Report from the Commission to the European Parliament and the Council on the implementation of Macro-Financial Assistance to third countries in 2001
Date: 2002-07-03
Institutions: European Commission
Subjects: EU aid, economic reform, economic statistics, financial aid, report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 11.07.2002
COM(2002) 352 final/2

CORRIGENDUM
Annule et remplace la page 6 (3ème §) du
COM(2002)352 final du 03.07.2002.
Concerne les 11 versions linguistiques

REPORT FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

ON THE IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE
TO THIRD COUNTRIES IN 2001

LIST OF ABBREVIATIONS

CAMEL

CBA

CEECs

CPI

DEM

EC

EFF

EIB

ESAF

EU

EUR

FDI

FESAL

FRY

FYROM

GDP

IFIs

IMF

MFA

NIS

PRGF

SAA

SAF

SBA

USD

VAT

WTO

liquidity (parameters used in

Capital, assets, management, earnings,
international system for rating banks)

Currency Board Arrangement

Central and East European Countries

Consumer Price Index

German Mark

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

New Independent States

Poverty Reduction and Growth Facility (formally ESAF)

Stabilisation and Association Agreement

Structural Adjustment Facility

Stand-By Arrangement

Dollar of the United States of America

Value Added Tax

World Trade Organisation

2

TABLE OF CONTENTS

I.

II.

1.

2.

a)

b)

c)

3.

4.

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

OVERVIEW ............................................................................................................ 7

Background .............................................................................................................. 7

Macro-financial assistance in 2001 ........................................................................... 7

New decisions .......................................................................................................... 7

Disbursements.......................................................................................................... 7

Repayments and undisbursed operations................................................................... 8

Trends and tendencies in macro-financial assistance................................................. 8

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

III.

ALBANIA.............................................................................................................. 15

1.

2.

3.

4.

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

Macroeconomic performance ................................................................................. 16

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

Implementation of macro-financial assistance......................................................... 17

IV.

ARMENIA............................................................................................................. 19

1.

2.

3.

4.

V.

1.

2.

3.

4.

Executive summary ................................................................................................ 19

Macroeconomic performance ................................................................................. 19

Structural reforms................................................................................................... 20

Implementation of exceptional financial assistance................................................. 21

BOSNIA AND HERZEGOVINA........................................................................... 22

Executive summary ................................................................................................ 22

Macroeconomic performance ................................................................................. 23

Structural reforms................................................................................................... 23

Implementation of macro-financial assistance......................................................... 24

VI.

FEDERAL REPUBLIC OF YUGOSLAVIA (Kosovo) .......................................... 26

1.

2.

3.

4.

Executive summary ................................................................................................ 26

Macroeconomic performance ................................................................................. 27

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

Implementation of exceptional financial assistance................................................. 29

3

VII.

FEDERAL REPUBLIC OF YUGOSLAVIA (Serbia And Montenegro) ................. 30

1.

2.

3.

4.

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

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

Structural reforms................................................................................................... 31

Implementation of macrofinancial assistance .......................................................... 32

VIII.

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA............................... 34

1.

2.

3.

4.

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

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

Structural reforms................................................................................................... 36

Implementation of macro-financial assistance......................................................... 36

IX.

GEORGIA.............................................................................................................. 38

1.

2.

3.

4.

X.

1.

2.

3.

4.

Executive summary ................................................................................................ 38

Macroeconomic performance ................................................................................. 39

Structural reforms................................................................................................... 39

Implementation of exceptional financial assistance................................................. 40

MOLDOVA ........................................................................................................... 41

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

Macroeconomic performance ................................................................................. 42

Structural reforms................................................................................................... 43

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

XI.

ROMANIA ............................................................................................................ 44

1.

2.

3.

4.

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

Macroeconomic performance ................................................................................. 45

Structural reforms................................................................................................... 46

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

XII.

TAJIKISTAN......................................................................................................... 48

1.

2.

3.

4.

Executive summary ................................................................................................ 48

Macroeconomic performance ................................................................................. 49

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

Implementation of macro-financial assistance......................................................... 50

4

XIII.

UKRAINE ............................................................................................................. 51

1.

2.

3.

4.

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

Macroeconomic performance ................................................................................. 52

Structural reforms................................................................................................... 53

Implementation of macro-financial assistance......................................................... 54

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 2001, 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 2001, 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 2001.

This report is submitted in accordance with the Council Decisions regarding 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 2001 appears in Annex 1. Annex 2 summarises
the macro-financial assistance provided by bilateral and multilateral donors to the countries
that received EC macro-financial assistance. Finally, selected macroeconomic indicators are
summarised in Annex 3.

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(1995)572 of 27 November 1995
COM(1996)695 of 8 January 1997
COM(1998)3 of 13 January 1998
COM(1999)580 of 15 November 1999.
COM(2000)682 of 27 October 2000.
COM(2001)288 of 1 June 2001.

6

II.

1.

OVERVIEW

Background

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
its complementarity to financing from the IFIs and its macroeconomic
this assistance,
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 2001

New decisions

The years 1999 and 2000 had already been years of enhanced MFA to the Balkan countries,
when, as a result of increased balance-of-payments difficulties and of the Kosovo crisis, seven
operations for a maximum amount of EUR 515 million had been decided by the Council for
Romania, Bulgaria, Albania, Bosnia and Herzegovina, the former Yugoslav Republic of
Macedonia (FYROM), -Kosovo and Montenegro. In 2001, this increase in assistance to the
Balkan region was confirmed by a substantial assistance package to the Federal Republic of
Yugoslavia (Serbia and Montenegro). The Council decided in July 2001 to provide EUR 300
million in total of which a EUR 225 million loan and grants of EUR 75 million following
democratic changes in this country. In December 2001, The Council approved a revision of
this Decision by increasing the overall amount of this assistance to up to EUR 345 million of
which EUR 120 million for the grant component. In June, further grant assistance to Kosovo
was decided in an amount of EUR 30 million. This was followed in December with a EUR 18
million grant package to the Former Yugoslav Republic of Macedonia (FYROM).

b)

Disbursements

Disbursements of macro-financial assistance amounted to a total of EUR 392 million in
2001, excluding grants of EUR 5.5 million for Armenia and of EUR 40 million for the
Federal Republic of Yugoslavia (Serbia and Montenegro) disbursed on the basis of
procedures initiated in 2001 but adopted in January 2002. The disbursements consisted of
EUR 15 million for the Federal Republic of Yugoslavia (Kosovo), EUR 260 million for the
Federal Republic of Yugoslavia (Serbia and Montenegro), EUR 15 million for Bosnia, EUR
22 million for the former Yugoslav Republic of Macedonia and EUR 6 million for Georgia. In
March 2001 Tajikistan settled its remaining arrears of EUR 78.8 million towards the
Community. It subsequently benefited from a new EUR 95 million assistance package
consisting of a EUR 60 million loan and of grants to be disbursed over a five year period. Out
of this assistance package adopted in March 2000, a grant amount of EUR 14 million and a
loan of EUR 60 million were disbursed in 2001.

Out of the EUR 392 million disbursed, EUR 95 million took the form of grants. These were
for the former Yugoslav Republic of Macedonia (EUR 10 million), the Federal Republic of
Yugoslavia (Kosovo) (EUR 15 million), Bosnia (EUR 15 million), the Federal Republic of

7

Yugoslavia (Serbia and Montenegro) (EUR 35 million), Georgia (EUR 6 million) and
Tajikistan (EUR 14 million). The rest of the assistance took the form of loans : for the Former
Yugoslav Republic of Macedonia, (EUR 12 million), for the Federal Republic of Yugoslavia
(Serbia and Montenegro) (EUR 225 million), and for Tajikistan (EUR 60 million).

c)

Repayments and undisbursed operations

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
(Hungary, Baltics, Slovakia, Algeria), or of a difficult political climate (Belarus). In these
cases, the disbursement of the remaining tranches is not programmed anymore. For more
recently adopted operations, implementation, in some cases, has been delayed because of the
slowing-down in the reform process (Romania, Georgia). In the case of Albania, Moldova and
Ukraine, evolving circumstances have led the Commission to reconsidering the terms of the
existing assistance operations. These might be reconsidered or replaced by new revised
assistance packages, possibly in the course of the year 2002. The last column of Annex 1
provides details concerning the undisbursed amounts.

3.

Trends and tendencies in macro-financial assistance

The Community's macro-financial assistance is
intended to support macroeconomic
stabilisation of the beneficiary countries and ease their balance of payments difficulties. It
plays also a very useful role in promoting structural reform.. 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 EU faced balance of payments difficulties
and 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 countries in Central and Eastern Europe. As a result of the conflicts in the Western
Balkans, in particular the Kosovo conflict of 1999 and of the political changes in the Federal
Republic of Yugoslavia (Serbia and Montenegro), a clear tendency for a relative increase of
MFA to the countries of the Balkans developed through the 1999-2001 Council Decisions.

Out of the three MFA decisions taken in 2001, two were for traditional balance of payment
assistance operations, while the third one only was designed to support the budget of the
beneficiary entity. This budget support operation was decided in favour of Kosovo, which
could not benefit from an IMF-supported economic programme. A particularity of the
decisions of the 2000-2001 period was the substantial share of grant support in the total
amount decided : 43 % instead of 6 % over the 1990-1999 period. The new grant/loan
proportions of the assistance packages reflects the assessment made by the EU bodies of the
relative degree of poverty of the recipient countries and of their limited debt servicing
capacity. As observed already in 1999 and 2000, 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. Consistently, MFA has been
effectively combined with assistance from the Phare/Ispa, Tacis or Obnova/Cards
programmes with a view to strengthening the institutional capacity that was essential to the
success of the structural reform process.

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

8

and financing needs of the potential beneficiary countries. Graph 1a for operations decided
over the whole period from 1990 to 2001 (totalling up to EUR 5.8 billion) and Graph 2a for
actual amounts disbursed (totalling up to EUR 4.7 billion) show the important concentration
of the assistance in the CEECs that are candidates for EU accession (around 57% of total
macro-financial assistance over the last decade). However, macro-financial assistance to these
countries was progressively phased out in parallel with their progress in macroeconomic
adjustment and reform. More recently, macro-financial assistance has been mainly provided
to the Western Balkans (operations in 1999, 2000 and 2001) and some low income NIS. The
relatively low amounts for the Mediterranean countries (14% of the overall amounts
authorised, but no new authorisation since 1996) should be considered against the background
of other forms of macroeconomic support made available to these countries (notably the
MEDA Structural Adjustment Facilities).

9

Table 1. Macro-financial assistance, 1990-2001
Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Totals

By region
EU Accession Countries
Western Balkans
NIS
Mediterranean

870

1.220

588

Total amounts authorised

870

1.808

out of which, straight grants

28

410
70

480

70

255
35
130
200

620

35

0

255

255

15

15

Interest
subsidies
to Israel

Albania

Albania

250
40
265

555

95

Armenia
and
Georgia

150

150

300
160

460

70

55
125

180

90

393

393

168

3.305
753
940
788

5.786

556

Kosovo (35)
Montenegro
(20)
Tajikistan
(35)

FYROM (18)
FRY (120)
Kosovo (30)

Bosnia (40)
FYROM (30)

10

Disbursements, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Totals

By region
EU Accession Countries
Western Balkans
NIS
Mediterranean

350

695

705
35

438

Total amounts disbursed

350

695

1.178

out of which, straight grants

63

70

25
150

245

270
35

305

35

80
15
135
100

330

15

40
20
115

175

20

70
25
100

195

250
15
156

421

18

40
25
71

136

28

160
105

265

85

312
80

392

105

2.730
587
682
688

4.687

369

NB: 2000 figures include disbursements in favour of Bosnia, FYROM and Montenegro which, for technical reasons, took place in early January 2001.

Israel (28)
Albania (35)

Albania

Albania

Albania

Armenia (8)
Georgia (10)

Armenia (4),
Georgia (9),
Bosnia (15)

Bosnia (15)
FYROM (10)
Kosovo (15)
FRY (35)
Georgia (6)
Tajikistan
(14)

Bosnia (10)
FYROM (20)
Kosovo (35)
Montenegro
(20)

11

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

1,808

870

620

480

555

255

0

15

460

393

150

180

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Graph 2b. MFA 1990-2001, disbursements,
Distribution by region

Mediterranean
15%

NIS
15%

Western Balkans
13%

EU Accession
Countries
57%

Graph 1c. MFA 2000-2001, authorisations
Distribution by region

NIS
22%

Western
Balkans
78%

12

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

1,178

695

350

305

245

330

421

392

175

195

265

136

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Graph 2b. MFA 1990-2001, disbursements,
Distribution by region

Mediterranean
15%

NIS
15%

Western Balkans
13%

EU Accession
Countries
57%

Graph 2c. MFA 2000-2001, disbursements,
Distribution by region

NIS
12%

EU Accession
Countries
24%

Western Balkans
64%

13

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 2001 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 substantially until 1999..

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 1991, 1994, 1995 and 2001. 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. In 2001, the Federal Republic of Yugoslavia (Serbia and Montenegro) benefited
from a substantial debt relief arrangement agreed in the context of the Paris Club.

14

III.

ALBANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

further

progress

Under the 3-year IMF programme adopted in
May 1998, the Albanian authorities managed to
in macroeconomic
make
stabilisation: GDP growth for 2001 reached
6.5%, a figure slightly below the average growth
rate of 7-8% registered in the three previous
years, the fiscal deficit was further reduced, the
current account deficit
slightly deteriorated
partly because of strong imports of investment
goods, the exchange rate of the Lek remained
strong
slightly
the
depreciating against
the dollar, and annual
inflation was maintained at a low level (some
3.5%).

euro while

against

On the structural reform side, some progress was
registered. In the financial sector, further steps
were taken for the privatisation of the remaining
state-owned bank, which is expected to be
privatised in 2002. A second GSM license was
attributed in early 2001. Progress with the
restructuring of the power sector is in line with
the action plan agreed in December 2000.
Significant progress was also registered in the
fiscal area with the adoption of the second
Medium Term Expenditure Framework covering
the 2002-2004 period.

The macro-financial assistance of up to EUR 20
million decided by the Council in April 1999
was not implemented because of the reticence of
to increase non-
the Albanian authorities
concessional borrowing under
relatively
comfortable Net International Reserve (NIR)
position. As a result, this assistance has now
been deprogrammed.

a

15

1.

Price liberalisation

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

2.

Trade liberalisation

No quantitative restrictions on imports. Few export bans
remaining. Four different levels of tariff rates (0, 2, 10 and
15%). Member of WTO since September 2000.

3.

Exchange regime

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

4.

Foreign direct investment

legislation. No restriction on profit

repatriation.
Liberal
Although the sale of land to foreigners is permitted and despite
progress in land registration,
is not yet
functioning properly.

the land market

5. Monetary policy

Central bank monetary policy entirely based on the use of
indirect instruments, following the 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 and reformed in October 1997.
Update in June 2001, for the period 2002-2004, of the Medium
Term Expenditure Framework (MTEF) designed in December
2000.

7.

Privatisation and enterprise restructuring

Privatisation of arable land largely completed. 1997 SME’s
large state-owned
privatisation programme completed. First
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, to be privatised in 2002.

2.

Macroeconomic performance

Since 1998, the Albanian authorities have 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 and 2000 with GDP growth of respectively
7.3 and 7.7%. Annual inflation as of end-2000 remained under control, at 4.5%, the
domestically financed budget deficit was further reduced, and the current account deficit
decreased to 7% of GDP.

