the Community already disbursed a first tranche of EUR 25 million in December 1999.

time,

7

The fourth macro-financial assistance operation in favour of Bulgaria has been decided
by the Council in November 1999. It consists of a long-term loan facility of a maximum
of EUR 100 million (maximum maturity of 10 years) with a view to ensuring a
sustainable balance-of-payment situation. The loan is to be made available to Bulgaria
in two instalments. The first instalment has been released on the basis of the satisfactory
track record of Bulgaria's macroeconomic programme, as agreed with the IMF. The
second instalment is linked with the continuation of Bulgaria's adjustment and reform
programme.

FYROM had undertaken fundamental political and economic reforms. An economic
programme had been adopted by its authorities with strong support from the IMF and
the World Bank. In order to support the balance of payments and help ease the country's
external financial constraints and social consequences of the economic disruptions
caused by the conflict in Kosovo, the Council has decided in November 1999 to provide
the country with macro-financial assistance in the form of a loan of up to
EUR 50 million (with a grace period of 10 years and a maximum maturity of 15 years),
and a grant amounting to a maximum of EUR 30 million for the 1999 to 2000 period.

In 1999, Romania was still facing economic problems but has nevertheless undertaken
fundamental economic reforms and made substantial efforts to establish a well-
functioning market economy with a view to increasing employment and living
standards. In November 1999, the Community decided to provide Romania with a
fourth macro-financial assistance, consisting on a long term loan facility of a maximum
amount of EUR 200 million (maximum maturity of 10 years), with a view to ensuring a
sustainable balance of payments situation. The loan is to be made available to Romania
in two tranches.

b)

Disbursements

Disbursements of macro-financial assistance to third countries have amounted to a total
of EUR 136 million in 1999. These disbursements consisted of EUR 25 million in
favour of Bosnia
and Herzegovina, EUR 40 million in favour of Bulgaria,
EUR 4 million for Armenia, EUR 9 million in favour of Georgia and EUR 58 million
for Ukraine. The latter three operations were part of previously decided operations.
Disbursements made to Bosnia and Herzegovina and Bulgaria related to newly decided
operations during 1999.

Out of the total EUR 136 million disbursed, EUR 28 million have taken the form of
straight grants financed from the general budget
(articles B7-531 and B7-532).
These have been in favour of Bosnia and Herzegovina (EUR 15 million), Georgia
(EUR 9 million) and Armenia (EUR 4 million). The bulk of the assistance has, as usual,
taken the form of long-term loans (Bosnia and Herzegovina, EUR 10 million; Bulgaria,
EUR 40 million; Ukraine, EUR 58 million).

c)

Repayments and undisbursed operations

During 1999, the only macro-financial assistance loan falling due has been honoured by
Romania related to the second repayment of assistance decided in January 1992. Estonia
and Armenia have repaid in advance EUR 5 million each corresponding to the loans of
1993 and 1998 respectively.

8

Some operations decided in the first half of the 1990s have not been fully disbursed as
initially foreseen. This has been the result either of improved external financial
conditions, mainly in terms of balance of payments and external debt position as was
the case for the Baltic countries (1992), Hungary (1990) and Slovakia (1994) or of
worsening of the political climate and/or the slowing-down of the reform process as in
the cases of Belarus (1995) and Algeria (1994). These operations are not programmed
anymore. The last column of Annex 1 shows the undisbursed amounts. The operations
for Albania, Bosnia and Herzegovina, Bulgaria, FYROM, Romania, Armenia and
Georgia and Ukraine III are likely to be implemented as planned.

d)

Other

By the end of 1999, three Commission proposals were waiting for a decision by the
Council. The first one concerned Tadjikistan - for which the Commission had proposed
in July 1999 a possible aid of up to EUR 110 million in the framework of the operation
in favour of Armenia and Georgia.

The second proposal concerns the third macro-financial assistance in favour of
Moldova, consisting of a loan amounting to a maximum of EUR 15 million.

Finally,
assistance in favour of Kosovo of up to EUR 35 million.

the Commission proposed in November an exceptional

financial grant

3.

Trends and tendencies in macro-financial assistance

The Community’s macro-financial assistance was originally intended to support
macroeconomic 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. As a result of the conflicts in the
Western Balkans and in particular the Kosovo conflict of 1999, a tendency for enhanced
macro-financial assistance to the countries of the Balkans in general is been confirmed
as demonstrated by last years' Council decisions.

It also became clear that, while macro-financial assistance geared to the original
objective of supporting macroeconomic 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. This approach has been confirmed in the context of
assistance to some NIS and to the Western Balkan 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.

9

Tables 1 and 2, and its accompanying Graphs 1a and 2a show well the exceptional
character of the EC macro-financial assistance. The highest volumes of macro-financial
assistance operations were decided and disbursed in the immediate years after the
changes in the political and economic systems of the countries of Central and Eastern
Europe. Since then, the fluctuations registered in macro-financial assistance to third
countries reflect the application of the principle of decisions taken on a case-by-case
basis after an assessment of the macro-economic situation and external financing needs
of the potential beneficiary countries.

Graph 1a for operations decided and Graph 2a for actual amounts disbursed show the
important concentration of the assistance in the countries candidate to EU accession,
thus reflecting the guiding principle of assisting the neighbouring countries with whom
political and economic relations with the EU are particularly close. Around two thirds
of macro-financial assistance has been geared over the last decade to EU accession
countries. Some New Independent States and some Mediterranean countries share an
equal ratio of around 16% of the total assistance since 1990, while the Western Balkan
countries account for 6% of operations decided, the half of it in 1999.

10

TABLE 1 - MACRO-FINANCIAL ASSISTANCE, 1990-1999

MAXIMUM AMOUNTS AUTHORISED, MILLIONS EURO

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Totals

By region

EU Accession Countries

870

1.220

410

Western Balkans

NIS

Mediterranean

70

588

250

40

255

15

265

150

255

35

130

200

300

3.305

160

305

815

788

Total amounts authorised

870

1.808

480

0

620

255

15

555

150

460

5.213

out of which, straight grants

28

70

35

95

70

298

TABLE 2 - MACRO-FINANCIAL OPERATIONS, 1990-1999

DISBURSEMENTS, MILLIONS EURO

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Totals

By region

EU Accession Countries

350

695

705

270

70

Western Balkans

NIS

Mediterranean

35

35

438

25

150

80

15

135

100

40

20

70

25

250

15

115

100

156

40

25

71

2.570

170

602

688

Total amounts disbursed

350

695

1.178

305

245

330

175

195

421

136

4.030

out of which, straight grants

63

35

15

20

18

28

179

11

Graph 1a. Maximum amounts authorised by year,
millions euro

1.808

870

620

480

555

460

255

150

0

15

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Graph 2a. Amounts disbursed by year,
millions euro

1.178

695

350

305

245

330

421

175

195

136

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

12

Graph 1b. MFA 1990-1999, authorisations
distribution by region

Mediterranean
15%

NIS
16%

Western
Balkans
6%

EU Accession
Countries
63%

Graph 2b. MFA 1990-1999, disbursements,
distribution by region

Mediterranean
17%

NIS
15%

Western Balkans
4%

EU Accession
Countries
64%

13

4.

Burden-sharing

In the context of the G-24 assistance coordination process, the European Commission in
liaison with the World Bank organises donor's conferences for support to CEECs where
the needs of resources are assessed and the contributions from the IFIs and bilateral
donors -including the EC- are agreed in principle. For other potential recipient
countries, a similar approach is followed through Consultative Group meetings
convened at the initiative of the World Bank.

The resources provided by different contributors to support the balance-of-payment
needs of the countries recipient of EC macro-financial assistance are summarised in
Annex 2. Details by recipient country for the year 1999 are provided in Annex 2.1.

Since the inception of macro-financial assistance, the absolute amounts committed by
the EC have fluctuated substantially, in parallel with the balance-of-payment support
provided by the international community (see Annex 2 and similar tables in previous
macro-financial assistance reports).

Initially, an important feature of Community assistance was that very large sums of
funds were made available to support the programmes of the IFIs. 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.

However, as the IFIs were progressively able to mobilize more resources through new
instruments, their share in the financing packages has risen substantially, in particular
when referring only to mobilisation of new funds.

At the same time, contributions by external creditors, both public and private, were
mobilized in the form of debt-relief and debt-reduction operations which were
particularly important in 1994, 1995 and 1999. The countries concerned by these debt-
relief and similar operations amongst those receiving EC macro-financial assistance
have been: Algeria in 1991 and 1994; Bulgaria in 1991, 1994 and 1997; Moldova in
1996; Ukraine in 1994, 1995 and 1999, and fYROM, Bosnia & Herzegovina and
Albania in 1999.

14

III.

ALBANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Prices mostly market-determined, with the exception of public
transport, rail fares, postal tariffs, electricity and the rural water
supply.

2.

Trade liberalisation

No quantitative restrictions on imports and last remaining export
bans removed in September 1999. Four different levels of tariff
rates (0, 5, 10 and 20%). Accession to WTO close to
completion.

3.

Exchange regime

Since July 1992 free floating exchange rate. Exchange system
largely free of restrictions on current account
transactions,
including profit repatriation. Controls remain on outflows of
capital transactions by residents.

4.

Foreign direct investment

Liberal legislation. Sale of land to foreigners permitted. Land
registration completed in most accessible areas.

5. Monetary policy

Bank-by-bank credit ceilings removed in November 1999.
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).

6.

Public finances

VAT introduced in July 1996. Budgetary revenue estimated at
20.4% of GDP in 1999; expenditure estimated at 31.4% of GDP
(including Kosovo-related expenditures and interests).

7.

Privatisation and enterprise restructuring

Privatisation of arable land largely completed. Privatisation of
some 470 SMEs almost finished (complete privatisation is a
prior action for January 2000 IMF programme review). No large
state-owned enterprises active in strategic sectors privatised so
far. Stock exchange set up in March 1996.

8.

Financial sector reform

Two-tier banking system dominated by the two remaining large
state-owned banks. Adoption of new law on secured
transactions and of new Companies and Bankruptcy laws in
1999. Liquidation of pyramid schemes almost finished.

Under the IMF 3-year programme adopted in
May 1998, and despite the Kosovo crisis, the
Albanian authorities managed to maintain
macroeconomic stabilisation: GDP growth for
1999 should have reached 8%, in line with the
1998 figure, the fiscal deficit was kept under
the Lek has
control,
remained strong against
the dollar, annual
inflation was less than 1% and the current
account deficit widened much less than expected
(from 6% to 8.5% of GDP).

the exchange rate of

On the structural reform side, progress was
registered, generally at a slower pace than
expected, partly linked to the Kosovo crisis. In
the area of financial sector reform, privatisation
of the two remaining state-owned banks is under
way, the legislative framework and the banking
supervision have been significantly improved
and the liquidation of the pyramid schemes is
close to its end. The privatisation of SMEs is
almost
less
results
satisfactory for
large enterprises in strategic
sectors. The adoption by Parliament in 1999 of
both the revised Civil Service Law and the new
Customs Code has constituted very important
steps in the reform of the public administration
and the customs administration,
respectively.
Finally, significant progress was also registered
in the strengthening of tax collection.

finished, but

the

are

The Council decided in April 1999 to make
available a long term loan facility of a maximum
principal amount fo up to EUR 20 million.

2.

Macroeconomic performance

of

and

1993

1996, Albania made
Between
in the stabilisation and
important progress
in
its
liberalisation
implementation of structural reforms, supported
by substantial international assistance. After a
period of unrest in 1997, following the collapse
of the pyramid schemes, the new government
managed to restore macro-economic stability.

economy

and

15

Following a six-monthly emergency programme, the Albanian authorities implemented
a comprehensive medium-term macroeconomic and structural adjustment programme
supported by the IMF under an ESAF2. As a result, GDP growth rebounded to 8% in
1998 (following a 7% decline in 1997), inflation slowed to single digit
level, the
domestically financed budget deficit was largely reduced, and the current account
deficit was halved to 6% of GDP.

the authorities have shown continued commitment

to
Despite the Kosovo crisis,
macroeconomic stabilisation. According to preliminary estimates, GDP growth should
reach the targeted 8% in 1999 and can mainly be attributed to strong growth in the
construction, transport and services sectors. The Kosovo crisis partly contributed to the
increase in the last two sectors. Unemployment is estimated at about 18%. Price and
monetary stability has been remarkable in 1999: the Lek remained stable against the
USD and annual inflation was at 0.5% at the end of the year, a figure to be compared to
a 7% target. This remarkable result must, however, be partly attributed to the Kosovo
crisis, as a part of the huge quantity of humanitarian aid was sold on local markets and
depressed food prices, the core of the CPI in Albania. While the Kosovo crisis has had a
rather strong impact on the fiscal situation3, the latter is nevertheless less critical than
anticipated. The 1999 overall budget deficit, which includes Kosovo-related direct
expenditures now estimated at about 2% of GDP, should reach some 11% of GDP (to
be compared with a May 1999 revised target of 13.8% and a 10.4% outturn in 1998),
while the domestically financed budget deficit should be close to 5%, slightly lower
than the 5.5% target included in the IMF programme. Still, it is to be noted that, even if
the deficit target was reached, the revenue and expenditure targets were not. The
balance of payments situation is stronger than expected. The current account deficit,
which was expected to sharply increase as a consequence of the Kosovo crisis, was
reached
finally limited to 8.5% of GDP (6% in 1998). External
USD 475 million, equivalent to over 4 months of imports.

reserves

3.

