Report from the Commission to the budgetary authority on guarantees covered by the general budget - situation at 30 June 2002 [SEC(2003)529]
Date: 2003-05-12
Institutions: European Commission
Subjects: budgetary reserve (EU), financial cooperation, financial management, general budget (EU), investment protection, management accounting, short-term monetary support

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 12.5.2003
COM(2003) 249 final

REPORT FROM THE COMMISSION

to the budgetary authority on guarantees covered by the general
budget - situation at 30 June 2002

[SEC(2003)529]

TABLE OF CONTENTS

Part One: Events Since The Report At 31 December 2001, The Risk Situation And Activation
Of Budget Guarantees .................................................................................................. 4

1.

1.1.

1.2.

2.

2.1.

2.2.

2.3.

3.

3.1.

3.2.

Introduction: types of operation................................................................................... 4

Operations with macroeconomic objectives ................................................................ 4

Operations with microeconomic objectives ................................................................. 4

Events since the report at 31 December 2001.............................................................. 4

Ukraine......................................................................................................................... 4

Federal Republic of Yugoslavia................................................................................... 4

Bosnia and Herzegovina .............................................................................................. 5

Risk situation................................................................................................................ 5

Amount outstanding at 30 June 2002........................................................................... 6

Maximum annual risk borne by the Community budget: operations disbursed at 30
June 2002 ..................................................................................................................... 6

3.3.

Maximum theoretical annual risk borne by the Community budget............................ 7

4.

4.1.

4.2.

5.

6.

7.

Activation of budget guarantees................................................................................... 7

Payments from cash resources ..................................................................................... 7

Activation of the Guarantee Fund ................................................................................ 7

Analysis of the Community's theoretical lending and guarantee capacity in respect of
non-member countries.................................................................................................. 7

Situation of the Guarantee Fund at 30 June 2002 ........................................................ 8

Relative solidity ........................................................................................................... 9

Part Two: Evaluation Of Potential Risks: Economic And Financial Situation Of The Non-

Member Countries Benefiting From The Most Important Loan Operations ............. 10

1.

2.

2.1.

2.2.

2.3.

3.

3.1.

3.2.

Introduction................................................................................................................ 10

Accession countries.................................................................................................... 10

Bulgaria ...................................................................................................................... 10

Lithuania .................................................................................................................... 11

Romania ..................................................................................................................... 12

Western Balkans......................................................................................................... 12

Bosnia and Herzegovina (BiH) .................................................................................. 13

Federal Republic of Yugoslavia (FRY) ..................................................................... 13

2

3.3.

Former Yugoslav Republic of Macedonia (fYRoM) ................................................. 14

4.

4.1.

4.2.

4.3.

4.4.

4.5.

4.6.

5.

Newly Independent States.......................................................................................... 14

Armenia...................................................................................................................... 15

Belarus ....................................................................................................................... 15

Georgia....................................................................................................................... 16

Moldova ..................................................................................................................... 16

Tajikistan.................................................................................................................... 17

Ukraine....................................................................................................................... 17

Other Non-member Countries.................................................................................... 18

5.1.

Algeria........................................................................................................................ 18

List of abbreviations................................................................................................................. 20

3

Part One:
Events Since The Report At 31 December 2001, The Risk
Situation And Activation Of Budget Guarantees1

1.

INTRODUCTION: TYPES OF OPERATION

The risks covered by the Community budget derive from a variety of lending and guarantee
operations  which  can  be  divided  into  two  categories:  loans  with  macroeconomic  objectives
and loans with microeconomic objectives.

1.1.

Operations with macroeconomic objectives

The  first  of  these  are  the  balance-of-payments  loans  for  Member  States  or  non-member
countries, normally carrying strict economic conditions and undertakings.

1.2.

