Report from the Commission to the European Parliament and to the Council on the implementation of macro-financial assistance to third countries in 2000
Date: 2001-06-01
Institutions: European Commission
Subjects: Central and Eastern Europe, EU aid, economic reform, financial aid, third country

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 1.6.2001
COM(2001) 288 final

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

ON THE IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE
TO THIRD COUNTRIES IN 2000

BiH
CAMEL

CBA
CEECs
CPI
DEM
EBRD
EC
EFF
EIB
ESAF
EU
EUR
FDI
FESAL
FRY
FYROM
GDP
IFIs
IMF
MFA
MoU
NIS
PRGF
SAA
SAF
SBA
SDR
UN
UNMIK
USD
VAT
WTO

List of abbreviations

liquidity (parameters used in

Bosnia and Herzegovina
Capital, assets, management, earnings,
international system for rating banks)
Currency Board Arrangement
Central and East European Countries
Consumer Price Index
German Mark
European Bank for Reconstruction and Development
European Community
Extended Fund Facility
European Investment Bank
Enhanced Structural Adjustment Facility
European Union
Euro
Foreign Direct Investment
Financial and Enterprise Structural Adjustment Loan
Federal Republic of Yugoslavia
Former Yugoslav Republic of Macedonia
Gross Domestic Product
International Financial Institutions
International Monetary Fund
Macro-Financial Assistance
Memorandum of Understanding
New Independent States
Poverty Reduction and Growth Facility (formally ESAF)
Stabilisation and Association Agreement
Structural Adjustment Facility
Stand-By Arrangement
Special Drawing Right
United Nations
United Nations Interim Administration Mission in Kosovo
Dollar of the United States of America
Value Added Tax
World Trade Organisation

2

TABLE OF CONTENTS

I.

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

II. OVERVIEW ....................................................................................................... 6

1.

2.

3.

4.

Background ..................................................................................................... 6

Macro-financial assistance in 2000................................................................. 7

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

Burden-sharing ..............................................................................................15

III. ALBANIA ..........................................................................................................16

1.

2.

3.

4.

Executive summary........................................................................................16

Macroeconomic performance ........................................................................17

Structural reforms .........................................................................................18

Implementation of macro-financial assistance..............................................18

IV. ARMENIA .........................................................................................................20

1.

2.

3.

4.

Executive summary........................................................................................20

Macroeconomic performance ........................................................................20

Structural reform...........................................................................................21

Implementation of exceptional financial assistance......................................22

V. BOSNIA AND HERZEGOVINA ......................................................................23

1.

2.

3.

4.

Executive summary........................................................................................23

Macroeconomic performance ........................................................................24

Structural reforms .........................................................................................24

Implementation of macro-financial assistance..............................................26

VI. BULGARIA .......................................................................................................27

1.

2.

3.

4.

Executive summary........................................................................................27

Macroeconomic performance ........................................................................28

Structural reforms .........................................................................................28

Implementation of macro-financial assistance..............................................29

VII. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA...................30

1.

2.

3.

Executive summary........................................................................................30

Macroeconomic performance ........................................................................31

Structural reform...........................................................................................31

3

4.

Implementation of macro-financial assistance..............................................32

VIII. GEORGIA......................................................................................................34

1.

2.

3.

4.

Executive summary........................................................................................34

Macroeconomic performance ........................................................................35

Structural reforms .........................................................................................35

Implementation of exceptional financial assistance......................................36

IX. KOSOVO ...........................................................................................................37

1.

2.

3.

4.

Executive summary........................................................................................37

Macroeconomic performance ........................................................................38

Structural reforms .........................................................................................38

Implementation of macro-financial assistance..............................................40

X. MOLDOVA........................................................................................................41

1.

2.

3.

4.

Executive summary........................................................................................41

Macroeconomic performance ........................................................................41

Structural reforms .........................................................................................42

Implementation of macro-financial assistance..............................................43

XI. MONTENEGRO................................................................................................44

1.

2.

3.

4.

Executive summary........................................................................................44

Macroeconomic performance ........................................................................44

Structural reforms .........................................................................................45

Implementation of macro-financial assistance..............................................46

XII. ROMANIA .....................................................................................................47

1.

2.

3.

4.

Executive summary........................................................................................47

Macroeconomic performance ........................................................................48

Structural reforms .........................................................................................49

Implementation of macro-financial assistance..............................................49

XIII. TAJIKISTAN.................................................................................................51

1.

2.

3.

4.

Executive summary........................................................................................51

Macroeconomic performance ........................................................................51

Structural reforms .........................................................................................52

Implementation of macro-financial assistance..............................................53

4

XIV. UKRAINE ......................................................................................................54

1.

2.

3.

4.

Executive summary........................................................................................54

Macroeconomic performance ........................................................................55

Structural reforms .........................................................................................56

Implementation of macro-financial assistance..............................................57

5

I.

INTRODUCTION

This report assesses the economic situation, the progress of reforms and the prospects of
the countries that received macro-financial assistance in 2000, 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 2000, and an analysis of
the burden-sharing among the international donor 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 under previously decided operations have been made in 2000.

is submitted in accordance with the Council Decisions regarding
This report
Community macro-financial or exceptional 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 2000 appears in Annex 1. Annex 2
summarises the macro-financial assistance provided by bilateral and multilateral donors
received EC macro-financial assistance. Finally, selected
to the countries that
macroeconomic indicators are summarised in Annex 3.

II.

1.

OVERVIEW

Background

Initially conceived for intra-Community balance-of-payment support, macro-financial
assistance (MFA) 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 Western Balkans, 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 MFA to the Central and
East European Countries (CEECs) with a view to support their process of transition to
market economies. 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 economic

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.
COM(2000)682 of 27 October 2000.

6

programmes that the CEECs were implementing in agreement with the International
Monetary Fund (IMF) and the World Bank.

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 that were formerly part of the republic of Yugoslavia.
Outside the region of Central and Eastern Europe, several other operations for some
Newly Independent States and a few Mediterranean countries were decided by the
Council.

MFA supports the political and economic reform efforts of the beneficiary countries and
is implemented in association with support programmes from the IMF and the World
Bank. It has continued to incorporate a set of principles which underline the exceptional
character of this assistance, its complementarity to financing from the IFIs and its
macroeconomic conditionality. In particular, Community MFA 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 stabilising the financial situation
and establishing market-oriented economies. The Commission implements this type of
assistance in consultation with the Economic and Financial Committee.

2.

a)

Macro-financial assistance in 2000

New decisions

The year 1999 had been a year of enhanced MFA to Balkan countries, when, as a result
of increased balance-of-payments difficulties and of the Kosovo crisis, five operations
for a maximum amount of EUR 460 million had been decided by the Council for
Albania, Bosnia and Herzegovina, Bulgaria,
the former Yugoslav Republic of
Macedonia (FYROM) and Romania. In the year 2000, new MFA operations were
decided for two Balkan entities, Kosovo and Montenegro, and one NIS, Moldova. In
March 2000, the Council also decided to extend to Tajikistan the exceptional assistance
decided in November 1997 for Armenia and Georgia, and to increase accordingly the
maximum amounts of the grant and loan envelopes foreseen for this assistance.

In February 2000, the Council decided to provide exceptional financial assistance to
Kosovo of up to EUR 35 million in the form of grants. The funds were to be made
available to the United Nations Interim Administration Mission in Kosovo (UNMIK)
through its Central Fiscal Authority (CFA). Taking into consideration the considerable
progress achieved by UNMIK in establishing essential administrative functions and
developing a sound economic framework in Kosovo under very difficult circumstances,
a first tranche of EUR 20 million was released in the second half of March 2000. A
Commission review mission that took place in June 2000 found that UNMIK had made
good progress in establishing an economic framework in Kosovo and that the conditions
attached to the disbursement of the second tranche had been broadly fulfilled. It was
therefore decided to proceed with the disbursement of the second tranche of EUR 15
million in the second half of August. This exceptional assistance, which forms part of
an overall European Community assistance package, was complementary to the
resources provided by the World Bank and bilateral donors.

7

Montenegro's macroeconomic situation, which had already deteriorated during a
decade of gradual dissolution of the Socialist Federal Republic of Yugoslavia, suffered
from the outbreak of the Kosovo crisis and the large influx of refugees from Kosovo. In
recognition of the difficult situation of the government of Montenegro, the Council
decided on 22 May 2000 to provide Montenegro with exceptional Community financial
assistance of up to EUR 20 million in the form of an outright grant, which was to be
released in at least two successive tranches, and to be subject to economic policy
conditionality. Following the signature of the Memorandum of Understanding (MoU)
between the Republic and the Commission,
tranche of the assistance,
amounting to EUR 7 million, was disbursed in August 2000. As the authorities broadly
met the economic policy conditions attached to this assistance, set out in the MoU, by
undertaking accelerated efforts towards the creation of a market-oriented economy, the
release of a second tranche of EUR 12.95 million was disbursed in early January 2001,
while some EUR 50,000 was used for technical support
in the context of the
implementation of this assistance.

the first

In 2000, Moldova continued to be faced with serious economic problems. On 1
December 2000, the government signed a three-year memorandum of understanding
with the IMF in the context of a Poverty Reduction and Growth Facility. Subsequently,
in the last week of 2000, Moldova received, in total, external financing of roughly USD
42 million. In July 2000, the Council decided to provide MFA of up to EUR 15 million
to Moldova. The release of a first tranche, amounting to EUR 10 million, is subject
to a
review by the IMF of satisfactory implementation of its agreement.

The Council also decided in March 2000 to extend to Tajikistan the exceptional
financial assistance already agreed for Armenia and Georgia in November 1997. It
decided accordingly to increase the maximum amount of this type of assistance by EUR
110 million (EUR 75 million in loans and EUR 35 million in grants) to a total of EUR
375 million (EUR 245 million in loans and EUR 130 million in grants). Negotiations
concerning the terms, amounts and conditions attached to the financial assistance led to
an agreement being formally signed by the Tajik authorities in December 2000.

b)

Disbursements

Disbursements of macro-financial assistance amounted to a total of EUR 265
million in 2000, including EUR 50 million disbursed in the first days of January 2001
on the basis of procedures launched in December 2000. These disbursements consisted
of EUR 35 million for Kosovo, EUR 20 million for Montenegro, EUR 20 million for
Bosnia, EUR 30 million for the former Yugoslav Republic of Macedonia, EUR 60
million for Bulgaria and EUR 100 million for Romania. The last four disbursements
were part of previously decided operations. Disbursements to Kosovo and Montenegro
were related to operations decided during 2000.

Of the EUR 265 million disbursed, EUR 85 million took the form of grants. These were
for the former Yugoslav Republic of Macedonia (EUR 20 million), Kosovo (EUR 35
million), Bosnia (EUR 10 million) and Montenegro (EUR 20 million). The rest of the
assistance took the form of long-term loans (for the former Yugoslav Republic of
Macedonia, EUR 10 million, for Bosnia, EUR 10 million, for Bulgaria, EUR 60 million
and for Romania, EUR 100 million).

8

c)

Repayments and undisbursed operations

Several repayments took place in 2000: both Estonia (EUR 20 million) and Latvia
(EUR 40 million) discharged on time their financial obligations and have no more
outstanding debts towards the EC. Other repayments were made on the due date by
Lithuania (EUR 50 million), Romania (EUR 80 million) and Moldova (EUR 5 million).

Some MFA operations decided in the first half of the 1990s have not been fully paid out
as initially foreseen. This has been the result of either improved external financial
conditions, (as in the cases of the Baltic countries, Hungary, Slovakia and more recently
also Algeria) or of a difficult political climate and/or the slowing-down of the reform
process (as in the cases of Belarus and again of Algeria). In these cases,
the
disbursement of the remaining tranches is not programmed anymore. Among the
recently decided operations, some delays have occurred in the disbursements to
Armenia, Georgia, Ukraine, Albania and Bosnia, whereas the operations for the former
Yugoslav Republic of Macedonia, Romania and Moldova are likely to be implemented
as originally foreseen. The last column of Annex 1 provides details concerning the
undisbursed amounts.

d)

Other

In the course of the year 2000, the Commission submitted no other MFA proposal to the
Council.

3.

Trends and tendencies in macro-financial assistance

The Community's macro-financial assistance was originally intended to support
macroeconomic stabilisation 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 a relative
increase of MFA to the countries of the Balkans developed through the 1999 and 2000
Council decisions. In 2000, assistance decided for this region amounted to some 30%,
compared to 34% in 1999 and to 3% for the period 1990-1998.

A particularity of the decisions taken in 2000 was that three out of the four operations
decided were designed to support the budget of the beneficiary countries or entities.
Also, two operations were decided in favour of entities which could not benefit from an
IMF-supported economic programme. As observed already in 1999, MFA is aimed not
only at promoting macroeconomic stabilisation and the balance of payments, but also
plays a very useful role in supporting the government’s programme of structural reform.
Thus it has been effectively combined with assistance from the Phare, Tacis or
OBNOVA programmes to strengthen the capacity of institutions that were essential to
the success of the necessary structural reform measures.

9

Tables 1 and 2, and their accompanying Graphs 1a and 2a underline the exceptional
character of the EC MFA. The highest volumes of MFA operations were decided and
disbursed in the years immediately after the changes in the political and economic
systems of the countries of Central and Eastern Europe. Since then, the fluctuations in
the amounts of MFA reflect decisions taken on a case-by-case basis after an assessment
of the macro-economic situation and financing needs of the potential beneficiary
countries. Graph 1a for operations decided over the whole period from 1990 to 2000
(totalling up to EUR 5.4 billion) and Graph 2a for actual amounts disbursed (totalling
EUR 4.3 billion) show the important concentration of the assistance in the CEECs that
are candidates for EU accession (around 60% of total macro-financial assistance over
the last decade). As explained earlier, assistance to the candidate countries was largely
concentrated in the first half of the past decade, which indicates a progressive phasing
out of this kind of assistance in parallel with progress in macroeconomic adjustment and
reform in the recipient countries. More recently, macro-financial assistance has been
mainly provided to the Western Balkans (operations in 1999 and 2000) and some low
income NIS. The relatively low amounts for the Mediterranean countries (15% of the
overall amounts authorised, but no new authorisation since 1996) are explained by the
other forms of macroeconomic support (notably the MEDA Structural Adjustment
Facilities) made available to these countries.

10

TABLE 1 - MACRO-FINANCIAL ASSISTANCE, 1990-2000

MAXIMUM AMOUNTS AUTHORISED, MILLION EURO

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Totals

By region

EU Candidate Countries

870

1220

410

Western Balkans

NIS

Mediterranean

70

588

255

35

130

200

250

40

255

15

265

150

300

160

55

125

3305

360

940

788

Total amounts authorised

870

1808

480

0

620

255

15

555

150

460

180

5393

of which, grants

28

70

35

95

70

90

388

11

TABLE 2 - MACRO-FINANCIAL OPERATIONS, 1990-2000

DISBURSEMENTS, MILLION EURO

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Totals

By region

EU Candidate 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

160

2730

105

275

602

688

Total amounts disbursed

350

695

1178

305

245

330

175

195

421

136

265

4295

of which, grants

63

35

15

20

18

28

85

264

NB: 2000 figures include disbursements to Bosnia, the former Yugoslav Republic of Macedonia and Montenegro
which, for technical reasons, took place in early January 2001.

12

Graph 1a. Maximum amounts authorised by year,
in EUR million

1,808

870

480

620

255

0

15

555

460

150

180

1990 1991

1992 1993 1994

1995 1996 1997 1998

1999 2000

Graph 1b. MFA 1990-2000, authorisations
Distribution by region

Mediterranean
15%

NIS
17%

Western
Balkans
7%

EU Candidate
Countries
61%

Graph 1c. MFA 1999-2000, authorisations
Distribution by region
Mediterranean
0%

NIS
20%

EU Candidate
Countries
46%

Western
Balkans
34%

13

Graph 2a. Amounts disbursed by year,
in EUR million

1,178

695

350

305

245

330

175

195

421

265

136

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Graph 2b. MFA 1990-2000, disbursements,
Distribution by region

Mediterranean
16%

NIS
14%

Western
Balkans
6%

EU Candidate
Countries
64%

Graph 2c. MFA 1999-2000, disbursements,
Distribution by region
Mediterranean
0%

NIS
18%

EU Candidate
Countries
50%

Western Balkans
32%

14

4.

Burden-sharing

In the context of the donor co-ordination process in support of CEECs and the Western
Balkans, the European Commission in liaison with the World Bank has organised
pledging conferences where the needs for external financing are assessed and potential
contributions from the IFIs and bilateral donors -including the EC- are agreed in
principle. A similar approach has been followed for other potential beneficiary countries
through Consultative Group meetings convened at the initiative of the World Bank.