Structural reforms

In the area of financial sector reform, progress in privatisation of the two remaining
state-owned banks was mitigated. Indeed, if privatisation of the National Commercial
Bank is expected before end-June 2000, the law aiming at privatising the Savings Bank
has still to be adopted by Parliament. The legislative framework has been improved
with the adoption by Parliament of the new Law on Secured Transactions,
the
submission to Parliament of a new draft law on money laundering and improvements in
the enforcement of the recently adopted Companies and Bankruptcy laws. Significant
progress has also been made in the area of banking supervision, while the liquidation of
the pyramid schemes is close to its end.

2

3

In November 1999, the Enhanced Structural Adjustment Facility (ESAF) - the IMF concessional
facility for low-income countries - was renamed the Poverty Reduction and Growth Facility
(PRGF) and its purposes were redefined: the PRGF-supported programmes will be based on
country-owned poverty reduction strategies and will be consistent with a comprehensive
framework for macroeconomic, structural and social policies to foster growth and reduce
poverty.
The impact on the 1999 budget has now been estimated at some USD 85 million, equivalent to
about 2% of GDP. Most of these expenditures have been financed by external donors, including
the EU, in the form of grants or loans with largely concessional terms.

16

Some delays appeared in the privatisation programme. The sale or liquidation of the
remaining state-owned small and medium-sized enterprises was not achieved and
became a prior action for completion of IMF programme mid-term review expected in
January 2000. Privatisation of enterprises in strategic sectors has also been delayed but
the Government has committed itself to make significant progress in 2000.

The adoption by Parliament in 1999 of both the revised Civil Service Law and the new
Customs Code has constituted very important steps in the reform of the public
administration and the customs administration, respectively. Significant progress was
also registered in the strengthening of tax collection: 10,000 companies with a turn-over
of more than 35,000 EUR have been defined as big taxpayers and charged with a 30%
tax on net profit, while 27,000 taxpayers representing SME’s were charged with a
moderate lump sum tax. Private income tax is calculated according to a progressive rate
system ranging from 5 to 30%. Also the law on fiscal procedures, aiming at regulating
relations between taxpayers and tax authorities, has been adopted by Parliament in
December 1999. Some progress was registered in reform of the judiciary.

4.

Implementation of the exceptional financial assistance

In the context of the IMF 3-year ESAF-supported programme, approved in May 1998,
the Council decided on 22 April 1999 to provide to Albania a macro-financial assistance
facility of up to EUR 20 million. Contrary to the previous two macro-financial
assistance operations (EUR 70 million grant decided in 1992 and EUR 35 million grant
decided in 1994), this assistance would take the form of a loan.

In December 1999, a first Commission staff mission was carried out with a view to
negotiate a Memorandum of Understanding (MoU), setting out the conditions for the
release of the first and second tranches of the assistance, consistent economic policy
conditionality agreed with the IMF and the World Bank. At that point, however, the
Albanian authorities were not ready to commit on a specific set of policy conditions.
In Spring 2000, however, the authorities have indicated their readiness to negotiate the
conditionality to be attached to the Community loan.

On 14 June 1999, the IMF approved the second annual PRGF arrangement covering the
period April 1999-March 2000 and agreed to augment Albania’s access of
SDR 35.3 million for the programme under the ESAF by SDR 9.74 million. The mid-
term review of
is expected to be completed in
January 2000. In the framework of the Country Assistance Strategy for Albania for the
period 1998-2001, the World Bank approved in June 1999 a USD 20 million Structural
Adjustment Credit (SAC), which was increased to USD 45 million in the context of the
Kosovo crisis.

this second year arrangement

17

IV.

ARMENIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

Armenia's economy expanded 3% only in
1999, as the negative impact of the Russian
crisis appeared stronger than anticipated. End
year annual inflation was only 2%. The large
budget and current account deficits remained
sources of concern and Armenia will continue
to rely on international assistance for financing
the gaps.

In December 1998, the IMF Board approved a
third annual arrangement under the three year
Enhanced
Facility
Structural Adjustment
(ESAF) of some USD 150 million facility
adopted in February 1996 in favour of
Armenia. On 8 October 1999,
the IMF
completed the midterm review under this third
annual arrangement.

the exceptional

financial assistance
Under
adopted
the
Community disbursed a second grant tranche
of EUR 4 million.

17 November 19974,

on

2.

Macroeconomic performance

GDP rose by 7.2% in 1998 and by 3% in 1999.
GDP was boosted by a substantial increase in
fixed capital investment and a resulting rise
in construction. However, growth
(45%)
depended substantially on foreign financing, in
particular
from the World Bank and IMF,
allowing Armenia to run large current account
and budget deficits.

The Government's return to tighter fiscal and
monetary policies brought inflation down to -
1.3% in 1998. Inflation was not expected to
exceed 2% for 1999 as a whole.

In the first seven months of 1999, the state
budget showed a deficit equivalent to 4.5% of
GDP,
the
corresponding period of 1998 and 4.7% for
1998 as a whole.

compared with

1.4% in

1. Price liberalisation

Most prices liberalised and consumer subsidies sharply reduced.
Prices of very few items subject to regulation.

2. Trade liberalisation

Liberal trade policy. Simple and relatively open import regime with a
low tariff structure. No quantitative restrictions. Accession to the
WTO expected in 2000.

3. Exchange regime

Floating exchange rate. Limited official
intervention. Very liberal
exchange system. Access to foreign exchange unrestricted. Interbank
market dominant for foreign exchange.

4. Foreign direct investment

Liberal policy towards foreign direct investment, notably absence of
restrictions on repatriation of profits and capital.

5. Monetary policy

In the first half of 1999, excessive intervention in the foreign
exchange market and attempts to control
the interest rate in the
securities market. Afterwards, tightening of the financial policies and
increased reliance on market forces.

6. Public finances

Budgetary revenue (including grants) estimated at around 22.5% of
GDP; total expenditure estimated at about 28.7% of GDP.

7. Privatisation and enterprise restructuring

The privatisation process continued (chemical plant, precious stone
processing company, brandy producing company, hotel, bakeries and
mills…), albeit at a rather slow pace, both for medium and large sized
enterprises. While there were some efficiency gains in the energy
sector, the Government was in the process of privatising the power
distribution companies, which will help to solve the cash collection
problems.

8. Financial sector reform

The banking system consists of the Central Bank of Armenia and
31 commercial banks, of which three foreign owned. The Government
sold its residual shares in Ardshinbank, while the privatisation of the
Savings Bank has been postponed because of its high political
sensitivity.
failure to adhere to reserve
requirements and automatic penalties for violation of prudential
regulations. All banks adhere to International Accounting Standards.

Increased penalties for

4

Council Decision 97/787/EC – OJ L 322 of 25.11.1997.

18

Central government budget revenue in the first six months of 1999 was only 87.3% of
the projected level, while accumulated tax arrears grew alarmingly. However,
the
Government adopted a package of austerity measures comprising higher taxes on
tobacco products, petroleum, and cut
in non-core expenditure in the health and
education sectors. As a result, a steady improvement in tax collection was registered and
budget revenue targets for 1999 were expected to be met. This improvement enabled the
Government to resume payments of family benefits in October.

In 1998, Armenia's current account deficit (excluding official transfers) was equivalent
to 27.3% of GDP, as a result of the commercial blockade imposed on the country, the
financial crisis in Russia and the relative strength of the Dram. Imports were more than
triple the value of exports. The trade deficit, however, shrank by 9.2% to 28% of GDP
in January-June 1999, as a result of a steeper drop in imports relative to exports. Inflows
from expatriated nationals, international financial institutions and bilateral donors (in
particular the US) as well as substantial amounts of foreign direct investment (about
USD 100 million) have prevented these imbalances from destabilising Armenia's
economy. These deficits are, however, clearly unsustainable in the long run. In 1999,
the country's stock of external debt was growing and expected to be around 47% of
GDP (USD 870 million) at the end of the year. Gross foreign exchange reserves,
bolstered by privatisation receipts, were still comfortable with an imports coverage ratio
of around 3.7 months. After a slight depreciation in the wake of the Russian crisis, the
currency appreciated somewhat in recent months to a level of around Dram 519/USD at
the end of December 1999.

3.

Structural reforms

The speed and continuity of the structural reform process weakened in the first half of
1999, in particular in privatising state owned enterprises and in rehabilitating the energy
sector as well as in implementing reforms and enforcing prudential regulations in the
banking sector. Nevertheless, for 1999 as a whole, the authorities maintained a liberal
trade and exchange system amidst severe difficulties (blockade, Russian crisis, political
crisis,...) and pursued resolutely a WTO membership. The Government reported
successes in reducing the technical losses and energy theft and in raising electricity
tariffs in the energy sector, while progress was made in rehabilitating the sector in the
second half of the year. With regard to the banking sector, the Ardshinbank was fully
privatized. The authorities are expected to initiate the privatisation/restructuring of the
Savings Bank with the assistance of the World Bank in the coming months. The Civil
Service reform strategy will be supported by the World Bank SAC 4 programme in
2000.

The IMF expressed concern about the policy setbacks and a loss of momentum in the
implementation of the structural reforms in late 1998 and the first half of 1999, in
particular in implementing the financial rehabilitation plan for the energy sector. It
welcomed recent corrective actions by the new Government,
the
authorities' decision to undertake strong corrective fiscal measures and efforts to restore
the momentum of privatisation. It also welcomed the authorities' commitment
to
strengthening monetary control and the enforcement of the banking system's prudential
and regulatory requirements. The IMF finally stressed the importance of developing and
adopting a comprehensive external debt strategy for the medium term, including using
privatisation proceeds to improve the external debt profile.

in particular

19

The World Bank postponed to 2000 the disbursement of a fourth tranche under its
SAC 3 (Structural Adjustment Credit) programme because of Armenia's low tariff
collection level in the irrigation sector, because of delays in proceeding with audits of
the power sector companies and of slow progress in privatising the electricity
distribution network. The World Bank is considering the possibility of granting a SAC 4
programme to Armenia in 2000. This programme is expected to focus on reforming the
State sector and promoting the private sector development. It would also include
elements aimed at social welfare, education and health.

4.

Implementation of the exceptional financial assistance

Under the EUR 1250 million Community trade credit facility made available to the NIS
in 1992, Armenia benefited from some EUR 58 million in the form of loans. However,
owing to difficult political, economic and financial conditions, the country was unable
to properly service its external financial obligations including those towards the
Community. In order to facilitate the settlement of this debt problem, the Council
adopted in November 1997 a Commission proposal to provide Armenia (and Georgia)
with exceptional financial assistance in the form of a combination of loans and straight
grants.

The implementation of this assistance is subject to Armenia remaining on track with its
IMF programme and proceeding with structural reforms in accordance with successive
Memoranda of Understanding to be agreed with the Commission. The country is also
required to proceed with regular principal repayments, so as to reduce the financial
exposure of the Community in this high risk region as fast as possible.

In December 1998, with Armenia having fully settled its arrears towards the
Community (EUR 51 million) and its IMF programme being back on track,
the
financial assistance
Commission disbursed the first
tranche of
(EUR 28 million in loan and EUR 8 million in grant). The
second tranche
(EUR 4 million of grant) under this assistance was disbursed in early December 1999.
This tranche was subject to a EUR 5 million reduction by Armenia in its outstanding
financial obligations towards the Community (EUR 28 million) and to the country
implementing forcefully its macro-economic programme supported by the IMF three
year ESAF.

the exceptional

In July 1999, an agreement
in principle has been reached between the Armenian
authorities and the Commission Services on the structural conditionality attached to the
disbursement of the third tranche of the assistance scheduled for 2000. However, the
Armenian authorities have failed to ratify this agreement. A new negotiating mission
might be necessary in the coming months to elaborate a new Supplemental
in parallel with the future World Bank SAC 4
Memorandum of Understanding,
programme.