Owing to the weak agricultural growth and to the deteriorating electricity situation, real
GDP growth in 2001 slowed down to 6.5%, from an average of 7-8% in the previous
three years. Transport and services mainly contributed to this growth. Albania’s growth
performance also had a positive impact on the unemployment rate, which declined from
about 17% in December 2000 to about 14.5% in December 2001 - possibly also because
of increased controls on enterprises and the grey economy. A relatively restrictive
monetary policy, coupled with significant
increases in productivity, contributed to
keeping inflation under control. In spite of inflationary pressures caused by the crisis in
the neighbouring FYRoM, as well as by election-related public expenditure, inflation
was limited to 3.5% in December (year-on-year).

Taking into account the amendments to the 2001 budget resulting from the energy crisis
and involving additional subsidies for electricity imports, fiscal performance in 2001
has been broadly on track with expectations, however with lower than projected revenue
and expenditure. The overall deficit is expected to have reached around 9% of GDP, in
line with the 2000 figure. Foreign financing of the deficit, which predominantly took the
form of grants or concessional borrowing, accounted for about 4% of GDP, domestic
financing for about 3%, privatisation receipts accounting for the remaining 2%.

As usual since the beginning of the transition, strong inflows of remittances from
Albanians living abroad – estimated at about USD 470 million in 2001 - partly
compensated for the officially recorded trade deficit, which is however reported to have
increased because of important imports of investment machinery and better customs
the current account balance is expected to have slightly
control. Consequently,
deteriorated (7.4% of GDP, compared to 7% in 2000). Foreign direct
investment
accelerated in 2001, which contributed to a new increase in foreign exchange reserves
(USD 737 million or 4.7 months of imports as of end-2001, compared to USD 608
million or 4.3 months of imports as of end-2000). The combination of low inflation and
a fairly comfortable level of foreign exchange reserves contributed to the stability of the
exchange rate of the national currency: over the last couple of years, the Lek has only
slightly depreciated against the dollar, while remaining roughly stable vis-à-vis the euro.
At the end of 2001, foreign debt, including arrears, reached a level of USD 1.19 billion,
corresponding to about 29% of GDP, which is quite low compared to some other
Western Balkan countries, and is expected to stabilise at this level in the years to come.

3.

Structural reforms

Further progress was achieved in 2001 in enterprise privatisation and restructuring.
Following the sale in July 2000 of the mobile phone company AMC, a second GSM
license was attributed in August 2001 to a British-Greek consortium (thus contributing

16

to FDI). In May 2001, the Albanian Parliament approved the law for the privatisation of
the fixed-line telecom operator, Albtelekom, which is expected to be completed in late
2002. As of September 2001, progress with the implementation of the restructuring of
the power sector, including the electricity company KESH, was broadly in line with the
action plan agreed in December 2000. Steps were also made in the privatisation of the
oil company Servcom.

The privatisation of the National Commercial Bank in October 2000 created the
preconditions for the privatisation of the remaining state-owned – and largest - bank in
the country, the Savings Bank (SB). Following the adoption by Parliament of the
necessary privatisation law and other preparatory steps, the opening of the international
tender for its privatisation was announced in June 2001. However, following the 11
September events and continuing unrest
in the former Yugoslav Republic of
Macedonia, the privatisation process has been delayed. The revised timetable includes a
short list selection of interested banks by the end of March 2002 and the selection of the
buyer by the end of June. Meanwhile, efforts have been made to reduce the SB’s
dominant position in the market, by transferring 70 pension payment offices to
Albapost, and by contracting SB’s fiscal functions in Elbasan district, via auctions, to
the German FEFAD Bank.

Concerning trade liberalisation, there are no quantitative restrictions on imports and
only very few remaining on exports (skins and hides and scrap metals, and some wood
products). As from January 2001, the maximum tariff rate on imports has been reduced
to 15%, which represents a significant reduction from that prevailing in 1999 (20%) and
2000 (18%).

Some steps have been carried out
in order to improving the Albanian business
environment and investment climate. A Bankruptcy Law, consistent with the Law on
Securing Charges, has been adopted in 2001, as well as a Law on Deposit Insurance.
The registry for movable property is now operational. Efforts are being made to further
improve the legal framework and to stimulate domestic and foreign investments. The
setting up of an agency that will provide “one-stop” facilities for investors and a credit
information point is planned for 2002. The law for the execution of court decisions was
approved in January 2001 and a law on mediation of business disputes was expected to
be approved before the end of the year 2001. However, despite these initiatives, the
current deficiencies of the Albanian judiciary and business-related administrations, as
well as repeated corruption cases, prevent a serious boost of investments. Key
legislation such as the commercial law remains to be improved in order to facilitate
adequate implementation and enforcement.

In the fiscal area, the Medium Term Expenditure Framework (MTEF), designed for the
first time in 2000, was updated and improved in June 2001 for the 2002-2004 period
within the framework of the World Bank-sponsored Growth Poverty Reduction Strategy
(GPRS). The MTEF and the GPRS provide a strong framework for the preparation of
the 2002 budget with a clear prioritisation of expenditure.

4.

Implementation of macro-financial assistance

In the context of the 3-year PRGF-supported programme approved by the IMF in May
1998, the Council decided on 22 April 1999 to provide to Albania a macro-financial

17

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 would take the form of a loan.

(EUR 70 million grant decided

assistance operations

However, in 1999 and 2000, the Community also supported Albania’s short- and
medium-term adjustment and reform programme with targeted grant support to the
budget: EUR 14.5 million through the PHARE Special Assistance and EUR 5 million
under the EC Food Security Programmes. To help the country to cope with the costs
linked to the presence of refugees during the Kosovo crisis, the Commission also
provided to Albania exceptional grant budgetary support of some EUR 33 million.

In this context, and also in the light of the country’s favourable hard currency reserves
position, the Albanian authorities have indicated that they did not require the release of
the Community macro-financial assistance in the form of a loan. As a result, the
Commission has now deprogrammed this assistance operation.

18

IV.

ARMENIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

The Armenian economy grew at a record high
rate in 2001. Real GDP growth was 9.6 % (6.0
% in 2000). Growth was driven by agriculture,
construction and services. Exports were up 14
% while imports remained unchanged from
previous year. The current account deficit
declined somewhat to about 11 % of GDP (14.5
% in 2000). Budget revenues increased as tax
collection improved, but
the tax/GDP ratio
declined

three

years,

The Parliament approved in July 2001 a list of
over 900 enterprises to be privatised over the
including mining,
next
metallurgical and energy assets. Lack of
interest from foreign investors in a difficult
investment
climate has however delayed
bidding and negotiations.

a

approved

IMF Board

The
three-year
arrangement for Armenia under the Poverty
Reduction and Growth Facility in May 2001.
Of the total PRGF loan amount of about USD
87 million, USD 13 million was disbursed in
2001.

The Commission concluded in June 2001 that
Armenia had made substantial progress in
satisfying the conditions for the disbursement
of the grant tranche scheduled for 2001. The
grant disbursement was made in February
2002.

1.

Price liberalisation

No administered prices exist outside the utilities sector.

2. Trade liberalisation

Liberal trade policy. Simple and relatively open import regime with a
low tariff structure. No quantitative restrictions. Negotiations on
access to the WTO continued in 2001 (agricultural protection remains
unresolved).

3. Exchange regime

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

4.

Foreign direct investment

Liberal policy towards
restrictions on repatriation of profits and capital.

foreign direct

investment,

absence of

Monetary policy

Low inflation environment maintained through cautious monetary
policies conducted by the Central Bank.

5.

Public finances

Budget revenue estimated at around 17 % of GDP in 2001;
expenditure estimated at about 22 % of GDP.

total

6.

Privatisation and enterprise restructuring

New privatisation programme approved in Parliament. The privatisation
process has however slowed down due to lack of investor interest in a
difficult business climate. New attempts to bring private management to
the power distribution companies after the international tender failed.

7.

Financial sector reform

The fully state-owned Savings Bank has been sold to local investors in
2001. Minimum capital requirement for existing banks increased in
2001 and further increases scheduled for coming years.

2.

Macroeconomic performance

Armenia has made progress in macroeconomic policies, but continues to run a high
current account deficit and relies on transfers and remittances from the Armenian
diaspora to finance this. The Armenian economy grows at record high speed: real GDP
grew by 9.6 % in 2001 (the highest rate since independence). Because it is fairly
isolated from world markets, the current economic slowdown has not affected Armenia.
Growth is supported by both exports and domestic spending. There was a 13 % rise in
retail sales in 2001. Exports rose by 14 % while imports remained virtually unchanged
from the previous year. Continued growth in exports is important since the lack of trade
relations has hindered export expansion to regional markets (due to regional isolation in

19

relation to the unsolved Nagorno Karabakh conflict). The current account deficit
(including official transfers) declined in 2001 somewhat to 11 % of GDP (from 14 % of
GDP in 2000).

During 2001, budget revenues increased as tax collection improved, but the positive
development was not maintained throughout the year and there were problems in budget
implementation towards the end of 2001. Revenue increases allowed the government to
reduce pension arrears. Nevertheless, the tax/GDP ratio declined to 14.3 % in 2001. No
significant reduction in the general government deficit has been recorded in 2001, and
the deficit is estimated to have remained at nearly 5 % of GDP.

Monetary policy was gradually loosened over 2001, and consumer price inflation rose
from 0.4 % in 2000 to 2.9 % in 2001, which remains, however, below the projected
3.5 %. The Armenian dram was rather stable in 2001 at about 560 dram per USD.
Foreign exchange reserves are still comfortable at more than 3 months of imports.
External debt amounted to around USD 860 million (about 45 % of GDP) at the
beginning of 2001, and there was no substantial change during 2001. Armenia has
negotiated an agreement with Russia on a debt-equity swap for its USD 94 million debt.
The agreement will become effective in 2002.

The IMF Board approved a three-year arrangement for Armenia under the Poverty
Reduction and Growth Facility in May 2001. Of the total PRGF loan amount of about
USD 87 million, USD 13 million was disbursed in 2001. Towards the end of the year
Armenia encountered problems in meeting the agreed economic policy targets and
further disbursements were postponed until early 2002.

3.

Structural reforms

The pace of structural reforms started to recover in 2001 after a slowdown in
1999-2000. The Parliament approved in July 2001 a new privatisation programme
which includes a list of over 900 enterprises to be privatised in three years. The list
includes also mining, metallurgical and energy assets. At the same time, the emphasis
has shifted from quick sales toward attraction of suitable strategic investors. The
privatisation process has not been proceeding as expected, however. Of the 14 larger
companies which were originally targeted for privatisation in 2001, seven were sold. A
difficult
investment and business climate has dampened interest from abroad. For
instance, the international tenders to privatise four electricity distribution companies
failed to attract bids in 2001. As an alternative, it has been decided to merge the four
networks into one, and the government has started negotiations on leasing the
distributors to a foreign operator for a three-year period. Privatisation of power
generation assets is also under preparation.

Minimum capital requirements for existing banks have been increased to accelerate
consolidation in the very fragmented banking sector. The last fully state-owned bank,
the Savings Bank, was sold to a group of Armenian investors in 2001.

There has been progress in bringing competition policies in line with EU rules. A new
law on competition policy has been enacted and an independent Competition
Commission has been established. Enforcement of bankruptcy legislation still remains
ineffective, however.

20

Also a new financial disclosure law for all highly placed public officials has been
enacted. A government commission for anti-corruption policies has been created, but
adoption and implementation of new measures has progressed slowly.

A new tax code was enacted in December 2000 to replace progressive corporate
taxation with a flat rate of 20 % for large businesses. Measures to simplify the tax code
for small businesses have also been taken.

The Government has declared the development of information technologies as its main
priority in fostering the economy and creating new jobs. Armenia has specialists and
expertise in the sector and it seeks to limit the brain drain which has become a serious
problem.

4.

Implementation of exceptional financial assistance

Armenia has benefited from a European Community assistance package which consists
of a loan of EUR 28 million (disbursed in 1998) and a total grant amount of EUR 30
million (to be disbursed over the period 1998-2004). The structural conditionality for
the 2001 grant tranche included i.a. conditions on improvement in tax collection rates,
strengthening of prudential regulation in the banking sector, adoption of a new land
code, clearing of arrears on salaries and pensions, clearing of arrears to energy suppliers
and preparation of a vade-mecum for foreign investors. A Commission staff mission
concluded in June 2001 that Armenia had made substantial progress in satisfying the
macroeconomic and structural conditions for the disbursement of the 2001 grant tranche
which amounts to EUR 5.5 million. The grant disbursement was made in 2002 on the
basis of the procedure initiated in 2001, after Armenia’s reduction of its net debtor
position towards the Community by EUR 7 million as agreed between the Commission
and the Armenian authorities.

21

V.

1.

BOSNIA AND HERZEGOVINA

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

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

2. Trade liberalisation

The Free Trade Agreement (FTA) with Croatia became effective on
January 1, 2001, with tariffs on goods originating in BiH being
reduced by 30 % and up to 100 % from 2004 onward. Similar FTAs
are being negotiated with FYROM, Slovenia and FRY. Accession to
the WTO is moving ahead and is expected in the first half of 2002.

3. Exchange regime

The common currency, KM, is pegged to the DM/Euro at parity under
the currency board arrangement since June 1998 and no revision of
the parity in connection to the switchover to the Euro was foreseen.

4.

Foreign direct investment

Uncertain environment resulting from perceived high risks and non-
transparent policies. The Federation has adopted in November 2001 a
law on foreign investment, making its legislation compatible with the
1998 State law on foreign investment policy.

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

Bloated public sector wage bills, subsidies, and unsustainable social
security schemes. State budget not secured by own resources and
contingent upon entities contributions. Progress has been achieved
though at the institutional level. Tax harmonisation between entities
not yet attained.

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 and has gained new momentum only recently 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 slower than expected. Reform of the payments system is
well advanced with the official closure of the Payments Bureaux, the
transfer of their functions to the banking sector and the establishment
of a central clearing house.

the

IMF-supported

Under
Stand-By
Arrangement (SBA), approved in May 1998,
Bosnia and Herzegovina (BiH) has made
significant progress towards macroeconomic
stability thanks to adherence to the strict rules
under the currency board arrangement as well
as fiscal restraint. In 2001 growth remained
sustained, although it was revised downwards
to 5-6%, from an initially estimated 8%, and
inflation subdued (at about 4.5% in 2001). The
is estimated to
high current account deficit
have declined further in 2001, to 20.8% of
GDP (22.2% in 2000). The IMF completed the
sixth and final seventh reviews under the SBA
on 10 May 2001 and a new arrangement is
expected to be agreed in early 2002.

In the area of structural
reforms, marked
progress has been made in 2001 in small-scale
privatisation, public expenditure management
and reform, customs administration reform and
privatisation.
recently
However, progress was slower in the areas of
tax harmonisation, privatisation of state-owned
banks, and establishing a simplified investment
environment.

large-scale

also

Given the satisfactory progress with regard to
structural conditions attached to Community
the Commission
macro-financial assistance,
disbursed the third and final grant
tranche
amounting to EUR 15 million at the end of
2001.

22

2.

Macroeconomic performance

General elections took place in November 2000; however, only after protracted
negotiations and the intervention of the OHR could governments be formed in both
Entities and the State. They were formed in January 2001 in Republika Srpska (RS),
February in the State and March in the federation of BiH (FBiH). This delayed
economic reform and led to an extended legislative paralysis. In the second half of the
year, the new governments regained momentum in their progress with reforms.