The resources provided by various donors to support the residual external financing
needs of the countries that receive EC MFA are summarised in Annex 2. Details by
recipient country for the year 2000 are provided in Annex 2.1.

Since the inception of MFA, the absolute amounts committed by the EC have fluctuated
substantially,
financial support provided by the
international community (see Annex 2 and similar tables in previous MFA reports).

in parallel with the volume of

Initially, Community assistance was substantial in comparison with funding provided by
IFIs. The Community indeed played a key role, both as a major provider of these funds
and as the co-ordinator of bilateral assistance for the CEECs through the G-24 process.
However, as the IFIs were progressively able to mobilise more resources through new
instruments, their share in the financing packages rose substantially2.

At the same time, contributions from external creditors, both public and private, were
mobilised in the form of debt-relief and debt-reduction operations which were
particularly important in 1994, 1995 and 1999. Among the countries receiving EC
MFA, those concerned by these debt-relief and similar operations were Algeria in 1991
and 1994; Bulgaria in 1991, 1994 and 1997; Moldova in 1996; Ukraine in 1994, 1995
and 1999, and the former Yugoslav Republic of Macedonia, Bosnia and Herzegovina
and Albania in 1999. In 2000, no debt relief took place for any country receiving EC
MFA.

2

In the year 2000, as indicated above,
two out of the four EU operations (Kosovo and
Montenegro) were decided outside of the context of an IMF programme. This can partly explain
why the share of the IFIs in 2000 was very small compared to previous years.

15

III.

ALBANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Prices mostly market-determined, with the exception of a few
selected public services.

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%). Acceded to WTO in September 2000.

3.

Exchange regime

Since July 1992 free floating exchange rate. Exchange system
largely free of restrictions on current account
transactions,
including profit repatriation.

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. Removal of minimum
short-term deposit rates in July 2000. Treasury bill auctions (3,
6, 12 months).

6.

Public finances

VAT introduced in July 1996. In 2000, budget revenue and
expenditure estimated respectively at 23% and 32.6% of GDP.

7.

Privatisation and enterprise restructuring

Privatisation of arable land largely completed. Privatisation of
some 470 SMEs (1997 programme) completed in 2000. First
large state-owned strategic enterprise (AMC) privatised in 2000.
Stock exchange set up in March 1996.

8.

Financial sector reform

Two-tier banking system dominated by the remaining large
state-owned bank,
the Savings Bank. National Commercial
Bank privatised in 2000.

further

progress

Under the IMF 3-year programme adopted in
May 1998, the Albanian authorities managed to
in macroeconomic
make
stabilisation: GDP growth for 2000 reached
7.8%, similar to the 1998 and 1999 figures, both
the fiscal deficit and the current account deficit
were significantly reduced, the exchange rate of
the Lek remained strong against the dollar and
annual inflation was maintained at a low level
(some 4%).

structural

taken for

reform side,

On the
significant
progress was registered. In the area of financial
state-owned bank was
reform, one
sector
privatised and steps were
the
privatisation of the remaining one, while the
central bank abandoned its direct control over
credits. The 1997 SME privatisation programme
was completed in 2000, and an important
advance was made in the privatisation of
strategic sectors in June 2000 with the sale of
the mobile phone company AMC. Finally,
significant progress was also registered in the
strengthening of tax collection and in public
expenditure management.

The implementation of
the macro-financial
assistance of up to EUR 20 million decided by
the Council in April 1999 did not start because
of the reticence of the Albanian authorities to
increase non-concessional borrowing under a
relatively comfortable Net International Reserve
(NIR) position.

16

2.

Macroeconomic performance

Between 1993 and 1996, Albania made important progress in the stabilisation and
liberalisation of its economy and in the 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.

Following a six-month emergency programme, the Albanian authorities implemented a
comprehensive medium-term macroeconomic and structural adjustment programme
supported by the IMF under a Poverty Reduction and Growth Facility (PRGF, formerly
ESAF). The successful start of recovery in 1998 was maintained in 1999 with GDP
growth of some 8% for the second year in a row. Annual inflation as of end-1999 was
negative, the domestically financed budget deficit was further reduced, while the current
account deficit, which was expected to increase sharply as a consequence of the Kosovo
crisis, was limited to 8.5% of GDP.

Owing to the improved internal political situation, as well as to the strengthening of
institutions, sufficient stability was achieved for the economy to record impressive
results in 2000. GDP growth reached 7.8%, mainly supported by construction, transport,
and agriculture. Despite the increase in oil prices and the energy crisis which emerged
in the last quarter, inflation remained under control (4% on an end-of-year basis), owing
to strict monetary control, a general increase in productivity and the stability of the
currency, the Lek. Positive developments also occurred in the fiscal area. Thanks to a
sharp increase in tax revenues (25% with respect to 1999), the fiscal deficit is estimated
to have decreased from 11.5% of GDP in 1999 to 9.5% in 2000. Whereas the domestic
financing decreased only slightly (5.0% in 2000 compared to 5.4% in 1999), the large
amounts of privatisation receipts allowed a sharp reduction in borrowing. On the
expenditure side, the implementation of the 2000 budget was in line with the forecasts.
The current account balance also improved in 2000. As usual, large remittances from
Albanians living abroad (about USD 160 million were transferred during the first half of
2000) partly compensated for the still high trade deficit, so that the current account
deficit is expected to have been about USD 260 million, equivalent to some 7% of GDP
investment was recorded,
(8% in 1999). A significant
especially thanks to revenues from the privatisation of the mobile phone company
AMC. Gross official reserves reached USD 550 million as of end-2000, equivalent to
4.5 months of imports.

increase in foreign direct

The potential impact of the energy crisis on the economic situation should, however, not
be underestimated. It is indeed expected that energy shortages will have a negative
impact on industrial production, whereas inflation might pick up because of higher
energy prices. On the fiscal side, a reduction in tax revenues could be registered if
companies have to stop their activity, whereas subsidies paid by the Government on
imported energy might increase. In this context, a power sector action plan has been
defined, aiming, in the short term, at fighting against electricity theft and non-payment
of electricity bills, and,
in the longer term, at modernising the largely outdated
electricity production and distribution networks.

17

3.

Structural reforms

In the area of financial sector reform, some progress was made in the privatisation of the
two remaining state-owned banks. The National Commercial Bank was sold to foreign
investors in November 2000, but the privatisation of the Savings Bank was delayed.
Preparatory steps were taken, however, with the adoption by Parliament of the
necessary privatisation law, the auditing of the accounts by an international audit
company, KPMG, and the recapitalisation by the state to cover the negative capital of
the bank. Initial steps were also taken in the privatisation of the state-owned insurance
company, INSIG. Private banking activity was encouraged by the central bank’s
relinquishing of direct control over credits.This, together with the recovery in economic
activity, contributed to a significant increase in credits granted by banks to the private
sector.

For enterprise privatisation and restructuring, the year 2000 was successful. The mobile
phone company AMC was sold for the unexpectedly high amount of USD 86 million
(or EUR 91 million), and the investors rapidly launched investments to improve the
network quality and to meet increasing customer demand. The four medium-sized
enterprises that remained to be privatised in the framework of the 1997 privatisation
programme were also sold during the year. Further progress was recorded in the
strategic sectors : the oil-sector service company, Servcom, was restructured and the law
on its privatisation was passed by Parliament in December 2000, and a new action plan
for the restructuring of the power sector began to be implemented.

Reform of tax collection contributed to an increase in tax revenues for the year 2000 of
about 25%, compared to 1999. The main measures taken on customs revenues included
changes in key personnel in the major customs houses, better control of goods in transit
and regular revision of reference prices. As far as domestic taxes are concerned,
improved enforcement led to a significant increase in the number of registered VAT and
Improved co-ordination between the tax and customs
small business taxpayers.
administrations also contributed to a reduction in tax evasion.

Good progress was also made in the reform of public expenditure management with the
adoption of the Medium Term Expenditure Framework (MTEF) covering the period
2001-2003. The MTEF was adopted after intense discussions among the ministries
concerned and the donor community. It is supposed to be revised on a regular basis. It
identifies four key areas of expenditure : infrastructure, education, health and social
affairs. It also represents a first, concrete sign of improved efficiency of the public
administration in Albania.

4.

Implementation of macro-financial assistance

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

(EUR 70 million grant decided

assistance operations

The implementation of the EC macro-financial assistance was not initiated because the
Albanian authorities twice indicated - in December 1999 and in June 2000 – to

18

Commission staff missions that they wished to reflect more carefully on whether to
engage in non-concessional borrowing under the present relatively strong NIR position.
The Commission services have indicated that
they envisage de-programming this
assistance.

On 30 June 2000, the IMF Board approved the third annual Poverty Reduction and
Growth Facility (PRGF) arrangement covering the period July 2000-July 2001.
The mid-term review of this third-year arrangement is expected to be completed in
January 2001. Since the Kosovo crisis,
the World Bank has put more immediate
emphasis on support
to the social sectors and on emergency interventions in
infrastructure. In the framework of the Country Assistance Strategy for Albania for the
period 1998-2001, the World Bank pursued the implementation of the USD 45 million
Structural Adjustment Credit (SAC) decided in June 1999.

At the end of 2000, Albania ceased to be eligible for the PHARE assistance programme.
It will in future be eligible for the new Community instrument for the Western Balkans,
CARDS (Community Assistance for Reconstruction, Development and Stabilisation).

19

IV.

ARMENIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

After stagnating in early 2000, GDP growth
accelerated to around 4% year-on-year over the
first 10 months of the year, despite the fact that
agricultural production was affected by a severe
drought during the summer.

The completion of the third mid-term review
under the IMF ESAF programme for Armenia
took place
in late 1999. The Armenian
authorities are currently negotiating a new three
IMF Poverty
the
year programme under
Reduction and Growth Facility.

Armenia has so far implemented appropriate
macro-economic policies, but still runs high
budget and current account deficits, which
partly result
from the commercial blockade
imposed on the country (a consequence of the
unsolved Nagorno Karabakh conflict). There
are also concerns about the speed of economic
reforms and the privatisation process, as well as
the state of the budget income. The IMF insists
on Armenia using privatisation proceeds to
reduce its huge external debt.

The absence of a clear prospect of Armenia
reaching a new agreement with the IMF before
the end of the year 2000, the disappointing
fiscal results, as well as the slow structural
reform process prompted the Commission to
postpone the disbursement of the third tranche
of grant assistance initially scheduled for
2000.

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 2001.

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

Central bank is fully independant. Inflation remained very low, despite
a more relaxed monetary policy towards the end of 2000.

6. Public finances

Budget revenue estimated at around 17% of GDP in 2000;
expenditure estimated at about 24% of GDP.

total

7. Privatisation and enterprise restructuring

The privatisation process continued at a rather slow pace for medium
and large sized enterprises. The liquidation process of numerous not
sold enterprises has been launched. The Government
in the
process of privatising the power distribution companies.

is still

8. Financial sector reform

The banking system consists of the CBA and 31 commercial banks, of
which three foreign owned. The Government decided to privatise the
Savings Bank and offered strategic investors to participate in the
privatisation tender. Recent Law on the Securities market. Securities
and Exchange Commission as well as Central Depository for Securities
are operational.

2.

Macroeconomic performance

After stagnating in early 2000, GDP growth accelerated to around 4% year-on-year over
the first 10 months of the year thanks to an acceleration in industrial production and
construction. However, agricultural production was affected by a severe drought during
the summer.

In 2000, budget
resulting in
expenditure cuts and a rapid build-up in expenditure arrears. Inflation was halted, with a

revenues continued to be below projected levels,

20

increase in energy prices. The
price decline of about 0.5% despite a substantial
Armenian currency depreciated by about 6% in nominal terms against the USD in 2000.

In the first eight months of 2000, the trade turnover increased by 13% (year-on-year) to
USD 740 million. However, the trade deficit grew slightly year-on-year in the first nine
months of the year, despite a substantial acceleration of export growth. The trade and
current account deficits are expected to remain very high (above 20% of GDP), as long
as the external commercial blockade resulting from the unsettled Nagorno-Karabakh
conflict remains in force.

The total volume of FDI increased substantially in the first half of 2000, reflecting
heavy inflows from established foreign investors and resurgent investment from Russia.
Foreign exchange reserves were still comfortable at more than 3 months of imports.
External debt amounted to around USD 850 million or 47% of GDP at the end of 1999,
while its servicing was equivalent to 17% of budget revenue. External debt is large in
terms of the debt stock and debt service to export ratios, but the country is expected to
benefit from substantial transfers and investment from abroad. The external debt is
deemed to be reasonably sustainable when measured by the debt stock and debt service
to fiscal revenue ratios.

3.

Structural reform

laws or
Serious steps were begun to restructure the public administration: draft
programmes were prepared or submitted to the Parliament on compulsory declaration
of incomes and property by senior officials; on state control over inspections and
licensing; and on reform of the civil service. Despite announcements that radical cuts
were being considered in the inflated state apparatus, it appears that the trend in the
number of state employees is increased slightly.

In the energy sector, thanks to the tight fiscal package adopted in August 1999, all
arrears were cleared by September 1999. However, in 2000, the fiscal situation severely
deteriorated and new arrears accumulated. A programme was drawn up which aimed at
the financial recovery of the energy system of Armenia during 2000-2002; it covered
the regulation of financial flows, debts and financial relations between different sectors
of production.

The Government did achieve major improvements in cost recovery in the irrigation
sector. The overall collection level for the 1999 irrigation season was close to the agreed
target of 65%.

In the financial sector, the Law on the Securities Market was adopted. The Securities
and Exchange Commission was created and a Central Depository for Securities became
operational. In August 2000, the Government adopted a decision on the privatisation of
the Savings Bank and,
invited potential strategic investors to
participate in the privatisation tender.

in December 2000,

With regard to privatisation, 65% of the 10,000 small enterprises had been privatised at
the end of 1998. In February 2000, 1,500 of the 2,000 medium and large enterprises had
been privatised. The pace of privatisation of medium and large enterprises slackened,
from almost 200 in 1998 to 54 in 1999 and 33 in the first eight months of 2000. The
main reason was that over 300 medium and large enterprises were offered for
the
privatisation several times and nevertheless failed to find buyers. Since then,

21

Government has made a decision to wind up these enterprises, and many of them are in
the process of liquidation.

On 25 April 2000,
the Armenian Parliament decided to exclude the electricity
distribution networks from the list of state properties to be privatised in 1998-2000.
However, a specific privatisation law adopted in August 2000 provided for 51% of the
shares of the four power distribution companies to be sold to strategic investors in 2001
(20% of the shares have already been sold to the EBRD, and the remainder will be sold
to the workers).

4.

Implementation of 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
including those towards the
properly to service its external financial obligations,
Community. In order to support the country's adjustment and reform efforts and 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 and agreed in principle to make available loans of up to EUR 170 million and
grants of up to EUR 95 million.

In December 1998, after Armenia had fully settled its arrears towards the Community
(EUR 51 million) and the IMF-supported programme had come back on track, the
Commission disbursed the first tranche of exceptional financial assistance, (a loan of
EUR 28 million and a grant of EUR 8 million). The second tranche (EUR 4 million of
grant money) was disbursed in December 1999, soon after the successful completion of
the third mid-term review under the IMF ESAF and after a principal repayment by
Armenia of EUR 5 million of the EUR 28 million loan provided in 1998.

in principle had been reached between the Armenian
In July 1999, an agreement
authorities and the Commission services on the structural conditionality to be attached
to the disbursement of the third tranche of assistance scheduled for 2000. However, the
Armenian authorities failed to ratify this agreement. Moreover, there was no clear
prospect of the country reaching an agreement with the IMF on a new three-year
programme before the end of the year 2000, as fiscal results were disappointing, while
structural reform had slowed down in 1999 and 2000. Therefore, the Commission staff
mission which visited Yerevan in June 2000 considered that the conditions did not exist
for allowing a tranche of grant money to be disbursed in 2000.

22

V.

1.