20

V.

1.

BOSNIA AND HERZEGOVINA

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Most prices have been liberalised with the exception of a few selected
public services

2. Trade liberalisation

Both Entities have effectively dismantled the preferential
trading
arrangements (in May 1999) with Croatia and the FRY. A uniform
customs code is in place since January 1999 with a common tariff
regime comprising four product categories, in the range of 0-15%. BiH
is yet not member of the WTO.

3. Exchange regime

The common currency, KM, is pegged to the DM at parity under the
currency board arrangement since June 1998.

4.

Foreign direct investment

Highly unfavourable environment resulting from perceived high risks
and intransparent policies. Entities still need to fully implement the
State Law on FDI.

5. Monetary policy

The Central Bank of BiH is responsible for operating the Currency
Board Arrangement. The CBBH and other banks are prohibited from
lending money to the government.

6.

Public finances

Entities were forced to compress budgets by some 30% in 1999 due to
weak revenue performance. Further reforms are needed, in particular tax
harmonisation between the Entities in order to ensure an efficient and
transparent tax system.

7.

Privatisation and enterprise restructuring

While the small-scale privatisation program has been a success in the
Federation, it has yet to be initiated in the RS. Large scale privatisation
has not been seriously considered as yet.

8.

Financial sector reform

Banking sector
reform has progressed in both Entities with the
introduction of prudential regulations. Privatisation of a couple of the
few solvent Banks is expected shortly. Payments system reforms are
also being implemented with a view to terminate the monopoly of the
Payments Bureaux by end-2000.

a

(a)

the

common

currency,

stability has

IMF-supported

Under
Stand-By
Arrangement, which was concluded in May
been
1998, macroeconomic
maintained in Bosnia and Herzegovina. GDP
growth for 1999, however, is estimated to have
decelerated from a projected 16% to 10%
largely as a result of the adverse impact of the
Kosovo crisis. Progress has been made in
improving the country-wide economic policy
framework. In particular, significant progress
has been made with regard to key economic
measures:
the
Konvertible Marka, has been adopted which
the
has brought monetary stability under
of
operations
Board
the
Currency
Arrangement;
(b) a common State budget
ensuring transfers from the entities is in place;
(c) a new uniform Customs Code, consistent
with EU standards came into effect on 1st of
January 1999 and in May 1999 the Entities
eliminated in practice the preferential trading
agreements with
countries.
Finally, there are agreements between Bosnia
and Herzegovina and its bilateral creditors
within the framework of the Paris Club and
London Club. The IMF thus completed its first
review on June 28, 1999 and decided to extend
the Stand-By Arrangement.

neighbouring

as

banking

enterprise

As far as structural reforms are concerned,
progress has been made in implementation by
the entities of Bosnia and Herzegovina of
reforms of the payments system and small-
scale
privatisation. However,
progress has been slower in some other areas
reform and
such
privatisation,
enterprise
privatisation and tax and customs reforms. Key
to continued progress in the areas of economic
reform lies in strengthened inter-entity co-
operation in order to ensure a country-wide
process of self-sustained growth as donor
assistance is expected to be gradually phased
out in the coming years.

sector

scale

large

21

The Council decided a macro-financial assistance of up to EUR 60 million in
May 1999.

2.

Macroeconomic performance

During the period 1996-98, Bosnia and Herzegovina (BiH) has managed to sustain an
average growth rate of about 35%. These high growth rates have been achieved from
very low initial GDP levels and in the context of
the externally financed
USD 5.1 billion Economic Recovery and Reconstruction Programme (1996-1999) for
BiH supported by the international donor community. For 1999, real GDP growth is
estimated to have decelerated to 10% compared to a pre-crisis projection of 16%,
largely as a result of the impact of the Kosovo crisis on trade and domestic investment
earlier in the year. Despite these high rates of growth, inflation has come down rapidly
to country-wide single digit levels, supported by a strict adherence to rules of the
currency board arrangement (CBA) and prudent fiscal policies implemented as part of a
country-wide macro economic programme supported by the IMF under a Stand-By
Arrangement (SBA). The exchange rate of the Konvertible Marka (KM) remains
pegged on a 1:1 basis against the german mark (euro) in the context of the CBA.
Unemployment remains high in both Entities, hovering around a level of 40%. In 1999,
both Entities were forced to rebalance their budgets and compress expenditures by some
30%, notably as a result of the adverse effects of the Kosovo crisis in the first half of
1999.

The current account continues to show a very large deficit (of about 22% of GDP in
1999), mainly financed by donor assistance. Gross official foreign exchange reserves
stood at around DEM 877 million in end-1999 – three times as high as in the beginning
of the year - having recorded a spectacular increase during the last half of 1999,
reflecting the increased acceptance of the KM in both Entities. The foreign debt of BiH
remains at high levels (about 70% of GDP at end-1998), partly reflecting a substantial
debt burden inherited from the former Yugoslavia. Debt service as a percentage of
exports of goods and services, however, is low relative to the debt-over-GDP ratio,
reflecting the concessional nature of much of the debt and favourable debt rescheduling
agreements with the London Club and Paris Club. These factors also explain why debt
and debt service ratios are projected to continue declining in the coming years despite
substantial reconstruction-related foreign borrowing.

3.

Structural reforms

It

is important

In the fiscal area, regular transfers from the entity budgets to the state budgets have been
adhered to although frequent delays have caused problems in promptly servicing BiH’s
external debt.
that both Entities balance their budgets limiting
expenditure to available resources. Furthermore, fiscal activities hitherto treated as off-
budget items should be included in the draft budgets. On the positive front, the draft
budget for fiscal year 2000 foresees a reduction in military expenditure. The legal
framework for Entity-level Supreme Audit Institutions has been created. Although the
ground work for establishing Treasury systems at the State and Entity levels has been
laid, there is now need to ensure the proper functioning of these institutions. The
Federation government has adopted the legislative changes required for the financial
and administrative merger of the two existing pension funds, and it now needs to be
passed in the parliament.

22

Despite numerous difficulties, including popular misgivings about the common BiH
currency, the KM has increasingly won confidence. In the Republika Srpska,
the
acceptance of the KM has gained rapidly over the last half year and it is estimated that
the KM is used for more than 70 per cent of government payments and revenues. The
Federation finally passed a law in October which prohibits the use of the DM and the
Kuna for non-cash payments through the payments bureaux (ZPP and SAP). All taxes
and wages are now to be paid in KM.

Overall, good progress has been made in the reform of the payment system and in the
preparations for eliminating the Payment Bureau by December 2000, the deadline
agreed with donors. The Federation adopted an amended law in September that
abolishes the monopoly position of the Payment Bureaux over domestic payment
transactions, and provides a legal basis for a governing board that will guarantee
transparency in the transformation process. Subsequently, governing boards have been
formed in both Entities charged with reform of the payments systems

The regulatory framework for banking sector reform has been put in place by and large
and the privatisation process is moving forward with the anticipated liquidation of
several insolvent banks to take place in the near term. The Federation has adopted a plan
for the Federation Investment Bank (consistent with the WB prescription) and the
privatisation is expected early next year. The Republika Srpska (RS) passed the Law on
Commercial Banks in July 1999. In the RS, privatisation plans are expected to be
announced soon for at least two of the larger state banks. While expected to become
functional soon in the Federation, in the RS, the government needs to establish an
autonomous and self-financing deposit insurance scheme before privatisation can be
started in earnest.

In the area of privatisation, the Federation began selling off small and medium sized
enterprises in May 1999, and the process was expected to be completed in end 1999. All
cantons but Mostar have held open auctions. In the case of the RS progress has been
slower. Only 9 of the 23 enterprises announced for sale since July have been sold due to
limited interest. In the RS, small scale privatisation has not taken off mainly because of
lack of interest (in the RS, citizens eligible for taking part in the privatisation are
supposed to register themselves as opposed to in the Federation, where citizens receive
vouchers automatically) and/or because of technical matters (companies failing to
submit audits and opening balance sheets to the RS Privatisation Agency).

On 8 June 1999, both Entities reached an agreement that would harmonise excise rates
for seven commodity groups across Entities and mandate the unification of all excise
tax rates on imported and domestic goods by 15 July 1999. However, both Entities still
need to ensure the full implementation of this agreement. A formal agreement on co-
operation between the entities on tax administration is also still missing. The BiH
authorities need to undertake further steps to harmonise tax systems between the
entities, and to bring the legal framework for commercial activities in line with EU
standards. The Entities have drafted new regulations concerning sub-laws on customs
powers, penalties and offences with the assistance of CAFAO. The drafts have now
been finalised, and have been submitted for a legal opinion. Finally, progress with
regard to the elimination of parallel structures in the customs and tax services of the
Federation, as assessed by the CAFAO program, has been slow.

23

4.

Implementation of the exceptional financial assistance

The Council adopted on 10 May 1999, a decision providing for exceptional macro-
financial assistance to Bosnia and Herzegovina. This assistance amounts to a maximum
of EUR 60 million, comprising a significant grant element of up to EUR 40 million, and
a long-term loan element of up to EUR 20 million. The effective implementation of the
assistance has been conditional upon the full clearance by BiH of its outstanding due
obligations to the Community and the EIB. Following the fulfilment of this condition,
and other prior
totalling
EUR 25 million in December, comprising a EUR 15 million grant element, and a
EUR 10 million loan element. The disbursement of the second tranche is linked to
satisfactory progress under the current IMF programme as well as progress with regard
to a set of specific Community conditions attached to the implementation of the
assistance.

the Community disbursed a

actions,

tranche

first

In May 1998, the IMF approved a SBA (USD 81 million). In June 1999, the IMF
decided to augment its assistance by USD 23 million as a result of the adverse impact of
the Kosovo crisis. The World Bank runs two policy based aid programmes in BiH in
support of public finance reform and enterprise and banking sector privatisation. These
are financially supported by two IDA credits amounting to a total of USD 134 million
on a concessional basis, including an augmentation in the amount of USD 28 million to
take into account the adverse impact of the Kosovo crisis.

24

VI.

BULGARIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

The share of administrated prices in the CPI basket stood at 17.4% in
1999. The prices of energy products and in particularly heating are
progressively liberalised.

2.

Trade liberalisation

The regime is largely liberalised.

3.

Exchange regime

Lev pegged to the euro since January 1999, under a currency board
arrangement. Denominated 5 July 1999 by removing three zeros so 1
Lev now equals one german mark.

4.

Foreign direct investment

Foreign investors can freely repatriate profits and proceeds.

5. Monetary policy

Central bank responsible for operating the currency board, which have
remained credible and supported by high reserves.

6.

Public finances

The fiscal stance has consistently been tighter than programmed and
tax collection has improved. IMF imposed discipline to balance
upwards pressure on expenditure on the level of public wages.

7.

Privatisation and enterprise restructuring

From the beginning of the process in 1992 to October 1999, about
40%
privatised.
1998 and 1999 was marked by a certain slowdown in the pace of
privatisation but sustained progress was achieved.

long-term

assets

been

have

of

8.

Financial sector reform

The financial position of the banking sector has improved substantially
since the crisis in 1996. Main problems are reluctance to lend to a still
weak private sector and delayed privatisation.

The economic stabilisation of Bulgaria was
confirmed in 1999, despite a difficult external
environment. The year was marked by the
Kosovo crisis which had both an immediate
and a medium term impact on trade flows in
the region. While the crisis contributed to
prolong the mini-recession of the winter 1998-
1999, other factors were also to blame. In
particular, the economic restructuring of the
manufacturing sector which lead to a decrease
in output and a rise in unemployment rates.
The second half of 1999 was marked by an
increase
including
renewed interest from foreign investors. A
invitation to open
main event was
the
accession negotiations
confirmed by the
Helsinki Summit. This should provide further
incentive for investments in the country.

in economic

activity,

The political
stability of Bulgaria was
confirmed by the local elections which were
interpreted as a renewed mandate to pursue
the reform policy supported by International
Financial
Institutions and the EU. As a
consequence of its determination to pursue
reform, Bulgaria stayed on track with its
the medium term
commitments
agreed with IMF.
economic programme
the
through
now halfway
is
Bulgaria
programme which is a condition for using the
Extended
total
in
(USD 858 million/
SDR 627.62 million
EUR 820 million).

Facility

under

Fund

of

25

The Council on 8 November 1999 decided on a Macro-financial assistance loan of EUR 100 million
in favour of Bulgaria – the fourth of its kind. A first tranche of EUR 40 million was disbursed in
December.