Macroeconomic data for 2001 indicate that GDP growth continued to decelerate, and
the authorities expect a growth rate of around 5-6% for the year 2001 as a whole,
compared to higher rates in previous years and an initial 8% estimate. Tentative
information points to some recovery of agricultural production, from the decline in 2000
which was mostly due to a severe drought. Unemployment is estimated at about 40% of
the labour force, a rate which is particularly high if compared with the average rate in
the Western Balkan region (17%) or in candidate countries (12%).

Inflation remains subdued (estimated at about 4.5% in 2001) and the exchange rate of
the Konvertible Marka (KM) stable, supported by a strict adherence to the rules of the
currency board introduced in mid-1998. Maintaining its credibility is the main monetary
objective of the Central Bank. The KM was pegged on a 1:1 basis to the Deutsche
Mark/Euro, and the monetary authorities have ruled out any revision of the parity in
connection to the switchover to the euro. On the fiscal side, general government
expenditure remained very high and was estimated at about 44% of GDP in 2001.
Bloated public sector wage bills, subsidies, and unsustainable social security schemes
are a cause for concern; larger than expected deficits as a result of increased spending
on wages and pensions have forced the State to take action towards the end of the year
to bring current expenditure into line with available resources.

The trend of export recovery initiated in 2000 (partly due to a reopening of the
Yugoslav market), combined with a slight increase of imports (mainly due to reductions
in donor finance for reconstruction) translated into an almost constant trade deficit of
USD 1.6 billion. The current account deficit (excluding transfers) declined further in
2001. But with 20.8% of GDP (after 22.2% in 2000), it still is very high. Foreign debt
remains at high levels (about 61% of GDP in 2001), partly as a result of a substantial
debt burden inherited from the former Yugoslavia. Debt service in percentage of export
of goods is relatively low, though, reflecting the concessional nature of much of the
debt and favourable debt rescheduling. Net foreign direct investment (FDI) per capita
increased from USD 35 in 2000 to USD 38 in 2001 (projected), but remains one of the
lowest of the region. Little progress has in fact been achieved in improving the
legislative environment for FDI, which remains difficult and non-transparent, with
differing rules across Entities.

3.

Structural reforms

Progress has been made in 2001 with regard to public expenditure management and
reform. At the State level, work is already under way to strengthen budgetary control of
State functions in a Ministry of Treasury set up in October 2000. At the Entity level,
Treasury departments have been established in the course of the year in the Finance
Ministries of both Entities, and the creation of a Single Treasury Account is operational

23

since 1st of January 2002. All government payment orders will pass through this
account, hence ensuring greater fiscal transparency and control.

In the area of customs and tax reforms, both Entities have now adopted a Law on Tax
Administration. While some steps in harmonising tax rates have been taken, especially
for excise and sales tax rates, full harmonisation is not yet attained. As far as the
reorganisation programme of the tax administration is concerned, much progress has
been achieved in 2001 in the Federation, where the establishment of control and
investigation units, as well as of a debt management service is progressing well. The RS
has speeded up this process only recently, and adopted the relevant Law in October
2001. Discussions on the introduction of VAT are only in a preliminary stage, and raise
a number of issues related to the difficult co-operation between the two Entities.

Small-scale enterprise privatisation has advanced well in both Entities; the Federation
has privatised up to now 192 small-scale enterprises, while in the RS 169 have been
sold. The deadline for the sale of the remaining public small enterprises has been
extended and has now been set for 31 March 2003. For large-scale privatisation,
progress has been slower, although the process was speeded up recently. In the
Federation, 34 companies, out of 157 offered, were successfully privatised. In the RS,
where it has been particularly difficult to attract foreign bidders, only three strategic
companies, out of the original list of 86, have been privatised to date, while contract
negotiations are ongoing for a fourth company. The impact of privatisation on corporate
governance remains uneven and often delayed, in so far as citizens or the privatisation
investment funds are not always in a position to assess the viability of the enterprises or
impose industrial restructuring.

The payment bureaux were closed at the beginning of January 2001 and their functions
transferred to the banking sector. Substantial progress has also been achieved in banking
supervision and prudential regulations (e.g. through the increase of minimum capital
requirements). On the other hand, privatisation of state-owned banks progressed at a
slower pace than envisaged,
in both Entities: no bank has been privatised in the
Federation, even though two banks are in the final stage of negotiations, while only
three banks have been sold in the RS. By the end of 2001, a draft law on deposit
insurance was prepared, which envisages the creation of a State-level bank-deposit
insurance agency. It is expected to cover depositors’ assets up to KM 5,000 in member
banks. At present separate agencies exists in each Entity, although in the RS no funds
have been reserved to cover relevant interventions.

4.

Implementation of macro-financial assistance

In May 1998, the authorities of BiH concluded a Stand-By Arrangement (SBA) with the
IMF. In May 1999, the Council decided to provide BiH with a package of Community
macro-financial assistance comprising a loan facility of up to EUR 20 million and a
grant facility of up to EUR 40 million (Decision 1999/325/EC). 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 disbursed
in December 1999 a first tranche totalling EUR 25 million (EUR 15 million grant 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. Out of this amount, EUR 2 million of the EUR 10 million grant element was

24

made available to the State budget, while the remainder was made available to the
Entity budgets.

Following some delays in policy implementation, which required three extensions of the
SBA (in May 1999, March 2000 and December 2000), the IMF completed its sixth and
final seventh review and approved the disbursement of USD 18 million (SDR 14
million) in May 2001. Negotiations are still under way with the BiH authorities on a
new SBA, which is expected to be signed in the early months of 2002.

The disbursement of the third tranche of EUR 15 million (all grant) had been linked to
continued progress under the IMF programme as well as to a set of structural reform
criteria including i.a. in the area of public expenditure management, customs and tax,
privatisation and banking reforms. In mid-2001, a first review was carried out by
Commission staff which acknowledged progress in several areas but encouraged the
authorities to make further progress in other key areas, such as public expenditure
management and reform or FDI legislation. Following a second review in November,
and the broad fulfilment of structural conditions by the BiH authorities, the third and
final tranche of Community assistance was disbursed at the end of 2001. Out of the total
amount, EUR 2.5 million have been made available directly to the State budget, while
the remainder was made available to the Entity budgets.

25

VI.

1.

FEDERAL REPUBLIC OF YUGOSLAVIA (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

UNMIK applies an amended FRY customs code, charging a 10%
customs rate, varying excise duties, and sales tax (15%), replaced by the
VAT in July 2001, on imported goods. It does not charge customs on
goods originating in the rest of FRY. UNMIK has maintained the
preferential trading arrangements of FRY with the former Yugoslav
Republic of Macedonia.

3. Exchange regime

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

4. Foreign direct investment

The establishment of the commercial
law framework has advanced.
However, the business environment remains unfavourable resulting from
political situation and legal uncertainties.

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 including the
preparation of the changeover to the euro from January 2002 onwards.

6. Public finances

Domestic revenues exceeded original estimates
in 2001. Further
expansion of taxes and measures to enhance revenue collection are
planned. The control of the public wage bill remains a challenge. For the
time being, there is no comprehensive social protection system.

7. Privatisation and enterprise restructuring

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

8. Financial sector reform

Within the regulatory and supervisory framework of BPK, the number of
licensed banks has increased to seven. The number of accounts and
deposits are developing positively. The payments system is advancing
with increasing number of non-cash transactions. Based on a regulation
passed in October, a regulatory and supervisory framework for the
insurance sector is being set up.

to

continued

conditions

Economic activity in Kosovo has resumed
with considerable speed after the conflict and
improve:
living
growth of real GDP is estimated to have been
in the order of 10% in 2001, albeit coming
from a low level and driven by donor
supported reconstruction. GDP inflation is
estimated at 13%. However, manufacturing
and export activities remain subdued and
unemployment is high.

has

further

progressed

UNMIK, and particularly its EU-led Pillar IV,
responsible for economic reconstruction and
in
development,
important economic areas. It has enhanced
unexpectedly well revenue collection and tax
compliance. The number of banks as well as
bank deposits and lending have developed
favourably. In the absence of an acknowledged
privatisation body, UNMIK also carried out
state-owned
commercialisation tenders
enterprises so as to pave the ground for
investment.

for

to

further

provide

the Council
In continuation of its support,
decided in June 2001, following a Commission
proposal,
exceptional
Community financial assistance to Kosovo of
up to EUR 30 million in the form of a grant
(2001/511/EC). The disbursement of the first
tranche took place in September upon the
signature of a Memorandum of Understanding
between UNMIK and the Community.

26

2.

Macroeconomic performance

Economic activity has resumed with considerable speed after the conflict and living
conditions continue to improve: growth of real GDP is estimated to have been in the
order of 10% in 2001, albeit coming from a low level. Reconstruction is evident,
agriculture is rebounding and there is a vibrant private service sector. Winery, one of the
few export sectors, seems to develop positively: a production of 10 million litres is
expected for 2001. The number of registered businesses as of October 2001 has
increased by 44% compared to end of 2000. There are indications of a shift from trade
to other economic activities including manufacturing. However, the economy continues
to be characterised by the donor supported reconstruction programmes and the
significant foreign presence resulting in unusually high imports and problematic
imbalances in salary and taxation. Unemployment remains high (in the order of 50%).
GDP inflation in 2001 is estimated at some 13%. The availability of macro-economic
inflation,
data remains poor: there are no official figures for GDP, GDP growth,
consumption, private investment or population from the Statistical Office of Kosovo.
Despite progress and considerable efforts to refine the estimates, the calculation still
bear a significant level of arbitrariness due to the weak database.

The Central Fiscal Authority (CFA) managed well the implementation of the Kosovo
budget 2001 although a number of budget expenditure items were revised upwards
during the year from original DM 500 million to DM 566.5 million. Preliminary data
suggest that actual expenditure for 2001 will turn out in the order of DM 537 million
whereas domestic revenue collection performed significantly better than originally
budgeted (DM 572 million compared to DM 338 million). Depending on the final
outcome of the budget and including donor support for the budget, the CFA will be able
to carry forward a certain accumulated cash balance, which will be needed temporarily
to provide collateral for the euro conversion and for contingency purposes. The balance
will allow the budget to mature, i.e. to address a number of long-term obligations and to
initiate capital investment expenditure under the budget, notably for maintenance of
donor investments. This is also important since donors support is expected to decrease.

its sustainability remains a major concern of

According to the European Agency for Reconstruction (EAR), the provision of public
the
services has improved but
reconstruction efforts. The public utilities, notably the energy sector, still suffer from
unreliable supply and very low cost recovery. The de-facto low price provides
incentives for increasing consumption (e.g. car-wash facilities, electric heater). In the
area of telecommunication, the progress in the fixed line network is still limited and
province-wide telecommunications largely rely on the mobile network. In the area of
rail, some lines are running; a master plan on the network is being worked on including
the establishment of facilities for spare parts and basic rehabilitation.

3.

Structural reforms

UNMIK has progressed unexpectedly well in enhancing revenue collection and tax
compliance. This is due to the opening of Tax Collection Offices at the Administrative
Boundary Line (ABL) with Serbia, the successful implementation of the VAT from 1
July onwards, effective control measures and improved capacity ensuing from on-going
recruitment and training.

27

UNMIK prepared the introduction of a two-pillar pension system comprising a pay-as-
you-go-system financed from contributions (including a universal benefit scheme for
those who did not contribute to the past pension system) and a mandatory fully funded
system.

from January 2002. The BPK is carrying out

In 2001, the Banking and Payments Authority of Kosovo (BPK) fully licensed an
additional six commercial banks thus totalling seven banks which operate 22 branch
offices. So as to ensure stability and to avoid overbanking, the BPK will raise the capital
requirements with effect
regular
supervision inspections, which have not brought up any grave misconduct. In addition,
BPK has granted licenses to 15 micro-finance and non-bank financial institutions,
(seven in 2001), that provide credit to individuals and SMEs. The growth in deposits
reflects both the growing number of banks and confidence in the system. Loan activity
however is more constrained and limited to a maturity below 12 months. The lack of
access to debt finance for capital investment is one of the major obstacles to the further
development of productive activities. In particular, the lack of collateral for bank
lending is identified as one of the major factors hampering such an access.

On 5 October 2001, UNMIK adopted the regulation on Insurance Licensing,
Supervision and Regulation, which assigns the BPK with the licensing and supervising
of insurance companies. Existing insurance companies are required to apply for
licensing under the new regulation.

The BPK has continued to improve its payment system to offer payment services to
UNMIK, the Kosovo civil administration and NGOs. According to the BPK, it currently
provides UNMIK with payments services through seven branches throughout the region
and makes over 80,000 individual payments monthly for public salaries and stipends.
The BPK aims to restrict its services to banks; it has closed down the accounts of public
enterprises. The inter-bank clearing system inaugurated in May is operating smoothly
and more than doubled the monthly transactions until October compared to June.

The number of non-cash payments is increasing. Starting with some 75 non-cash
transactions in July, the department of public services has paid in October some 1,300
salaries upon accounts and almost 2,900 payments in December. Until the end of the
year, UNMIK was subsidising the charges linked to opening and holding an account
with a bank. Some departments started to require the holding of an account as a pre-
condition for recruitment.

training. It

UNMIK has closed further the missing elements in the commercial law framework.
Through its regional offices, it provides business information and contacts; it organises
seminars and management
is also carrying out substantial training of
Kosovars to work in the ministry. However, UNMIK continues to suffer from the lack
in political support to progress in the area of privatisation. In the absence of an
acknowledged privatisation body, UNMIK also carried out commercialisation tenders
and has signed, as of 15 November, 11 deals committing an investment volume of DM
108 million over the contract period. It remains a major challenge to improve the quality
of the judicial system and law enforcement so as not to deter investors.

Concerning the changeover to the Euro, UNMIK follows the model of the EU area with
only two months of dual circulation so as to limit money laundering. The BPK has
estimated cash needs at about DM 15-20m of coins in total, compared to DM 500m for
notes. A public information campaign was organised in the course of 2001. The BPK

28

has been in contact with the ECB, Deutsche Bundesbank, Österreichische Nationalbank
and the banks it holds account with (Commerzbank, Raiffeisenbank). The ECB
approved a frontloading also in the case of Kosovo; commercial banks have provided
for the cash shipments.

4.

Implementation of exceptional financial assistance

Following the provision of a first exceptional financial assistance grant of EUR 35
million in 2000 as part of a broader Community assistance package of EUR 360 million,
another grant of up to EUR 30 million has been approved in June 2001 (2001/511/EC)
with a view to alleviating the financial situation in Kosovo,
facilitating the
establishment and continuation of essential administrative functions and supporting the
development of a sound economic framework. These funds add to the EUR 320 million
pledged under CARDS assistance in 2001.

A first tranche of EUR 15 million was disbursed in mid-September following the
signature of a Memorandum of Understanding (MoU) between UNMIK and the
Community. The release of the second tranche is subject to satisfactory compliance with
economic policy conditions as laid down in the MoU. These include measures to
promote the financial and private sector development, to produce macro-economic data,
and, most importantly, to develop the revenue base further so as to pursue prudent
budgetary policies. The funds were to be made available to UNMIK through its CFA. A
first review by the Commission in November showed that considerable progress has
been made in these areas.

In the course of the implementation of its exceptional financial assistance,
the
Commission has been maintaining close contacts with the International Financial
Institutions, notably the IMF and the World Bank, both at working level as well as via
the regular meetings of the Working Level Steering Group monitoring the economic
and financial developments in Kosovo.

29

VII.

FEDERAL REPUBLIC OF YUGOSLAVIA (SERBIA AND MONTENEGRO)

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Most administrative price controls have been removed with the
exception of some public services where considerable price increases
have been implemented.