BOSNIA AND HERZEGOVINA

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

the present

Under
IMF-supported stand-by
arrangement, BiH has made significant progress
to
towards macroeconomic stability thanks
adherence to the strict rules under the currency
board arrangement as well as fiscal restraint.
The IMF completed the fourth and fifth reviews
the Stand-By Arrangement on 22
under
December 2000. Following this, and given
satisfactory progress with regard to structural
conditions attached to Community macro-
financial assistance, the Commission disbursed
the second tranche amounting to EUR 20
million at
the end of 2000. In the area of
structural reforms, marked progress has been
made in small-scale privatisation, payments
systems reform, customs administration reform
and recently also banking sector
reform.
However, in order to stimulate private sector
development
the
foreign
authorities need to move ahead with large-scale
tax
enterprise
harmonisation, and establishing a transparent
and uniform investment
regime, and more
generally to improve inter-Entity collaboration
so as to put in place a single economic space.

privatisation,

investment,

further

and

1.

Price liberalisation

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

2. Trade liberalisation

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

3. Exchange regime

The common currency, KM, has been 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 non-transparent policies. The Federation still needs to implement
fully 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

Larger than expected budget deficits have resulted from increasing wage
and pension bills combined with a shortfall in revenues. Further reforms
to enhance revenue collection and to create viable social protection
systems are necessary.

7.

Privatisation and enterprise restructuring

While small-scale privatisation has advanced well
in both Entities
recently, the process of large-scale enterprise privatisation has been
slow. It is expected to gain new momentum thanks to external technical
assistance for tender procedures.

8.

Financial sector reform

The regulatory framework for banking has been laid down in both
Entities but the process of privatisation or liquidation of state banks has
been delayed, and is not expected to be completed before mid-2001.
Reform of the payments system is well advanced with the official
closure of the Payments Bureaux, the transfer of their functions to
private and public actors and the establishment of a central clearing
house.

23

2.

Macroeconomic performance

GDP growth in 1999, adversely affected by the Kosovo crisis, is estimated to have
reached 9%. For the year 2000, the authorities had originally foreseen GDP growth in
the range of 12-15%. However, the estimated growth has been put lower, at 10%,
because of the adverse impact of one of the worst droughts experienced by BiH in
recent years. High economic growth has had little impact on unemployment: 40% of the
labour force was officially estimated to be without employment at end-1999.

Adherence to the rules of the currency board arrangement (CBA) has helped to
moderate inflationary pressures. Annual
inflation measured in Konvertible Marka
(KM), the currency issued by the currency board since mid-1998, is expected to record
3% for the year 2000 in both Entities. As of end-2000, the acceptance of the KM in BiH
appears to be almost universal. The sharp rise in the foreign reserves held by the Central
Bank bear witness to this; at end-1999, they stood at 866 million KM (covering about
2.5 months of imports) compared to 300 million KM at end-1998. On the fiscal side, the
overall fiscal deficit to GDP ratios (before grants) were initially projected at 1.6% and
3.3% for the Federation and the Republika Srpska, respectively (1.1% and 2.1% after
grants). However, larger than expected deficits as a result of increased spending on
wages and pensions and shortfalls in revenues have forced both Entities to take action to
bring current expenditure into line with available resources.

The current account deficit declined significantly in 1999 (to about 21% of GDP, as
compared to 32% in 1998) as a result of slower-than-planned implementation of
reconstruction projects and slower growth of private domestic demand. This deficit
declined further in 2000, and continued to be financed mainly by donor assistance.
Foreign debt remains at high levels (about 70% of GDP in 1999), which partly is the
result of a substantial debt burden inherited from the former Socialist Republic of
Yugoslavia. Debt service as a percentage of exports of goods and services, however, is
relatively low, reflecting the concessional nature of much of the debt as well as
favourable debt rescheduling agreements with the London and Paris Clubs.

3.

Structural reforms

Progress has been achieved at both State and Entity level with regard to public
expenditure management and reform. At the State level, following the passing by the
Parliament of the necessary law in September 2000, a Ministry of Treasury was set up.
In the Entities following the adoption of the legal framework, a similar process has
taken place through the establishment of a Treasury unit attached to the respective
Ministry of Finance. The legal framework for the creation of the Supreme Audit
Institutions was adopted at the end of 1999 in both Entities. The condition that real
military expenditure should not increase in real terms in the 2000 Entity budgets was
met (in the adopted budgets, autumn 1999). As regards pension reforms, the proposed
legislation on the merger of the two pension funds was submitted to the Federation
Parliament on 26 August 1999 but has not yet been adopted, owing to strong political
opposition.

In the area of customs and tax reforms, tangible progress has been achieved, especially
thanks to improved inter-Entity co-operation. In particular, with regard to customs
reforms, both Entities have been working closely together with the EU-funded CAFAO
mission. The merger of the tax control and enforcement components of the Federation
Financial Police with the Federation Tax Administration is well advanced. The tax

24

administration now reports directly to the Federation Ministry of Finance. As for the
establishment of large-trader control, and investigation and intelligence units,
the
legislative framework has been put
in place and is being implemented (Law on
Federation Tax Administration in force as of 31 August 2000). Customs regulations
including sub-laws on customs powers, penalties and offences have recently been
passed (in the Republika Srpska in April 2000 and in the Federation in early September)
and staff are now being trained in the enforcement of these laws. Some progress has
been made in eliminating parallel structures in the Federation, although it cannot be
considered satisfactory. However, especially in the cities of Mostar and Travnik, co-
ordination is still lacking and the two predominant ethnic groups apparently continue to
work separately, despite the fact that they now physically share the same premises.
Excise and sales tax rates have been gradually harmonised. On 4 July 2000, an
agreement was reached between the Entities on how to proceed with excise and sales
tax reforms in terms of collection and revenue attribution, following recommendations
by the IMF and the World Bank.

The acceptance and use of the KM is now widespread in BiH, and the majority of
transactions are effected in KM in both Entities. This development follows measures
adopted by both Entity governments to promote the use of the KM, including the
prohibition of non-cash payments using other currencies than the KM. Payments
systems reform has advanced well in both Entities with the closure of the Payments
Bureaux (SPP, ZAP, and ZPP) at the end of 2000. Non-payments functions, such as tax
control and information collection, were relocated to relevant institutions and a central
clearing house for inter-bank transactions was established by the Central Bank.

Small-scale enterprise privatisation has advanced well recently in both Entities.In the
Federation, which started the process earlier (in May 1999) than the Republika Srpska,
the authorities were expected to complete the process for 150 small-scale enterprises
and 350 business premises by the end of 2000. The World Bank estimates that in the
Republika Srpska around one-third of all small-scale enterprises that were expected to
be privatised (169 in total) have been sold. Following serious delays initially related to
the registration and distribution process, the voucher privatisation scheme started on 16
October in the Republika Srpska. The World Bank considered the privatisation agencies
of the Entities (including that of the Mostar canton in the Federation) adequately staffed
and operational already in January 2000. The medium-term challenge consists of
moving forward the process of large-scale enterprise privatisation and the restructuring
of key public utility companies.

As far as the banking sector reform and privatisation process of state-owned banks is
concerned, Open Balance Sheets (OBS) have been submitted to the respective Entity
Banking Agencies and solvency tests are being carried out before the banks can be put
up for sale. In the Federation, three state banks are expected to be put up for sale shortly
(The Union Banka, the Central Profit Bank, and the Federation Investment Bank). In the
Republika Srpska, which started far later, the process has advanced well recently. Out of
11 State Banks, 10 have had their OBS approved, and privatisation plans are being
prepared. The Law on Commercial Banks was passed in July 1999 in the Republika
Srpska. The Law on Deposit Insurance was passed in the Federation in August 2000,
but has yet to be adopted in the Republika Srpska.

25

4.

Implementation of macro-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 grant element of up to EUR 40 million, and a loan
element of EUR 20 million. Following the completion of the first review under the IMF
programme and the full clearance by BiH of its outstanding obligations to the
Community and the EIB, the Commission in December 1999 disbursed a first tranche
totalling EUR 25 million, comprising a EUR 15 million of grant money, and a EUR 10
million loan. Following satisfactory progress under the IMF programme, including the
completion of the fourth and fifth reviews and the satisfactory fulfilment of the specific
conditions attached to the Community assistance (relating to structural reform), the
second tranche, amounting to EUR 20 million, was disbursed at the end of 2000. EUR 2
million of the EUR 10 million grant element was made available to the State budget, in
view of its financing needs, while the remainder was made available to the Entity
budgets. The disbursement of the third tranche, EUR 15 million grant, has been linked
to a set of structural reform criteria as well as to continued progress under the IMF
programme.

In May 1998, the IMF approved the 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. Following some delays in policy implementation, the fourth and the
fifth IMF reviews were completed on 22 December 2000, making available USD 21
million, and the programme was extended to May 2001. The World Bank is currently
implementing two policy-based operations in support of public finance reforms (PFSAC
II) and privatisation and banking sector reforms (EBPAC), which amount to USD 72
million, and USD 50 million, respectively.

As of 2001, Bosnia and Herzegovina is no longer eligible for the OBNOVA assistance
programme. Instead, it is now eligible for the new Community instrument for the
Western Balkans, CARDS (Community Assistance for Reconstruction, Development
and Stabilisation).

26

VI.

BULGARIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

Economic stability in Bulgaria persisted in
2000. Economic reforms continued and the
was
Currency
maintained.

Arrangement

Board

stability and structural
Macro-economic
substantial
reforms
economic growth which is expected to be
close to 5 per cent in 2000.

contributed

to

a

reform.

its
The Bulgarian government continues
structural reforms in both privatisation and
vast
regulatory
reforms,
improvements with
Bulgaria cannot be seen as a functioning
market economy, able to cope with the
competitive pressures and market forces in
the EU in the medium term.

structural

Despite

to

decided

continued

Bulgaria
require macro-
financial assistance. On 8 November 1999
of
the Council
EUR 100 million for Bulgaria – the fourth of
its kind. A first tranche of EUR 40 million
was disbursed in December 1999 and a
second
in
tranche
September 2000.

of EUR 60 million

loan

on

a

increase from 2000
EU assistance will
onwards as the pre-accession instruments
ISPA and SAPARD are put in place. Total
grant assistance is expected to reach a yearly
EUR 256 million in the 2000-2006 period.

1.

Price liberalisation

The share of administered prices in the CPI basket stood at nearly 20%
in 2000. The prices of energy products and in particularly heating are
being 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: 1 Lev equals 1 DEM

4.

Foreign direct investment

Foreign investors can freely repatriate profits and proceeds.

5. Monetary policy

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

6.

Public finances

A 1.5 per cent deficit was planned for 2000 (and 2001), a major step
forward over 1999. This goal was likely to be realised easily.

7.

Privatisation and enterprise restructuring

A first wave of privatisations has been implemented (just under two
thirds of state assets). A second wave involving public utilities and
other infrastructure enterprises has begun.

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 IMF’s three-year Extended Fund Facility Arrangement for Bulgaria was approved
to SDR 627.62 million (about
in September 1998 for a total amount equivalent
USD 814 million). In September 2000, the fourth review under this arrangement was
completed, which enabled the release of SDR 52.3 million (about USD 68 million) from
the IMF, bringing total disbursements under the programme to SDR 470.7 million
(about USD 610 million).

Also in September 2000, the World Bank approved a EUR 30 million (USD14.39
million) loan for Bulgaria to help support
the implementation of the Education
Modernisation Project.

27

2.

Macroeconomic performance

Favourable external and internal economic developments pushed up growth in Bulgaria,
and led to a fiscal performance that was better than planned. Annual real GDP growth is
expected to be close to 5% in 2000. Exports grew faster than imports, which should help
the trade deficit to narrow. Real GDP grew by 5.2% in the first half of 2000 compared
to the same period of 1999. Growth accelerated in the second quarter of 2000, reaching
5.5% compared to 4.8% in the first quarter. It was driven mainly by exports and
investment. Fixed investment grew by 12% year-on-year in real terms in the second
quarter of 2000, following 18% in the previous quarter. Industrial output gradually
picked up and in September was 10.4% higher than in the same month of 1999. The
trade deficit widened slightly in the first eight months of 2000 compared with the same
period of last year. The dollar value of exports increased by nearly 23%, while imports
were about 19% higher than in the first eight months of 1999. Almost half of the
increase in the value of imports was due to the higher price of energy. Although
Bulgaria is a net importer of oil, it is also a major exporter of oil products. Their value
trebled in the second quarter of 2000 compared with the same period of 1999. Another
favourable development was the unusually good tourist season. All these developments
resulted in a narrowing of the current account deficit from USD 434 million in the first
eight months of 1999 to USD 361 million in the first eight months of 2000; in the same
period the trade deficit widened from USD 682 million to USD 727 million. Foreign
direct investment in Bulgaria in the first eight months of 2000 amounted to USD 366
in the same period.
million, which more than covered the current account deficit
Investment
including the sale of United Bulgarian Bank,
accounted for USD 126 million. . After the first attempt to privatise the national tobacco
company attracted little interest, the government decided to re-launch Bulgartabac’s
sale. Delays have also marked the privatisation of the telecommunications monopoly
BTC.

in the banking sector,

Consumer price inflation, which was 0.4% on average in 1999, gradually increased to
12% in October 2000 on a year-on-year basis. Higher prices of fuels contributed to
rising inflation, whereas the rise in food prices abated somewhat in comparison with the
rise in August. The consumer price index increased by significantly more than the end-
year target of 8-9% for 2000. Bulgaria’s main interest rate was raised in several steps;
the average annual yield on three-month Treasury bills approached 4.5% at the end of
October.

Unemployment edged down from its peak level of 19% in April to 17.8% in September.
This partly reflected seasonally high employment in agriculture and tourist services, and
partly new jobs created in the services sector. The number of registered unemployed fell
to just below 680,000, but trade unions put the actual number above one million. It is
also estimated that 1.2 million people, out of an active population of 4.7 million, are
employed in the grey economy. Measures are being undertaken to stimulate the
incorporation of the grey sector into the official economy.

3.

Structural reforms

The restructuring of the economy proceeded in line with the plan set out in the medium-
term economic programme. The first results of the monitoring programme, which
surveys 154 troubled enterprises, indicated that tax and social security arrears were
substantial and increasing in a limited number of monitored enterprises. An action plan
involve the closure of
for the district heating companies was agreed which will

28

companies that are not viable in the longer term and increased subsidies to restructure
those which are assumed to have a future.

Privatisation entered a second stage. The first stage focussed on enterprises and
involved about 63% of all state-owned assets. The second phase of the privatisation
programme concerns mainly utilities and infrastructure. Monitoring results for the 154
troubled enterprises showed that losses were still substantial, pointing to the urgency of
further restructuring. The privatisation of the banking sector progressed and was
expected to lead to a substantial and much-needed improvement of
financial
intermediation. Important reforms of health insurance, social security and the pension
system continued, further reinforcing the market orientation of the economy.

4.

Implementation of macro-financial assistance

The fourth macro-financial assistance operation took place in 1999-20003. The Kosovo
conflict’s impact on the current account led to an increase in the financing gap and the
Commission proposed 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 programme. This was
confirmed in late November, making it possible to disburse a first
instalment of
EUR 40 million in December 1999. The second instalment was conditional on
Bulgaria’s performance in relation to a number of structural reform measures. The
conditions were consistent with the conditionality framework of the Medium Term
Programme (IMF) and a World Bank structural adjustment
loan (FESAL). They
emphasised, however, reforms that were of particular importance to the accession
process, notably restructuring of state-owned enterprises, transparency of state aids and
environmental legislation. In view of the progress with these reforms, the second
tranche was disbursed in September 2000.

3

1991

in:
Previous macro-financial
June
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).

approved
1991

(EUR 290 million

the Council

and March

loans were

in August

assistance

disbursed

by

29

VII.

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Price liberalisation has been essentially completed. Price controls exist
for only very few products, including oil and oil derivates.

2.

Trade liberalisation

A small number of tariff and non-tariff barriers remain in place. The
recently completed SAA will imply more liberal market access for EU
products and gradual reduction of tariffs on most important products.

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 to 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
investment, while the absence of a properly functioning market for
land also hampers FDI inflows. FDI inflows have been erratic in recent
years and have mainly comprised a few large transactions.

5.

Monetary policy

Monetary policy is essentially based on the exchange-rate anchor.

6.

Public finances

Very substantial revenue was recorded in 2000, partly due to the
introduction of VAT in April as well as to generally stronger economic
activity. Some slippage of the wage bill early in the year partly eroded
these budget gains. A surplus of 2.2% of GDP is estimated.

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. 40 major loss-making enterprises must be sold or closed
before end-2001; currently 9 enterprises have been dealt with and the
privatisation process seems to have regained momentum.

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 has now been sold to the
National Bank of Greece. Banking supervision through National Bank.