Also the World Bank has released a new adjustment loan during 1999. EU assistance will increase
from year 2000 onwards as thepre-accession instruments ISPA and SAPARD are put in place. Total
grant assistance is expected to reach a yearly 256 in the 2000-2006 period.

2.

Macroeconomic performance

The recovery of economic activity observed in early 1998 faded towards the end of the same year.
Together with the Kosovo crisis this depressed trade and the investment climate in the first half of
1999. Weaker European demand and the crisis in Russia played an important role for the slowdown,
but the ongoing reform-driven restructuring of the industrial sector further reduced industrial
output. Sales in the manufacturing sector declined by 12.8% on average in the first eight months of
1999 compared with the same period in 1998, with a particularly strong decline in activity in sectors
such as vehicles and chemicals. All these factors contributed to weak GDP growth in the first half
of 1999. However, recovery gained considerable pace in the second half of 1999 and latest forecasts
points to GDP growth of around 2.5% for the whole year, although industrial production fell 5%.

increased in 1999, as a result of

Unemployment
large-scale redundancies following the
restructuring or liquidation of public sector enterprises. A renewed increase in employment is
expected as soon as the privatisation of industries and the development of small and medium-sized
enterprises improve profitability in the sector.

In 1998 and 1999, a dramatic reduction of inflation was achieved thanks to the stabilising effect of
the currency board and the fall in international commodity prices. The end-year inflation rate was
1% in 1998, far below the 16% forecast underlying the government’s budget. Inflation has since
remained low despite increases in administered prices which accounted for temporary surges in
inflation in January and July 1999. The year-on-year inflation rate by end 1999 was 6.2%. Further
increases in international and domestic energy prices and tariff increases for utilities will add
upwards pressure on the CPI over the winter.

Total exports declined by more than 10% in 1999. The first signs of recovery emerged mid-1999
but the disruption of traffic through the Federal Republic of Yugoslavia and the blockage of the
Danube river continue to have a negative impact on trade. The composition of exports in value
terms is gradually changing: the share of raw materials decreases while the share of consumer
goods including food increases.

Imports remained in 1999 slightly above the previous year’s level due to a strong demand for
consumer goods and capital equipment. Combined with falling exports this had a negative impact
on the current account, where a deficit of around 5.2% of GDP is foreseen for 1999. For the coming
years, deficit levels are expected to remain the same as a result of real wage increases and the need
for capital equipment in the restructuring industries. The development of international energy prices
will have an important impact too.

A surplus on the capital account contributes to the financing of the current account deficit. Inflows
of foreign direct investment amounted to EUR 358 million in 1998 or about three quarters of the
amount recorded in 1997. The latest figures indicate a substantial increase to over EUR 600 million
in 1999. Cumulative FDI inflows are still low on a per capita basis in comparison with other
transition economies. Official external sources including IMF support and macro-financial
assistance from the European Union helps to reinforce Bulgaria’s external financing capacity

26

In 1998, the fiscal performance was better than expected and the consolidated budget recorded a
surplus of 1.1% of GDP. The 1999 budget originally provided for an overall deficit of 2.8% of
GDP. However, a higher-than-programmed surplus was recorded in the first half of the year and the
deficit for 1999 will settle around 0.9% of GDP.

the currency board arrangement has been satisfactory.

The operation of
large
disbursements from official creditors contributed to a further rise in the reserves of the central bank.
They stood at EUR 2.7 billion at the end of 1998, which is equivalent to 6 months of imports of
goods and services. By the end of 1999 they corresponded to 6.4 months of imports and are
adequate to cover the central bank’s liabilities under the currency board. On 1 January 1999, the
euro replaced the german mark as peg currency. The lev was re-denominated on 5 July 1999
removing three zeros; one lev now equals one german mark. The base interest rate which fluctuated
between 5.2% and 6.2% throughout 1998 was reduced to 5% early in 1999 and to 4.42% in
January 2000.

In 1998,

3.

Structural reforms

While the privatisation of state-owned enterprises in terms of the number of units sold has been
progressing in both 1998 and 1999, there was a slowdown in terms of the total value of the assets
sold. The privatisation process is expected to come to an end around 2002 and many of the most
valuable enterprises have been – or will soon be – sold. The importance in terms of budget revenue
will decrease accordingly.

Measures have been taken to strengthen financial discipline in the remaining state-owned
enterprises. To obtain subsidies during a transition period the enterprises were obliged to present
financial recovery plans on how to eliminate losses and enable subsidy-free operation from 2002. In
addition, 154 state owned enterprises have been singled out for financial monitoring to avoid that
new arrears are building up.

Substantial progress has been achieved on the privatisation of banks. Three banks have been
privatised and the three remaining state banks are expected to follow in first half of 2000.
Preparations to privatise the State Savings Bank have been launched. At the end of 1998 all banks
met the minimum capital adequacy ratio of 10%. In fact, the system-wide average ratio reached
41% in June 1999. This is an illustration of the risk-averse lending policy which may hamper the
ability to finance the restructuring efforts.

While the government attaches importance to the development of the stock market, trade in equities
is as a consequence not liquid. As the level of economic
remains very low and the market
development increases, this may become a serious impediment in attracting private capital.

27

4.

Implementation of macro-financial assistance

Discussions on the present macro-financial assistance to Bulgaria (the fourth since 19915) were
launched in late 1998. The Kosovo conflict’s impact on the current account led to an increase in the
financing gap and the Commission proposal in July 1999 a EUR 100 million macro-financial
assistance loan. The Council adopted this proposal on 8 November 1999 (Decision 1999/731/EC).
The Commission shortly after finalised the negotiation of the conditions attached to the loan, which
consists of two tranches. Disbursement of the first tranche was made conditional on a successful
second review of the IMF medium term program. As this was confirmed late November it was
possible to disburse a first instalment of EUR 40 million in December 1999. The second instalment
is conditional on Bulgaria’s performance in relation to a number of structural reform measures. The
loan conditions are consistent with the conditionality framework of the Medium Term Programme
(IMF) and a World Bank’s structural adjustment loan (FESAL). They emphasise, however, reforms
that are of particular importance to the accession process. Provided that Bulgaria stay on track with
its reform program the Commission intends to proceed with the release of the second tranche in the
third quarter of 2000.

5

Previous macro-financial assistance loans have been approved by the Council in:
June 1991 (EUR 290 million disbursed in August 1991 and March 1992),
October 1992 (EUR 110 million disbursed in December 1994 and August 1996), and
July 1997 (EUR 250 million disbursed in February 1998 and December 1998).

28

VII.

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

Since the creation of the former Yugoslav
Republic of Macedonia (fYROM) in 1992 the
country initially suffered a significant fall in
GDP followed by several years of steady if
modest GDP growth. Thus, by 1999 it
is
estimated that the level of GDP is still well
the
recorded by the time of
below that
establishment of the independent republic.

1999 was marked by the Kosovo crisis, which
gave rise to a massive refugee influx, a
disruption of trade patterns and a fall in FDI.
The reconstruction of Kosovo is now turning
into a major source of economic growth in
fYROM. Since 1992, fYROM has undertaken
an encouraging economic reform programme.
In 1999, however,
the programme was not
implemented as planned and in particular
major state owned loss-making enterprises
were not
restructured or sold as planned.
Accordingly, the IMF programme is now off
track. Negotiations with the IMF are ongoing
and it is expected that the new government
will recreate the momentum in the reform
process.

The Kosovo crisis gave rise to a large increase
in refugee related government expenditure.
including the
The international community,
European Union, reacted promptly and has
undertaken to provide important amounts of
macro-financial support for fYROM.

decided

The Council
a macro-financial
assistance operation of up to EUR 80 million
in November 1999.

1.

Price liberalisation

Price liberalisation has been essentially completed. Price controls exist
for only very few products.

2.

Trade liberalisation

A small number of tariff and non-tariff barriers remain in place. Most
temporary safeguard measures introduced in the wake of the Kosovo
conflict have been removed again, but important duties remains for sugar
imports. The average tariff rate is 15%. Revised customs code approved
by government.

3.

Exchange regime

From early 1994, de facto peg of the denar to the Euro; since the
devaluation of July 1997 it stands at some 60.5 denar for one Euro.

4.

Foreign direct investment

The environment for FDI has improved. However, approval from the
government is still requested to carry out some types of foreign direct
investments, while the absence of a properly functioning market for land
are also hampering the FDI inflows. FDI inflows increased substantially
in 1998 as the authorities have been more open to FDI. Overall, the
capital account remains largely regulated.

5.

Monetary policy

Monetary policy essentially based on the exchange rate anchor.

6.

Public finances

Tight fiscal policies continued in 1999, (although public expenditure
increased strongly as a result of refugee related expenditure in 1999). A
deficit of some 3-4% of GDP is expected.

7.

Privatisation and enterprise restructuring

Privatisation programme begun in 1993; some 1200 out of 1216
enterprises have finalised privatisation though only some have been
restructured. Private sector accounts for more than two-thirds of GDP.
Slow progress in privatisation and restructuring of agro-industrial
conglomerates.

8.

Financial sector reform

Two-tier banking system. There are 20 banks, one branch of a foreign
bank and 19 savings banks. The sector is dominated by Stopanska
Banka, which has been restructured and is now being sold to the National
Bank of Greece. Banking supervision through National Bank. Lending to
22 largest debtor enterprises closely monitored.

2.

Macroeconomic performance

In early 1999 expectations regarding economic growth were gloomy: the Kosovo crisis was having
a marked negative effect on economic activity in fYROM due to disruption of trade, fall-out of FDI
and the massive influx of refugees.

29

However, the end of the Kosovo conflict and the quick return of most of the refugees was followed
by a pickup in economic activity in fYROM, as the international relief efforts in Kosovo boosted
exports and as the presence of foreign relief and military personnel in the area supported demand in
fYROM. Therefore, in spite of the fall of output in spring, it is now expected that real GDP growth
could be around 2.5% for the year 1999.

As for the current account deficit, it also turned out better than feared early in the year at 4.0% of
GDP. As noted above, a pickup in exports linked to the reconstruction of Kosovo were instrumental
in this. Still, for the year as a whole, exports are expected to have declined by just over 1% while
imports may have fallen by over 7%.

Government finances have been developing broadly satisfactory. Since 1995, the government
deficit has been between 0 and 2% of GDP each year. A deficit of 1.5% is likely to materialise for
1999. The refugees from Kosovo gave rise to a marked increase in public expenditure on
accommodation, food, health, etc. However, an important share of this extra expenditure was
covered by emergency budgetary assistance from bilateral donors and international organisations,
including the European Community.

The unemployment rate remained at a very high level even if it fell slightly, compared with 1998.
Thus, a labour force survey conducted in spring 1999 showed an unemployment rate of 32.4%,
slightly lower than the registered average unemployment rate in 1998 of around 36%. Fears of an
increased number of unemployed persons over the short term appears to slow down the necessary
thereby continuing a
economic restructuring of
misallocation of resources in the economy (see below).

large state-owned loss-making companies,

3.

Structural reform

In many areas structural reform is quite advanced in fYROM. Price liberalisation and institution
building are areas in which important progress has been made at an early stage of the economic
transition process. Also, trade liberalisation is advanced, even if the Kosovo crisis triggered the
introduction of temporary safeguard measures and an import license system in 1999. After the
crisis, most measures were abolished, but a number of safeguard measures remain in place and
specific duties for sugar imports have been introduced.

With respect to privatisation of large state-owned and often loss-making companies (most often
agro-industrial conglomerates), progress in the past two years has been unsatisfactory. As a direct
result of the reluctance on the part of the government to conduct the necessary restructuring through
sale, closing, privatisation or a combination hereof the ESAF programme agreed with the IMF is
now off track. This three-year programme will expire in April 2000 and negotiations between the
Fund and the newly formed government are currently ongoing with a view to establishing a new
IMF programme. It is to be expected that the negotiations will involve conditionality regarding at
least some of the 12 state owned loss-making enterprises, which should have been closed by now.

The continuously loss-making companies are likely to constitute a constant capital drain on the
economy, thus hampering more innovative and efficient companies’ access to the necessary capital
via the domestic capital market. A constant misallocation of resources is the result, reducing both
economic output and employment.

Earlier, an attempt to privatise the largest bank (the Stopanska Banka) had failed. Currently,
however, it appears that the sale of this bank will go through in 2000. If successfully completed, this
could constitute an important step towards the creation of a functioning, market based financial
sector in fYROM.

30

4.