2. Trade liberalisation

A new 2001 federal law simplified procedures, abolished most licences
and quotas, reduced the number of duties and lowered the average tariff
rate ; separate trade law in Montenegro with lower tariffs than on the
federal level.

3. Exchange regime

Managed float regime under which the exchange rate of the Dinar has
been kept stable; Montenegro introduced the Euro as the sole legal
tender in November 2000.

4.

Foreign Direct Investment

is

FDI
relatively low, Serbian foreign investment
preparation; Montenegro adopted a law on FDI already in 2000.

still

law in

5. Monetary policy

Strict monetary policy of the National Bank of Yugoslavia; creation of
base money almost exclusively on the basis of
foreign exchange
increases and limited credits to general government; no sovereign
monetary policy in Montenegro.

6.

Public finance

Comprehensive fiscal reforms, including the implementation of a major
tax reform in Serbia and the preparation of a Tax Action Plan in
Montenegro;
improved
revenue collection and expenditure control, Treasury system being set
up.

initial steps to improve fiscal management;

7.

Privatisation and enterprise restructuring

Adoption of a new privatisation framework in Serbia in June 2001,
enterprise and anti-trust law in preparation, restructuring plans for two
continuation of Mass Privatisation
large loss makers
programme in Montenegro.

adopted,

8.

Financial sector reform

Progress in bank rehabilitation in Serbia, Bank Rehabilitation Agency
was set up, all banks have been screened and either closed, merged or
put under enhanced supervision. Four largest non-viable Serbian banks
to be closed. In Montenegro, the largest bank, Montenegro Banka, was
put under temporary administration.

the

have

authorities

foreign exchange reserves

it appears that one year after

Overall
the
political changes occurred in the FRY in late
accomplished
2000,
substantial progress toward restoring macro-
economic stability,
liberalising the exchange,
price and trade regimes and improving market
confidence. In 2001, real output grew by 5.5 %;
inflation has declined considerably from 115 to
40%, the exchange rate has been kept stable
increased
while
substantially, and budget performance was good
with a much lower than expected cash deficit
before grants. However, economic difficulties
persist and further important decisions on the
restructuring of the FRY economy will be on
the political agenda soon. They will most likely
lead to the eventual closure of a number of big
the
and non-viable enterprises and banks. At
same time the authorities will be facing the
challenge of sustaining general public support
for reforms.

that covers

In October 2001, the second review under the
IMF stand-by arrangement
the
period until end-March 2002 was started and
successfully completed in mid-January 2002. It
enabled the FRY to draw on the third tranche of
USD 62.5 million out of the total amount of
USD250 million.

In July, the Council decided to provide a macro-
financial assistance to FRY of up to EUR 300
million. Following the clearance of all arrears of
the FRY towards the European Investment
Bank and the Community, the first tranche of
EUR 260 million was released in October 2001.
Following a satisfactory review of economic
policy conditions, the second tranche of EUR
40 million was disbursed in January 2002. On
10 December 2001,
the Council approved a
revision of its July decision designed to increase
the overall amount of this assistance to up to
EUR 345 million.

30

2.

Macroeconomic performance

Real GDP growth in 2001 (5.5%, incl. some 3.5% in Montenegro) was mainly driven
by a strong recovery in agricultural output (20-25%) from the previous year’s severe
drought, and increased activity in services,
including tourism in Montenegro, and
transportation. However, industrial production continued to perform poorly and in Jan-
Nov 2001 it was 0.6% lower than during the same period in 2000.

As a result of tight monetary policies, inflation in Serbia came down considerably from
115% at end-2000 to around 40% at end-2001, despite several major increases in
electricity prices by a cumulative 120% since the start of 2001. In Montenegro, annual
inflation increased slightly to 25% from 22.5%, mainly due to accelerated liberalisation
of prices for electricity, municipal services, transport and milk and bread in the course
of the year.

The consolidated general government accounts in the FRY recorded a cash deficit
before grants of some 2.4% of GDP in 2001 (around USD 240 million), compared to the
originally budgeted of 6.1% of GDP. The lower deficit was mainly due to improved tax
revenue performance, but also reflected action taken to compress public spending (by
1.8% of GDP) in the light of a shortfall in foreign budgetary financing and delays in
obtaining privatisation receipts in Serbia.

Following the adoption of a managed float in Serbia at the beginning of 2001, the Dinar
remained broadly stable at the level fixed in October 2000 (YuD 30 per Deutsche
Mark). Gross reserves of the National Bank of Yugoslavia reached around USD 1,300
million by end-January 2002 (compared to USD 605 million at the beginning of 2001),
equivalent to almost 2.9 months of projected imports in 2002. In Montenegro, the
unilateral adoption of the Deutsche Mark/Euro as the sole legal tender in late 2000
contributed to macro-economic stabilisation as it excludes the possibility of base money
creation.

The balance of payments of the FRY recorded a widening trade deficit in 2001, which
could be close to USD 2,800 million, and large inflows of remittances and service
receipts. The latter helped containing the current account deficit to around USD 1,075
million before grants. Foreign Direct Investments are still low and were expected to
reach USD 120 million in 2001.

A huge outstanding debt of some USD12.2 billion at end-2001, or 140% of GDP, is a
major constraint on the external front. In that respect, the agreement between the Paris
Club and the FRY authorities on a phased 66% reduction in the net present value of
obligations towards Paris Club creditors (some USD4.5 billion) and a rescheduling of
the remaining stock over 22 years with a 6 year grace period must be seen as an
important element to foster the sustainability of the country’s external position.

3.

Structural reforms

In both Serbia and Montenegro, the liberalisation of prices continued through 2001 with
the abolition of price controls for almost all good categories and the gradual adjustment

31

of prices to more market-oriented levels, in particular for energy in Serbia and for
public utilities and essential goods (e.g. milk and bread) in Montenegro.

Significant progress was made in Serbia with the adoption of a new privatisation
framework in June 2001 that sets the basis for the privatisation of 150 state and socially
owned enterprises through tenders and some 5,000 other companies through auctions on
the basis of transparent procedures. According to the new law, foreign investors can
obtain up to 70% of shares through public tenders. At end-2001, 35 companies had been
put under tendering procedures. The authorities had received bids for the privatisation
of three large cement companies, which were expected to be sold in January 2002,
somewhat later than initially envisaged. Enterprise restructuring plans for two large loss
makers (the car holding Zastava and a big copper producer BOR) were elaborated and a
plan concerning the Zastava Company was eventually agreed among the government,
the management and unions. A new Serbian law on the Agency for SME development
was adopted in November 2001. In Montenegro, the mass privatisation programme that
encompasses 450.000 citizens and 221 companies was completed in early December
2001. Moreover, for some 20 companies tendering procedures were initiated (out of 110
enterprises that are going to be privatised through batch sales, tenders or auctions, or to
be liquidated). 51% of Montenegro’s telecom company was offered for sale in mid-
2001 and three investors expressed interest. In 2002, the Montenegrin authorities intend
to tender Yugopetrol.

The first fundamental steps to liberalise foreign trade were taken in May 2001, with the
adoption at federal level of the Foreign Trade Act, the Customs Tariff and the Tariff
Act, which simplified procedures, abolished most licences and quotas, reduced the
number of duties and lowered the average tariff rate. In Montenegro, progress was made
with regard to trade liberalisation as the number of items subject to restrictions was
reduced. Since 2000, Custom tariffs have been reduced substantially from 25% to below
3% on average and are currently lower than in Serbia.

Bank restructuring in Serbia progressed rapidly in line with the Bank Restructuring
Strategy that was adopted by the National Bank of Yugoslavia (NBY) in May 2001.
After all 82 banks in Serbia had been reviewed, 19 banks were closed and another 15
banks were merged. Licences for five new banks were issued from May to December
2001. A decision to close the four largest banks was announced in early 2002. Although
the whole banking system in Serbia has remained extremely fragile, there have been
signs of renewed public confidence as evidenced by a substantial revival of savings. In
Montenegro, further steps were taken to restructure the banking system. Diagnostic
reports for 10 banks were prepared with the support of international advisors. Four
banks were re-licensed on the basis of these reports. Moreover,
the authorities
elaborated and endorsed in principle a plan to restructure the largest bank, Montenegro
Banka.

4.

Implementation of macrofinancial assistance

On 11 June 2001 an IMF stand-by arrangement covering the period until end-March
2002 was approved and successfully reviewed in October 2001 and January 2002. On
16 July 2001, the Council approved a Community macro-financial assistance of up to
EUR 300 million in favour of the FRY, comprising a loan facility of up to EUR 225
million and a grant facility of up to EUR 75 million. Following the clearance of all
arrears of the FRY towards the European Investment Bank and the Community, the first

32

tranche of the assistance amounting to EUR 260 million (comprising EUR 225 million
loan and EUR 35 million grant) was released in October 2001. A review mission in
December 2001 found that the conditions attached to the disbursement of the second
tranche (EUR 40 million) had been broadly fulfilled in the following areas: Public
expenditure management and control, tax administration and tax policy reform, private
sector development, bank restructuring and management of external debt. Following
this satisfactory review the second tranche was disbursed in January 2002. On 10
December 2001, the Council approved a revision of its July decision increasing the
grant element of the assistance to up to EUR 120 million, thereby augmenting the
overall amount of this assistance to up to EUR 345 million.

33

VIII.

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Price liberalisation has been essentially completed, except for most
utilities and various items such as oil and oil by-products, postal
services.

2.

Trade liberalisation

A small number of tariff and non-tariff barriers remain in place. The
recently completed SAA and the Interim agreement 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 DM, and now to the
Euro; since the devaluation of July 1997 it stands at some 60.5 denar to
one Euro.

4.

Foreign direct investment (FDI)

The environment for FDI has improved. However, approval from the
government is still requested to carry out some types of foreign direct
investments, while the absence of a properly functioning market for
land is also hampering the FDI inflows. FDI inflows have been erratic
in recent years and largely dependent on a few large transactions.

5. Monetary policy

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

6.

Public finances

In April 2000, the Government introduced VAT and lowered taxation
on labour from January 2001 onwards. The Public Revenue Office
increased controls in the second half of
the year 2001. The
Government has launched in 2001 public investment programme
focuses on public infrastructure (water supply, road maintenance), the
rehabilitation of schools and health centres.

7.

Privatisation and enterprise restructuring

The privatisation programme begun in 1993; by the end of December
2001, some 1646 enterprises had already been privatised. Privatisation
in the agricultural sector is nearly complete. In the second semester
2001, three large industrial enterprises were privatised. The liquidation
of a number of loss making companies has been delayed and is
expected to take place in 2002.

8.

Financial sector reform

New banking law of 2000 establishing the legal framework for
modernised and strengthened banking sector. The banking sector is
is highly
already predominantly privately owned. The
concentrated: the two largest banks, Stopanska Banka (sold in April
2000 to a Greek bank) and Komercijalna Banka, hold about two thirds
of total deposits in the banking system.

sector

The year 2001 was marked by the eruption of
ethnic fighting which dramatically affected the
population and economy. After several years of
positive growth, GDP decreased markedly in
2001 by almost 5%. As a result of the security
crisis,
the situation of public finances was
affected by some slippage in public expenditure,
notably military expenditure, and an important
reduction of VAT collected. The public finances
deficit for the year 2001 was about 6.7% of
GDP. Inflation (5.3 %) remained subdued.

spring crisis

Significant progress was recorded in 2001 in
implementing structural reforms in a number of
areas, notably tax reform, strengthening budget
controls, trade policy and public administration.
Owing to the
fYRoM
Government was not able to achieve the
objectives
PRGF/EFF-
supported program, approved by IMF in autumn
2000, which was discontinued. As a bridge to a
new arrangement, the fYRoM authorities agreed
in December with the IMF on a Staff Monitored
Programme (SMP) for a period of six months
(starting on 1 January 2002).

three-year

the

the

of

against

reform,

structural

Following the broad progress recorded in 2001 in
the areas of
the
background of the political and economic crisis in
Spring, the disbursement of the second tranche
(EUR 10 million grant and EUR 12 million loan)
of macro-financial assistance (totalling EUR 80
million) was
2001
(payment made in early January 2002 on the basis
of the SMP). On 10 December 2001, the Council
approved an additional macro-financial assistance
in the form of a EUR 18 million grant in favour of
the fYRoM.

in December

launched

34

2.

Macroeconomic performance

2001 was an exceptional year for the fYRoM owing to the eruption of ethnic fighting in
Spring, which lasted until the political settlement of the crisis in August. The crisis
dramatically affected the population and the economy. GDP, which had previously been
expected to grow at a rate of about 6%, decreased instead by 4.6%, thus causing a
negative swing of about 10 GDP percentage points. In addition, the cost of repairs of
damaged housing and infrastructure, according to a recent study2, is estimated at around
1.8% of GDP. The contraction of output affected most sectors of the economy. The
level of unemployment, with 29.5% of the labour force by the end of the year 2001
(compared to 32.2% in 2000), reflects the low level of production.

In spite of the crisis, conservative monetary policies based on the external exchange
anchor vis-à-vis the DM/EUR have prevented the country from falling into the spiral of
high inflation. To stem losses of reserves in the context of the security crisis, the Central
Bank in May-June increased reserve requirements and more than doubled its short term
interest rates. Consumer prices overall increased by 5.3% in 2001, against 5.8% in the
year 2000.

In Spring increased military expenditure in the context of internal fighting put a
particular strain on the Government’s budget, especially the hiring of new military and
police personnel and increases of salaries for special units in the police and the army.
Expenditure peaked at 41% of GDP, i.e. 7 percentage points of GDP higher than in
2000. Against this increase in expenditure, revenue decreased markedly. Overall, in
2001 the fiscal revenue decreased by 7% in nominal terms and the overall fiscal deficit
reached 6.7% over the year as a whole, against a surplus of 2.5% of GDP in the
previous year.

On the external side, a sharp drop of imports, down to about USD 1527 million from a
level of USD 1875 million in 2000, allowed for a reduction of the trade deficit to USD
370 million. The current account deficit increased sharply to a level of about 11% of
GDP. This high deficit was however to some extent compensated by long term capital
inflows from privatisation proceeds in the amount of USD 310 million (about 9% of
GDP), following the sale of the national telecom operator in January 2001. Therefore,
hard currency reserves, in spite of significant losses over the year, remained significant,
in the amount of about USD 779 million at the end of the year, equivalent to 4.9 months
of imports. At the end of 2001 the fYRoM was on track with its debt servicing
obligations.

The Poverty Reduction and Growth Facility (PRGF) and Extended Fund Facility (EFF)
programme agreed with the IMF in late 2000 was discontinued in Spring. In late 2001
the authorities reached an agreement with the IMF on a 6-month Staff Monitored
Programme (which started on 1 January 2002), committing to tighter fiscal discipline,
with reduced government expenditure at 36.8% of GDP in 2002, down from 41% of
GDP in 2001, and which is to be replaced in the course of 2002 by a new upper credit
tranche arrangement.

2

IMG report on damage assessment in the fYRoM, November 2001.

35

Overall, the situation remains fragile and further consolidation of the civilian peace
process is essential in order to re-establish the ground for sustained stabilisation and
reform policies as well as economic growth.

3.

Structural reforms

Following the liberalisation of bread and flour prices in October 2000, price
liberalisation is now essentially completed, except for most utilities, public transport
and various items such as oil and postal services.

In spite of the successful sale in January 2001 of 51% of the national telecom company
to Matav, the Hungarian operator, privatisation overall slowed down over the year 2001.
In the second semester three large industrial enterprises were privatised: Sletovo
Battery, Gazella (shoe manufacturer) and Godel (leather work). The privatisation of the
state electricity company, ESM, is being prepared with the aim to sell the company by
the end of 2002.