Operations with microeconomic objectives

These  are  loans  to  finance  projects  which  are  usually  repaid  over  the  long  term  from  funds
which  these  projects  are  expected  to  generate;  as  a  rule,  they  are  granted  to  companies,
financial institutions or non-member countries and, in addition to the Community guarantee,
are covered by the usual guarantees demanded by banks.

This  covers  Euratom  and  NCI2  loans  in  Member  States  and  the  Euratom  and  EIB  loans
outside  the  Community  (Mediterranean  countries,  Central  and  Eastern  Europe,  countries  of
Asia and Latin America, Republic of South Africa).

2.

EVENTS SINCE THE REPORT AT 31 DECEMBER 2001

2.1.

Ukraine

On 17 January 2002, the Commission approved a proposal for a Council Decision providing
macro-financial assistance to Ukraine. The amount to be granted is € 110 million in the form
of a loan with a maximum maturity of fifteen years.

2.2.

Federal Republic of Yugoslavia

The Commission is expected to approve a proposal for a Council Decision in the second half
of  2002  providing  macro-financial  assistance  to  the  Federal  Republic  of  Yugoslavia.  The
amount to be granted is € 55 million in the form of a loan with a maximum maturity of fifteen
years and € 75 million in the form of non-repayable grants.

1

2

Please  note  that  a  Commission  Staff  working  Paper  contains  a  set  of  detailed  tables  and  explicatory
notes to this report [SEC(2003)529]
Not active since 1995

4

                                                
2.3.

Bosnia and Herzegovina

The Commission is expected to approve a proposal for a Council Decision in the second half
of 2002 providing macro-financial assistance to Bosnia and Herzegovina. The  amount to be
granted is € 20 million in the form of a loan with a maximum maturity of fifteen years and €
40 million in the form of non-repayable grants.

3.

RISK SITUATION

There are two possible methods for evaluating the risks borne by the Community budget:

– 

– 

The method, often used by bankers, of the total amount of capital outstanding for the
operations concerned on a given date (situation described in Annex 1 Table A1);

The  more  budgetary  approach  of  calculating  the  maximum  amount  which  the
Community could have to pay out in each financial year.

The second approach itself has been applied in two different ways:

– 

– 

By  reference  only  to  actual  disbursements  at  the  date  of  the  report,  assuming  that
there are no early repayments (see Annex 1 Table A2 below showing the lower limit
of this maximum risk to the Community budget);

On a more forward-looking basis, by  reference to  all  the  operations decided  by the
Council  or  proposed  by  the  Commission  in  order  to  estimate  the  impact  on  future
budgets, assuming that the Commission's proposals are accepted (see Annex 1 Table
A3  below  showing  the  upper  limit  of  this  maximum  risk  borne  by  the  Community
budget).

The latter exercise gives some idea of the future level of risks connected with the proposals
made. However, a number of assumptions have to be made about dates of disbursement and
terms of repayment (details are given in the annex) as well as interest3 and exchange rates4.

The  results  are  shown  in  Annex  Tables  A1  to  A3,  which  make  separate  assessments  of  the
risks relating to countries inside the Community and countries outside the Community.

The overall figures quoted cover risks of different types; loans to one country in the case of
macro-financial assistance and loans for projects  guaranteed by the borrowers in the case of
NCI and EIB operations, for example.

The following analysis distinguishes between total risk, the risk in respect of Member States
and the risk in respect of non-member countries.

3

4

An average interest rate of 8% is assumed for EIB loans (fix and floating rate); the average interest rate
assumed for borrowing and lending operations is 4,4%. An interest rate of 4,89% has been applied for
the new operations in Table A3.
The exchange rates used for loans in currencies other than the euro are those of 30 June 2002.

5

                                                
3.1.

Amount outstanding at 30 June 2002

The  total  risk  at  30  June  2002  came  to  €  15.118  million,  as  against  €  15.443  million  at  31
December 2001. Details are shown in Annex Table A1.

The following table shows the operations which have had an effect on the amount outstanding
since the last report.