In the period after the foundation of the former
Yugoslav Republic of Macedonia in 1992 the
country suffered a significant fall in GDP. This
was followed by several years of positive but
low GDP growth. Thus the level of GDP by
2000 was still significantly below that recorded
in 1992.

consumption and

In 2000 economic growth was quite strong for
the first time since independence, as real GDP
grew by some 6%. Contrary to late 1999, when
growth was mostly driven by the post-conflict
boom in Kosovo, growth in 2000 was entirely
driven by a surge in domestic demand, both
private
investment. The
international support for FRY/Kosovo created
an important market for exports of a range of
goods and services and the substantial presence
of relief, military and other personnel in the
former Yugoslav Republic of Macedonia added
to domestic demand. The re-establishment of
international
trade routes and the surge in
domestic demand implied strong import growth
and the current account deficit widened.

The negotiations with the IMF on a new
programme that could be supported by a
PRGF/EFF arrangement were finally completed
in autumn 2000 and the IMF Board approved
the three-year arrangement in November while
the World Bank approved a second FESAL
arrangement in December. The Government is
committed to an ambitious programme of
economic reform in this framework.

a

establishment

new economic
of
The
programme and the successful conclusions of
the negotiations with the Fund and the World
Bank as well as agreement on a Memorandum
of Understanding setting out the conditionality
for Community macro-financial
assistance
allowed the Commission to start implementing
the assistance of up to EUR 80 million decided
by the Council in November 1999.

30

The disbursement of the first tranche of the assistance, comprising a grant of EUR 20
million and a loan of EUR 10 million, took place in December 2000 and January 2001.

2.

Macroeconomic performance

From mid-1999 the post-conflict developments in Kosovo triggered strong growth in
the former Yugoslav Republic of Macedonia. Shortly after the end of the Kosovo crisis
exports to FRY/Kosovo surged and Skopje’s location as the main base for international
intervention in Kosovo implied significant service income as well. Throughout 2000,
the post-conflict boom continued, but growth was driven by domestic demand,
in
particular private consumption rather than by net exports. Real GDP in 2000 expanded
by an estimated 6% as growth was underpinned by a strong surge in domestic demand,
which is estimated to have grown by close to 8% in real terms. Private consumption, in
particular in the first quarter of the year before the introduction of VAT on 1 April,
is
expanded significantly and gross capital formation (including stock building)
estimated to have grown by almost 30%, after a marked fall in 1999. With domestic
demand growing at some 8% and real GDP growth of 6%, economic growth was
entirely driven by domestic demand.

Imports grew faster than exports and the external side constituted a drag on growth. As
for the current account deficit, it turned out significantly worse than in 1999, as it
widened to some 6.5% of GDP in 2000 against 4.0% of GDP in 1999 and thus returned
to levels recorded in most years since independence. The deterioration in 2000 was
mainly due to very strong growth in imports of goods, whereas the services balance
improved slightly. The rather strong export performance was outweighed by imports for
private consumption as well as machinery, etc., required for capital formation.

During 2000 fiscal performance was particularly strong. The rebound of economic
activity and especially the better-than-expected results in VAT collection after it was
introduced on 1 April led to a general government budget surplus of about 2¼% of GDP
for the year as a whole. Following a major slippage in the wage bill of the central
government early in the year, the authorities introduced direct control by the Prime
Minister’s office of recruitment and wage levels in several line ministries.

The unemployment rate remained high, despite a slight fall. The labour force survey
conducted in spring 2000 showed an unemployment rate of 32.1%, slightly lower than
the registered average unemployment rate in 1999 of 32.4%. Substantial structural
problems in the labour market make it unlikely that strong economic growth alone can
reduce the unemployment rate substantially.

Inflation stood at 6.1% year-on-year, somewhat higher than in previous years, mainly
due to the one-off effect of introducing VAT. However, the authorities broadly managed
to contain inflation, as the effects on prices of the introduction of VAT petered out
during the first three months. Monetary policy remained unchanged; the denar exchange
rate was kept stable against the Euro throughout the year without major tensions.

3.

Structural reform

As part of the negotiations with the Fund and the World Bank about a new economic
programme that could be supported by the IFI’s the Government presented an ambitious
multi-annual reform programme, covering most areas of economic reform.

31

As regards fiscal reform, the action of the authorities during the year 2000 followed the
guiding principles agreed with the IFI’s for a medium-term transformation of the fiscal
domain. Those principles include improved fiscal transparency, budget design and
preparation; shifting the tax burden from direct to indirect taxes; reform of public
administration and rationalisation of expenditure; integration of core off-budget special
revenue into central government accounts; and enhanced debt management. Several
actions were undertaken during the year, notably the introduction of VAT. Among other
measures, the authorities established a Treasury Department at the Ministry of Finance,
issued negotiable government bonds in exchange for frozen foreign currency deposits
and established a debt monitoring unit in the Ministry of Finance.

Substantial progress was made in the financial sector. The banking sector was already
predominantly privately owned, and the privatisation of the largest commercial bank,
Stopanska Banka, was finally completed in April. Privatisation took place through sale
to foreign investors (National Bank of Greece). This sale, like the previous sale of
Kreditna Banka, the closure of Almako Banka and the announcement of the sale of the
third largest bank, was a major step in the restructuring of the sector. Those steps were
reinforced by the enactment of a new Banking Law in June. The legislation
strengthened the legal framework of bank supervision and enhanced the monitoring
ability of the Central Bank.

Privatisation of large enterprises has been unsatisfactory in recent years. As a direct
result of the earlier reluctance of the government to conduct the necessary privatisation
of a range of state-owned loss-making enterprises, the ESAF programme agreed with
the IMF was considered to be off track. However, the privatisation process accelerated
significantly in mid-2000, and 9 of the companies were sold (to investors or to the
workers) or liquidated. The privatisation of the largest loss-maker, FENI - a nickel
smelting firm - was completed in November. This was the last prior action to be
undertaken by the authorities before IMF and World Bank Board approval.

In November the Government and the European Commission on behalf of the
Community reached agreement on a Stabilisation and Association Agreement, which
will
fields of common interest and gradual
establishment of a free trade area. The former Yugoslav Republic of Macedonia is the
first country to conclude such an agreement with the Community.

imply closer co-operation in most

4.

Implementation of macro-financial assistance

On 8 November 1999 the Council decided to provide up to EUR 80 million of
supplementary macro-financial assistance to the former Yugoslav Republic of
Macedonia. This assistance consists of up to EUR 50 million of loans and up to EUR 30
million of grants. In view of the fragile economic situation in the former Yugoslav
Republic of Macedonia at the time of the decision, and in particular foreign debt levels
(over 40% of GDP and rapidly increasing), the Council decided, exceptionally, to
provide part of the macro-financial assistance in the form of a grant. A first assistance
operation of EUR 40 million had been in the form of loans disbursed in September 1997
and February 1998.

As foreseen in the Council Decision, the release of the first tranche of the Community
macro-financial assistance of up to EUR 80 million was to be undertaken “on the basis
of an agreement between the country and the IMF on a macroeconomic programme that
is supported by a PRGF/EFF arrangement.” The IMF Board approval, together with the

32

the MoU and the Loan and Grant Agreements, constituted the
signature of
conditionality for release of the first tranche of the assistance, against the background of
good progress in economic stabilisation and reform. The MoU and the Loan and Grant
Agreements were agreed in November and subsequently signed through an exchange of
letters. In parallel the IMF Board approved the economic programme and the upper
credit tranche arrangement (PRGF/EFF). Hence all the conditions were fulfilled for the
release of the first tranche of the Community macro-financial assistance. Accordingly,
the first tranche was released in late December 2000. It amounted to EUR 30 million, of
which EUR 20 million was in the form of grants and EUR 10 million was a loan4.

Furthermore,
the Community continued to implement up to EUR 25 million of
exceptional budgetary support to help the country cope with the costs related to the
inflow of refugees during the Kosovo crisis.

In November the IMF approved a three-year EFF loan of USD 31 million and a three-
year PRGF loan amounting to USD 13 million5. The IMF facility is intended to support
the Government’s economic programme and the Poverty Reduction Strategy
Programme. In December, the World Bank Board approved the second Financial and
Enterprise Sector Adjustment Programme (FESAL II). The programme amounts to
USD 50.3 million, of which USD 30.3 million is a loan while USD 20 million consists
of IDA credits. The FASAL II facility is intended to support the Government’s financial
and enterprise sector reform programme and thus to stimulate private sector growth and
job creation. One of the strategic aims of the FESAL II facility is to sell large firms to
strategic foreign investors.

As of 2001, the former Yugoslav Republic of Macedonia is no longer eligible for the
PHARE assistance programme. Instead, it is now eligible for the new Community
instrument
for
Reconstruction, Development and Stabilisation).

the Western Balkans, CARDS (Community Assistance

for

4
5

For technical reasons, the loan element of the first tranche was released on 15 January 2001.
The PRGF loan was agreed in principle on 29 November and finally approved on 15 December.

33

VIII. GEORGIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

As a result of a severe drought which caused a
significant decline in agricultural production, the
economy is expected to have grown by only
1.2% in 2000. Given Georgia's heavy external
debt burden and its limited debt service capacity,
substantial deficits, both internal and external,
are expected to persist over the next few years.
With regard to structural reform, a number of
important measures were taken to improve tax
enforcement and strengthen the civil service.
The reform of the judiciary system has been
initiated. A number of large-scale enterprises
have been privatised, although more needs to be
done in this area. Georgia has also made
substantial progress in reforming its energy
sector.

in

revenue,

combined

the IMF Board favourably
In July 1999,
concluded the mid-term review under the third
annual ESAF arrangement. Since then, recurrent
with
shortfalls
inappropriate spending priorities, led to further
accumulation of expenditure arrears. However,
after a satisfactory track record of several
months in fiscal revenue, the country benefited
from a positive IMF decision on a new three-
year
and
Growth Facility) on 12 January 2001.

(Poverty Reduction

programme

The absence of a clear prospect of Georgia
reaching a new agreement with the IMF before
the end of the year 2000, mainly because of the
disappointing
the
Commission to postpone the disbursement of the
third grant
initially
scheduled for 2000.

tranche of

assistance

prompted

results,

fiscal

1.

Price liberalisation

Most prices have been liberalised.

2.

Trade liberalisation

Liberal international trade policy. Most import and export restrictions
have been eliminated. Georgia became a member of the WTO in 1999.

3.

Exchange regime

The lari is not subject to exchange restrictions. Auctions at the Tbilisi
Interbank Currency Exchange.

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.
Progressive privatisation establishing title and registeringof urban and
industrial land.

5.

Monetary policy

The central bank is fully independent. The prudent monetary policy
contributed to low inflation and a stable exchange rate in 2000.

6.

Public finances

Improved revenue collection . Budgetary revenue (including grants)
estimated at 15% of GDP; total expenditure and net lending estimated at
19.5% of GDP. The recently appointed anti-corruption commission has
proposed a set of reforms to increase transparency and strengthen
governance.

7.

Privatisation and enterprise restructuring

In the energy sector, privatisation has made good progress with public
offers being issued for companies in western and eastern Georgia. But
the weakness of the power sector remains a major obstacle to economic
growth. Privatisation of the telecommunications sector is going ahead:
invitations to bid in tenders for the two state-owned companies were sent
to 150 strategic investors.

8.

Financial sector reform

32 commercial banks. By mid-January 2001, only half of the banks had
managed to meet the new minimum capital requirement (lari 5 million).
The banking sector appeared increasingly fragile with low CAMEL
ratings for 21 banks, while public confidence remained low.

34

2.

Macroeconomic performance6

The macroeconomic situation of Georgia deteriorated in 2000, with a GDP decline of
0.2% year-on-year over the first three quarters of the year. This resulted from a severe
drought, which caused a significant decline in agricultural production. However,
industrial production, trade, transport, communications and services expanded. As a
result, the economy is now expected to have grown by 1.2% in 2000.

In the first eight months of 2000, state budget revenue was again below target mainly as
a result of weak administration, corruption and difficulty in collecting revenue, in
particular customs duties, in a divided country with a sizeable black economy. End-year
inflation was expected to remain below the 1999 level, at around 7% only. In 2000, the
exchange rate of the Lari was stable at around 2 Lari/USD.

In 2000, Georgia’s current account deficit was expected to remain at the very high level
of 14% of GDP. Foreign trade was expected to suffer from the severe drought and the
resulting lower agricultural production. Foreign exchange reserves were still low at
around 1.1 months of imports. External debt at end-2000 amounted to around USD 1.8
bn or about 59% of GDP (48% of GDP in 1998). In 2000, the country reached new
rescheduling agreements with major creditors which will make the debt service burden
more sustainable for the near future.

3.

Structural reforms

To address corruption, one of the major problems impeding reform,
the newly
appointed anti-corruption commission prepared a report proposing a broad set of
reforms to increase transparency and strengthen governance. Georgia's tax system was
being reformed through a USAID programme. Strong measures were taken, such as
dismissal of heads of services for having missed targets and establishment of a
"financial legion" to secure tax enforcement. A specialised unit for collecting petroleum
and tobacco taxes was being considered. The reform process in the customs department
was still in its early stages. A major factor in the persistent high level of tax arrears was
the unwillingness of the authorities to pursue arrears of state enterprises. The Tax
Department nevertheless requested sequestration of the bank accounts of 1,399
enterprises which had arrears totalling USD 71.5 million, and Court rulings were made
with regard to half of them. However, there was a delay in paying the cash into the
budget, because of the inflexibility of the judicial administration. Although 204 cases of
bankruptcy had been presented to the court, only five enterprises had so far been
declared bankrupt, though from these five USD 13 million had been collected. The
creation of an independent organisation called "Bankruptcy Bureau" was being
considered to make the Bankruptcy Law more effective. A reform of the Judiciary was
ongoing: judges were required to pass an examination in order to retain positions.

It is estimated that 1,292 or 80% of medium-sized and large enterprises had been
largely to insiders, but few of these companies had subsequently been
privatised,
restructured. The remaining 20% represented a significant part of the total asset value.
They were the largest strategic enterprises, including those relating to infrastructure.

6

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.

35

In 2000, around USD 13 million from privatisation was transferred to the state budget.
Georgian Airlines, Kaspi Cement and Chiaturmanganese were privatised, as well as
shipbuilding and aircraft repair companies. Documents related to licensing and tariff
policy in the telecommunications sector were submitted to the Parliament, and 150
the two state-owned
foreign companies were invited to bid in tenders
telecommunications companies . Globally, Georgia has made substantial progress in
reforming its energy sector. Power generating and distributing companies were offered
for privatisation in eastern and western Georgia, while progress towards privatisation
was made in the gas sector. Georgia is one of the few countries of the Former Soviet
Union that has sold power distribution companies to strategic investors.

for

The absence of a capital market hindered an improvement in corporate governance that
would have come about from the establishment of proper rules for the disclosure,
trading and listing of securities. The banking system appeared increasingly fragile and
public confidence remained low, despite the appropriate banking regulations and
supervision efforts implemented by the National Bank of Georgia.

Establishing title and registration of industrial and urban landwere important, especially
for SMEs, since interest rates were high and banks cautious, requiring collateral. By
end-1999, over 3,200 private enterprises had registered their land holdings with the
regional and municipal registrars of the State Department of Land Management.
Renewed efforts were made in this area in 2000.

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
properly to service its external financial obligations,
including those towards the
Community. In order to support the country's reform efforts and 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 and agreed in
principle to make available loans of up to EUR 170 million and grants of up to EUR 95
million.

In July 1998, when Georgia had fully settled its arrears towards the Community (EUR
131 million) and its IMF programme was back on track, the Commission disbursed the
first tranche of the exceptional financial assistance (EUR 110 million loan and EUR 10
million grant). The second tranche (EUR 9 million grant) 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.

The absence of a clear prospect of Georgia reaching a new agreement with the IMF on a
new three-year programme before the end of the year 2000, in particular because of
disappointing fiscal results (customs revenue remained very low), prompted the
Commission to postpone the disbursement of the third grant tranche of assistance
initially scheduled for 2000.

36

IX.

1.

KOSOVO

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1. Price liberalisation

Prices are liberalised with the exception of a few public services.

2. Trade liberalisation

In August 1999, UNMIK amended the existing FRY customs code,
introducing a 10% customs rate, varying excise duties, and sales tax
(15%) on imported goods. UNMIK has maintained the preferential
trading arrangements of FRY with the former Yugoslav Republic of
Macedonia.

3. Exchange regime

The use of the D-Mark (and other currencies) has been legalised, albeit
the Yugoslav Dinar remains the legal tender.

4. Foreign direct investment

Highly unfavourable environment resulting from perceived high risks
and legal uncertainties. UNMIK adopted a regulation on FDI at the end
of 2000.