Some 40 large loss making enterprises were expected to be either sold or liquidated in
2001: while the crisis delayed the process in the first semester, the authorities have
taken action in the last quarter by liquidating one company and commissioning
expertise from international consultants on 17 enterprises,
the bulk of which are
expected to be closed in the course of 2002.

The EU is the main trade partner of the fYRoM and accounts for 48.5% of exports and
41.8% of imports. Following the signature of a Stabilisation and Association Agreement
(SAA) between fYRoM and the EC in the year 2000, the first of the kind, the Interim
Agreement came into effect in June 2001. Quotas on agricultural and fishery products
were abolished. In agriculture, reciprocal trade concessions were agreed (with the
exception of wine). The fYRoM concluded Free Trade Agreements (FTAs) with a
number of neighbouring countries (including Croatia which is the second country after
the fYRoM to have signed an SAA with the EC), EFTA countries and Ukraine. The
fYRoM is an observer in the WTO and negotiations which were delayed by the crisis of
last year resumed at the end of the year, with a view to achieving full membership in the
year 2002.

As of July 2001 the payments functions from the old Payments Office (ZPP) inherited
from the socialist era were progressively phased out and transferred to the banking
system. In 2001, the authorities reinforced the surveillance of the financial sector, in
particular of eight identified problem banks. The rating of three of those banks was
upgraded to the necessary minimum. Actions on the five remaining banks were initiated
such as the appointment of an administrator, or the merging of two of the problem
banks with other banks to improve their financial strength. The sector however
continues to suffer from a high level of non performing loans (about 35% were
classified doubtful or non performing) and low efficiency, and its development
is
impeded by the low degree of financial intermediation.

4.

Implementation of macro-financial assistance

On 8 November 1999, the Council decided to provide the former Yugoslav Republic of
Macedonia with a second macro-financial assistance of up to EUR 80 million (loan up
to EUR 50 million and grant up to EUR 30 million).

36

Following the approval of a PRGF/EFF-supported program by the IMF Executive
Board which was delayed until 29 November 2000, a first tranche of the Community
assistance amounting to EUR 20 million grant and EUR 10 million loan was disbursed
in December 2000/January 2001.

strengthening budget controls,

The set of conditions to be fulfilled for the release of the second tranche, included tax
reform,
trade policy and public administration.
Following a review showing broad progress, also taking into account the difficult
political and economic situation in the country,
the Commission launched the
disbursement of the second tranche (EUR 10 million grants and EUR 12 million loans)
in December 2001 (disbursed in January 2002 on the basis of a Staff Monitored
Programme providing a macro-economic framework).

Moreover, the original Council decision was revised on 10 December 2001, allowing
for the extension of the assistance until the end of 2003 and increasing the grant element
by EUR 18 million (to a grant total of EUR 48 million out of a total EUR 98 million).
This additional macro-financial assistance as well as the outstanding assistance under
the original decision will be implemented in the framework of an new IMF arrangement
and is subject to specific economic policy conditions still to be negotiated.

37

IX.

GEORGIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

Economic growth accelerated in 2001 and is
estimated at 4.5% (1.9% in 2000). Inflation
remained moderate at 3.4% (4.6% in 2000). The
current account position deteriorated somewhat
from previous year.

In March 2001 Georgia reached an agreement
with the Paris Club following which debt
repayments are rescheduled over 20 years with a
three-year grace period. Bilateral discussions
have not been concluded with all creditors, most
importantly with the largest non-Paris Club
creditor, Turkmenistan. There are still some
service
around
concerns
obligations in 2003 and 2004.

remaining

debt

and

announced

The structural reform process slowed down in
from foreign
2001. There was less interest
investors
in
telecommunications and in the energy sector
were not
the
government in November 2001 created further
delays in reform efforts towards the end of the
year.

finalised. The dismissal of

privatisations

1.

Price liberalisation

Most prices have been liberalised.

2.

Trade liberalisation

Liberal international trade policy. Georgia became a member of the
WTO in June 2000. Most import and export restrictions have been
eliminated, but the parliament has introduced an export ban on non-
ferrous scrap metal (Georgia’s biggest export item) from Feb. 2002 as a
measure against illegal activities. There have been restrictions on timber
exports also.

3.

Exchange regime

The lari is not subject to exchange restrictions. Floating exchange rate.

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 registering of urban and
industrial land.

5. Monetary policy

The prudent monetary policy has contributed to the stabilisation of the
inflation rate at a low level. Dollarisation of the economy remains high
(about 80 percent of deposits are in foreign currencies).

6.

Public finances

Georgia’s three-year arrangement under
the
PRGF was approved by the IMF Board in
January 2001 and Georgia was able to draw a
total SDR 27 million by the end of the year from
the IMF.

Georgia benefited in December 2001 from a
the
tranche of EUR 6 million under
grant
Community’s exceptional financial assistance.

Budgetary revenue (including grants) estimated at 16.5 % of GDP; total
expenditure and net
lending estimated at 18 % of GDP. An anti-
corruption strategy is being implemented. A new budget system law is
under preparation.

7.

Privatisation and enterprise restructuring

Small and medium size privatisation has been largely completed.
Currently the focus is on main utilities (telecommunications and the
power sector) where the government aims at finding strategic investors
or bringing companies under private management, if suitable investors
not found. There has been a marked decline in foreign investor interest
(due to poor business climate) and progress has been made slowly.

8.

Financial sector reform

Several measures have been taken to strengthen bank regulation and
supervision. Legislation has been amended to establish the authority of
the National Bank of Georgia to revoke bank licences. In 2001 the
National Bank revoked licences from six failing bank. The minimum
capital requirement has been increased. IAS reporting standards and new
asset classification and provisioning regulations have been adopted for
commercial banks. Public confidence in the banking sector still remains
low, however.

38

2.

Macroeconomic performance

The macroeconomic situation of Georgia improved in 2001, with an estimated real GDP
growth of 4.5 %. This resulted mainly from agricultural production which recovered
from the previous year’s severe drought. On the other hand, industrial production fell by
1 %.

The general government deficit has been reduced clearly (-7 % of GDP in 1999; -4 % in
2000; -2 % in the first half of 2001) reflecting primarily expenditure cuts but only to a
very modest extent improvements in revenues. Georgia has still one of the lowest tax-
to-GDP ratios in the region (about 14.5 % in 2001). Revenue collection by the general
government was disappointing also in 2001, although total revenues increased slightly
in relation to the GDP from the previous year. Weak administration, corruption and
smuggling have not been tackled in a way that would bring significant improvements in
collection rates. Consequently, the government was not able to reduce the stock of
accumulated social expenditure arrears as planned.

The monetary authorities reaffirmed their commitment to maintain low inflation. In
2001 consumer price inflation slowed down to 3.4 % (year-end) from 4.6 % in 2000
(year-end). The lari depreciated about 7 % against the US dollar during 2001, first in the
beginning of the year and then at the time of the government crisis in November 2001
(the exchange rate was at about 2,15 lari/USD at the end of the year). Public confidence
in the lari remains low, and it has not acquired a savings function yet (foreign currency
deposits are at about 80 % of all deposits).

Georgia’s current account deficit is estimated to have further deteriorated in 2001 from
the previous year when it was at 5.4 % of the GDP, transfers included. Foreign
exchange reserves increased at the end of the year but were still low in terms of imports
coverage at below 1 ½ months of imports. External debt at end-2001 amounted to
around USD 1.7 billion or about 52 % of GDP (53 % of GDP in 2000).

Georgia reached an agreement with the Paris Club in March 2001, following which debt
repayments are rescheduled over 20 years with a three-year grace period. Bilateral
discussions were not concluded with all creditors by the end of 2001. Most importantly,
Georgia continues discussions with its largest non-Paris Club creditor, Turkmenistan.
Despite the Paris Club agreement, there are still some concerns around remaining debt
service obligations in 2003 and 2004.

Georgia’s three-year arrangement under the PRGF was approved by the IMF Board in
January 2001 and Georgia was able to draw a total SDR 27 million by the end of the
year from the IMF.

3.

Structural reforms

Georgia has a relatively liberal international trade regime, but recently there have been
increasing political pressures to impose export bans in order to attack illegal activities in
the country. The parliament imposed an export ban on timber until the end of 2001, and
a ban on non-ferrous metal waste and scrap exports (Georgia’s largest export good)
which is to become effective in 2002.

Several privatisation initiatives failed to bring results in 2001. The focus has shifted
from the remaining large state-owned industrial enterprises (where restructuring is on-

39

going albeit slowly) to main utilities, especially in the telecommunication and the power
sectors. There has been a decline in foreign investor interest, due to an unfavourable
investment climate, and since it has become more difficult to find suitable strategic
investors,
the government now attempts to bring the companies under private
in the case of remaining state-owned
management as a first step. For instance,
electricity distribution companies, it is necessary to bring private management which
would enforce non-payment cases in order to raise total collection rates.

The National Bank of Georgia (NBG) continued to take steps in strengthening bank
regulation and supervision. Licences were revoked from six banks in 2001 but in two
cases banks were still able to retain their licences through a Supreme court ruling. The
parliament passed amendments to the banking and central bank legislation in October
2001 to establish fully the authority of the NBG in resolution of the problem of
insolvent banks. Since February 2001, commercial banks are required to submit
monthly reports in line with IAS. The NBG has also issued new asset classification and
provisioning regulations in 2001.

Following an anti-corruption strategy which was published in 2000, two Presidential
Decrees were issued in 2001 focusing on short-term measures to increase transparency
through a broadening of financial disclosure, clarifying the role of government
regulatory agencies, carrying out internal audits of government agencies and publication
of their expenditures. The implementation of these Decrees started slowly, but after the
reshuffling of the government at the end of the year, there has been a renewed intention
to focus measures on tax and customs administration.

4.

Implementation of exceptional financial assistance

The structural conditionality for the 2001 grant included i.a. conditions on improvement
in tax collection rates, reduction of arrears on salaries, pensions and social expenditure,
privatisation of the remaining electricity distribution and generation companies and of
the telecommunications, and review of bankruptcy legislation. Although substantial
progress was made in most of these areas during 2001, in a number of areas progress is
lagging,
reform, and
privatisation. The Commission decided therefore in December 2001 to disburse a
reduced amount of EUR 6 million grant under the Community’s exceptional financial
assistance to Georgia, after an early principal repayment of EUR 8 million was made by
this country on its outstanding debts towards the Community.

in customs revenue collection, energy sector

in particular

40

X.

1.

MOLDOVA

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

The vast majority of prices were liberalised in 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 joined the WTO in 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 finance

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. No further progress was
made in 2001; foreign debt sustainability is critical.

7.

Privatisation and enterprise restructuring

Structural
reforms accelerated markedly in 2000. Substantial
progress was recorded in the energy sector, land reform was on
schedule, whereas the main bottleneck,
the privatisation of the
economically very important winery and tobacco sectors was finally
approved in October 2000. In 2001, no further progress was
achieved, and proposals were even made to turn back reforms.

8.

Financial sector reform

The central bank has been successful
sector consolidation, and the banking system is sound.

in implementing banking

Markets remain undercapitalised.

a

and

relatively weak

Real GDP grew by 6.1% year on year in 2001,
according to preliminary data. Despite slow
external
reforms
environment, the economy is still expected to
grow at an annual rate of around 4-5% in 2002-
03. This reflects an extremely low base period,
following years of steep economic decline, as
well as the accumulated effects of gradual
reform progress. Moldova's economy will also
benefit from relative macroeconomic stability
and generally solid import demand in Russia.

Inflation continued to fall dramatically, to 6.4%
by the end of 2001, down from 18.4% in 2000
and 43.8% in 1999. The average monthly rise in
prices equalled a record low 0.5%, despite a
moderate increase in monthly inflation towards
the latter part of the year.

Political developments
a
standstill in reforms in 2001, in particular in the
field of privatisation and enterprise reform.

prompted

again

a

signed

government

The
three-year
memorandum of understanding in the context of
a PRGF with the IMF on 1 December 2000.
However, since a new government took office
in February 2001,
the IMF-programme was
continuously off track and no external financing
was received.

Given that the release of the first tranche of a
EUR 15 million macro-financial assistance loan
to Moldova (approved by the Council of the
European Union in July 2000), was conditional
of
upon
Moldova’s arrangement with the IMF, no
disbursements have been made so far under the
Community’s assistance package.

implementation

satisfactory

a

41

2.

Macroeconomic performance

The relatively strong performance seen in 2001 is mainly the result of the industrial
sector's strong recovery, in combination with the halt in the agricultural sector's decline.
Disaggregated GDP data are available only for the first half of 2001. This confirms the
dominant role played by the manufacturing sector, which accounted for almost 20% of
GDP over the period and was growing at a double-digit rate by the second quarter.
Industrial production data for the third quarter show continued, albeit more moderate,
double-digit industrial growth. By contrast, the much larger services sector, which is
now responsible for more than half of total GDP, grew only marginally over the first
half and contributed negligibly to growth over this period. From the expenditure side,
domestic demand, particularly by households, accounted for most of the GDP growth
seen during the first half of 2001, particularly during the first quarter.

Consumer price inflation fell to 6.4% by the end of 2001, down from 18.4% in 2000 and
43.8% in 1999. The average monthly rise in prices equalled a record low 0.5%, despite
a moderate increase in monthly inflation towards the latter part of the year. This
increase was primarily attributable to seasonal factors, which drove up the price of food
(food prices grew by 3% in December). Monthly inflation in December, at 1.9%, was
the highest recorded in almost two years. High inflation and sluggish nominal wage
growth prompted a steady decline in real wages throughout 1999 and the first half of
2000. An economic turnaround and sharp disinflation since then have prompted a
renewed rise in real wages throughout 2001, particularly as the government has moved
aggressively to raise minimum wage levels, according to Economic Trends, by
September 2001.

The government has eased fears that
it would preside over a considerable fiscal
loosening. In late November 2001, it won parliamentary approval for an IMF-supported
budget for 2002, and it is unlikely to reverse the fiscal improvements achieved under the
previous two cabinets. The IMF requires that the country's budget has to be balanced
and if the new administrative-territorial reform, for instance, needs some additional
expenses it is necessary to determine their source, whether they will be effected by
increase of budget returns or by reduction of other expenditure.

The 2002 budget passed by parliament in late November includes a consolidated deficit
of Lei 320 million (USD 24m), or around 1.4% of target GDP. During the final budget
debate, parliamentary deputies rejected calls for a further boost to projections for both
revenue and expenditure.

The government financed its budget deficit in 2001 through new central bank loans,
which totalled approximately Lei145m between January and September, and sales of
government securities, which reached Lei119m over the same period. When first
formulating its budget for 2001, the government had planned to finance its deficit from
privatisation receipts and multilateral inflows, neither of which proved forthcoming.

The current-account deficit for the third quarter of 2001 increased to USD 49 million,
compared with USD 35 million in the third quarter of 2000. This resulted from the rise
in the merchandise trade deficit sparked by a slowdown in export sector growth over the
course of 2001, and continued high levels of import expenditure. The rising current-
account deficit also represents a drop in the transfers surplus, owing to low levels of
grants, and an increase in the services deficit, which was brought on by a decline in

42

travel and transportation services. These considerations more than
exports of
outweighed the sharp increase in the income surplus brought on by increased
remittances from Moldovans working outside the CIS (the NBM counts remittances as
income). Owing to the sharp fall in the second-quarter deficit, the cumulative deficit in
January-September is still somewhat narrower than that recorded during the year-earlier
period.