Implementation of macro-financial assistance

As a direct result of the Kosovo conflict and the high resulting refugee related expenditure, the
European Commission and the World Bank organised a joint G-24/Consultative Group meeting on
5 May. At the meeting donors pledged close to USD 250 million in total. The Community pledged
up to EUR 25 million of exceptional budgetary support to help the country cope with the costs
related to the inflow of refugees and indicated its willingness to consider further exceptional macro-
financial assistance. The first tranche of the assistance of EUR 12.2 million was disbursed on
16 June.

On 8 November the Council decided to provide up to EUR 80 million of supplementary macro-
financial assistance to fYROM. Exceptionally, in view of the fragile economic situation in fYROM,
in particular with regard to foreign debt levels (around 40% of GDP), the Council decided to
provide part of the macro-financial assistance (up to EUR 30 million) in the form of grants.

One essential condition for the implementation of this supplementary macro-financial assistance is
the establishment of a new IMF programme. As mentioned, negotiations are ongoing and agreement
on a new programme is expected to be reached by mid-2000.

In August 1998, the World Bank endorsed a new Country Assistance Strategy (CAS) for FYROM
from mid-1998 to mid-2001, which supports the government's national development strategy. This
CAS outlines a USD 200 million programme of new lending to facilitate reforms and economic
development and in order to reduce unemployment and poverty. However, the lending programme
is currently stalled due to fYROM’s non-compliance with the attached conditionality. To date, the
World Bank has made four adjustment operations totalling USD 254 million.

31

VIII. GEORGIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

Georgia's economy was expected to expand by
2-3% in 1999. While the negative impact of
the Russian crisis seemed to have been partly
overcome, low internal demand, resulting from
social arrears linked to fiscal shortcomings,
continued
growth.
Provided a new three year agreement is signed
with the IMF, growth is expected to accelerate
in 2000.

economic

impede

to

On 28 July 1998, the IMF Board approved a
third annual arrangement under
the ESAF
programme in favour of Georgia. In November
1998, January and May 1999, IMF missions
were not in a position to favourably conclude
the mid-term review under this third ESAF
arrangement, as a result of
low revenue
collection rates. Finally, the IMF released its
next ESAF tranche in July 1999. A new three
year
IMF is being
discussed. However, a favourable outcome
was not expected before April 2000.

agreement with the

on

the exceptional

17 November 19976,

financial assistance
Under
adopted
the
Community disbursed a second grant tranche
of EUR 9 million in September 1999. This
disbursement was subject to a EUR 10 million
in its outstanding
reduction by Georgia
financial obligations towards the Community
(EUR 110 million) and to the implementation
of the macro-economic programme supported
by the IMF.

1.

Price liberalisation

Most prices have been liberalised.

2.

Trade liberalisation

Liberal international trade policy. Most import and export restrictions
have been eliminated. Georgia’s Parliament is expected to ratify the
WTO Protocol Accession soon.

3.

Exchange regime

The lari is not subject to exchange restrictions. Auctions at the Tiblisi
Interbank Currency Exchange (TICEX).

4.

Foreign direct investment

Adequate overall legislation. Unlimited repatriation of capital and profits
and no limitations on holding foreign currency bank accounts. Foreign
investors are not allowed to own agricultural land, only to lease it.
However, they are allowed to buy buildings and to lease land in the same
way as domestic residents.

5.

Monetary policy

Appropriate. However, indirect monetary instruments limited to National
Bank of Georgia (NBG) interventions in the inter-bank credit auctions
and to the use of banks' reserve requirements. After a suspension in the
wake of the Russian crisis, issuance of Treasury bills resumed in small
amounts in August 1999.

6.

Public finances

Budgetary revenue (excluding grants) estimated at 14.7% of GDP;
expenditure estimated at 21.5% of GDP.

7.

Privatisation and enterprise restructuring

In the energy sector, privatisation has made good progress. Progress has
also been registered in billing, metering,
tariff increases and tariff
collection. Privatisation of the telecommunications sector is going ahead.

8.

Financial sector reform

NBG is tightening prudential regulations and strengthening banking
supervision. However, most of the 37 commercial banks of the country
are still small and undercapitalised, while level of bank deposit is low
and level of dollarisation high.

6

Council Decision 97/787/EC – OJ L 322 of 25.11.1997.

32

2.

Macroeconomic performance7

Georgia's GDP rose by just 2.9% in 1998, far below projections of 11%, and slowed further to 1.7%
in the first half of 1999. A growth of 3% was reached for 1999 as a whole. The moderate growth
largely reflects a collapse in exports to Russia, Ukraine and Moldova in the wake of the Russian
rouble's devaluation. The budget crisis' impact on domestic demand compounded this situation. The
rapid depreciation of the Lari associated with the National Bank's decision to cease foreign
exchange interventions induced an inflation increase in December 1998. However, thanks to a
relatively stringent monetary policy, inflation tempered from April 1999 and consumer prices grew
only 9.6% during the first eleven months of 1999. Annual inflation (Dec/Dec) was expected to
reach a maximum of 11% in 1999.

The budget deficit (on a commitment basis) represented 6.5% of GDP in 1998. It was likely to
remain high, even to grow up, due to the economic growth deceleration, weak tax collection
inadequate spending priorities, financial problems of many large enterprises and high cost of debt
servicing. It was finally equivalent to 6.7% of GDP for 1999 as a whole. In the first half of 1999,
although the State Tax Service collected more than was planned, shortfalls were registered in
several areas: excise duties and VAT on domestic goods, corporate income tax (in real terms), taxes
for Special State Funds, payments of tax arrears. In 1999, expenditure arrears, in particular social
arrears, built up to a level of 4.2% of GDP, instead of being eliminated as planned.

In 1998, largely as a result of the collapse of exports to Russia during the final quarter, the current
account deficit (excluding official transfers) surged to a level of 17.5% of GDP. It was however
smaller in 1999 (14% of GDP), as a result of subdued domestic demand for imports. Georgia
benefited from substantial amounts of foreign direct investment in 1998 (above USD 200 million).
FDI decreased substantially in 1999, in particular because of the completion of the Baku-Supsa
pipeline rehabilitation. The external deficits were covered mainly with foreign loans. Consequently,
but also as a result of the Lari depreciation of December 1998, Georgia's foreign debt, which
represented 48% of GDP in late 1998, was on the rise and was expected to represent 63% of GDP at
the end of 1999. Gross foreign exchange reserves represented an import coverage ratio of 1.5 only.
The exchange rate has now stabilised at a level of 2 Laris for 1 USD, but a persistent inflation could
weaken the currency in the coming months.

The country was expected to benefit from a new three year ESAF arrangement with the IMF before
the end of 1999. However, the IMF did not consider the current draft budget for 2000 as fully
satisfactory. Moreover, it remained concerned by the interrelated problems of corruption and
insufficient tax revenue, as well as by the relatively low priority given so far to the payment of
public-sector salaries and pensions.

3.

Structural reforms

The authorities continued to make progress on structural reform. With the elimination of the export
tax on scrap metal, the trade regime became fairly liberal, while the exchange system remained free
of restrictions. The negotiation process for WTO accession was successfully concluded in October
1999. Even if progress were registered in the judiciary system, law implementation, in particular the
Bankruptcy Law, remained rather deficient.

7

The authorities have recently revised the nominal GDP data. The new estimates of nominal GDP are about
34% lower than the previously published data, mainly because of a revision of the estimates for informal
activities.

33

With regard to privatisation, the tenders for the energy distribution and generation companies were
leading to contracts with foreign companies
the
telecommunication companies and ports is expected to take place in 2000.

(Itera, AES,...). The privatisation of

With regard to reform in tax administration, little progress was reached in strengthening the public
finance situation in 1999. The country needs to focus in particular on the effectiveness of revenue
collection,
to implement sustained efforts to prevent corruption as well as to improve its
expenditure management.

Georgia's National Bank continued to consolidate the commercial banking sector. As a result, the
number of banks was reduced to 37 at end-September 1999. Thanks to international audits, the large
former state banks improved their financial position, except the Agrobank which remained in a
weak financial condition. Most commercial banks were, however, still small and undercapitalised.
Public confidence in the strength of the financial system remained rather low, as evidenced by the
low level of bank deposits and the high level of dollarization.

The legal environment allowing urban and industrial
development of the agricultural sector was still hindered by the slow emergence of a land market.

land privatisation was in place. The

4.

Implementation of exceptional financial assistance

Under the EUR 1250 million Community trade credit facility made available to the NIS in 1992,
Georgia benefited from some EUR 113 million in the form of loans. However, owing to difficult
political, economic and financial conditions, the country was unable to properly service its external
financial obligations including those towards the Community. In order to facilitate the settlement of
this debt problem, the Council adopted in November 1997 a Commission proposal to provide
Georgia (and Armenia) with exceptional financial assistance in the form of a combination of loans
and grants.

The disbursement of this assistance is subject
to Georgia remaining on track with its IMF
programme and proceeding with structural reforms in accordance with successive Memoranda of
Understanding to be agreed with the Commission. The country is also required to proceed with
regular principal repayments, so as to reduce the financial exposure of the Community in this high
risk region as fast as possible.

In July 1998, with Georgia having fully settled its arrears
the Community
(EUR 131 million) and its IMF programme being back on track, the Commission disbursed the first
tranche of the exceptional financial assistance (EUR 110 million in loans and EUR 10 million in
grants). The second tranche (EUR 9 million of grants) under this assistance was disbursed in
September 1999, soon after a principal repayment by Georgia of EUR 10 million of
the
EUR 110 million loan provided in 1998.

towards

The disbursement of the third tranche of the exceptional financial assistance is scheduled to take
place later
following satisfactory implementation of the agreed structural policy
conditions.

this year

34

IX.

ROMANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

imbalances,

rising unemployment,

Romania continued to be confronted with
serious economic difficulties in 1999. In a
context of widespread financing problems,
low capital
macroeconomic
inflows,
and timid
restructuring of large loss-making companies,
limited progress was made in consolidating
macroeconomic stability and restoring market
confidence.
policies
continued to be undermined by the financial
losses of
the
accumulation of
inter-enterprise
arrears,
timid restructuring and a weak
financial sector.

the state-owned enterprises,

Macroeconomic

tax and

the

capital

private

At the beginning of the year, the country's low
international credibility cast doubts on its
ability to repay its external obligations and
reduced
inflows.
This confidence crisis precipitated a sharp fall
currency. Nevertheless, Romania
of
successfully repaid all its external debt and
rebuilt its depleted foreign exchange reserves.
The low level of external financing, combined
with the weakness of domestic savings, led to
a sharp adjustment of the current account
deficit, which had reached a very high level in
1998.

on

Institutions

In the face of serious balance of payments
problems, the government accelerated reforms
and reached agreement with the International
Financial
new structural
adjustment loans. In support of these efforts,
the Council of the European Union adopted an
EUR 200 million macro-financial assistance
loan
the
EUR 100 million first tranche of this loan is
tied to a review by the IMF of satisfactory
implementation of its agreement. Because this
review could not take place in 1999, the first
payment under the EC assistance has been
delayed.

to Romania. The release

of

1. Price liberalisation

The number of controlled prices (essentially public utilities and energy),
represented about 7% of the CPI basket at the end of 1999.

2. Trade liberalisation

In 1999, average applied MFN rate was about 16% for
industrial
products and about 34% for agricultural products. Romania has signed a
Europe Agreement with the EU and free trade agreements with CEFTA,
EFTA, Moldova and Turkey. An import surcharge was introduced in
1998 and stood at 4% in 1999.

3. Exchange regime

The leu freely floats, but the central bank intervenes frequently on the
market. There is full current account convertibility.

4. Foreign direct investment

The FDI regime is open and non-discriminatory; profit may be freely
repatriated. Since early 1997, foreign investors can own land necessary
to carry out their activities. Portfolio investment by non-residents in
fixed income securities was not possible in 1999. Laws regulating FDI
and portfolio investment were repeatedly modified in 1997-99, creating
legal uncertainty.

5. Monetary policy

The National Bank of Romania is independent. The Law on the central
bank restricts its mandate to ensuring price stability and limits the
amount of
to the government. The
it can grant
effectiveness of monetary policy remained hampered by the absence of a
secondary market for government securities.

financing that

6. Public finances

Basic tax reform already completed, but major steps to consolidate
public finances remain to be implemented, including pension and health
reforms, strengthening financial discipline, tackling unfunded liabilities
and improving budgeting and expenditures control.