Table 1: Capital outstanding at 30 June 20021

Amount outstanding at 31 December 2001

Loan repayments
                    Euratom
                    NIC
                    Financial assistance
                    EIB

Loans disbursed
                    Euratom
                    Financial assistance
                    EIB

Exchange rate differences between Euro and other
currencies

Amount outstanding at 30 June 2002

1 All guaranteed loans (Member States, non-Member States) confounded.

€ million

15.443

0
0
-23
-477

15
12
255

-107

15.118

The capital outstanding in respect of operations in the Member States was € 45 million at 30
June 2002, compared with € 52 million at 31 December 2001.

The  capital  outstanding  from  non-member  countries  at  30  June  2002  was  €  15.073  million,
compared with € 15.391 million at 30 December 2001.

3.2.

Maximum  annual  risk  borne  by  the  Community  budget:  operations  disbursed
at 30 June 2002

For 2002 the total risk amounts to € 1.072 million.

– 

– 

The risk in respect of the Member States comes to € 8 million.

The risk in respect of non-member countries comes to € 1.064 million.

Details of the maximum annual risk are set out in Annex Table A2

6

3.3.

Maximum theoretical annual risk borne by the Community budget

For 2002 the maximum theoretical risk amounts to € 1.104 million. It will increase from 2003
onwards and reach €4.128 million in 2010.

– 

– 

The trend in the maximum theoretical risk in respect of Member States is almost the
same as in Table A2.

For the non-member countries it amounts to €1.095 million for 2002. The  risk  will
increase from 2003 onwards to reach € 4.128 million by 2010.

Details of the maximum theoretical annual risk is set out in Annex Table A3.

4.

ACTIVATION OF BUDGET GUARANTEES

4.1.

Payments from cash resources

The  Commission  draws  on  its  cash  resources,  under  Article  12  of  Council  Regulation
(EC, Euratom) No. 1150/2000 of 22 May 2000, implementing Decision 94/728/EC, Euratom,
on the system of the Communities' own resources, in order to avoid delays and resulting costs
in servicing its borrowing operations when a debtor is late in paying.

4.2.

Activation of the Guarantee Fund

Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 established a Guarantee
Fund for external action. In the event of late payment by a recipient of a loan granted by the
Community, the Guarantee Fund is called on to cover the default within three months of the
date  on  which  is  payment  is  due.  If  a  borrower  defaults  on  an  EIB  loan  guaranteed  by  the
Community budget, the Community will act within three months of receiving a letter from the
Bank calling for the guarantee to be activated. The Commission will then authorise the Bank
to take the corresponding amounts from the Guarantee Fund.

Default interest for the time between the date on which cash resources are made available and
the date of activation of the Fund is drawn from the Fund and repaid to the cash resources.

In the last six months the Fund has not been called on to honour guarantees.

5.

ANALYSIS  OF  THE  COMMUNITY'S  THEORETICAL  LENDING  AND  GUARANTEE
CAPACITY IN RESPECT OF NON-MEMBER COUNTRIES

In  practice,  the  Guarantee  Fund  and  reserve  facility  limits  the  Community's  lending  and
guarantee  capacity  to  non-member  countries,  since  the  appropriations  available  for
provisioning the Fund whenever a new lending decision (or any annual tranche in the case of
guarantees for  multiannual operations) is  adopted  are  limited  by  the  amount  entered  for  the
guarantee reserve in the Financial Perspective5.

5

The figure entered in the 2000-2006 Financial Perspective is € 200 million at 1999 prices.

7

                                                
At  any  given  time,  lending  capacity  corresponds  to  the  margin  remaining  in  the  guarantee
reserve. This margin is equal to the difference between the reserve and the estimated amount
needed to provision the Guarantee Fund for operations which have already been adopted and
which are in preparation.