5. Monetary policy

Given its status, Kosovo does not have a Central Bank nor a monetary
policy.
The Banking and Payments Authority of Kosovo (BPK)
exercises a number of functions usually attributed to a central bank.

6. Public finances

A smaller than expected budget deficit in 2000 was due to higher than
expected local revenues. Further expansion of taxes and measures to
enhance revenue collection are necessary. For the time being, there is no
comprehensive social protection system.

7. Privatisation and enterprise restructuring

Privatisation of public enterprises hampered by legal uncertainties.
UNMIK began to commercialise enterprises through management
contracts.

8. Financial sector reform

The regulatory and supervisory framework for banking has been
established and is in the process of implementation. The introduction of
the payments system is advanced with transactions essentially working
off-line. The regulation of insurance products is under preparation.

suffered

the
Even before the crisis of spring 1999,
economy of Kosovo
from the
international isolation of the Federal Republic
of Yugoslavia (FRY),
the slow pace of
economic reform, and a total neglect of
investment
a
for
almost
the conflict, housing and
consequence of
public facilities were damaged, agricultural
and industrial production came to a standstill
and even the few basic payment functions
carried out by the formal
financial sector
ceased to exist.

a decade. As

the

and

United

Nations

community

international

development

and more
The
supported the
particularly the EU have
reconstruction
the
of
province with large-scale financial assistance
since the conflict ended in June 1999. On the
basis of Security Council Resolution 1244
(1999),
Interim
Administration Mission in Kosovo (UNMIK)
was established and has achieved substantial
progress in various fields. In the economic
domain, UNMIK, and particularly its EU-led
economic
Pillar
reconstruction and development, has advanced
in setting up a
and
economic framework including the legalisation
of the D-Mark and a Kosovo Consolidated
Budget. Progress has been made in important
economic areas, such as the promotion of the
sector
reconstruction
development, banking and payments, as well
as the development of the revenue base and
pursuit of sound budgetary policies.

sound institutional

responsible

process,

private

IV,

for

As a result, renewed economic activity is
visible,having
considerable
resumed with
speed after the conflict, though it is essentially
restricted to trade, some services and basic
situation of
reconstruction. The political
Kosovo remains difficult
internally and
externally - and continues to be marked by
ethnic and social tensions.

-

37

In February 2000, following a Commission proposal, the Council decided to provide
exceptional Community financial assistance to Kosovo of up to EUR 35 million in the
form of a grant. Disbursements took place in two tranches released in March and
August 2000.

2.

Macroeconomic performance

Even before the crisis of spring 1999, the economy of Kosovo suffered from the
international isolation of the Federal Republic of Yugoslavia (FRY), the slow pace of
economic reform, and a total neglect of investment for almost a decade. As a
consequence of the conflict, housing and public facilities were damaged, agricultural
and industrial production came to a standstill and even the few basic payment functions
carried out by the formal financial sector ceased to exist. In October 1999,
the
International Labour Organisation (ILO) estimated the rate of unemployment to be well
over 50% and to be particularly high among the younger age groups which account for a
significant proportion of the population.

Although there are no reliable statistical data, there is evidence that economic activity
resumed with considerable speed after the conflict. In 2000, agricultural production was
estimated to be at more than 75% of its pre-war level; construction and some trade-
related services were booming. But industrial production appeared to be still very low.
GDP per capita in 1995 was unofficially estimated at about USD 500. Preliminary,
highly tentative estimates produced by the IMF indicated GDP per capita in 2000 to be
in the range of USD 650-850. UNMIK data suggest that GDP per capita may even
exceed USD 1,000. Workers' remittances from abroad remain a major source of
household income.

Anecdotal evidence suggests that inflation has not been a problem to date and there are
no complaints of rising prices or of shortages of key commodities. Imports are
estimated to correspond to about 80% of GDP. There are hardly any exports, although
there is some unrecorded trade with the rest of Serbia.

3.

Structural reforms

The development of the private sector has been identified as a key priority area for the
transformation of the Kosovar economy. UNMIK is proceeding with a mixed strategy
defined in, among others, a "White Paper" circulated in May 2000, which foresees
support to the existing enterprises and incentives for the creation of new ones. In the
case of existing public enterprises, UNMIK's strategy is aimed at attracting private
investors through concessions, leases or management contracts. A first example of a
management contract that UNMIK hopes to replicate for other medium and large
enterprises is the contract concluded with the Swiss Holderbank for the Sharr cement
factory. The contract envisages a 10-year concession for the exploitation of the plant in
return for substantial investment and industrial restructuring. Other main elements of
the "White Paper” are the commercialisation of non-private enterprises in the short
term, the completion of the legal framework, the definition of property rights and the
building of social consensus around privatisation. In the long term, public enterprises
will be transferred to a "Kosovo Enterprise Agency (KEA)", which will decide on their
restructuring
prevails,
privatisation remains extremely difficult.

commercialisation. While

institutional

uncertainty

and

38

Following the recommendations of the IMF, the Banking and Payments Authority of
Kosovo (BPK), set up in November 1999, has made important progress in establishing
the legal and regulatory framework for a sound banking and payments system. Progress
has been faster than expected in the area of bank licensing and supervision. The only
licensed bank in Kosovo (Micro Enterprise Bank) so far appears to operate smoothly,
continuously to expand its coverage and range of products and to increase its staff and
staff qualifications. The BPK granted preliminary approval to seven other applicants for
a banking license,but no further full licenses were issued in 2000 for several reasons:
the inability of some new banks to raise adequate capital; the necessity to carry out
investigations on some major shareholders; and some unresolved property issues
regarding bank premises. In addition, the BPK granted approval to nine micro-finance
and non-bank groups to provide limited deposit-taking and micro-type lending,
essentially covering the non-bankable segment of the market. Eight institutions are
already operational.

The BPK continued to develop its payments system to offer payment services to
UNMIK, the Kosovo civil administration and NGOs. A modern system donated by
Norway was installed and became operational
in June 2000. Training of staff is
ongoing. BPK took over imports of cash as well as cash shipments within the province.
The process of preparing for the changeover from the D-mark to the Euro in 2002 has
started.

Equally important institutional development has been promoted by UNMIK in the fiscal
area. The establishment of the Central Fiscal Authority (CFA) in November 1999 was a
first, significant step towards the creation of a modern budget management system. The
CFA, which became a JIAS department in 2000, has specific responsibilities for the
design and execution of the Kosovo budget. The UNMIK Tax Administration was
officially established in April 2000. Since then, an organisational structure based upon
taxation administration functions (returns processing, audit, collection, taxpayer service
and education, appeals etc) has been set up. Two taxes – a Hotel Food and Beverage
Sales Tax and a Presumptive Tax – began to be administered in 2000. The UNMIK
Customs Service was established officially at the end of August 1999, with the support
of the Customs Assistance Mission in Kosovo (CAM-K) funded by the EC. The
Customs Services essentially collects revenues at international border crossing points,
the Administrative Boundary Line (ABL) with Montenegro and an inland Tax
Collection Point.

After an initial phase in which the CFA experienced some problems in increasing and
stabilising revenue levels as well as controlling expenditures, notably for public service
wages and utilities, the budgetary situation showed signs of substantial improvement, in
particular from summer 2000 onwards. Revenue developed quite favourably and had
reached DM 216.6 million at the end of November. On the expenditure side, the actual
spending relative to budgeted amounts was below pro-rata; total expenditure as of
November 2000 stood at DM 321.8 million. Certain budget adjustments were initiated
in August which shifted budgeted allocations between departments and left overall
expenditures almost unchanged (DEM 430.8 million). Against this background, the
CFA expects a deficit of roughly DEM 300 million in the budgetary sphere (including
some DM 100 million not entirely integrated into the budget and financed by donor-
designated grants) in 2000, which will be fully funded by external assistance.

While the performance in 2000 was broadly positive, there were some setbacks. The
introduction of a 15% wage withholding tax was put on hold as the UN refused to grant

39

the requested waiver of the general practice of exempting remuneration of UN local
staff from taxation. The lack of any form of taxation exacerbates the difference in salary
levels between local staff employed directly by the UN and those (including judges and
Kosovar department heads) working for the Kosovo administration. Elsewhere the CFA
had to remain particularly vigilant to avoid major policy slippage in the control of
expenditures of the big spending departments. This applied in particular to the of public
utilities, most notably the energy sector.

4.

Implementation of macro-financial assistance

In February 2000, following a Commission proposal, the Council decided to provide
exceptional Community financial assistance to Kosovo of up to EUR 35 million in the
form of a grant7. The funds were to be made available to the United Nations Interim
Administration Mission in Kosovo (UNMIK) through its Central Fiscal Authority
(CFA).

Taking into consideration the considerable progress achieved by UNMIK in
establishing essential administrative functions and developing a sound economic
framework in Kosovo, a first tranche of EUR 20 million was released in the second half
of March 2000.

The second tranche of EUR 15 million was disbursed in the second half of August. A
review mission in June had found that the conditions attached to the disbursement of the
second tranche had been broadly fulfilled in the following areas: promotion of the
reconstruction process, private sector development, banking and payments as well as the
development of the revenue base and pursuit of sound budgetary policies. This
exceptional assistance, which forms part of an overall European Community assistance
package totalling some EUR 300 million (including about EUR 73 million in the
budgetary sphere but excluding humanitarian assistance), was complementary to the
resources provided by the World Bank and bilateral donors.

7

2000/140/EC of 14 February 2000, OJ L 47, 19.2.2000, p. 28-29

40

X.

1.

MOLDOVA

Executive summary

economic problems. However,

In 2000, Moldova continued to be faced with
serious
the
adverse weather conditions affecting agricultural
output were compensated by an upturn in
industry,
transport, and construction, which
brought GDP in 2000 to the same level as the
previous year. Fiscal policies were substantially
tightened and important progress was registered
in the area of structural reform, notably with the
land
wineries,
privatization.

energy

sector,

and

the

The inflation rate was halved in 2000, to just
over 20% in the year to December. The current
account deficit increased, however, largely due
to higher imports caused by stronger domestic
demand. In spite of the total lack of external
financing and the significant external debt
servicing, gross
remained virtually
unchanged over the year, covering around 2 ½
months of imports of goods and services. The
exchange rate was broadly stable at around 12.5
lei/USD .

reserves

signed a new three-year
The government
memorandum of understanding in the context of
a PRGF with the IMF on 1 December 2000, one
day after parliament granted final approval to
budget. Subsequently, Moldova
the
received, in total, external financing of roughly
USD 42 million in the last week of 2000.

2001

the Council of the European
In July 2000,
Union approved a EUR 15 million macro-
financial asistance loan to Moldova. The
release of the first tranche was tied to a review
by the IMF of satisfactory implementation of
its agreement.

2.

Macroeconomic performance

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

The vast majority of prices were liberalised at an early stage of
transition. Only very few administered prices are left .

2.

Trade liberalisation

Moldova maintains a very liberal
trade regime. The tariff structure
features three bands (5,10 and 15%) and the simple average tariff is only
7%. Moldova hopes to join the WTO in early 2001.

3.

Exchange regime

Freely floating exchange rate, full current account convertibility

4.

Foreign direct investment

The FDI regime is open and non-discriminatory.

5.

Monetary policy

Conservative policies, aiming at price stability by the use of monetary
aggregates as nominal anchors.

6.

Public finances

An impressive, and necessary, reduction in the budget deficit was made
in 1999 and 2000, mainly by reductions in health care, education and
public sector expenditure. The debt/GDP ratio is roughly 110%, and the
bulk of debt servicing is due in the next three years.

7.

Privatisation and enterprise restructuring

Structural reforms accelerated markedly in 2000. Substantial progress
was recorded in the energy sector, land reform was on schedule, and the
privatisation of the economically very important wine and tobacco
sectors was finally approved in October 2000.

8.

Financial sector reform

The banking sector is small and underdeveloped, partly because it lacks
attractive investment opportunities. The central bank is constantly
spurring banking sector consolidation. Markets remain undercapitalised.

The Moldovan economy has contracted by over 60% since the country became
independent in 1991. Moldova is still suffering seriously from disruptions resulting
from the Russian crisis, and unfavourable weather conditions and rising energy prices
adversely affected growth in 2000. However, sound financial policies in combination
with a gradual improvement in the economies of Moldova's main trading partners
triggered some financial and macro-economic stabilisation, though at very low levels.

41

The latest forecasts point to GDP growth of 1.0% for the year 2000. The recovery
resulted mainly from a rise in consumption demand. The retail trade turnover (of
registered enterprises) increased by about 5.0%, following a 27.8% plunge in 1999.
Owing to the drought, agricultural production fell by just under 10%. Industrial output
recovered remarkably, though, rising over 2% after a 9% decline in 1999.

After a sharp acceleration of inflation in 1999, to about 45%, a substantial tightening of
the fiscal and monetary policy mix succeeded in reducing the CPI increase to the year-
end to just over 20%.

Fiscal policy developments in 1999 and 2000 were both impressive and unprecedented,
thanks largely to a rationalisation of health care, education and public sector
expenditure. The government budget deficit as a percentage of GDP was reduced from
over 8% in 1998 to 2.6% in 1999 and just over 1% in 2000.

Monetary policy was tightened in 2000. Strong foreign exchange inflows caused the leu
exchange rate to appreciate slightly, while allowing the central bank to replenish its
international reserves, despite large debt service obligations.

The current account deficit widened in 2000 to about 8% of GDP, largely because of
higher imports, which started to recover in line with incomes. Exports remained
sluggish, in part because of the effects of the drought. Exports increased by 5%, while
imports rose by over 30% in the year to December 2000.

In 2000, steps were taken to reduce arrears on debt service obligations and energy
payments. In March, USD 137 million of arrears due to Gazprom were settled through
(i) the issuance of promissory notes valued at USD 90 million to pay off the debts for
natural gas deliveries in 1996 and 1997, and (ii) an agreement on a debt-equity swap in
the gas sector, whereby Gazprom acquired 51% of Moldovagaz in return for the
clearance of USD 47 million of arrears (mainly through this operation, FDI-inflows
accelerated markedly, from 2.6% of GDP in 1999 to 10% of GDP, or USD 143 million).
In April, the rescheduling agreement with the Russian authorities covering the total debt
to Russia, including that to Oneximbank, was eventually signed. Also, rescheduling
discussions were launched with a number of commercial creditors holding government
guarantees. Notwithstanding efforts to reach rescheduling agreements with creditors and
to normalise relations with energy suppliers, the sustainability of Moldova’s external
debt remainsin doubt.

3.

Structural reforms

Political developments prompted a standstill in reforms in 1999, in particular with the
failure of the parliament to pass legislation for privatisations in the wine and tobacco
sectors. However, in 2000, substantial progress was made with privatisations in the
energy sector. In addition, the key privatisations of wineries and tobacco plants were
finally approved in October 2000.

The preparations for the privatisation of Moldtelecom, Moldova's national telecom
operator, has proceeded slowly. However, an independent regulatory body has been
established to assist in restructuring this sector.

42

There was a significant acceleration in land reform. Half of all state and collective farms
scheduled for privatisation started restructuring, and half of the land parcels intended for
registration in the Cadaster system in 2000 were in fact registered.

Firm restructuring and bankruptcy procedures were formally initiated for a number of
firms with large debts to the budget, some of them long outstanding.

While substantial progress was made in structural reform in 2000, further reform of the
legal and regulatory environment remains essential to improve governance and the
investment climate.

4.

Implementation of macro-financial assistance

On 10 July 2000, the Council decided to provide Moldova with a macro-financial
assistance package of up to EUR 15 million. However, given that the IMF programme
was off track, the Commission could not disburse it.

the government

On 1 December,
signed a new three-year memorandum of
understanding with the IMF in the context of a Poverty Reduction and Growth Facility
to the 2001 budget.
(PRGF), one day after parliament granted its final approval
Subsequently, Moldova received, in total, external financing of roughly USD 42 million
in the last week of 2000.

The Commission also reached an agreement ad referendum on the conditions for the
release of its macro-financial assistance. Accordingly, EUR 10 million will be disbursed
in a first tranche, and the remaining EUR 5 million in the second instalment. The release
of the first tranche is subject to the successful conclusion of the first review under the
PRGF with the IMF, as well as to progress made with respect to a number of structural
reforms agreed between the Commission Services and the Moldovan authorities. The
conditions for the second tranche are to be negotiated subsequently.

On 7 December 2000, Moldova made a first principal repayment of EUR 5 million of a
previous EU macro-financial loan, in spite of the difficult financial situation the country
faced.

43

XI.

MONTENEGRO

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

inhabitants.