7. Privatisation and enterprise restructuring

By the end of 1999, most small and medium sized companies had been
privatised, but most
large-scale companies remained public. Large
utilities were reorganised in 1998-99 and privatisation was initiated.
Corporate governance and financial discipline of mostly large and loss-
making public companies remained weak.

8. Financial sector reform

Reform of the banking sector was slow in the first years, leading to
strong difficulties in 1997 and 1999. Public banks continued to account
for the majority of banking assets at the end of 1999. Capital markets
remained small and underdeveloped.

35

2.

Macroeconomic performance

In 1999, economic activity continued to contract and GDP is estimated to have fallen by 3.2% in
real terms for the year as a whole. On the expenditure side, investment registered a strong decline,
reflecting weak aggregate demand, the impact of prolonged high interest rates, and the difficulties
to raise outside financing. The crisis in Kosovo had a further, albeit modest, negative impact.
However, there has been a modest revival of exports and retail sales.

At the beginning of 1999, weak domestic and international confidence and the strong financing
difficulties of the financial system led to very high levels of interest rates, both in nominal and real
terms. This strongly affected investment and consumption, as well as the fiscal situation. Interest
the State budget, casting doubts on the
charges became the largest expenditure item for
sustainability of the fiscal situation. The high cost and the short-term maturity of domestic debt,
which was the main source of financing in 1999, were two important factors explaining this rapid
increase.

The fall in nominal and real interest rates that took place in the second half of 1999, as well as the
availability of some official external financing allowed the government to reduce its borrowings on
the domestic markets and control better its expenditures. In fact, the implementation of the budget
proved better in the second half of the year, allowing the government to meet its fiscal targets.
Overall, the fiscal position remained fragile, notably because of the importance of privatisation
revenues.

Higher liquidity, combined with the strong impact of the depreciation of the currency, led to an
acceleration of consumer prices inflation, which jumped from 32% at the beginning of the year to
more than 55% at the end of the year. In fact, monetary policy continued to be over-burdened as
the same time: strengthening
monetary authorities have tried to pursue many objectives at
credibility of the national currency; increasing the level of foreign exchange reserves; controlling
liquidity and reducing inflation; and ensuring some real depreciation of the currency to support
exports.

Unemployment has increased rapidly and reached more than 11% of the labour force at the end of
1999. It could still continue to rise as enterprise restructuring accelerates. The social situation was
also a serious cause of concern, with poverty growing steadily and health conditions deteriorating.

One of Romania's main economic problems since the beginning of transition has been its relatively
weak external position. The absence of meaningful restructuring in most of the public sector and a
non-friendly business environment has resulted in a weak export sector. In addition, the low level of
foreign direct investment and other form of long term capital has led to a build-up of external debt -
mostly of a relatively short term nature - and large fluctuations in foreign exchange reserves.

These vulnerabilities were fully exposed in 1999, when the country had to make large external debt
repayments, at a time when its low credibility led to a dramatic reduction in foreign financing. In
early 1999, the precarious situation of the balance of payments raised doubts about the country’s
capacity to service its external debt. Speculative pressures precipitated a sharp fall of the currency
in March, while foreign exchange reserves fell to less than one month of imports at the end of June.
However, the authorities stabilised the currency market and avoided a full-blown financial crisis.
They also repaid on time and in full all of their external debt obligations.

The current account adjusted strongly in 1999; it is estimated that the deficit will be reduced to
USD 1.2 billion, from USD 3 billion in the previous year. The main factors have been the fall in

36

domestic demand and difficulties to raise trade financing, which have reduced imports by about
15%.

3.

Structural reforms

To a large extent, Romania's macroeconomic problems stem from timid and sometimes incoherent
structural reforms. In 1999, significant progress was made in tackling the problems of the financial
sector and accelerating privatisation. However, weak corporate governance and a not hospitable and
transparent business environment remained sources of concern.

Privatisation accelerated. A few landmark deals were announced in the first months of the year,
including the sales of a controlling stake in the Telecommunication Company and the largest car
manufacturer. Many other ambitious privatisation operations were initiated, although most will not
be finalised until the middle of 2000 or thereafter. The decentralisation of the privatisation process
has speeded up the sale of small and medium sized companies. However, the overall performance
remained disappointing; due to significant and frequent changes in the legal framework for
privatisation and investment; many tenders generated insufficient interest or had to be cancelled,
including an important deal for the largest oil refinery. Uncertainties linked to the new legal
framework brought the privatisation of large enterprises almost to a complete halt in the second half
of 1999. One of the consequences of the slowdown in large-scale privatisation was the reduction in
FDI inflows.

Privatisation of banks continued: one small bank was sold in spring 1999 and the government
initiated privatisation procedures for two other large banks. In the context of the prior actions
agreed with the IFIs, the government took important measures to restructure the ailing public banks,
which were confronted to serious problems due to the high share of non-performing assets. A
special agency to recover bad assets was created. The licence of Bancorex, the largest public bank,
was revoked at the end of July and its remaining assets transferred to another public bank.

The lack of financial discipline continued to be a serious problems, increasing the amount of inter-
the large state-owned utilities providers, and causing
enterprises arrears,
interruption of basic services.

in particular

for

Important measures were taken in the agricultural field, in particular an ordinance on restitution of
State land and forests as well as privatisation of State farms.

4.

Implementation of macro-financial assistance

the end of 1998,

At
the Romanian authorities started negotiations on a new programme of
macroeconomic stabilisation and structural reforms, to be supported by new loans from the IMF and
the World Bank. On 10 June 1999, the World Bank approved credits worth USD 325 million
(including a new USD 300 million Private Sector Adjustment Loan) and on 5 August, the IMF
executive Board approved a SDR 400 million (USD 550 million) new Stand-by arrangement
(SBA). In 1999, the World Bank released USD 150 million under the PSAL, while the IMF made a
first payment of USD 73 million. However, the release of the second instalment could not be made
in October, as originally scheduled.

Following the signature of a letter of intent between the Romanian authorities and the IMF, the
Commission adopted on 28 July 1999 a proposal for a Council decision to grant a new balance of
payments loan to Romania. On 8 November, the Council decided to grant to Romania a new long-
term balance of payments loan of up to EUR 200 million. This is the fourth such loan since 1992.

37

At the end of 1999, the Commission and the Romanian authorities reached agreement on the
conditions for the release of the assistance which will be released in two equal instalments. The
release of the first tranche is subject to the successful conclusion of the first review under the stand-
by arrangement with the IMF. The second tranche will be released subject to continued satisfactory
implementation of the IMF programme and progress with respect to a selected number of structural
reforms.

On 1 February 1999, Romania repaid on time the second tranche of ECU 190 million of the first EU
macro-financial loan.

38

X.

1.

UKRAINE

Executive summary

1999 was another year of economic decline for
Ukraine, although output bottomed out in the
second half of the year. Reflecting the easing
of macroeconomic policies and the sharp
depreciation of the exchange rate around the
Presidential elections of October/November,
inflation accelerated in late 1999. On a more
positive note, despite the slippages of the
second half of
the consolidated
the year,
government deficit was cut from 3% of GDP
in 1998 to 1.1% of GDP in 1999. Also, the
current account deficit declined reflecting the
negative effect of shrinking output on imports.

financial

and the

Yet, Ukraine’s external
situation
remains critical. The government must make
substantial payments to foreign creditors in
2000, usable official foreign exchange reserves
remain very low,
country was
downgraded to a default grade rating in early
2000 by a major international rating agency.
The government announced in early 2000 a
deal to restructure some of its foreign debt,
mostly bond debt owed to the private sector
but also part of Ukraine's debt to the Russian
gas company Gazprom.

in

other

areas,

especially

Progress with structural
reforms has been
mixed. There has been some progress in areas
such as privatisation, deregulation, and fiscal
and public administration reform. However,
the
reforms
agricultural and energy sectors, have been very
disappointing, and private enterprises continue
to face an unstable and often unfriendly
regulatory environment. Although banking
supervision has been strengthened, the banking
system remains weak.
In the trade area,
Ukraine has introduced since 1998 a number
of restrictions that are incompatible with its
Partnership
and Cooperation Agreement
(PCA) with the EU.

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Most prices have been liberalised. Communal services tariffs (such as
gas, electricity, heating, and rents) are subject to administrative control
and tend to be below full-cost recovery.

2.

Trade liberalisation

Import regime free of quantitative restrictions, with a few exceptions for
health and safety reasons. Trade-weighted average import tariff was
7.5% in mid-1999. A uniform 2% import surcharge was imposed in July
1999 for six months. Few export restrictions (there are export duties on
hides and skins and on sunflower seeds). PCA with EU entered into force
on 1 March 1998. In 1999, Ukraine introduce several trade restrictions
that were incompatible with the PCA.

3.

Foreign exchange regime

Full current account convertibility (Article VIII status at the IMF)
since September 1996. Certain foreign exchange restrictions on
current transactions were reintroduced between September 1998 and
August 1999 to defend the currency.

4.

Foreign direct investment

Tax relief granted to some investments constituting at least 20% of an
enterprise's capital and to investments in the automobile industry
above USD 100 million. FDI inflows have remained very low on a per
capita basis (they reached only USD 747 million, or USD 15 per
capita, in 1998).

5.

Monetary policy

Increasing reliance on indirect monetary instruments. Central bank
credit to commercial banks allocated mostly through the Lombard
facility, credit auctions and repos. Reserve requirements were unified
in April 1997 at 11%, raised to 16.5% during 1997-98, and cut back to
15% in January 1999.

6.

Public finances

General government expenditure reduced from about 70% of GDP in
1992 to some 38% in 1998. Public employment cut by 1 million (to
4.7 million) between 1994 and 1998. Consolidated government deficit
reduced from 5.2% of GDP in 1997 to 1.1% of GDP in 1999. Social
security contributions, the VAT and the profit tax are the main sources
for about 70% of consolidated
of revenue, accounting together
government tax revenues.

7.

Privatisation and enterprise restructuring

Small-scale privatisation virtually completed. Over 9,500 enterprises
privatised through a mass (voucher) privatisation scheme launched in
early 1995. Over a quarter of 200 large enterprises privatised. Limited
involvement of
foreign or strategic investors. According to the
government, private sector accounted for about 60% of industrial
output in 1998.

8.

Financial sector reform

Significant efforts made since 1997 to strengthen banking
supervision and regulation, including the adoption of new law on
the central bank in July 1999, the introduction of the International
Accounting Standards, and the establishment of a new reporting
system for banks. Most banks are privately owned. The banking
system, however, remains weak, with several of the largest banks
being in poor condition. Capital markets remain underdeveloped.

39

In October 1998, the EU Council decided to grant to Ukraine a third macro-financial
loan in the amount of up to EUR 150 million. The first
tranche of the loan was
disbursed in July 1999.

The disbursement of the second tranche has been delayed, partly reflecting the
interruption of purchases under the EFF in the autumn of 1999. Discussions with the
authorities on the conditions for the implementation of the undisbursed part of the EU
loan are expected to resume as soon as the EFF is put back on track

2.

Macroeconomic performance

The loss of confidence in emerging markets and, especially, the Russian crisis had a
serious negative effect on the Ukrainian economy in 1998, with real GDP declining by
about 2%, the currency depreciating sharply, and inflation accelerating from 10% at
end-1997 to 20% at end-1998. Ukraine was, however, able to avert a Russian-type of
crisis and, in particular, did not default on its foreign debt.

Real GDP fell by 0.4% in 1999, although its rate of decline seems to have slowed in the
second half of the year, with some sectors showing signs of recovery. Reflecting the
easing of monetary and fiscal policies and the sharp depreciation of the exchange rate
around the Presidential elections of October/November 1999, inflation accelerated again
in late 1999, with the CPI jumping by 4.1% in December. Average CPI inflation in
1999 was 19.2%. Despite the slippages of the second half of the year, the consolidated
government deficit was cut from 3% of GDP in 1998 to 1.1% of GDP in 1999. The
Parliament has adopted a revised draft budget for 2000 aiming at a zero deficit.

The current account deficit is estimated to have swung from a deficit of 3% of GDP in
1998 to a small surplus in 1999, reflecting the negative effect of shrinking output on
imports, which amply offset a new drop in exports from their already depressed,
Russian-crisis related, 1998 levels. But the balance of payments position remains very
vulnerable. The government must pay about USD 3 billion to foreign creditors in 2000.
Usable official foreign exchange reserves stood at only about USD 1.1 billion at end-
1999, or the equivalent of 3.5 weeks of imports. Reflecting what it perceives as an
increased risk of default, Moody's downgraded in early January Ukraine's long-term
foreign currency rating from B3 to Caa1 (a default grade rating).