Table  A4  shows  an  estimate  of  the  Community's  lending  capacity  in  respect  of  non-EU
countries over the period 2002-2004 in line with the Guarantee Fund mechanism. The method
of calculation and references to legal texts are set out in greater detail in the Annex.

On  the  basis  of  the  decisions  adopted  by  the  Council  and  decisions  proposed  and  in
preparation (see Annex Table A4), €171,39 million is expected to be used from the guarantee
reserve in 2002, leaving € 41,61 million available at the end of the year.

If account is taken of the effect on the  guarantee reserve  of the provisioning  of the  Fund in
respect of loans already decided and loans proposed and in preparation for 2002, the  annual
capacity available for loans is as follows:

– 

– 

€ 462,31 million for loans with a 100% guarantee under the Community budget, or

€  711,24  million  for  loans  with  a  65%  guarantee  (in  accordance  with  Council
Decision 2000/24/EC of 22 December 1999).

At  30  June  2002,  outstanding  lending  and  loan  guarantee  operations  for  non-member
countries totalled € 15.073 million.

Table 2: Outstanding lending and loan guarantee operations for non-member countries

1. Capital outstanding, borrowing and lending

2. Capital outstanding, EIB

3. Capital outstanding, payments defaults

4. Default Interest

Unpaid interest due*

TOTAL

€ million

        Situation at 30 June 2002

1.658

13.415

0

0

0

15.073

* unpaid interest due within the meaning of the Regulation establishing the  Guarantee Fund

The ratio between the Fund’s resources and outstanding capital liabilities, within the meaning
of the Regulation establishing the Fund, was 11,39%, which is higher than the target figure of
9% set in Regulation No 1149/1999 amending Regulation No 2728/94 establishing the Fund.
The rules state that at the end of a year the surplus shall be paid back to a special heading in
the statement of revenue in the general budget of the European Communities.

The surplus at the end of the financial year 2001 was € 372,46 million.

6.

SITUATION OF THE GUARANTEE FUND AT 30 JUNE 2002

At  30  June  2002,  the  Guarantee  Fund  amounted  to  €  1.815,5  million.  The  following
movements were recorded in the first half of 2002:

8

 
– 

– 

– 

– 

– 

7.

no call to the Fund as a result of further defaults;

no late repayment (no arrears);

net revenue of € 35,9 million on investments from the Fund’s assets;

no transfer from the 2002 reserve;

an  amount  of  €  372,46  million  was  repaid  to  the  budget  as  Fund  surplus  as  of  31
December 2001 in August 20026.

RELATIVE SOLIDITY

The  ratio  between  the  amount  in  the  Fund  at  30  June  2002  (€ 1.815,5  million)  and  the
maximum annual risk for loans to non-member countries (defined as the total amount falling
due) shown for 2002 in Annex Table A3 (€ 1.093 million) is 166 %.

6

For further details refer to the “Annual report from the Commission on the situation of the Guarantee
Fund and its management during the year 2001”.

9

                                                
Part Two:
Evaluation Of Potential Risks: Economic And Financial Situation
Of The Non-Member Countries Benefiting From The Most
Important Loan Operations

1.

INTRODUCTION

The figures in Part One provide information on quantitative aspects of the risk borne by  the
general budget. However, this data should be accompanied by an assessment of the quality of
the  risk,  which  depends  on  the  type  of  operation  and  the  standing  of  the  borrower.  Recent
events, which may influence the portfolio country risk, are analysed below.

The  country  risk  evaluation  presented  in  Part  Two  presents  a  table  of  risk  indicators  (see
Annexes) for each non-member country that has received EC macro-financial assistance and
still  has  outstanding  debts  to  the  EC.  To  complement  this,  textual  analysis  is  provided  for
those countries where significant new information influencing the risk evaluation has become
available since the previous report, which covered the last six months of 2001.

The evaluation in this Part does not deal  with countries other  than those mentioned, mainly
because  Community  exposure  elsewhere  (notably  through  guarantees  of  EIB  lending)  is
project related and also well diversified among countries.