Montenegro is a constituent
republic of the
Federal Republic of Yugoslavia (FRY) of some
Montenegro’s
600,000
macroeconomic situation deteriorated steadily
during a decade of gradual dissolution of the
Socialist Federal Republic
of Yugoslavia,
disruption of trade patterns, wars in the region
and economic decline in the large Serbian
market. The outbreak of the Kosovo crisis and
the large influx of refugees from Kosovo led to a
further sharp deterioration of
the economic
situation in the Republic.

exceptional

Community

In recognition of the difficult situation of the
Government
the Council
of Montenegro,
decided on 22 May 2000 to provide Montenegro
with
financial
assistance of up to EUR 20 million in the form
of a grant
two
to be released in at
successive tranches, and subject
to economic
policy conditionality. The assistance was aimed
at sustaining and accelerating the efforts of the
reform-minded government towards the creation
of a market-oriented economy and in particular
its efforts to enhance budgetary transparency
and to improve the tax and revenue base while
increasing public expenditure efficiency.

least

assistance.

reform measures

During the second half of 2000 and before the
release of the second tranche the authorities
undertook important
and
the economic policy conditions
broadly met
attached to this
In particular,
considerable progress was made in the area of
budget preparation. Also, important steps in the
reform of tax policy and administration were
achieved. The final adoption of an organic
budget law in December 2000 should constitute
a major prerequisite
increasing public
expenditure management and control.

for

1.

Price liberalisation

Many prices have been liberalised in the past two years. Prices of milk
and bread are expected to be liberalised in the course of 2001. Before
fully liberalising main food price categories, which are still subject to
controls, government will identify compensation schemes for neediest
groups of population (in the framework of EU Food Security
Programme).

2.

Trade liberalisation

Some progress has been made; the number of items subject to restrictions
has been reduced; reform of the Customs Service is being discussed with,
inter alia, business representatives. .

3.

Exchange regime

DM became sole legal tender in December 2000.

4.

Foreign direct investment

Investment environment
still considered unfavourable because of
perceived high risks, non-transparent policies, and political uncertainties
with regard to future constitutional arrangements.

5. Monetary policy

Newly adopted law of
the central bank gives the central bank
responsibility for supervising and regulating domestic banks; de facto no
control over monetary policy as the supply of base money is determined
by the balance of payments outcome.

6.

Public finances

Adoption of organic budget law in December 2000 should provide basis
for strengthening the role of the Ministry of Finance in budget execution
and expenditure control and may also pave the way for the introduction
of a Treasury System.

7.

Privatisation and enterprise restructuring

Mass Voucher Privatisation covers some 191 companies and is expected
to be completed before mid-2001. A further 110 companies are in the
process of being privatised through tenders, auctions, or bankruptcy
procedures. Tenders have been invited for the telecommunications and
electricity companies.

8.

Financial sector reform

Banking sector reform is expected to progress as the law on the banking
system was adopted in December 2000. Currently 14 domestic banks
operating in Montenegro, most of which may need huge financial
resources before they can be transformed into viable financial
institutions. New foreign bank started operations in Montenegro recently.

2.

Macroeconomic performance

The lack of a national accounting framework and the limited availability of economic
data in the Republic make it difficult to assess the macroeconomic situation. Moreover,

44

the large size of the grey economy casts doubts on the relevance of official statistics as a
measure of the country’s welfare or as a tool for economic policy and fiscal projections.

During the first
three quarters of 2000, economic activity seemed to be largely
constrained by the disruption of trade with Serbia and hardly any economic recovery
was observed. Industrial production, however, rebounded somewhat in October 2000,
mainly owing to the resumption of production in the large aluminium company. For the
first ten months, industrial output increased by almost 4% compared to the same period
in 1999. Cost pressures continued to impact adversely on production and employment
so the Secretariat for Development’s estimate of 5% real growth in 2000 may not
materialise.

The macroeconomic environment can be described as a combination of expansionary
fiscal and income policies under tight monetary conditions. Public spending was
significantly affected by a boost in wages for public employees and in social benefits
related to wages, amounting to two thirds of total expenditure of the Republic budget.
Given the shortfall in public revenues, fiscal expansion is being financed to a large
extent by inflows of external aid.

From December 1999 to September 2000 the minimum wage increased by 60% and
average nominal wages rose by 55%. Inflation eroded only part of this increase;
consumer prices rose by 17% during the same period so that real incomes still improved
markedly. Inflation decelerated steadily, reaching a monthly rate of 1% in October 2000
after a peak of 5% in January. This still meant an annualised inflation of almost 13%.

The boost in real income has supposedly fuelled imports, leading to an increase of the
trade deficit to USD 45 million for the first ten months of 2000, compared to USD 31.5
million for the corresponding period in 1999. A resumption of trade with Serbia should
have had a favourable impact on the volume of trade for the balance of 2000.

Public finances in the Republic remained in a critical condition. For the year 2000, the
deficit before grants is estimated at about DM 90 million (7.5% of estimated GDP).
Arrears are estimated to have reached DM 85 million at end-2000. This implies an
actual overall deficit of the Republic budget on accrual basis of DM 175 million, or
14.6% of GDP. Grants are likely to reach DM 110 million (from US estimated at DM
59 million; from EU estimated at DM 51 million), so the amount of DM 20 million
exceeding the expected cash deficit could be used to reduce the outstanding arrears.

For the first ten months of 2000, the consolidated budget (including the Republic budget
and the extra-budgetary funds) reached a deficit of almost DM 100 million. Net arrears
of the consolidated budget at end of 2000 were expected to reach some DM 120 million.

3.

Structural reforms

The main expression of the Government’s commitment to market-oriented reforms is
the extension of the privatisation programme started in 1991. The present phase of the
programme (Mass Voucher Privatisation) covers 191 companies and is expected to be
completed before the middle of 2001. In addition, 110 enterprises are in the process of
being privatised through “batch” sales, tenders, auctions, or bankruptcy procedures.
Tenders have already been invited for
the telecommunications and electricity
companies.

45

Price liberalisation is proceeding. The authorities are aware that energy prices need to
be freed before procedures for the privatisation of the electricity company and
Yugopetrol, the state owned entity which controls the import, refinery and distribution
of petrol, can be launched. Some progress has been made with regard to trade
liberalisation, as the number of items subject to restrictions has been reduced.

The new laws on the Central Bank of Montenegro and on the Banking System were
adopted by Parliament in 2000. These laws, which comply with international standards,
should provide the basis for transforming the current cash economy into a market-
oriented system of financial intermediation. However, it will still be necessary to define
the respective roles of the central bank in Podgorica and the Federal central bank in
Belgrade in the light of the political developments in Yugoslavia. The restructuring of
the banking sector requires a major effort and huge financial resources; it remains to be
seen to what extent the 14 domestic banks that are currently operating in Montenegro
can be transformed into viable financial institutions. A new foreign bank has started
operations and requests from three other foreign institutions were under review by the
authorities at the end of 2000.

4.

Implementation of macro-financial assistance

On 22 May 2000, the Council of the European Union decided to provide the Republic
of Montenegro with exceptional financial assistance of up to EUR 20 million in the
form of a grant to be disbursed in at least two successive tranches. The objective of this
assistance was to alleviate the Republic’s financial constraints through budget support.
In particular, the assistance was aimed at sustaining and accelerating the current efforts
of the authorities of Montenegro to enhance budgetary transparency and to take further
steps to improve the tax and revenue base while increasing public expenditure
efficiency.

Following the signature of the Memorandum of Understanding (MoU), the first tranche
of the assistance, amounting to EUR 7 million, was disbursed in August 2000. The
release of a second tranche of EUR 12.95 million, which was subject to a number of
policy measures set out in the MoU, was launched at the end of 2000 (disbursed in early
January 2001) after the Commission Services had verified that the conditionality had
been fulfilled. EUR 50,000 of this assistance was used for technical support aimed at
assisting the authorities, most notably the Ministry of Finance, in the implementation of
reform measures related to some of the conditions outlined in the MoU.

In line with the Council decision and given the lack of a comprehensive macro-
economic programme supported by the IFIs, the policy conditions of this assistance
mostly concentrate on measures to improve budgetary procedures and to enhance fiscal
transparency, rather than on specific fiscal and budgetary performance targets. In its
review of the conditionality, the Commission concluded that the authorities had broadly
fulfilled the economic policy conditions. Particular progress had been achieved in the
area of budget preparation and in tax policy and administration reform. Less progress
had been made in public expenditure management and control, though the adoption of
an organic budget law by the government in December 2000 was an important step
towards strengthening the role and capability of the Ministry of Finance in public
expenditure control, as it would also provide the legal basis for the establishment of a
Treasury System.

46

XII.

ROMANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

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 in an
effort to maintain external competitiveness. 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 expenditure control

7.

Privatisation and enterprise restructuring

By the end of 2000, most small and medium-sized companies had been
privatised, but most large-scale companies remained public. Corporate
governance and financial discipline of mostly large and loss-making
public companies remained weak. The authorities are committed to
privatising 63 large state-owned enterprises as part of a World Bank
private sector adjustment loan.

8.

Financial sector reform

Reform of the banking sector was slow at first,
leading to serious
difficulties in 1997 and 1999. However, the authorities took a major step
forward by closing a major loss-making state-owned bank accounting for
remain small and
1/3 of
underdeveloped.

the banking system. Capital markets

Although Romania's macro-economic situation
remains fragile, there were signs of a gradual
improvement during 2000. The large reduction
in the current account deficit, the full and timely
repayment of all external obligations and the
rebuilding of official reserves were important
achievements. The revival of exports and real
GDP growth during 2000 are encouraging signs.
However,
the inflation rate continued to be
extremely high and the level of foreign direct
investment
extremely
disappointing.

inflows

was

of

large

in
loss-making

There was a lack of significant progress on
structural reforms and the financial discipline of
the enterprise sector continue to be weak. While
and medium-sized
privatisation
small
less
companies continued at a rapid pace,
progress was made
and
privatising
restructuring
public
companies. Many privatisation operations were
initiated, but only a few were finalised, and the
majority had to be postponed or cancelled. The
situation within the agricultural sector - by far
the largest source of employment - continued to
deteriorate. Private sector growth was hampered
by legal, political and economicdifficulties, such
as
system and
ambiguous property rights.

dysfunctional

financial

a

in

of

support

assistance

In November 1999, the Council of the European
Union had approved a EUR 200 million macro-
financial
the
government’s efforts to accelerate reforms and
ensure macroeconomic stability, backed by an
IMF programme. The first tranche of EUR 100
million was disbursed when the IMF approved
the first review of the stand-by arrangement.
Unfortunately,
IMF programme went
quickly off track and the subsequent review of
the programme, which was due in September
2000, was not completed. As a consequence, the
second tranche of the macro financial assistance
loan was not disbursed.

the

47

In November 2000, Romania elected a minority PDSR (Partly of Social Democracy)
government. In December 2000 the new government announced its programme.
Economic issues were given significant attention. The objectives of the new programme
are ambitious. It implies commitment to the core principles of the Medium Term
Economic Strategy agreed by the previous coalition in March 2000. However concrete
measures are yet to be taken.

2.

Macroeconomic performance

After three years of recession, Romania enjoyed a modest increase in economic activity
during 2000. Preliminary data for the first nine months of 2000 suggest
the
economy grew by 2.1 per cent. Industrial production was 8.2 per cent higher than in the
same period of 1999, confirming the moderate upturn in activity. The external sector
was the chief source of the recovery, as the acceleration of EU growth increased
demand for exports. The agricultural sector performed poorly, as a drought depressed
In contrast, domestic demand remained subdued as private-sector
production.
consumption was constrained by moderate real wage growth.

that

The current account performed well and preliminary data suggest that the deficit in
2000 may have been 3.2% of GDP. The current account deficit narrowed during the first
nine months of 2000. The cumulative deficit fell to USD 682 million compared to USD
781 million for the same period of 1999. Export receipts during the first half of 2000, in
terms of US dollars, recorded 27 per cent growth and reached their highest level in ten
years. Imports also surged, albeit at a slightly lower rate than exports. Nonetheless, a
large component of the correction is due to the current
transfers surplus and
improvements in the services balance, which places a question mark on the quality of
the current account improvement.

Owing to the uncertain macroeconomic environment, FDI inflows declined during the
first half of 2000. In the first six months of the year, gross FDI inflows reached about
USD 347 million, compared to USD 688 million in 1999. Nevertheless, concerns about
Romania’s external creditworthiness and its capacity to service its foreign debt
obligations subsided, as the authorities made full and timely payment of external
obligations.

There is no sign that inflation has started a downward path. Average inflation in 2000,
at 49%, was higher than the 1999 rate of 45.8%. The economy lacks an effective
nominal anchor. Loose monetary conditions placed significant downward pressure on
the nominal exchange rate. Between January and December the Lei fell by 40 per cent
against the US dollar and by a third against the Euro.

The fiscal position in 2000 did not improve. The general government deficit was 3.7%,
as in 1999. The fiscal stance was loosened in the summer of 2000, but, in the closing
months of the year, the upturn in economic activity boosted tax revenues, and relieved
fiscal pressures slightly. The previous government also introduced various measures
designed to increase tax payments and limit the growth of inter-enterprise arrears. These
initiatives had some limited success. Despite these recent positive developments, the
fiscal position remains fragile. Pressures to increase public sector wages will continue to
be strong, the interest payment burden is large, and tax arrears continue to place severe
strains on fiscal policy management.

48

3.

Structural reforms

Structural reform, in particular privatisation, within the banking sector stalled in 2000.
Despite commitments under the IMF stand-by arrangement, there is no firm progress
towards the privatisation of BCR (Banca Comerciala Romana). Moreover, another
state-owned bank – Banca Agricola – continued to require significant liquidity support
from the central bank. The largest investment fund went bankrupt, causing the largest of
the credit co-operatives to suspend payments. A number of small banks and credit co-
operatives were closed down or went bankrupt. These problems had their origin in an
inadequate legislative and supervisory framework for the financial sector. Nonetheless,
the authorities acted with determination, ensuring that the problems, which culminated
they
in May-June 2000, did not
introduced legislation for the credit co-operatives and forced a few private banks to stop
their activity.

translate into a systemic crisis. Subsequently,

The financial system does not play its normal role of channelling savings to investment.
Romania does not have a functioning financial system supporting the development of
economic activity and long-term investment. Owing to a combination of weak
economic activity and poor confidence of the general public, domestic credit to the non-
government sector fell from 14.8% of GDP in June 1999 to 10.7% in June 2000.

The lack of financial discipline continued to be a serious problem in 2000. Although the
stock of arrears to the budget stabilised towards the end of the year, the overall stock
was extremely high. The problem was particularly serious within the large state-owned
utilities sector. However, a recommendation by the gas and electricity utilities regulator
to raise prices, which could have helped to alleviate the problem, was rejected.

Business creation has remained seriously hampered by uncertainty about property
rights, and significant and repeated changes in the legal and regulatory environment.
Indications are that market entry has become more difficult: the registered number of
new foreign-owned companies fell in 1999 and in the first months of 2000. While a
better bankruptcy law was established and a new State Aid law was passed at the
beginning of 2000, market exit is not satisfactory in Romania. Too many unviable
companies are allowed to continue their operations, through the state's disregard of hard
budget constraints, the reluctance to enforce state aids rules and the long and difficult
implementation by courts of bankruptcy legislation.

Steps were taken to continue the restructuring of some industries, in particular the
mining and maritime sectors, and to launch new ones. There were instances of success
in such industries as textiles, furniture and electronic sub-contracting, demonstrating
that there is an untapped potential for economic growth. In addition, business practices
improved, and a few of the largest loss-making companies were closed or restructured.
Finally, ambitious restructuring strategies were devised and began to be implemented in
the gas and power sectors, involving the unbundling of activities.

4.

Implementation of macro-financial assistance

the end of 1998,

At
the Romanian authorities started negotiations on a new
macroeconomic stabilisation programme with the IMF and the World Bank. A stand-by
arrangement amounting to SDR 400 million was approved in August 1999. Two
disbursements were made, amounting to SDR 140 million. In June 1999 the World
Bank approved credits amounting to USD 325 million, including a new private sector

49

adjustment loan (PSAL) amounting to USD 300 million. A first tranche of USD 150
million was disbursed. The first review of the IMF stand-by arrangement was completed
in June 2000. The second and final tranche of the PSAL, amounting to USD 150
million, was disbursed afterwards.