The government announced in early 2000 a deal to restructure some USD 2 billion of
foreign debt, mostly bond debt owed to the private sector but also part of Ukraine's debt
to the Russian gas company Gazprom. These debts will be swapped into 7-year maturity
euro- and dollar-denominated bonds, with the deal being managed by a syndicate of
international investment banks. There authorities may also approach the Paris Club to
ask for a rescheduling of Ukraine's Paris Club obligations. A satisfactory rescheduling
of Ukraine's foreign debt is a key element of the new programme being discussed with
the IMF. It should be noted that, although Ukraine has a debt service problem in 2000-
2001, its foreign debt is not high for international standards, amounting to about 40% of
GDP at end-1999.

40

3.

Structural reforms

Progress with structural reforms has been mixed. There has been some progress with
privatisation, deregulation,
fiscal and public administration reform, and banking
supervision. However, reforms in other areas, especially the agriculture and energy
sectors, have been very disappointing, and private enterprises continue to face an
unstable and often unfriendly regulatory environment. In the trade area, Ukraine has
introduced in recent years a number of restrictions that violate PCA rules.

The government has undertaken a number of structural improvements in the fiscal field
in recent years. Significant improvements to the VAT regime were introduced in 1998
and, in order to reduce the excessively high payroll taxation, the special payroll tax used
to finance the Chernobyl Fund was eliminated in 1999. In the area of administrative
reform, public sector employment was reduced by 1 million between 1994 and 1998,
and measures are being taken to reorganise and downsize certain Ministries.
The Parliament, however, has blocked some fiscal reforms recommended by the IMF.
Also, there have been delays in pension reform and in implementing the project to
establish a modern treasury system.

Privatisation has predominantly taken the form of sales to management and employees
and voucher privatisation, leaving industry with little access to new capital. Small-scale
privatisation is virtually complete, a mass (voucher) privatisation scheme has been
implemented, and over a quarter of the 200 larger enterprises have been sold (although
relatively few foreign or strategic investors have participated owing to a lack of
transparency in the procedures). The government intends to accelerate in 2000-2001 the
privatisation of large companies, including the state telephone monopoly Ukrtelekom,
partly in order to raise budget revenues and obtain the foreign exchange with which to
meet its large foreign debt obligations.

While there has been some progress with demonopolisation, deregulation and
bankruptcy legislation, the regulatory environment is not particularly conducive to the
promotion of private enterprise activity. Enterprises are subject to a relatively high tax
burden, and tax regulations are changed frequently. This has encouraged the emergence
of a large underground economy. The economic environment is also characterised by a
lack of financial discipline, with the government often running significant expenditure
arrears and inter-enterprise arrears having increased in recent years to worrying levels.
Reflecting the increase in inter-enterprise arrears and, in some cases, the desire to
escape tax control, barter transactions have grown strongly. A difficult business
environment has continued to discourage FDI inflows, which remain among the lowest
in the region on a per capita basis.

Substantial progress has been made since 1997 in strengthening banking supervision
and regulation and, despite persistent weakness in the seven major banks (which
continue to dominate the banking system), Ukraine was able to avoid a banking crisis in
the wake of the Russian crisis of August 1998. Banking supervision has been
strengthened through the reorganisation of the Banking Supervision Department of the
National Bank of Ukraine (NBU). Also, since 1 January 1998, banks have been obliged
to report their balance sheets according to the International Accounting Standards (IAS),
although the changeover to the IAS is taking place only gradually. Despite these
positive developments, the banking system remains weak. Banks' capitalisation levels
are low and the share of non-performing loans is high, having increased in the aftermath
of the Russian crisis.

41

Reforms in the agricultural sector have been very slow. Agriculture continues to be
hampered by delays in privatising the enterprises of the agro-industrial complex,
monopolistic practices, and the absence of a functioning land market. All this has
contributed to a decline in agricultural output, whose share in GDP has consistently
fallen since independence.

Reforms in the energy sector have also been disappointing. In the electricity sector,
customer arrears are widespread, cash collection rates remain very low, and there have
been delays with the privatisation of the regional power distribution companies. Further
privatisation, improved management, reduced costs, higher tariffs, and an increase in
cash collection rates are essential to make the sector profitable.

While most prices have been liberalised, a number of administered prices remain. Some
of these administrated prices, in particular tariffs for communal services, remain below
cost-recovery levels.

Finally, regarding trade liberalisation, although Ukraine has few export restrictions and
its average import tariff is not high by regional standards, companies exporting to
Ukraine face a number of non-tariff barriers and discriminatory practices. Moreover,
trade regulations are subject to frequent changes, introducing an undesirable element of
instability for foreign companies trading with Ukraine. Since the entry into force of the
PCA (1 March 1998), Ukraine has introduced a number of trade restrictions that are in
violation of its provisions. A temporary 2% import surcharge was imposed in July 1999.
Ukraine has applied for WTO membership but accession is not expected to happen
before 2001 at the earliest.

4.

Implementation of macro-financial assistance

In October 1998, the EU Council decided to grant to Ukraine a third macro-financial
loan in the amount of up to EUR 150 million8 The loan is to be disbursed in at least two
tranches and has a maximum maturity of 10 years. The disbursement of the first tranche
was delayed reflecting initial problems with the IMF's EFF (see below). Following the
resumption of purchases under the EFF and the implementation of a number conditions
the loan
agreed between the Commission and Ukraine,
(EUR 58 million) was disbursed in July 19999. At the same time, the Commission
agreed with the authorities on conditions attached to the release of a second tranche of
EUR 42 million. The release of the second tranche, however, was delayed owing to
policy slippages and the interruption of the EFF. Discussions between the Commission
and the Ukrainian authorities are expected to resume as soon as the EFF is put back on
track.

tranche of

the first

8

9

Council Decision 98/592/EC of 15 October 1998. The first and second macro-financial
assistance operations had been approved by the Council in December 1994 and October 1995.
The first loan, amounting to EUR 85 million was disbursed during 1995. The second one,
amounting to EUR 200 million, was disbursed in 1996 and 1997.
The economic policy conditionality for the first tranche focused on: trade liberalisation (in
particular the removal of a number of trade obstacles judged to be inconsistent with the
provisions of the PCA); financial sector reform; the treatment of foreign investors; and energy
sector reforms.

42

the IMF approved an EFF for Ukraine in the amount of
In September 1998,
USD 2.2 billion, which was later augmented to USD 2.6 billion. The EFF ran off-track
soon after its approval because of fiscal and structural slippages but resumed under a
revised economic programme in the spring of 1999. The easing of macroeconomic
policies, the failure to implement a number of structural reforms and the impasse
created by the Presidential election, however, led to a second interruption of purchases
under the EFF in the autumn of 1999. Following the appointment of a new government
led by Mr. Yuschenko in January 2000, the IMF has been negotiating with Ukraine a
new economic programme to be supported by a resumption of purchases under the EFF.
The resumption of IMF lending, however, has been complicated by allegations about a
possible irregular use of IMF funds by the NBU during 1997-1998. At the request of the
IMF, the government has commissioned an independent audit of the NBU’s reserve
transactions. The IMF is expected to wait for the full results of this audit before
approving any new programme.

World Bank lending has focused on public sector reform, the agriculture and energy
sectors, and privatisation and financial sector reform. In this last area, three adjustment
operations (the EDAL I and II and the FSAL) have been approved since 1996, for a
the
total of USD 910 million. While the EDAL loans have been fully disbursed,
disbursement of the third tranche of the FSAL (USD 100 million) has been delayed due
to the lack of implementation of some measures agreed under the loan and the
interruption of the EFF.

43

ANNEX 1 A: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES
BY DATE OF COUNCIL DECISIONS

Status of effective disbursements as of December 1999 (in millions of euro)

Authorisations

Disbursements

Country

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Hungary I
(Structural adjustment loan)

22.02.90

90/83/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

870

375

180

290

375

188

400

70

110

220

(40)
(80)
(100)

80

45

24.06.91

91/310/EC

24.06.91

91/311/EC

22.07.91

91/384/EC

22.07.91

91/408/EC

23.09.91

91/510/EC

28.09.92

92/482/EC

19.10.92

92/511/EC

23.11.92

92/542/EC

27.11.92

92/551/EC

13.06.94

94/346/EC

20.06.94

94/369/EC

125

28.11.94

94/773/EC

22.12.94

94/936/EC

22.12.94

94/939/EC

22.12.94

94/940/EC

10.04.95

95/132/EC

35

200

130

85

55

23.10.95

95/442/EC

200

25.03.96

96/242/EC

15

Apr. 1990
Feb. 1991

Mar. 1991
Mar. 1992

Aug. 1991
Jan. 1993

Aug. 1991
Mar. 1992

Jan. 1992
Apr. 1992

Mar. 1992

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

Mar. 1993
Mar. 1993
Jul. 1993
Jul. 1993
Aug. 1995

Feb. 1993

Dec. 1994
Aug. 1995

Nov. 1995
Sep. 1997
Dec 1997

Jun. 1995
Oct. 1996

350
260

185
190

100
80

150
140

190
185

188

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

15
20

Nov. 1995

100

610

375

180

290

375

188

400

70

110

135

(20)
(40)
(75)

80

45

125

35

100

260
(Suspended)

85
(Suspended)

(20)
(40)
(25)

100
(Suspended)

Cancelled
(Jul. 1996)

130
Cancelled

Dec. 1995

Dec. 1995

Aug. 1996
Oct. 1996
Sept. 1997

Dec. 1996

85

30

50
50
100

15

85

30

200

15

25
(Suspended)

Hungary II
(BOP loan)

Bulgaria I
(BOP loan)

Romania I
(BOP loan)

10

Israel
(structural adjustment soft loan)

Algeria I
(BOP loan)

Albania I
(BOP grant)

Bulgaria II
(BOP loan)

Baltics
(BOP loans)
of which :

Estonia
Latvia
Lithuania

Romania II
(BOP loan)

Moldova I
(BOP loan)

Romania III
(BOP loan)

Albania II
(BOP grant)

Algeria II
(BOP loan)

Slovakia
(BOP loan)

Ukraine I
(BOP loan)

Belarus
(BOP grant)

Ukraine II
(BOP loan)

Moldova II
(BOP loan)

10

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.

44

ANNEX 1 A: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES
BY DATE OF COUNCIL DECISIONS

Country

FYROM
(BOP loan)

Bulgaria III
(BOP loan)

11

Armenia and Georgia
(Structural adjustment loans and grants)
of which:

Armenia

Georgia

Ukraine III
(BOP loan)

Albania III
(BOP loan)

12

Bosnia I
(BOP loan and grant)

Bulgaria IV
(BOP loan)

13

FYROM II
(BOP loan and grant)

Romania IV
(BOP loan)

TOTAL

CONTINUED

Authorisations

Disbursements

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Disbursed Undisbursed

22.07.97

97/471/EC

22.07.97

97/472/EC

17.11.97

97/787/EC

40

250

265

(58)

(165)

15.10.98

98/592/EC

150

22.04.99

99/282/EC

10.05.99

99/325/EC

08.11.99

99/731/EC

08.11.99

99/733/EC

08.11.99

99/732/EC

20

60

100

80

200

5213

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

Dec. 1998
Dec. 1998
Dec. 1999

Jul. 1998
Aug. 1998
Sep. 1999

Jul. 1999

Dec. 1999
Dec. 1999

Dec. 1999

40

250

169

96

(40)

(18)

(129)

(36)

25
15

125
125

28
8
4

110
10
9

58

25

40

15 (grant)
10 (loan)

92

20

35

60

80

200

4030

1183

11

12

13

Exceptional financial assistance, which includes loans for a maximum amount of ECU 170 million and grants for a
maximum amount of ECU 95 million. Disbursements include an ECU 28 million loan and an ECU 8 million grant for
Armenia, and an ECU 110 million loan and an ECU 10 million grant for Georgia.
Includes a loan principal amount of EUR 20 million and grants of EUR 40 million.
Includes a loan principal amount of up to EUR 50 million and grants of up to EUR 30 million.