2.

ACCESSION COUNTRIES

Note can be taken of a general trend towards a reduction of the potential risks, although the
income policy in Romania will require close monitoring.

2.1.

Bulgaria

Real GDP growth was 4% in 2001 and 3,2% in the first quarter of 2002, thanks to sustained
domestic demand arising from private consumption and investment which was strong enough
to  weather  unfavourable  external  developments.  Inflation  decelerated  to  7,4%  on  annual
average and 4,8% at the end of the year. However, it increased again at the beginning of 2002
due to increases in administered prices and indirect taxes, but this tendency was reversed by
low food prices in the summer of 2002.

The currency board arrangement (EUR 1 = BGN 1,95583) is being maintained and continues
to  be  well  covered  by  foreign  reserves.  It  has  not  lead  to  a  deterioration  of  external
competitiveness  given  that  inflation  differentials  vis-à-vis  main  trade  partners  were  broadly
matched  by  differences  in  productivity  growth.  In  contrast  to  previous  years,  the  current
account  deficit  of  6%  of  GDP  in  2001  was  not  exceeded  by  net  inflows  of  foreign  direct
investment which were only about 5% of GDP. While a similar tendency appeared in the first
half  of  2002,  an  improvement  can  be  expected  for  the  second  half  of  2002  resulting  from
privatisation proceeds.

Registered unemployment  was high at 17,3% on  average  in  2001,  but  ran  lower  in  the  first
months  of  2002  compared  to  the  corresponding  months of the previous  year.  Job  losses  are
associated  with  structural  reforms,  including  an  accelerated  process  of  privatisation,  which

10

have  not  yet  been  fully  compensated  by  job  creation,  also  because  of  some  rigidities  and
mismatches on the labour market. As a result, the participation rate and the employment rate
are  relatively  low  and  long-term  unemployment  remains  high  at  more  than  60%  of  total
unemployed.

Fiscal discipline has been maintained over the last years. The general government sector had a
deficit of 0.6% of GDP in 2000 and a surplus of 1,7% of GDP in 20017. Public debt is falling
rapidly,  from  well  above  100%  of  GDP  in  1997  to  an  expected  62%  of  GDP  at  the  end  of
2002.  The  government  has  embarked  on  an  active  debt  management  with  the  objective  of
reducing risks by gradually shifting from a denomination in US$ towards a denomination in
euro, from short-term to long-term maturities, from floating into fixed interest rate bonds and
from foreign to domestic financing.

2.2.

Lithuania

Last year’s strong economic performance has continued in 2002, despite the global economic
slow down. In 2001, GDP grew by 5,9% and preliminary estimates for the first half of 2002
point to a growth rate of 5,8%. Exports and gross fixed capital formation developed strongly
in 2001, even in the third and fourth quarter. However, the first quarter 2002 saw a significant
slow  down  in  growth  of  exports.  Private  consumption  grew  more  moderately  in  2001  but
accelerated somewhat in the first quarter 2002. Public consumption has been constrained by
the goal to reduce the budget deficit and grew by less than ½% in 2001.

Inflation  has  remained  particularly  low,  despite  strong  growth  and  amounted  to  1,3%  on
average  in  2001.  The  price  increase  was  mainly  driven  by  food  prices  and  prices  for
communications. However, these price rises were to some extent balanced by sizeable price
reductions on petroleum products. In 2002, inflation has slowed down and stood at –1,1% in
August, compared to the same period in 2001. Prices have gone down on several products and
services  including  food,  clothing  and  footwear,  and  furnishings,  household  equipment  and
routine maintenance.

The high unemployment level is one of Lithuania’s greatest economic problems.  Registered
unemployment amounted to 12,5% in 2001 and according to the labour force survey 17,3%.
However,  whereas  the  unemployment  remained  stable  in  2001  (disregarding  seasonal
variations), it has started to come down in 2002 and was about 1 ½ percentage point lower in
July 2002 than one year before.