Official foreign exchange reserves were roughly constant during the last two years, at
just over USD 200 million, or between 2.5 and 3 months of imports.

3.

Structural reforms

Privatisation of the wineries, tobacco plants and utilities were earlier conditions set by
both the IMF and World Bank. The Communist Party consistently voted against the
sales when in opposition, but after coming to power was forced to support the sales as
the restoration of relations with the multilaterals grew more urgent.

Moldova has failed to complete any major privatisations since February 2000, such that
the government earned a meagre Lei 32.6 million (USD 2.5 million) from small-scale
privatisations in 2001. It already abandoned the sales of two of its major wineries,
Vismos and Nis- Struguras, at the end of 2001 because the offers, from Russian and
local companies, were too low.

The government has more ambitious plans for 2002, with around 350 companies up for
sale. These includes plans to sell majority stakes in two of the country's five electricity
distributors this year after two previous failed attempts. Union Fenosa (Spain) bought
the other three distributors for USD 25.2 m in 2000 and promised to invest a further
USD 67 million .

In the case of the planned sale of 51% of the state telephone operator, MoldTelecom,
the Austrian bank acting as advisor on the sale, Raifeissen Investments, is due to
prepare tender documents by March 2002. The government views this as the flagship
sale of the year, and the key to any chance of meeting its 2002 debt-servicing
obligations. In 1997 the government had turned down a USD 46 million offer from OTE
of Greece for 40% of the company. This time around it will face difficulties in
generating even this degree of interest, given the poor investor sentiment towards new
telecommunications acquisitions. Moldova faces the dilemma that the most serious
interest in Moldovan assets will come from Russian or Ukrainian investors, who are less
likely to carry through with the investment and corporate governance improvements
hoped for from Western strategic investors. The IMF-Memorandum stipulates that the
government is to take some concrete steps as to the privatization of the "Moldtelecom",
not necessarily to privatize but to reach a certain progress in the process.

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 since the installation of the new government
the
in early 2001,
Commission suspended preparations for implementation of Community’s assistance.

43

XI.

ROMANIA

1.

Executive summary

and

high,

income

account

The macroeconomic environment improved but
the situation remained fragile with a widening
albeit
deficit
current
declining, inflation. On the back of looser fiscal
and
growth
accelerated strongly in the first half of 2001. The
accompanying sharp deterioration in the external
balance prompted the authorities to adopt a
tighter policy stance in the second half of the
year when international conditions also became
less favourable.

economic

policies,

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

In 2001, the number of regulated prices (essentially public utilities and
energy), represented about 18% of the CPI basket.

2. Trade liberalisation

In 2001, the average applied MFN rate was 19.4% on all products, 15.6%
on industrial ones and 33.2% for agricultural goods. Romania has signed
a Europe Agreement with the EU and free trade agreements with
CEFTA, EFTA, Israel, Moldova and Turkey. In 2001, negotiations were
finalised with Lithuania and opened with Croatia. In violation of its
obligations under both the EA and the WTO, Romania introduced export
restrictions on strategic raw materials.

3. Exchange regime

Progress in structural reforms remained patchy.
Some important divestitures were concluded but
the underlying pace of privatisation remained
very slow. In the second half of the year, the
authorities began to aggressively adjust energy
prices but mounting public enterprises’ arrears
and losses during most of the year pointed to the
endurance of soft budget constraints.

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. Laws regulating and promoting FDI and
portfolio investment have been repeatedly modified, creating legal
uncertainty.

on

the

depend

effective
Much will
implementation of the comprehensive economic
programme agreed with the IMF in late October
that is to be supported by a new 18-month SBA
for SDR 300 million. No new disbursement of
EU macro-financial assistance took place during
the year.

5. Monetary policy

The National Bank of Romania enjoys a high degree of independence .
The Law on the statute of the central bank defines its main objective as
ensuring the stability of the national currency in order to contribute to
price stability. It also allows for a limited amount of direct financing to
the government.

6.

Public finances

Basic tax reform has been completed, but major steps to consolidate
public finances remain to be implemented, including pension and health
reforms, abolishing widespread tax exemptions, improving collection,
and developing better budgeting and expenditure control procedures.

7.

Privatisation and enterprise restructuring

By the end of 2001, the majority of small and medium-sized companies
had been privatised, but most large-scale companies remained public and
subject
to poor corporate governance and financial discipline. The
authorities have privatised 5 of the 64 large state-owned enterprises
identified for divestiture in agreement with the World Bank.

8.

Financial sector reform

leading to serious
Reform of the banking sector was slow at first,
difficulties in 1997 and 1999. Subsequently, however, the authorities
took major steps to strengthen the regulatory framework while closing or
restructuring and privatising the most problematic banks. At end-2001,
public-owned institutions still accounted for nearly half of all banking
sector assets. Capital markets remained small and underdeveloped.

44

2.

Macroeconomic performance

After a three-year recession, positive growth resumed in 2000 and accelerated strongly
in 2001, reaching 5.1% in the nine months to September. The recovery was initially
kick-started by the strong performance of exports which followed the sharp real
exchange rate depreciation of 1999. Since mid-2000, however, growth has become
increasingly domestic-based on the back of a loosening fiscal and quasi-fiscal stance. In
the recovery was driven by stock
in particular,
the first
accumulation and, above all, a sharp rise in household consumption which grew by
6.8% on the back of real increases in social transfers and wages.

three quarters of 2001,

Inflation declined considerably but remains very high. During 2001, its average rate fell
to 34.5%. By December, the year-on-year rate had dropped more than 10 percentage
points to 30.3% despite the sharp increases in energy prices mandated in the second half
of the year. Inflation was, nevertheless, higher than targeted and monetary policy
continued to give a greater weight to the objective of external viability within the
framework of the managed float regime introduced in 1999. After accelerating in the
first half of the year on the back of a substantial rise in the minimum wage and strong
growth in the public sector pay, the pace of real wage increases declined in the latter
part of the year. In November 2001, the average real wage increased 1.5% year-on-year.

Following the loosening of the fiscal and quasi-fiscal stance in the run up to last year’s
elections, policies were tightened but only in the second half of 2001. In 2000, the
general government deficit
increased to 4% of GDP from 3.8% in 1999. Despite
stronger growth in tax revenue bases and substantial savings on interest payments, the
2001 cumulative deficit had already reached 2% of projected GDP in June when the
authorities began tightening expenditure control. By November, the cumulative deficit
had only increased to 2.7% of projected GDP and appeared in line with a new end-year
deficit target (revised downwards to 3.5% of GDP from 3.7%). The quasi-fiscal stance
was also initially expansionary. Large state-owned enterprises financed strong increases
in wage and investment spending through arrears which rose 38% in real terms over the
first seven months of the year. At the same time, losses in the energy sector mounted
unchecked until the summer when tariffs were adjusted sharply and collection efforts
strengthened.

Against the background of this initially expansionary policy stance, the deterioration of
the trade and current account deficit which had begun in the second half of 2000
accelerated sharply. In the first half of 2001, the cumulative current account deficit
more than doubled relative to the same period of 2000 and reached 3.4% of projected
GDP (against 3.7% of GDP for the all of 2000). This sharp worsening was largely
driven by the rise in imports caused by stronger domestic demand and various one-off
factors, such as the impact of last year’s drought and the provision of time-bound fiscal
incentives for capital investment. However, as the impact of these measures waned and
the tightening policy stance began to take hold, the pace of external deterioration slowed
down with the current account rising to 4.3% of projected GDP by October 2001.
Export growth, however, declined sharply and turned negative on a year-on-year basis
in late 2001, showing that the slow down in EU growth could pose a serious challenge
to Romania’s external adjustment.

45

Improved access to the international financial markets allowed Romania to easily
finance its widening current account imbalance while increasing gross official reserves.
After regaining access to the international capital market towards end-2000, Romania
launched a EUR 600 million Eurobond on improved terms in June 2001 when Standard
and Poor’s raised its rating on Romanian long-term foreign currency debt (FITCH
IBCA and MOODY’s followed suit later in the year). Although external indebtedness
has risen from USD 10.5 billion at end-2000 to USD 11.4 billion at end-October,
Romania’s debt-to-GDP ratio remains moderate by international standards at 30.2
percent of projected GDP.

3.

Structural reforms

After stalling in the months prior to the end-2000 elections and in the early days of the
incoming administration, structural reforms were re-launched, most notably in the run
up to a new IMF programme agreed in late October.

Prior to the agreement, in fact, significant progress was recorded in the area of energy
price adjustment and privatisation. Over the summer, sharp hikes in energy tariffs ended
a long freeze which had undermined previous efforts to strengthen enterprise sector
financial discipline and led to the renewed accumulation of inter-enterprises arrears. By
the end of the 2001, energy prices had increased 56% on a year-on-year basis.

The privatisation process also re-started with the sale of Banca Agricola in spring, the
finalisation of a complex deal for the sale of SIDEX, an integrated steel plant
responsible for a large part of total losses in the state-owned enterprise sector, and the
agreement with the World Bank on the tendering procedures concerning two profitable
aluminium smelters. Little progress was, however, recorded in selling the large majority
of the 64 state-owned commercial enterprises prepared for privatisation under the
previous World Bank PSAL operation.

Despite these advances, the pace of structural reform remained relatively slow The
economic programme supported by the 18-month SBA approved by the IMF board at
end-October, however, sets an ambitious structural policy agenda aiming to advance
restructuring in the energy sector (most notably by raising energy tariffs to cost-
recovery levels and improving energy companies’ collection rates), accelerate
privatisation (through the sale of the largest public bank, two gas and two electricity
distribution companies) and strengthen the regulatory and supervisory regime in the
financial sector (including through the introduction of the International Accounting
Standards and of tighter norms on loan classification and foreign exchange exposure).

4.

Implementation of macro-financial assistance

Since 1991, the EU has supported Romania’s transition process through four macro-
financial assistance operations, the latest of which was approved in November 1999
when the EU Council granted Romania a balance-of-payments loan, of up to EUR 200
million, within the framework of a SDR 400 million SBA (Council Decision
99/732/EC). After the release of the first EUR 100 million tranche in June 2000,
however, the IMF programme went off track in the run up to the parliamentary and
presidential elections of end-2000 as the government’s commitment to wage discipline
in public enterprise waned and fiscal policy was loosened. No further disbursements of
EU macro-financial assistance could therefore take place and the IMF SBA eventually
expired in February 2001.

46

However, bolstered by a strengthening economic recovery, the incoming administration
adopted an increasingly pro-reform attitude in the course of 2001. Following the
implementation of several prior actions,
to economic
stabilisation and reforms led to the approval by the IMF Board of an 18-month SBA for
SDR 300 million (approximately USD 383 million) on October 31, 2001. Negotiations
with the World Bank for a second Private Sector Adjustment Loan (PSAL) of USD 300
million are also at a very advanced stage.

this renewed commitment

Against this background, in early 2002, the Commission secured the agreement
in
principle of the ECOFIN Council to make available to Romania EUR 100 million,
pursuant to Council Decision 99/732/EC, in two sub-tranches, subject to the satisfactory
implementation of the SBA and adequate progress in the country’ structural adjustment
process.

47

SUMMARY STATUS OF ECONOMIC REFORM

1.

Price liberalisation

Most prices liberalised (with the exception of public utilities).

2.

Trade liberalisation

Relatively liberal trade system with an average tariff rate of 8 % and no
significant non-tariff barriers. Applied for membership in the WTO
(observer status since July 2001). Customs union with Russia, Belarus,
Kazakhstan and Kyrgyz Republic.

3.

Foreign exchange regime

Relatively liberal exchange regime. Official exchange rate unified with
curb market rate in July 2000 when an interbank foreign exchange
market began operating. The new currency, somoni,
introduced in
October 2000. Managed floating of the somoni.

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 (a transfer tax of 15 %).

5. Monetary policy

Independence of the National Bank reasonably assured under the Law. In
practice, until mid-2000,
the NBT performed quasi-fiscal functions
dictated by broader economic and political considerations. Poor liquidity
management by the National Bank has been an additional source of
inflation.

6.

Public finances

Overall revenues estimated at 15 % of GDP; total expenditure estimated
at 15 % of GDP. A new Treasury system has been set up including
regional
treasuries in all administrative districts. A unit for major
taxpayers was also set up. A public audit office was established in 2001,
but it is not fully independent.

7.

Privatisation and enterprise restructuring

The privatisation of small enterprises is largely completed. Successful
privatisation of all cotton ginneries. 55 % of total agricultural land is in
private hands. Land reform slowed down in 2000 because of interference
from local governments. Officials continue to intervene in the operations
of new private farms and firms. The largest industrial companies and
utilities remain in state hands.

8.

Financial sector reform

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 (bank deposits below three percent of GDP).

XII.

TAJIKISTAN

1.

Executive summary

In 2000 a real GDP growth rate of 8.3 % was
achieved. In 2001 the GDP is estimated to have
grown with about 10 %. Aluminium production
continued on its increasing trend and also the
cotton harvest was good, but declining world
prices in both sectors dampened the results. It is
a positive development that growth has spread to
other sectors such as food processing, forestry
and construction materials.

As small-scale privatisation is coming to close,
the focus is moving to larger enterprises where
the privatisation process has had a much slower
start. The government has begun to reorganise
the public infrastructure with a view to separate
in the
regulatory and operational
transport,
power
sectors. Fiscal reforms and the restructuring of
the banking sector continued in 2001.

telecommunications

functions
and

review of Tajikistan’s

The IMF Board concluded favourably the most
third annual
recent
arrangement under the PRGF in July 2001, and
Tajikistan was able to draw a total of USD 16
million under the PRGF in 2001. The final two
reviews of the arrangement were not completed,
however, because of delays in implementing
structural reforms.

Tajikistan settled its remaining arrears of EUR
78.8 million towards the Community in March
2001. Subsequently, Tajikistan benefited from
a new macro-financial assistance package
consisting of a new loan of EUR 60 million
and a total grant amount of up to EUR 35
million. The Community loan and the first
grant tranche of EUR 7 million were disbursed
in March 2001. The second grant tranche of
EUR 7 million was disbursed in December
2001.

48

2.

Macroeconomic performance

Real GDP is estimated to have grown by about 10 % in 2001 (8.3 % in 2000).
Economic growth has spread to several sectors of the economy outside the dominating
cotton and aluminium sectors (such as food processing, forestry and construction
materials). The severe drought which has affected the region in 2000 and 2001 is not
completely overcome and last year’s grain harvest also suffered from the drought.
Hydroelectric plants have operated at less than half of their capacity because of the low
water levels, which necessitated an increase in net electricity imports. The current
account deficit is estimated to have increased to about 7 % of the GDP in 2001 (deficit
of 6.3 % in 2000, transfers included). Cross-border trade has been affected by increased
difficulties at the borders. Aluminium and cotton continue to provide up to 65 % of all
export revenues, and the trade balance is therefore very vulnerable to fluctuations in
world commodity prices.

The fiscal stance remained largely unchanged compared to the previous year. The
general government deficit is estimated at 0.1 % of GDP for 2001 (0.6 % in 2000).

Following the monetary tightening, the rate of inflation slowed down rapidly during
2001 (from an average of 33 % in 2000) to about 11 % year-end 2001). The Tajik
currency, somoni, stabilised during 2001, having depreciated initially after
its
introduction in October 2000.