45

ANNEX 1 B: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES
BY REGION

Status of effective disbursements as of December 1999 (in millions of euro)

Country

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Disbursed Undisbursed

Authorisations

Disbursements

A. EU Accession Countries

Estonia
Latvia
Lithuania

Baltics
(BOP loans)
of which :

Bulgaria I
(BOP loan)

Bulgaria II
(BOP loan)

Bulgaria III
(BOP loan)

Bulgaria IV
(BOP loan)

23.11.92

92/542/EC

220

24.06.91

91/311/EC

19.10.92

92/511/EC

22.07.97

97/472/EC

08.11.99

99/731/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary I
(Structural adjustment loan)

Hungary II
(BOP loan)

Romania I
(BOP loan)

Romania II
(BOP loan)

Romania III
(BOP loan)

Romania IV
(BOP loan)

Slovakia
(BOP loan)

TOTAL A

B. Western Balkans

Albania I
(BOP grant)

Albania II
(BOP grant)

Albania III
(BOP loan)

14

Bosnia I
(BOP loan and grant)

FYROM
(BOP loan)

15

FYROM II
(BOP loan and grant)

TOTAL B

22.02.90

90/83/EC

24.06.91

91/310/EC

22.07.91

91/384/EC

27.11.92

92/551/EC

20.06.94

94/369/EC

08.11.99

99/732/EC

22.12.94

94/939/EC

28.09.92

92/482/EC

28.11.94

94/773/EC

22.04.99

99/282/EC

10.05.99

99/325/EC

22.07.97

97/471/EC

08.11.99

99/733/EC

Mar. 1993
Mar. 1993
Jul. 1993
Aug. 1995

Aug. 1991
Mar. 1992

Dec. 1994
Aug .1996

Feb. 1998
Dec. 1998

Dec. 1999

Mar. 1991
Mar. 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

Feb. 1993

Nov. 1995
Sep. 1997
Dec 1997

Dec. 1992
Aug. 1993

Jun. 1995
Oct. 1996

Dec. 1999
Dec. 1999

Sep. 1997
Feb. 1998

50
25

150
140

70
40

125
125

185
190

350
260

100
80

190
185

55
40
30

35
35

15
20

15 (grant)
10 (loan)

25
15

85
(Suspended)

(20)
(40)
(25)

60

260
(Suspended)

135

(20)
(40)
(75)

290

110

250

40

375

610

180

375

80

125

200

Cancelled
(Jul. 1996)

130
Cancelled

2570

735

70

35

25

40

20

35

80

170

135

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

3305

70

35

20

60

40

80

305

14

15

Includes a loan principal amount of EUR 20 million and grants of EUR 40 million.
Includes a loan principal amount of up to EUR 50 million and grants of up to EUR 30 million.

46

ANNEX 1 B: COMMUNITY MACRO-FINANCIAL ASSISTANCE TO THIRD COUNTRIES
BY REGION

CONTINUED

Country

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Disbursed Undisbursed

Authorisations

Disbursements

C. New Independent States (NIS)

16

Armenia and Georgia
(Structural adjustment loans and grants)
of which:

Armenia

Georgia

Belarus
(BOP grant)

Moldova I
(BOP loan)

Moldova II
(BOP loan)

Ukraine I
(BOP loan)

Ukraine II
(BOP loan)

Ukraine III
(BOP loan)

TOTAL C

D. Mediterranean Countries

Algeria I
(BOP loan)

Algeria II
(BOP loan)

17

Israel
(structural adjustment soft loan)

TOTAL D

TOTAL A+B+C+D

17.11.97

97/787/EC

265

169

96

(58)

(165)

55

45

15

85

Dec. 1998
Dec. 1998
Dec. 1999

Jul. 1998
Aug. 1998
Sep. 1999

Dec. 1995

Dec. 1994
Aug. 1995

Dec. 1996

28
8
4

110
10
9

25
20

Dec. 1995

Dec. 1995

10.04.95

95/132/EC

13.06.94

94/346/EC

25.03.96

96/242/EC

22.12.94

94/940/EC

23.10.95

95/442/EC

200

15.10.98

98/592/EC

23.09.91

91/510/EC

22.12.94

94/936/EC

22.07.91

91/408/EC

150

815

400

200

188

788

5213

50
50
100

250
150

Aug. 1996
Oct. 1996
Sept. 1997

Jul. 1999

Jan. 1992
Aug. 1994

Nov. 1995

Mar. 1992

(40)

(18)

(129)

(36)

25
(Suspended)

30

45

15

85

200

58

92

602

213

400

100

187.5

688

4030

100
(Suspended)

100

1183

16

17

Exceptional financial assistance, which includes loans for a maximum amount of ECU 170 million and grants for a
maximum amount of ECU 95 million. Disbursements include an ECU 28 million loan and an ECU 8 million grant for
Armenia, and an ECU 110 million loan and an ECU 10 million grant for Georgia.
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.

47

ANNEX 2 - BALANCE OF PAYMENTS SUPPORT TO RECIPIENTS OF EU
MACRO-FINANCIAL ASSISTANCE BY CONTRIBUTOR, 1990-1999 (18)

2a. In millions US$

IFI's

IMF

World Bank

Bilaterals

EU (

19)
Other bilaterals (
of which

20

)

USA

Japan

Debt relief

Paris Club

London Club

Other (

21)

1990

419

219

200

1618

1108

511

200

1991

5607

4177

1430

5600

2190

1406

35

850

2004

554

1450

1992

1564

909

655

708

423

285

120

1994

4086

3206

880

11202

855

702

100

350

9645

4920

4380

345

1995

1877

1477

400

3885

330

150

150

3405

3405

1996

250

195

55

67

19

10

10

38

38

1997

732

584

148

582

329

73

15

54

180

180

1998

2800

2200

600

336

168

1999

1691

949

742

738

422

264

75

22

52

52

2.b In percent of total commitments, including debt relief

IFI's

IMF

World Bank

Bilaterals

EU (17)
Other bilaterals (18)
of which

USA

Japan

Debt relief

Paris Club

London Club
Other (19)

1990

1991

1992

1994

1995

1996

1997

1998

1999

21

11

10

79

54

25

10

50

37

13

50

20

13

0

8

18

5

13

69

40

29

31

19

13

5

27

21

6

73

6

5

1

2

63

32

29

2

33

26

7

67

6

3

3

59

59

79

62

17

21

6

3

3

12

12

56

44

11

44

25

5

1

4

14

14

94

74

20

6

6

70

39

31

30

17

11

3

1

2

2

2c. In percent of total commitments, excluding debt relief

IFI's

IMF

World Bank

Bilaterals

EU (17)
Other bilaterals (18)
of which

USA

Japan

1990

1991

1992

1994

1995

1996

1997

1998

1999

21

11

10

79

54

25

10

61

45

16

39

24

15

0

9

69

40

29

31

19

13

5

72

57

16

28

15

12

2

6

80

63

17

20

14

6

6

90

70

20

10

7

4

4

65

52

13

35

29

7

1

5

92

59

33

8

8

71

40

31

31

18

11

3

1

18

19

20

21

For the purpose of these table recipients of EC MFA means all countries listed in Table 1. 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 1995, and rescheduling agreements with international banks in
1998 and 1999;
- debt rescheduling in favour of Moldova by Russia in 1996;
- debt rescheduling in favour of Bulgaria and FYROM in 1997.

48

ANNEX 2.1: BALANCE OF PAYMENT SUPPORT TO RECIPIENTS OF EC
MACRO-FINANCIAL ASSISTANCE BY CONTRIBUTOR, 1998-199922

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

Balance of payments support 1998

Total

Ukraine III

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

2800
2200
600

168
168

94
74
20

6
6

673
333
340

100
49
51

2800
2200
600

168
168

94
74
20

6
6

673
333
340

100
49
51

IFI's
IMF
WB (policy based)

Bilaterals
EU
USA
Japan
Other bilaterals
Debt relief
London Club
Paris Club
Other

Total

2968

100

673

100

2968

100

673

100

Balance of payments support 1999

Total

Albania III

Bosnia I

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

1691
949
742

738
422
75
22
167
52

52

70
39
31

30
17
3
1
7
2

2

890
438
452

218
80
28

76
34

34

80
40
41

20
7
3

7
3

3

71
21
50

30
20

4
6

6

70
21
50

30
20

4
6

6

71
21
50

10

4
6

6

88
26
62

12

5
7

7

183
61
122

124
60
22

38
4

4

60
20
40

40
20
7

12
1

1

77
39
38

39
25
9.5

4

4

67
34
33

33
22
8

3

3

IFI's
IMF
WB (policy based)

Bilaterals
EU
USA
Japan
Other bilaterals
Debt relief
London Club
Paris Club
Other

Total

2429

100

1107

100

101

100

81

100

307

100

115.5

100

Bulgaria IV

FYROM II

Romania IV

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

465
290
175

210
110
25

75

IFI's
IMF
WB (policy based)

Bilaterals
EU
USA
Japan
Other bilaterals
Debt relief
London Club
Paris Club
Other

461
286
175

91
40

51

125
30
95

247
105
28
22
50
42

42

34
8
26

66
28
8
6
13
11

11

59
19
40

66
15
6

21
24

24

47
15
32

53
12
5

17
19

19

223
73
150

100
33
67

847
547
300

205
205

81
52
29

19
19

Total

675

551

372

100

125

100

1052

100

223

100

22

Disbursements are shown under the year of corresponding commitments.

49

ANNEX 3: SELECTED ECONOMIC INDICATORS

GDP at constant prices

(Percent change)

1996

1997

1998

1999

Programme

23

Estimates

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
FYROM
Georgia
Romania
Ukraine

9.1
5.8
69.0
-10.9
1.2
10.5
3.9
-10.0

Consumer price (end year)

(Percent change)

Albania
Armenia
Bosnia-Herzegovina

Federation
Republika Srpska

Bulgaria
FYROM
Georgia
Romania
Ukraine

17.4
5.7

310.8
0.2
13.7
56.9
39.7

Fiscal balance

(Percent of GDP)

Albania

24

Armenia
Bosnia-Herzegovina

Federation
Republika Srpska

Bulgaria
FYROM
Georgia
Romania
Ukraine

-11.7
-9.3

-3.0
0.0
-13.4
-0.3
–7.4
-4.0
-3.2

Current account

(Percent of GDP)

Albania

25

Armenia
Bosnia-Herzegovina
Bulgaria
FYROM

25

Georgia
Romania
Ukraine

-9.1
-27.9

-0.5
1.3
-6.5
–13.8

-7.3
-2.7

Official foreign exchange reserves
(end year)

(Months of imports)

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
FYROM
Georgia
Romania
Ukraine

3.1
2.2
2.4
1.6
1.7
2.7
2.1
5.2

-7.0
3.1
30.0
-7.4
1.4
11.0
-6.1
-3.0

42.1
21.9

14.0
3.0
579.7
4.5
7.3
151.4
10.0

-12.6
-5.8

-1.9
0.0
-2.6
-0.4
-7.0
-3.6
-5.6

-12.1
-28.0

-43.3
4.4
-7.4
-16.5

-6.1
-3.4

4.5
3.1
1.3
4.0
1.7
2.4
3.6
5.6

8.0
7.2
18.0
4.5
2.9
2.9
-5.4
-1.7

8.7
-1.3

5.0
38.0
1.0
-1.0
10.6
40.6
22.0

-10.4
-4.8

-1.7
-5.2
1.3
-1.6
-6.5
-4.0
-3.5

-6.1
-27.3

-31.5
-0.6
-8.9
-17.5

-7.2
-1.2

4.7
3.6
1.4
5.7
1.9
1.2
3.6
0.9

8.0
4.0
16.0
1.5
5.0
2.0
-3.5
-3.0

7.0
9.9

3.0

2.8
1.0
12.9
38.3
21.0

-13.8
-6.1

-1.6
-3.3
-1.5
-2.1
-2.8
-2.7
-1.3

-9.6
-21.8

-22.0
-5.6
-6.7
-15.7

-7.5
-2.1

3.9
3.6
2.2
-
2.8
2.5
7.1
0.8

8.0
3.1
2.5
2.5
2.7
3.0
-3.2
-0.4

0.5
2.0

6.2
0.7
10.9
54.9
19.1

-11.0
-5.4

-0.9
0.0
-6.7
-4.1
-1.1

-8.5
19.0

-4.5
-5.2
-4.0
-14.1

-3.8
0.5

4.5
4.0
4.0
6.4
3.4
1.5
6.4
0.8

23

24

25

Programme targets as set in:
May 1999 for Albania (approval of the second-year ESAF programme),

for Armenia,
for Bosnia-Herzegovina,

Programme revised in September 1999 for Bulgaria,

for FYROM,
for Georgia,

revised targets set

in August 1999 under

For Ukraine,
September 1998.
For Romania, no target for 1998 were included in the last IMF programme, approved in 1997 and which expired in
May 1998. Figures are IMF Staff estimates prepared for the last Article IV consultations.
On a cash basis.
Excluding offical transfers.
Sources: National authorities and IMF

the extended arrangement approved by the IMF in

50