Following the signature of a letter of intent between the Romanian authorities and the
IMF, , the Council decided, on 8 November 1999, to grant Romania a new long-term
balance of payments loan of up to EUR 200 million. This was the fourth such loan since
1992. At the end of 1999, the Commission and the Romanian authorities reached
agreement on the conditions for the release of the assistance. It was agreed that payment
would be made in two equal instalments. The first tranche was released after the
successful completion of the first review under the IMF stand-by arrangement. The
second tranche was subject to the continued satisfactory implementation of the IMF
programme, progress with respect to a number of structural reforms (notably enterprise
restructuring and privatisation in the banking sector) and the establishment of a coherent
medium term economic strategy.

During the summer of 2000, the then government’s commitment to the macroeconomic
framework weakened in the run up to parliamentary and presidential elections. The IMF
stand-by agreement, which was extended in June 2000, lapsed after the review in
September, when the then government could not deliver its commitment to reduce state-
owned enterprise arrears, limit the growth of public-sector wages, or restructure and
privatise the remaining state-owned banks. As a consequence, the second tranche of the
macro-financial assistance loan was not disbursed.

50

XIII.

TAJIKISTAN

1.

Executive summary

Real GDP grew by 9.6% (year-on-year) in the
first eight months of the year. Growth was
driven by manufacturing. However, a severe
drought resulted in a very bad grain harvest
(50% of the 1999 level), which was expected to
reduce GDP growth to 5% for 2000 as a whole.
The progress in the implementation of structural
reforms was acceptable. Significant steps were
made in fiscal reform and the privatisation of
smaller enterprises. Also banking regulation and
supervision improved, and the restructuring of
progressed. However,
the
Tajikistan was
in privatising larger
companies.

banking

slower

sector

On 27 January 2000, the IMF Board favourably
concluded the first and second reviews under the
second year of the PRGF programme. However,
in March, the third review was not favourably
completed and the last tranches under the second
year programme were not disbursed. However, a
new annual arrangement was decided by the
IMF Board on 3 November 2000.

The Commission reached an agreement with
Tajikistan
the
exceptional financial assistance adopted by the
Council in March 2000 (2000/244/EC).

implementation

the

on

of

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Most prices had already been liberalised at end-1996.

2.

Trade liberalisation

Relatively liberal trade system with average tariff rate of 8% and absence
of major non-tariff barriers. Applying for membership in the WTO.
Customs union with Russia, Belarus, Kazakhstan and Kyrgyz Republic.

3.

Foreign exchange regime

Relatively liberal exchange regime. An interbank foreign exchange
market began operating in July 2000 replacing the Tajikistan
International Currency Exchange and resulting in a more market-
determined exchange rate. New currency, the Somoni, since October
2000.

4.

Foreign direct investment

Modest foreign direct investment due to high perceived country risk,
despite a relatively liberal legal regime. No legal obstacles to foreign
direct investment or to foreign ownership of shares, no restrictions on the
repatriation of profit and capital.

5.

Monetary policy

Independence of the National Bank reasonably assured by law. In
practice, until mid-2000,
the NBT performed quasi-fiscal functions
dictated by broader economic and political considerations.

6.

Public finances

Budgetary revenue estimated at 14% of GDP in 2000; expenditure
estimated at 15% of GDP. New Tax Code and reinforcement of the
Treasury.

7.

Privatisation and enterprise restructuring

The privatisation of small enterprises has been completed. Slower
progress with regard to larger enterprises. Successful privatisation of all
cotton ginneries. 55% of total agricultural land is in private hands. Land
reform is not free of corruption. Officials continue to intervene in the
operations of new private farms and firms.

8.

Financial sector reform

19 commercial banks. Significant progress in improving banking
regulation and supervision. Restructuring agreements between the NBT
and the four main banks. Lending to insiders and non-collection of loans
remain widespread. Confidence in the system is still low and ability to
mobilise savings remains limited.

2.

Macroeconomic performance

Real GDP grew by 9.6% (year-on-year) in the first eight months of the year. Growth
was driven by manufacturing, where higher capacity utilisation continued to increase
productivity. However, a severe drought resulted in a very bad grain harvest (50% of the
1999 level), which is expected to have reduced GDP growth to 5% for 2000 as a whole.

In 2000, fiscal consolidation was achieved through improved revenue collection,
resulting in a surplus of about 1.7% of GDP in the first half of the year. Recent
increases in international oil prices and in food prices, as well as the depreciation of the

51

new currency, induced a sharp increase in inflation towards the end of the year. The
Tajik currency depreciated by 18% between end-March and mid-September 2000. Its
depreciation accelerated towards the end of the year 2000.

The current account deficit in the first half of 2000 (6% of GDP) was lower than in the
same period of 1999. However, drought and higher oil prices increased pressures on the
balance of payments. Moreover, capital inflows from official and private sources
(especially cotton sector financing) were lower than expected, causing pressure on gross
foreign exchange reserves (below 2 months of imports coverage).

Tajikistan's external debt represented 103% of GDP at the end of 1999,and was very
high when measured by the debt stock and debt service to fiscal revenue ratios.

3.

Structural reforms

Independence of the National Bank is reasonably assured by law, but in practice, until
March 2000, the NBT performed quasi-fiscal functions dictated by broader economic
and political considerations. The NBT's direct exposure to the cotton sector was,
however, expected to be eliminated and its indirect involvement to diminish after the
privatisation of the sector. Financing of the 2000 cotton crop was expected to be
covered by limited lending from the commercial banks funded through credit auctions
by the NBT, by the cotton sector's retained export earnings, and by new loans from
external private creditors.

With the adoption of a new Tax Code and the reinforcement of the Treasury, significant
progress was made in transforming the fiscal system into a modern rule-based
instrument of government policy: all fiscal revenues, including tax collections of the
State Customs Committee were brought under
regional
Treasuries were set up, and efforts were made to restructure the central Treasury and to
strengthen internal audit and control.

the Treasury’s control,

With regard to privatisation, small-scale privatisation neared completion (5,286 small
enterprises sold out of a total of 5,400). In the privatisation process, however, poor
transparency was a major concern. Tajikistan was slower in privatising the largest
enterprises. While most large enterprises had been “incorporated” (733 out of 750), less
than one third (214) of them had been sold at end-August 2000. The relatively slow
pace is attributable to the existence of a de facto minimum price. Another problem was
the delays in receiving full payment for the enterprises after the sale contract was
signed. The failure to privatise the Turzunzade aluminium smelter was indicative of the
problems faced by the larger enterprises in the country. The plant's inefficiency, low
world metals prices and a huge debt (USD 120 million) kept investors away. Given the
importance of the cotton sector for the Tajik economy, the successful completion of the
long-delayed privatisation of the cotton ginneries, with full payment received for all
ginneries, was especially commendable. By end-September 2000, some 290 state and
collective farms (out of 600) had been privatised. As of end-July 2000, the farm
privatisation process had converted 55% of total agricultural land into private farms (2.6
million hectares). The process was, however, not free of corruption.

The authorities made significant progress in improving banking regulation and
supervision. In particular, the minimum capital requirement was increased from USD
300,000 to USD 1 million from 1 January 2000. Banking supervision improved as the
NBT expanded and restructured its Banking Supervision Department (BSD) and

52

strengthened its prudential regulations. However, the banking system remained weak
and highly concentrated. Most banks were saddled with non-performing loans;
operational management was often weak and the financial system suffered from a weak
regulatory environment and a lack of functioning capital markets. As a result, overall
confidence in the system was still low and banks' ability to mobilise savings remained
limited. The number of banks declined from 28 in 1997 to 19 in 2000.

The National Bank of Tajikistan signed restructuring agreements with the four major
commercial banks. These four banks are the successors of the specialised banks of the
Soviet period and collect most deposits (70%) and issue most loans (75%). These banks
were audited according to international accounting standards by international agencies
and began preparing their first business plans. Some achieved a somewhat higher-than-
expected loan recovery. Restructuring schemes were agreed with some smaller banks.
No other financial institutions, apart from a number of small insurance companies, have
emerged yet.

4.

Implementation of macro-financial assistance

In March 2000, the Council adopted a decision to extend to Tajikistan the exceptional
financial assistance already agreed for Armenia and Georgia. The total loan component
of this assistance for the three countries was raised to a maximum of EUR 245 million,
with a maximum maturity of 15 years and a grace period of 10 years. The grant
component of this assistance consists of an amount of up to EUR 130 million during the
1997 to 2004 period, with a maximum of EUR 24 million annually. The assistance was
to be disbursed if the country fully settled its arrears towards the Community (EUR 78
million on 31 December 2000), if it remained on track with its IMF programme and if it
proceeded with substantial annual reductions in its net debtor position towards the
Community.

A Commission staff mission visited Tajikistan in May 2000 to negotiate the terms,
amounts and conditions attached to the Community exceptional financial assistance. It
reached an agreement in principle with the Tajik authorities on a new loan and on a total
grant amount to be disbursed over the 2000-2004 period, as well as on the requested
reduction by Tajikistan in its net debtor position towards the Community. The
agreement was formally signed by the Tajik authorities in December 2000.

53

XIV.

UKRAINE

1.

Executive summary

After
the
a decade of negative growth,
Ukrainian economy began to recover in late
1999 and is estimated to have expanded by 6%
in 2000. Inflation accelerated in 2000, reflecting
the sharp depreciation of the hryvnya in late
1999/early 2000, higher oil prices and other
is expected to decline in 2001.
factors, but
Assisted by the positive impact on revenues of
the economic recovery,
the
consolidated government declined to 1.5% in
2000.

the deficit of

external

financial

considerably.

position
Ukraine’s
by
Supported
strengthened
healthy export growth,
the current account
posted a substantial surplus in 2000. Also, in
April 2000, Ukraine successfully restructured
some USD 2.6 billion of foreign debt held by
the private sector.

in

steps

areas

significant

In the area of structural reform, although the
reformist government formed in December 1999
such
took
as
privatisation, banking regulation,
land reform
and energy sector reform (including the decision
to close Chernobyl on 15 December 2000),
much remains to be accomplished. In particular,
progress with gas sector reform has been elusive
and significant weaknesses remain in some large
banks. Also, Ukraine continues to impose a
number of trade restrictions that are not only
inadvisable from an economic point of view but
violate
and
Cooperation Agreement (PCA) with the EU.

its Partnership

rules of

the

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 levels.

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 repurchasing agreements. 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 1.5% of GDP in 2000. Social
security contributions, the VAT and the profit tax are the main sources
of revenue, accounting together
for about 70% of consolidated
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
in poor condition. Capital markets remain underdeveloped.

After more than a year of difficult discussions, complicated by allegations about the
irregular use of IMF funds by the National Bank of Ukraine (NBU) during 1997-98, the
IMF approved in December 2000 the reactivation of the extended arrangement (EFF).
In December 2000, a Commission staff mission travelled to Kiev to agree on the policy

54

measures related to the disbursement of the second tranche of the EUR150 million
macro-financial assistance approved by the EU in October 1998.

2.

Macroeconomic performance

Following a further drop (of 0.4%) in 1999, the economy recovered strongly in 2000,
led by robust export performance. Real GDP grew by 6 percent and industrial
production by 12 percent,
since the country's
independence.

the first positive yearly rates

Year-on-year CPI inflation accelerated from 18.4% in October 1999 to 28.9% in
November 2000, reflecting the sharp depreciation of the hryvnya at the time of the
Presidential elections of October/November 1999, the increase in oil prices, adjustments
in administrative prices, and relatively fast monetary growth. Money supply expanded
at an annual rate of about 36%. This partly reflected a structural re-monetisation of the
economy but also the monetary impact of the government's failure to service its debts to
the NBU, which the latter has not been able to fully compensate through liquidity-
mopping operations.

The deficit of the consolidated government, measured on a cash basis and including
privatisation revenues "below the line", declined from 2.4% of GDP in 1999 to an
estimated 1.5% of GDP in 2000. This partly reflected the positive effect on fiscal
revenues of stronger-than-expected economic activity but also the delays in debt service
payments to the NBU and the accumulation of certain arrears in the energy sector.

Ukraine’s current account swung from a deficit of about 3% of GDP in 1998 to a
surplus of 2.7% of GDP in 1999, reflecting the negative effect of shrinking output on
imports, which amply offset a new drop in exports. Supported by the depreciation of the
hryvnya and stronger demand in Ukraine's main trading partners, however, exports have
been growing strongly since late 1999. Although import growth has also accelerated
reflecting the recovery of domestic demand, the current account posted a substantial
surplus in the first three quarters of 2000.

In April 2000, some USD 2.6 billion of foreign debt, mostly eurobonds held by private
investors but also part of Ukraine's debt to the Russian gas company Gazprom, were
swapped into 7-year bonds denominated in Euros or dollars. Ukraine, stopped servicing
its debts to the Paris Club in January 2000, and sought a rescheduling of these debts
(which amount to about USD 700 million). Following the IMF's decision to resume its
lending to Ukraine, the Paris Club was expected to consider a rescheduling of Ukraine's
debts to its member countries.

Despite the improved current account and the rescheduling of private bond debt, the
balance of payments remains vulnerable. Foreign direct investment inflows continued to
be disappointing, and official foreign exchange reserves remained low (USD 1.15
billion at end-November 2000, or the equivalent of 3¾ weeks of imports). Moreover,
the need to undertake substantial imports of fuel was expected to have a negative effect
on the balance of payments during the winter of 2000-018. In January 2000, Moody’s,

8

As of October 2000, Ukrainian fuel stocks were clearly insufficient to cover production needs
for the winter. In October 2000, the EBRD approved a USD100 million "Fuel Purchase Loan
Facility" to help the state-owned power-generation companies purchase imports of fuel during
the winter.

55

reflecting what it perceived as an increased risk of default, downgraded Ukraine's rating
from B3 to Caa1 (a default grade rating).

Following a depreciation of about 20% between July 1999 and January 2000, the
hryvnya was relatively stable. The relative stability against the dollar, coupled with the
appreciation of the US currency and Ukraine's large inflation differential against its
main trading partners, resulted in a considerable real exchange rate appreciation from
February 2000, particularly vis-à-vis the Euro area (given the Euro's marked
depreciation against the dollar). This real appreciation, however, can be largely seen as
a correction to the over-depreciation suffered in late 1999 and early 2000, and the
exchange rate is thought to still be competitive.

3.

Structural reforms

Although the reformist government formed in December 1999 took significant steps in
the area of structural reform, progress in this field remained mixed and much remained
to be accomplished.

In agriculture , the President passed a decree in December 1999 allowing the effective
sale of individual plots from the collective agricultural enterprises and paving the way
for the development of a private land market. A subsequent Presidential decree,
however, in June 2000 partly restored state control of the grain market.

On the privatisation front, the President signed in December 1999 a decree on priority
measures to expedite privatisation, and, in early 2000, a privatisation programme for
2000-02 foreseeing the sale of large companies was adopted by parliament. At over 2
billion hryvnias, privatisation revenues more than doubled in 2000. Some sales,
however, were not conducted in a transparent manner: there were some instances of
companies being excluded from the bidding process without a clear justification.

Banking regulation and supervision have been considerably strengthened in recent years
with technical assistance from foreign donors. Significant weaknesses remain, however,
in some of the largest banks. Restructuring programmes for those banks were adopted
in 2000 and their implementation is a key aspect of the conditionality of the World
Bank, the IMF and the EU's macro-financial assistance. Two of these banks, namely
Banka Ukrainia and the state savings bank, made little progress in implementing their
programmes and were in a very weak position. Revised resolution plans for these banks,
however, were in the process of being adopted. Also, in December 2000, the parliament
passed a new law on banks and banking activities that strengthened the supervisory
powers of
the NBU and better defined the framework for dealing with bank
bankruptcies.

Progress with energy sector reform has been slow but a number of encouraging steps
have been taken since late 1999. On 15 December 2000, Chernobyl was finally closed
down, opening the way for an international financial package, led by the EU and the
EBRD, aimed at completing with acceptable safety standards the nuclear power plants
of Khmelnitsky and Rovno (the so-called K2R4 project). Also, there was some progress
in the area of power sector reform. In particular, privatisation tenders for 7 power
distribution companies were launched in October/November and a tender for the
selection of the privatisation adviser for a third batch of 6/7 companies was at an
advanced stage. There was also a significant improvement in cash collection rates in the
power sector in the second half of 2000.

56

In the area of the trade liberalisation, Ukraine has made some progress since the spring
of 2000 towards removing a number of trade restrictions that were incompatible with
the PCA but more needs to be done. As part of the conditionality linked to the
disbursement of
the authorities have been
discussing with the Commission a timetable for the elimination of the remaining
restrictions (see below).

the EU's macro-financial assistance,

4.