Tajikistan's external debt of USD 1,231 million represented 129 % of GDP at the end of
2000 and 297 % in relation to exports. External debt remained roughly constant over
2001. The ratio of the net present value of the external debt to fiscal revenues was at
about 400 percent for 2001. The imports coverage of gross international reserves of the
National Bank is at about 2 ½ months. Net foreign direct investment has been modest at
an annual level of about USD 20 millions over the last few years. The IMF Board
concluded favourably the most recent review of Tajikistan’s third annual arrangement
under the PRGF in July 2001, and Tajikistan was able to draw a total of USD 16 million
under the PRGF in 2001. There were however delays in the implementation of the
agreed structural reforms in the second half of the year, and the final two reviews under
the arrangement were not completed as planned.

3.

Structural reforms

Significant progress has been made in fiscal reforms. The sales taxes on cotton and
aluminium have been gradually phased out and are to be abolished fully in 2002-2003.
The treasury has been reinforced and regional treasuries were set up. A new unit for
major taxpayers has been created. A public audit office has been established but it does
not function fully independently. Areas where it is necessary to take further measures to
improve transparency and accountability include in particular quasi-fiscal operations
and financial relations between the Ministry of Finance and the Central Bank.

As small-scale privatisation is close to completion,
the focus is shifted to larger
enterprises where privatisation has been dragging so far. By August 2001, 349 large and
medium-sized companies had been sold out of the total 955 enterprises which are
subject to privatisation. Poor transparency remains a major concern in the privatisation
process. It has been estimated that around 70 % of privatised large and medium sized
companies are insider-owned and controlled. The government has announced its

49

intention to restructure the two largest state-owned companies (the electricity monopoly
Barki Tajik and the aluminium smelter Tadaz). Tadaz alone accounts for over half of
industrial output.

The land reform process has been slowed down by local governments which have been
reluctant to cede their control over the old collective farms. In agreement with the
World Bank, Tajikistan is committed to increase significantly the issuance of private
land certificates by May 2002. Responsibilities of the Land Reform Committee have
been enhanced to speed up the process.

The government has begun to restructure the public infrastructure with a view to
separate regulatory and operational functions in the transport, telecommunications and
power sectors. For instance, legislative changes are planned for Tajiktelecom to be
incorporated and for establishing an independent regulator in the telecommunications
sector.

The authorities continued to make progress in improving banking regulation and
supervision. A further increase in the minimum capital requirement is planned in order
to increase consolidation in the banking sector. Overall confidence in the banking
system remains low and banks' ability to mobilise savings is limited (bank deposits
amount to below 3 % of GDP). The National Bank of Tajikistan has concluded
restructuring agreements with the four major privatised commercial banks which has
produced some results i.a. in the area of loan recovery and credit assessment. Because
of non-compliance with the IAS, financial information is still unreliable.

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. Tajikistan settled its
remaining arrears of EUR 78.8 million towards the Community in March 2001.
Subsequently, Tajikistan benefited from a new assistance package which consists of a
new loan of EUR 60 million and a total grant amount of up to EUR 35 million to be
disbursed in successive annual tranches over the period extending to 2004. The new
loan and the first grant tranche of EUR 7 million were disbursed in March 2001. Given
that Tajikistan made satisfactory progress in structural reforms (notably with the
improvement of the taxation system, with the privatisation process, and with measures
related to restructuring of
the banking sector) while also the macroeconomic
performance of Tajikistan has been satisfactory despite the difficult external conditions,
the second tranche of EUR 7 million was disbursed in December 2001 after Tajikistan
had reduced its net debtor position towards the Community by EUR 8 million.

50

XIII. UKRAINE

1.

Executive summary

After a decade of negative growth, the Ukrainian
economy grew by 5.8 percent in 2000 and the
rate of growth accelerated in 2001. Other
macroeconomic trends have also been positive.
the
Inflation
consolidated budget deficit was kept at about 1½
% of GDP in 2000 and 2001.

declined markedly

and

has

is

surplus

The current account remains in surplus, although
the
shrinking reflecting strong
domestic demand driven import growth and an
appreciating real exchange rate. Following a
sharp depreciation in the second half of 1999,
the hryvnia has been relatively stable in nominal
terms since Spring 2000. In July 2001, the Paris
Club decided to reschedule Ukraine’s debts.

However,
the balance of payments remains
vulnerable. Debt service obligations are still
important and the country has yet
to regain
access to the international capital markets. FDI
remain disappointing and, although
inflows
they still
reserves
official
represent less than 2 months of imports.

increasing,

are

In the structural area, positive steps have been
taken in areas such as privatisation, banking
regulation,
land reform and energy sector
reform, but much remains to be done. Progress
reform has been elusive and
in gas sector
significant weaknesses remain in some large
banks. Also, Ukraine continues to impose trade
restrictions that violate the PCA rules.

The IMF reactivated its EFF in late 2001 but
disagreements over the budget have delayed the
completion of the 7th review of the programme,
the
scheduled for early 2002. In early 2002,
Commission submitted to the Council a proposal
to cancel the 1998 macro-financial assistance
and disburse its remaining funds under a new
macro-financial assistance operation. This new
assistance would amount to EUR 110 million
(including EUR 92 million from the 1998
operation).

51

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. A few export restrictions (such as export duties on
sunflower seeds and scrap) remain. PCA with EU entered into force on 1
March 1998. Ukraine has introduced 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 587 million, or USD 12 per
capita, in 1998).

5. Monetary policy

Increasing reliance on indirect monetary instruments. Central bank
credit to commercial banks allocated mostly through the Lombard
facility, credit auctions and repos.

6.

Public finances

General government expenditure reduced from about 70% of GDP in
1992 to some 36% of GDP in 2000. 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 2001. 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. Privatisation programme is now focusing on the large
enterprises, including those in the energy and telecommunications
sectors. Limited involvement of
strategic investors.
According to the government, private sector accounted for about 60%
of industrial output in 1998.

foreign or

8.

Financial sector reform

Significant efforts made since 1997 to strengthen banking supervision
and regulation, including the adoption of laws on the central bank and
on banking activities
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 some of the largest
banks in poor condition. Banking licence of one such bank was
withdrawn in 2001. Capital markets remain underdeveloped.

introduction of

in 1999-2000,

the

2.

Macroeconomic performance

After expanding by 5.8 percent in 2000, the first positive yearly rate since Ukraine's
independence, real GDP grew by 9 percent in the first 11 months of 2001. On the
supply side, growth was fuelled by both industrial and agricultural production, with the
latter benefiting from another exceptional grain harvest. On the demand side, the main
driving forces were consumer spending and investment. Economic activity has shown,
however, signs of deceleration in the second half of 2001, reflecting weaker demand in
Russia and other trading partners and the impact of an appreciating real exchange rate
on net exports. Growth is expected to continue slowing down in 2002 (to 5-6 percent).

Despite the strengthening of economic activity, inflation has been on a downward trend.
In November 2001, year-on-year consumer price inflation reached a post-independence
low of 4.5 percent, down from a recent peak of 32 percent in July 2000. The decline in
inflation reflects a combination of factors, including a moderate nominal appreciation of
the hryvnia, a prudent fiscal policy, the good harvests of 2000 and 2001, and lower oil
prices. There are, however, some concerns that the surge in real wages and pensions (a
reflection of the precipitous drop in inflation and, in the case of wages, fast productivity
growth, but also of political decisions), the decline in wage and pension arrears and the
fast rate of expansion of the monetary aggregates may increase again inflation in 2002.
In December 2001, monetary policy was loosened further when the central bank cut its
refinancing rate from 15 percent to 12.5 percent, the sixth reduction in 2001 (this rate
had stood at 27 percent at end-2000). The central bank also eased reserve requirements
for commercial banks during 2001.

The deficit of the consolidated government (on a cash basis and showing privatisation
revenues as a financing item) reached 1.5 percent of GDP in 2001, the same level as in
2000. The deficit would be significantly higher, however, if the roughly 1.9 billion
hryvnias (about 0.8 percent of GDP) of estimated arrears on VAT refunds were also
taken into account.3 The budget for 2002 foresees a deficit of 1.8 percent of GDP, in
line with IMF demands, but it does not properly take into account either the need to
clear the arrears on VAT refunds or the cost of the parliament’s decision to reintroduce
privileges for certain categories of the population (including the military and judges) for
housing, transportation and communal services.

Following a depreciation of about 20 percent between July 1999 and January 2000, the
hryvnia has been relatively stable. Given Ukraine's large inflation differential against its
main trading partners, this has resulted in a considerable real exchange rate appreciation
since February 2000. Although this real appreciation is beginning to affect export
performance, it is so far largely a correction to the over-depreciation suffered in late
1999 and early 2000. The exchange rate is therefore thought to remain at a relatively
competitive level.

With domestic demand keeping import growth strong and export growth decelerating
due to weaker foreign demand and the appreciation of the real exchange rate, the
surplus in the current account is narrowing. The surplus is estimated to have shrunk
from 4.7 percent of GDP in 2000 to about 3 percent of GDP last year and is projected to

3

The total stock of unpaid VAT refunds is estimated by the government at about 6 billion
hryvnias.

52

fall further to about 1½ percent of GDP this year. Despite this comfortable current
account, however,
the balance of payments remains vulnerable. Access to the
international bond markets was lost in the wake of the Russian crisis of 1998 and FDI
inflows have continued to be disappointing. In this context, official foreign exchange
reserves are still low (about USD 2.9 billion, or 7.5 weeks of imports, at end-October
2001), although they have shown an upward trend since the spring of 2000.

Ukraine’s external debt stock stood at the equivalent of about 30 percent of GDP at end-
2001. In July 2001, the Paris Club agreed on a rescheduling of Ukraine’s debts in July
2001.4 The agreement consolidates approximately USD 580 million due on loans
contracted by Ukraine before 31 December 1998. This amount consists of principal
arrears and maturities due from 19 December 2000 through 3 September 2002. This
debt is to be repaid over 12 years in 18 equal successive semi-annual instalments, with a
3-year grace period. In addition, the Paris Club has granted deferrals on the interest
payments, which effectively means that much of the interest payments burden for 2001
has been shifted to 2002.

The rescheduling agreement has reduced Ukraine's debt service due to Paris Club
creditors during 2001 and 2002 from an initial amount of USD 805 million to USD 286
million, which consists mainly of payments of interest and payments of principal falling
due in 2002 after the end of the consolidation period. This should make a significant
contribution to strengthening Ukraine's balance of payments position (the reduction in
debt service in 2001-02 is equivalent to about 1.4 percent of projected 2001 GDP). The
normalisation of Ukraine's relations with the Paris Club could also pave the way for an
eventual return of the country to the international capital markets.

3.

Structural reforms

Progress with structural reforms slowed down significantly in 2001, partly reflecting
the political stalemate around the resignation of Prime Minister Yushchenko and the
formation of a new government in May 2001. There have been, however, certain
encouraging steps, such as the withdrawal of the operating licence from Banka Ukraina
(an insolvent state-owned bank), the adoption of a new land code, and the improvement
in cash collection rates in the power sector.

In the agricultural area, the parliament passed a new Land Code in October 2001 that
lays the ground for the development of a private land market. The new Code, which
came into effect on 1 January 2002, was approved after a tense debate in which the
communists expressed their strong opposition. The code however imposes a moratorium
on sales of land until 2005. President Kuchma signed the new Code into law in
November 2001 but called for the abolition of the 5-year moratorium. Although the new
Code is a welcome step, to be really effective it will require a package of accompanying
laws, including laws on the Land Cadastre and Land Evaluation. The authorities are also
considering establishing an agrarian bank with the possible support of the World Bank.

On the privatisation front, the parliament adopted in early 2000 a programme for
2000-2002 foreseeing the sale of large companies. At over 2 billion hryvnias,

4

Ukraine had stopped servicing its debts to the Paris Club in January 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.

53

privatisation revenues more than doubled in 2000. Some sales, however, were not
conducted in a transparent manner, with some companies having been excluded in some
cases from the bidding process without a clear justification. The budget for 2001
foresaw a substantial
increase in privatisation revenues (to 5.9 billion hryvnias),
reflecting the sale of large companies. However, this target was not met: privatisation
revenues were only about one third of the programmed number, reflecting delays in the
privatisation of the electricity distribution companies and Ukrtelecom, the state-owned
telecommunications monopoly.

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 1999 and their implementation is a key aspect of the conditionality of the
World Bank, the IMF and of our macro-financial assistance. In mid-July the authorities
withdrew the operating licence from Banka Ukraina and the bank is being liquidated.
Another bank that is a delicate financial position is the State Savings Bank. Progress
with the restructuring of this bank has so far been rather limited.

In the energy area, Chernobyl was finally closed down on 15 December 2000. In the
same month, the Commission and the EBRD approved the loans for the K2R4 project
but the effectiveness of these loans was subject to a number of prior conditions,
including the reactivation of the IMF programme, the existence of an appropriate
regulatory authority in the nuclear sector, and confirmation of the financial commitment
of the different institutions involved. Although these conditions have been met, the
signing of the loan contracts has been delayed following the government’s request to
revise some of parameters and conditions of the project.

There has been some progress with power sector reform. Cash collection rates have
improved and the privatisation of a first batch of regional electricity distribution
companies was completed in May 2001. However, on 31 May 2001, President Kuchma
ordered a temporary suspension of the privatisation of additional electricity distribution
companies. While the authorities have later declared that this moratorium is over, some
uncertainties remain about
the timing and the number of companies that will be
privatised in the next round. One key pending area of structural reform in the energy
area concerns the gas sector, where little progress has been made so far.

In the area of 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. However, overall progress in this area, particularly with respect to certain export
restrictions and the elimination of discriminatory measures in the automobile sector, has
been insufficient.

4.

Implementation of macro-financial assistance

In October 1998, the Council granted to Ukraine a third macro-financial loan in the
amount of up to EUR 150 million.5 The first tranche (EUR 58 million) was disbursed in
July 1999. Discussions on the policy conditions for the release of the second tranche,

5

The first and second macro-financial assistance operations, in the amount of EUR 85 million and
EUR 200 million, respectively, were approved by the Council
in December 1994 and
October 1995.

54

however, were interrupted when the IMF’s EFF ran off-track in the autumn of 1999. In
December 2000, when the IMF reactivated the EFF,
the Commission resumed
discussions on the second tranche conditions.

In September 2001, an agreement ad referendum was reached on the conditions related
to the release of the second tranche of the 1998 loan facility. At the end of 2001,
however, the EFF went again off-track. Moreover, Ukraine seemed unlikely to meet
some of the conditions agreed with the Commission, notably those regarding the
elimination of discriminatory regulations in the automobile sector. In this context and
taking into account the debt rescheduling agreement reached between Ukraine and its
Paris Club creditors in July 2001, the Commission submitted to the Council in January
2002 a proposal to cancel the 1998 facility and disburse its remaining funds under a new
macro-financial assistance operation.6 This new assistance would amount to EUR 110
million (including the EUR 92 million from the 1998 operation) and would have a
longer maturity than the 1998 operation (15 years instead of 10) and a longer grace
period (10 years instead of 7).

6

COM (2002) 12 final, 17.01.2002.

55

Annex 1A - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
TO THIRD COUNTRIES BY DATES OF COUNCIL DECISIONS
Status of effective disbursements as of end-December 2001 (in millions of euro)

Authorisations

Disbursements

Country

Date of

Reference of

Council Decision 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

260
( Suspended)

870

375

180

290

375

Apr. 1990
Feb. 1991

Mar. 1991
Mar. 1992

Aug. 1991
Jan. 1993

Aug. 1991
Mar. 1992

Jan. 1992
Apr. 1992

350
260

185
190

100
80

150
140

190
185

610

375

180

290

375

(1)

Israel
(Structural adjustment soft loan)

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

Algeria I
(BOP loan)

Albania I
(BOP grant)

Bulgaria II
(BOP loan)

Baltics
(BOP loans)
of which :
Estonia
Latvia
Lithuania

Rom ania II
(BOP loan)

Moldova I
(BOP loan)

Rom ania 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)

FYROM I
(BOP loan)

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

15
20

déc-94
Aug. 1995

Nov. 1995
Sep. 1997
Dec. 1997

Jun. 1995
Oct. 1996

Nov. 1995

100

Dec. 1995

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Dec. 1996

Sep. 1997
Feb. 1998

85

30

50
50
100

15

25
15

400

70

110

135

(20)
(40)
(75)

80

45

125

35

100

85
(Suspended)

(20)
(40)
(25)

100
(Suspended)

Cancelled
(Jul. 1996)

130
Cancelled

25
(Suspended)

85

30

200

15

40

23.09.91

91/510/EC

28.09.92

92/482/EC

19.10.92

92/511/EC

23.11.92

92/542/EC

400

70

110

220

(40)
(80)
(100)

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

M ar. 1993
M ar. 1993
Jul. 1993
Aug. 1995

27.11.92

92/551/EC

80

Feb. 1993

13.06.94

94/346/EC

20.06.94

94/369/EC

28.11.94

94/773/EC

22.12.94

94/938/EC

22.12.94

94/939/EC

22.12.94

94/940/EC

10.04.95

95/132/EC

45

125

35

200

130

85

55

23.10.95

95/442/EC

200

25.03.96

96/242/EC

22.07.97

97/471/EC

15

40

56

Bulgaria III
(BOP loan)

22.07.97

97/472/EC

Armenia, Georgia and Tajikistan (2)
(Structural adjustment loans and grants)
of which

17.11.97

97/787/EC

modified by

28.3.00

00/244/EC

Armenia

Georgia

Tajikistan

Ukraine III
(BoP loan)

Albania III
(BOP loan)

15.10.98

98/592/EC

22.04.99

99/282/EC

Feb. 1998
Dec. 1998

Dec. 1998 (loan)
Dec. 1998 (grant)
Dec. 1999 (grant)
Feb. 2002 (grant)
Jul. 1998 (loan)
Aug. 1998 (grant)
Sep. 1999 (grant)
Dec. 2001 (grant)
Mar. 2001 (loan)
Mar. 2001 (grant)
Dec. 2001 (grant)

Jul. 1999

125
125

28
8
4
5,5
110
10
9
6
60
7
7

58

250

375

(58)

(175)

(95)

150

20

Bosnia I (3)
(BOP loan and grant)

10.05.99

99/325/EC

60

modified by

10.12.01

01/899/EC

08.11.99

99/731/EC

100

08.11.99

99/733/EC

modified by

10.12.01

01/900/EC

80
18

Dec. 1999 (grant)
Dec. 1999 (loan)
Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (grant)

Dec. 1999
Sep. 2000

Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (loan)
Dec. 2001 (grant)

250

254,5

120,5

(45.5)

(12.5)

(135)

(40)

(74)

(21)

92

20

60

100

52

58

15
10
10
10
15

40
60

20
10
12
10

08.11.99

99/732/EC

200

Jun. 2000

100

100

19.02.00

00/140/EC

22.05.00

00/355/EC

10.07.00

00/452/EC

27.06.01

01/511/EC

35

20

15

30

Mar. 2000
Aug. 2000

Aug. 2000
Dec. 2000

15 - Sep. 2001

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/EC

Oct. 2001
Oct. 2001
Jan. 2002

20
15

7
13

15

225
35
40

20
15

20

15

300

15

15

45

-------
5786

-------
4732

-------
1053,5

€

27.5 million in the form of interest subsidies.
225 million and grants for a maximum amount of

€

120 million.

Assistance to Israel includes a loan principal amount of
Exceptional financial assistance, which includes loans for a maximum amount of
Includes a loan principal amount of up to
Includes a loan principal amount of up to

(1)
(2)
(3)
(4)
(5) Exceptional financial assistance.

20 million and grants of up to
50 million and grants of up to

160 million and grants of
€

€
€

€
€

40 million.
48 million.

€

Bulgaria IV
(BOP loan)

FYROM II (4)
(BOP loan and grant)

Romania IV
(BOP loan)

Kosovo I (5)
(Grant budgetary support)

Montenegro (5)
(Grant budgetary support)

Moldova III
(BOP loan)

Kosovo II (3)
(Grant budgetary support)

FRY I (4)
(BOP loan and grant)

TOTAL

57

ANNEX 1B - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
TO THIRD COUNTRIES BY REGION
Status of effective disbursements as of end-December 2001 (in millions of euro)

Authorisations

Disbursements

Country

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

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)
-------
2730

130
Cancelled
-------
575

A. EU Accession countries

Baltics
(BOP loans)
of which :
Estonia
Latvia
Lithuania

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

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

Mar. 1993
Mar. 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

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

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

-------
3305

58

B. Western Balkans

Albania I
(BOP grant)

Albania II
(BOP grant)

Albania III
(BOP loan)

Bosnia I (1)
(BOP loan and grant)

FYROM I
(BOP loan)

FYROM II (2)
(BOP loan and grant)

Kosovo I (3)
(Grant budgetary support)

Kosovo II (3)
(Grant budgetary support)

Montenegro (3)
(Grant budgetary support)

FRY I (4)
(BOP loan and grant)

TOTAL B

28.09.92

92/482/EC

28.11.94

94/773/EC

22.04.99

99/282/EC

10.05.99
modified by
10.12.01

99/325/EC

01/899/EC

22.07.97

97/471/EC

08.11.99
modified by
10.12.2001

99/733/EC

01/900/EC

19.02.00

00/140/EC

27.06.01

01/511/EC

22.05.00

00/355/EC

70

35

20

60

40

80

18

35

30

20

Dec. 1992
Aug. 1993

Jun. 1995
Oct. 1996

Dec. 1999 (grant)
Dec. 1999 (loan)
Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (grant)

Sep. 1997
Feb. 1998

Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (loan)
Dec. 2001 (grant)

Mar. 2000
Aug. 2000

Sep. 2001

Aug. 2000
Dec. 2000

35
35

15
20

15
10
10
10
15

25
15

20
10
12
10

20
15

15

7
13

70

35

60

40

52

20
15

15

20

20
(Suspended)

28

18

15

16.07.01
modified by
10.12.2001

01/549/EC

345

01/901/EC

Oct. 2001 (grant)
Oct. 2001 (loan)
Jan. 2002 (grant)

35
225
40

-------
753

300

45

-------
627

-------
126

59

C. New Independent States (NIS)

Armenia, Georgia and Tajikistan (4)
(Structural adjustment loans and grants)
of which

17.11.97
modified by
28.3.00

97/787/EC

00/244/EC

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

(5)

Israel
(Structural adjustment soft loan)

Algeria I
(BOP loan)

Algeria II
(BOP loan)

TOTAL D

TOTAL A+B+C+D

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

375

(58)

(175)

(95)

55

45

15

15

85

Dec. 1998 (loan)
Dec. 1998 (grant)
Dec. 1999 (grant)
Feb. 2002 (grant)
Jul. 1998 (loan)
Aug. 1998 (grant)
Sep. 1999 (grant)
Dec. 2001 (grant)
Mar. 2001 (loan)
Mar. 2001 (grant)
Dec. 2001 (grant)

Dec. 1995

déc-94
Aug. 1995

Dec. 1996

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

254,5

120,5

(45.5)

(12.5)

(135)

(40)

(74)

(21)

30

45

15

85

200

58

25
(Suspended)

15

92
(Suspended)

28
8
4
5,5
110
10
9
6
60
7
7

30

25
20

15

85

50
50
100

58

23.10.95

95/442/EC

200

15.10.98

98/592/EC

150

Jul. 1999

-------
940

-------
687,5

-------
252,5

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

23.09.91

91/510/EC

22.12.94

94/938/EC

Jan. 1992
Aug. 1994

Nov. 1995

250
150

100

400

100

-------
687,5

4732

100
(Suspended)

-------
100

1054

400

200

-------
787,5

5786

48 million.

Includes a loan principal amount of
Includes a loan principal amount of up to

(1)
(2)
(3) Exceptional financial assistance.
(4)
(5)

€

€

20 million and grants of

€

40 million.
€

50 million and grants of up to

Exceptional financial assistance, which includes loans for a maximum amount of
Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27.5 million in the form of interest subsidies.

225 million and grants for a maximum amount of

120 million.

€

€

60

Annex 2: Balance of payments support to recipients of EU
macro-financial assistance by contributor, 1990-2001 (1)

2a. In millions US$

IFI's

IMF
World Bank

Bilaterals

EU (2)
Other bilaterals (3)

of which

USA
Japan

Debt relief

Paris Club
London Club
Other (4)

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

419
219
200
1618
1108
511

200

5607
4177
1430
5600
2190
1406

35
850
2004
554

1450

1564
909
655
708
423
285

120

4086
3206
880
11202
855
702

100
350
9645
4920
4380
345

1877
1477
400
3885
330
150

150
3405

3405

250
195
55
67
19
10

10

38

38

732
584
148
582
329
73

15
54
180

180

2800
2200
600
336
168

1751
1009
742
872
556
264

75
22
52
52

36
12
24
238
189
49

13
7

530
250
155
3421
359
92

22

2970
2970

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

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

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

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

94
74
20
6
6

13
4
9
87
69
18

5
3

67
38
28
33
21
10

3
1
2
2

14
7
4
89
9
2

1

78
78

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

IFI's

IMF
World Bank

Bilaterals

EU (2)
Other bilaterals (3)

of which

USA
Japan

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
21
10

3
1

13
4
9
87
69
18

5
3

47
29
18
53
42
11

3

(1)

(2)
(3)
(4)

Based on Council Decisions for EU operations.
No operation was decided in 1993.
EU macro-financial assistance.
Including EU Member States.

Syndicated commercial banks loan in favour of Algeria in 1991, debt relief in favour of Ukraine by Russia and Turkmenistan in 1994 and 1995, debt rescheduling in
favour of Moldova by Russia in 1996 and debt rescheduling in favour of Bulgaria and FYROM in 1997.

61

Annex 2.1.: Balance of payments support to recipients of EU
macro-financial assistance by contributor, 2000-2001 a)
(in millions of US$ and in percent of total commitments and disbursements)

Balance of payments support 2000

Total

Kosovo

Moldova

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

36
12
24

238
189
13
7
29

13
4
9

87
69
5
3
11

36
12
24

120
74
13
7
26

13
4
9

44
27
5
3
9

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

57

86

100

83

100

55

100

41

100

Montenegro

Tajikistan

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

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

62

Balance of payments support 2001

Total

Kosovo

Federal Republic of Yugoslavia

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

IFI's
IMF
WB (policy based)

Bilaterals

EU
USA
Japan
Other bilaterals
Debt relief

London Club
Paris Club
Other

530
250
155

3421
359
22

70
2970

2970

14
7
4

89
9
1

2
78

78

137
125
12

325
269
20

36

30
27
3

70
58
4

8

15

15

70
49
10

12

18

18

82
57
12

14

12

12

47
35
10

2

20

20

80
60
17

3

125
125

278
234
10

34

31
31

69
58
2

8

390
250
140

3350
310
12

59
2970

2970

10
7
4

90
8
0

2
79

79

Total

3826

103

462

100

85

100

59

100

3740

100

403

100

FYROM

Commitments
%

mio US$

Disbursements
%

mio US$

2
2

100
100

IFI's
IMF
WB (policy based)

Bilaterals

EU
USA
Japan
Other bilaterals
Debt relief

London Club
Paris Club
Other

34
34

61
16

45

45

36
36

64
17

47

47

Total

95

100

2

100

a) Disbursements are shown under the year of corresponding commitments.

63

ANNEX 3: Selected economic indicators

1998

1999

2000

2001
Programme (1) Estimates

GDP at constant prices

(Percent change)

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

8,0
7,2
10,0
2,5
2,9
2,9
-
-6,5
-4,8
5,3
-1,9

Consumer price (end year)

(Percent change)

Albania
Armenia
Bosnia-Herzegovina

Federation
Republika Srpska

FRY
FYROM
Georgia
Kosovo
Moldova
Romania
Tajikistan
Ukraine

8,7
-1,3

5,0
14,0
44,0
-2,4
10,7
-
18,2
40,6
2,7
22,0

Fiscal balance

(Percent of GDP)

Albania
Armenia *
Bosnia-Herzegovina

Federation
Republika Srpska

FRY
FYROM
Georgia *
Kosovo
Moldova
Romania
Tajikistan
Ukraine

-10,4
-4,8

-1,8
-5,1
n.a.
-1,7
-4,9
-
-8,6
-5,4
-3,8
-3,5

Current account

(Percent of GDP)

Albania
Armenia **
Bosnia-Herzegovina
FRY
FYROM
Georgia **
Kosovo
Moldova
Romania
Tajikistan

-6,1
-27,3
-18,9
-5,5
-9,6
-17,2
-
-16,7
-7,0
-9,3

7,8
6,0
5,0
6,7
4,6
1,9
-
1,9
1,8
8,3
4,5

4,2
0,4

2,0
15,0
115,0
4,9
4,6
-
18,4
40,7
61,0
27,0

-9,1
-4,0

-2,3
-2,9
-0,9
2,2
-2,6
-7,3
-1,5
-4,0
0,2
-1,5

-7,0
-19,8
-20,9
-7,6
-8,5
-13,7
-
-10,1
-3,7
-3,9

7,3
6,5
8,0
5,0
6,0
3,9
-
5,0
4,5
5,0
4,0

3,0
3,5

4,0
9,0
35,0
1,2
4,9
-
10,0
29,0
13,6
13,2

-9,2
-4,0

-1,7
-3,2
-6,1
-1,2
-1,4
-4,9
-1,5
-3,5
-0,5
-3,0

-7,5
-18,9
-20,4
14,6
-8,2
-9,7
-
-7,9
-6,0
-6,7

6,5
9,6
5,5
5,5
-4,6
4,5
10,0
6,1
5,3
10,3
7,0

3,5
2,9

2,0
7,0
40,0
5,3
3,4
7,9
6,4
30,3
11,5
6,1

-9,0
-4,8

n.a.
n.a.
-2,4
-6,7
-2,0
1,0
-1,1
-3,3
-0,1
-1,5

-7,4
-16,0
-17,2
10,7
-10,6
-9,5
-
-5,7
-5,9
-7,2

7,3
3,3
10,0
-15,7
2,7
2,9
-
-3,4
-1,2
3,7
-0,4

-1,0
2,0

-1,0
14,0
50,0
2,6
10,9
-
43,8
57,8
31,3
19,1

-11,4
-5,5

-1,3
-5,2
n.a.
0,0
-5,0
-
-2,6
-3,6
-3,1
-2,4

-7,3
-25,0
-21,4
-7,5
-5,9
-14,9
-
-2,6
-4,1
-3,4

64

Ukraine

-3,1

2,7

4,0

2,1

3,0

Official foreign exchange reserves (end year)

(Months of imports)

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

(1) Programme targets set in IMF programmes, if any.

*
**

On a cash basis.
Excluding official transfers.

Sources: National authorities and IMF

3,7
3,6
0,8
n.a.
2,0
1,0

-
1,4
2,2
1,5
0,6

3,8
3,7
2,2
1,1
3,0
1,3

-
2,9
2,6
1,7
0,8

4,3
3,5
2,5
1,3
3,5
1,0

-
2,7
2,9
1,9
0,8

4,5
3,7
2,5
1,5
3,6
1,2

-
3,1
3,0
2,5
1,0

4,7
3,5
3,6
2,4
6,0
1,2

-

2,6
3,5
2,2
2,0

65