Implementation of macro-financial assistance

In September 1998, the IMF approved an EFF for Ukraine of USD 2.2 billion, which
was later augmented to USD 2.6 billion. The EFF ran off-track a couple of months 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 the EFF in the autumn of
1999. After more than a year of difficult negotiations, the IMF decided in December
2000 to reactivate the EFF in support of a new economic programme agreed with the
authorities.9

In October 1998, the EU Council granted Ukraine a third macro-financial loan of up to
EUR 150 million10. The loan was to be disbursed in at least two tranches and has da
maximum maturity of 10 years. The disbursement of the first tranche was delayed
because of the initial problems with the IMF's EFF. Following the resumption of the
EFF and the implementation of a number conditions agreed between the EU and the
Ukrainian authorities, the first tranche (EUR 58 million) was disbursed in July 1999. At
the same time, the Commission staff agreed in principle with the authorities on the
policy conditions for the release of the second tranche of the loan, stated in a
Supplementary Memorandum of Understanding. This first version of the document,
however, was never signed, owing to the insistence by some Ukrainian ministries on
minor changes to the text and a new interruption, in the autumn of 1999, of the EFF.

In December 2000, when the reactivation of the EFF seemed within reach, a
Commission staff mission went to Kiev to resume discussions on the conditions for the
release of the second tranche of this assistance. The mission agreed ad referendum with
the authorities on practically all
the policy measures contained in a revised
Supplementary Memorandum of Understanding. These measures focused on the
elimination of trade restrictions that contravened the PCA, the reform of the energy
sector, the privatisation of large enterprises, the strengthening of the banking system,

9

10

One factor that complicated the resumption of IMF lending was the allegations about the
irregular use of IMF funds by the NBU in 1997-98. An independent audit commissioned in early
2000 at the request of the IMF found that the NBU had overstated its reserves, allowing it to
obtain several IMF disbursements that it would otherwise not have received. On the other hand,
the audit found no evidence of misappropriation of IMF funds. In late August, Ukraine repaid to
the IMF ahead of schedule the funds that it had purchased inappropriately by overstating its
reserves (SDR 72.5 million). Also, In September 2000, Ukraine agreed to take remedial
measures to avoid a repetition of these irregularities.
Council Decision 98/592/EC of 15 October 1998. The fist 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
EUR200 million, was disbursed in 1996 and 1997.

57

and the creation of a level playing field and a favourable climate for foreign investment.
The Commission staff proposed, ad referendum, a second tranche of

42 million.

€

58

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

Status of effective disbursements as of December 2000 (in millions of EUR)

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

Hungary II
(BOP loan)

Bulgaria I
(BOP loan)

Romania I
(BOP loan)

24.06.91

91/310/EC

24.06.91

91/311/EC

22.07.91

91/384/EC

Israel1
(structural adjustment soft loan)

22.07.91

91/408/EC

870

375

180

290

375

188

400

70

110

220

(40)
(80)
(100)

80

45

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
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)

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 loan)

Ukraine II
(BOP loan)

Moldova II
(BOP loan)

1

Assistance to Israel
ECU 27.5 million in the form of interest rate subsidies.

includes a loan principal amount of ECU 160 million and grants of

59

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

CONTINUED

Authorisations

Disbursements

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Disbursed Undisbursed

Country

FYROM I
(BOP loan)

Bulgaria III
(BOP loan)

22.07.97

97/471/EC

22.07.97

97/472/EC

Armenia, Georgia and Tajikistan2
(Structural adjustment loans and grants)
of which:

17.11.97

28.03.2000

97/787/EC
modified by
00/244/EC

Armenia

Georgia

Tajikistan

Ukraine III
(BOP loan)

Albania III
(BOP loan)

Bosnia I3
(BOP loan and grant)

Bulgaria IV
(BOP loan)

FYROM II4
(BOP loan and grant)

Romania IV
(BOP loan)

Kosovo5
(Grant budgetary support)

Montenegro5
(Grant budgetary support)

Moldova III
(BOP loan)

TOTAL

15.10.98

98/592/EC

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

19.02.00

00/140/EC

22.05.00

00/355/EC

10.07.00

00/452/EC

40

250

375

(58)

(165)

(110)

150

20

60

100

80

200

35

20

15

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

25
15

125
125

Dec. 1998
Dec. 1998
Dec. 1999

Jul. 1998
Aug. 1998
Sep. 1999

28 (loan)
8 (grant)
4 (grant)

110 (loan)
10 (grant)
9 (grant)

Jul. 1999

58

Dec. 1999
Dec. 1999
Jan. 2001
Jan. 2001

Dec. 1999
Sep. 2000

Dec. 2000
Jan. 2001

Jun. 2000

Mar. 2000
Aug. 2000

Aug. 2000
Jan. 2001

15 (grant)
10 (loan)
10 (grant)
10 (loan)

40
60

20 (grant)
10 (loan)

100

20
15

7
13

40

250

169

206

(40)

(18)

(129)

(36)

58

45

100

30

100

35

20

(110)

92

20

15

50

100

15

5393

4295

1098

2

3

4

5

Exceptional financial assistance, which includes loans for a maximum amount of ECU 245
million and grants for a maximum amount of ECU 130 million.
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.
Exceptional financial assistance

60

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

Status of effective disbursements as of December 2000 (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)

Bosnia I1
(BOP loan and grant)

FYROM I
(BOP loan)

FYROM II2
(BOP loan and grant)

Kosovo3
(Grant budgetary support)

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

19.02.00

00/140/EC

85
(Suspended)

(20)
(40)
(25)

260
(Suspended)

135

(20)
(40)
(75)

290

110

250

100

375

610

180

375

80

125

100

100

Cancelled
(Jul. 1996)

130
Cancelled

2730

575

70

35

45

40

30

35

20

15

50

20
40
50
25

150
140

70
40

125
125

40
60

185
190

350
260

100
80

190
185

80

55
40
30

100

35
35

15
20

15 (grant)
10 (loan)
10 (grant)
10 (loan)

25
15

20 (grant)
10 (loan)

20
15

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

Aug. 1991
Mar. 1992

Dec. 1994
Aug .1996

Feb. 1998
Dec. 1998

Dec. 1999
Sep. 2000

Mar. 1991
Mar. 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

Feb. 1993

Nov. 1995
Sep. 1997
Dec 1997

Jun. 2000

Dec. 1992
Aug. 1993

Jun. 1995
Oct. 1996

Dec. 1999
Dec. 1999
Jan. 2001
Jan. 2001

Sep. 1997
Feb. 1998

Dec. 2000
Jan. 2001

Mar. 2000
Aug. 2000

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

3305

70

35

20

60

40

80

35

1

2

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.

61

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

CONTINUED

Authorisations

Disbursements

Country

Date of
Council Decision

Reference of
Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Disbursed Undisbursed

Montenegro3

(Grant budgetary support)

22.05.00

00/355/EC

20

Aug. 2000
Jan. 2001

7
13

20

TOTAL B

C. New Independent States (NIS)

Armenia, Georgia and Tajikistan4
(Structural adjustment loans and grants)
of which:

17.11.97

28.03.00

97/787/EC
modified by
00/244/EC

360

375

(58)

(165)

(110)

55

45

15

15

85

275

85

169

206

28 (loan)
8 (grant)
4 (grant)

110 (loan)
10 (grant)
9 (grant)

(40)

(18)

(129)

(36)

30

25
20

15

85

50
50
100

58

250
150

100

188

(110)

25
(Suspended)

15

30

45

15

85

200

58

92

602

338

400

100

188

100
(Suspended)

688

4295

100

1098

Dec. 1998
Dec. 1998
Dec. 1999

Jul. 1998
Aug. 1998
Sep. 1999

Dec. 1995

Dec. 1994
Aug. 1995

Dec. 1996

Dec. 1995

Aug. 1996
Oct. 1996
Sept. 1997

Jul. 1999

Jan. 1992
Aug. 1994

Nov. 1995

Mar. 1992

10.04.95

95/132/EC

13.06.94

94/346/EC

25.03.96

96/242/EC

10.07.00

00/452/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

940

400

200

188

788

5393

Armenia

Georgia

Tajikistan

Belarus
(BOP loan)

Moldova I
(BOP loan)

Moldova II
(BOP loan)

Moldova III
(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)

Israel5
(structural adjustment soft loan)

TOTAL D

TOTAL A+B+C+D

3

4

5

Exceptional financial assistance.
Exceptional financial assistance, which includes loans for a maximum amount of ECU 245
million and grants for a maximum amount of ECU 130 million.
Assistance to Israel
ECU 27.5 million in the form of interest rate subsidies.

includes a loan principal amount of ECU 160 million and grants of

62

ANNEX 2 - BALANCE OF PAYMENTS SUPPORT TO RECIPIENTS OF EU
MACRO-FINANCIAL ASSISTANCE BY CONTRIBUTOR, 1990-2000 (1)

2a. In millions USD

IFI's

IMF

World Bank

Bilaterals

EU (2)
Other bilaterals (3)
of which

USA

Japan

Debt relief

Paris Club

London Club
Other (4)

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

1996

250

195

55

67

19

10

10

38

1997

732

584

148

582

329

73

15

54

180

3405

38

180

1998

2800

2200

600

336

168

2000

36

12

24

238

189

49

13

7

1999

1751

1009

742

872

556

264

75

22

52

52

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

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

IFI's

IMF

World Bank

Bilaterals

EU (2)
Other bilaterals (3)
of which

USA

Japan

Debt relief

Paris Club

London Club
Other (4)

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

13

4

9

87

69

18

5

3

67

38

28

33

21

10

3

1

2

2

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

IFI's

IMF

World Bank

Bilaterals

EU (2)
Other bilaterals (3)
of which

USA

Japan

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

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

68

39

29

32

22

10

3

1

13

4

9

87

69

18

5

3

1

2

3

4

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.

63

ANNEX 2.1: BALANCE OF PAYMENT SUPPORT TO RECIPIENTS OF EC
MACRO-FINANCIAL ASSISTANCE BY CONTRIBUTOR, 1999-20001

(in millions of USD and in per cent of total commitments and disbursements)

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

1751
1009
742

872
556
75
22
167
52

52

67
38
28

33
21
3
1
6
2

2

964
472
492

478
297
48

100
34

34

67
33
34

33
21
3

7
2

2

108
58
50

97
87

4
6

6

53
28
24

47
43

2
3

3

88
38
50

43
33

4
6

6

67
29
38

33
25

3
5

5

206
84
122

128
64
22

38
4

4

62
25
37

38
19
7

11
1

1

133
56
77

71
45
17

5
4

4

65
28
38

35
22
8

2
2

2

IFI's
IMF
WB (policy based)

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

Total

2624

100

1442

100

205

Bulgaria IV

100
FYROM II

132

100

334

100

204

100

Romania IV

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

IFI's
IMF
WB (policy based)

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

465
290
175

207
107
25

75

69
43
26

31
16
4

11

461
286
175

193
98
25

70

70
44
27

30
15
4

11

125
30
95

227
85
28
22
50
42

42

35
9
27

65
24
8
6
14
12

12

59
19
40

79
28
6

21
24

24

43
14
29

57
20
4

15
17

17

847
547
300

213
213

80
52
28

20
20

223
73
150

92
92

71
23
48

29
29

Total

672

100

654

100

352

100

138

100

1060

100

315

100

Balance of payments support 2000

Total

Kosovo

Moldova

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

36
12
24

238
189
13
7
29

13
4
9

87
69
5
3
11

36
12
24

120
74
13
7
26

23
8
15

77
47
8
4
17

5

5

81
42
13
7
19

6

6

94
49
15
8
22

5

5

78
42
13
7
16

6

6

94
50
16
8
19

31
12
19

24
14

10

57
22
35

43
25

18

31
12
19

10

76
29
47

24

10

24

IFI's
IMF
WB (policy based)

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

Total

275

100

156

100

86

100

83

100

55

100

41

100

1

Disbursements are shown under the year of corresponding commitments.

64

Montenegro

Tajikistan

Commitments
%

mio USD

Disbursements
%

mio USD

Commitments
%

mio USD

Disbursements
%

mio USD

32
32

100
100

32
32

100
100

102
102

100
100

IFI's
IMF
WB (policy based)

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

Total

32

100

32

100

102

100

65

ANNEX 3: SELECTED ECONOMIC INDICATORS

GDP at constant prices

(% change)

1997

1998

1999

Programme

2000

(1)

Estimates

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
FYROM
Georgia
Kosovo
Moldova
Montenegro
Romania
Tajikistan
Ukraine

-7.0
3.1
30.0
-7.4
1.4
10.7
-
1.3
30.5
-6.1
1.7
-3.0

Consumer price (end year)

(% change)

Albania
Armenia
Bosnia-Herzegovina

Federation
Republika Srpska

Bulgaria
FYROM
Georgia
Kosovo
Moldova
Montenegro
Romania
Tajikistan
Ukraine

42.1
21.9

14.0
3.0
579.7
4.5
7.2
-
11.1
-
151.4
163.6
10.0

Fiscal balance

(% of GDP)

Albania

(2)

Armenia
Bosnia-Herzegovina

Federation
Republika Srpska

Bulgaria
FYROM
Georgia
Kosovo
Moldova
Montenegro
Romania
Tajikistan
Ukraine

-12.6

-5.8

-1.9
0.0
-2.6
-0.4
-7.0
-
–7.5
-
-3.6
-11.7
-5.4

Current account

(% of GDP)

Albania

(3)

Armenia
Bosnia-Herzegovina
Bulgaria
FYROM

(3)

Georgia
Kosovo
Moldova
Montenegro
Romania
Tajikistan
Ukraine

-12.1

-28.0
-43.3
4.4
-7.4

-16.5
-
-14.8
-4.2
-6.1

-2.7

8.0
7.2
18.0
4.5
2.9
2.9
-
-6.5
46.0
-5.4
5.3
-1.9

8.7
-1.3

5.0
38.0
1.0
-2.4
10.7
-
18.2
44.7
40.6
2.7
22.0

-10.4

-4.9

-1.7
-5.2
1.4
-1.7
-6.4
-
-8.6
-
-4.0
-3.8
-3.5

-6.1

-27.1
-31.5
-0.5
-9.6

-17.2
-
-16.7
-6.0
-7.2
-9.3
-3.1

Official foreign exchange reserves
(end year)

(Months of imports)

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
FYROM
Georgia
Kosovo
Moldova
Montenegro
Romania
Tajikistan
Ukraine

3.8
3.1
1.3
4.0
1.7
1.5
-
3.1
-
3.6
0.6
1.4

4.2
3.6
1.4
5.7
2.0
1.0
-
1.4
-
3.6
1.5
0.6

7.0
-
12.0
4.0
6.0
1.2
-
-
-
1.5
5.0
4.2

3.0
-

-
-
3.5
4.9
6.8
-
-
-
30.0
-
27.1

-9.4

-

-3.0
-4.0
-1.4
2.2
-4.6
-
-
-
-3.5
-1.2
-1.5

-8.4

-

-4.0
-8.5

-13.7
-
-
-
-3.4
-5.7
4.8

4.6
-
-
6.0
3.5
1.2
-
-
-
4.2
1.9
0.8

7.3
3.3
9.0
2.4
2.7
2.9
-
-4.4
112.6
-3.2
3.7
-0.4

-1.0
2.0

3.0
5.0
6.2
2.6
10.9
-
43.8
146.0
54.9
31.3
19.1

-11.5

-7.3

-1.3
-5.1
-1.0
0.0
-6.9
-
-2.6
-5.8
-4.1
-3.1
-2.4

-8.0

-21.7
-22.0
-5.3
-5.9

-14.9
-
-2.6
-19.3
-3.8
-3.4
2.7

4.1
3.7
2.0
6.4
3.0
1.3
-
2.9
-
6.4
1.7
0.8

66

7.8
6.0
10.0
5.3
6.0
1.9
-
0.0
48.5
2.0
8.3
4.5

4.0
0.4

3.0
3.0
11.4
4.9
4.6
-
21.0
50.0
41.3
61.0
27.0

-9.5

-7.2

-2.8
-3.8
-0.6
2.2
-3.9
-7.3
-1.5
-8.3
-3.7
0.2
-1.5

-7.0

-19.7
-20.0
-5.4
-8.5

-13.7
-34.0
-7.9
-14.6
-4.3
-3.9
4.0

4.4
3.5
2.3
8.2
3.5
1.0
-
2.7
-
3.7
1.9
0.8

(1) Programme targets set in IMF programmes, if any
(2) On an accrual basis
(3) Excluding official transfers

Sources: National authorities and IMF

67