Strong export performance and rapid growth in 2001 have resulted in a further  reduction of
the current account deficit, from 6% of GDP in 2001 to 4,8% in 2002.

Lithuania has conducted a tight fiscal policy in order to cut down the budget deficit. In 2001 it
came down from 2,7% of GDP in the previous year to 1,9%. In the coming years, the budget
deficit might be expected to remain at about that level, as any further decline is obstructed by
expenses related to structural reforms such as the pension reform, the savings restitution etc.

7

Following ESA95 methodology, the surplus in 2001 will be subject to a revision in the order of 1.5% of
GDP, thus leading to deficit of between 0 and 1% of GDP.

11

                                                
2.3.

Romania

Economic recovery strengthened in 2001 and proved resilient during the current year. After a
modest  rebound  in  2000,  growth  accelerated  to  5,3%  in  2001  as  investment  and  stocks
increased  and  private  consumption  boomed  on  the  back  of  rising  real  wages  and  income.
Although the strengthening of domestic demand led to an increasingly negative contribution
by the external sector to growth, exports continued to expand at double-digit annual rates until
the last quarter of 2001, when growth slowed down sharply as the external economic situation
worsened. The economic recovery, however, has been resilient so far.  In  the  first  quarter of
2002, GDP increased by 3,1% as import growth came to a near halt while exports rebounded
somewhat  and  domestic  demand  continued  to  expand,  albeit  at  a  slower  pace.  Industrial
production figures and trade data point to a continuation of these favourable trends over the
second quarter of the year.

Contrary  to  past  experiences,  positive  economic  growth  has  been  accompanied  by  greater
domestic and external stabilisation. The adoption of a more coherent mix in the context of a
new  IMF  stand-by  arrangement  was  instrumental  in  halting  the  deterioration  of  the  current
account and supporting disinflation in the face of necessary increases in energy tariffs. On a
declining path since mid-2000, inflation dropped more than expected in the first half of 2002
when the year-on-year rate fell some 6 percentage points to 24% in June 2002. Following two
years  of  successful  external  consolidation,  the  current  account  deficit  widened  to  5,9%  of
GDP in 2001 on the back of the strengthening recovery and various one-off factors boosting
import growth such as the effect of the 2000 draught on the domestic supply of agricultural
goods and temporary fiscal incentives for capital investment by SMEs. However, the timely
tightening  of  the  fiscal  and  monetary  policy  in  the  second  half  of  2001  combined  with
rebounding goods export and lower prices for energy imports in the first half of 2002, and an
underlying trend towards higher private transfers from abroad and lower service trade deficits
lead  to  reverse  the  external  deterioration.  As  a  result,  over  the  first  half  of  2002,  the
cumulative current account deficit fell by over a third compared to the same period in 2001.
External financing conditions also continued to improve with a steady inflow of foreign direct
investment,  a  persistently  positive  error  and  omission  item  in  the  balance  of  payment,  and
improving borrowing conditions. Reaping the benefits of various upgrades granted by rating
agencies, Romania launched its first ten-year euro bond in April 2002.

Structural reforms have advanced further but at a slower pace than planned, as shown by long
delays in the completion of the first and second reviews under the IMF Stand-by arrangement.
The  sluggish  pace  of  privatisation,  the  persisting  difficulty  to  control  the  wage  bill  and  the
arrears  stock  of  public  enterprises  are  two  of  the  key  sources  of  concern  along  with  the
agreement signed by the government with two trade unions in June 2002 that provides for a
50%  increase  in  the  minimum  wage  and  a  reduction  in  the  minimum  income  tax  in  2003.
Safeguarding measures, including a tightening of the fiscal stance in 2003, were agreed only
later  with  the  IMF  and  will  need  to  be  strictly  implemented  to  sustain  stabilisation.  In  this
regard, the sharp growth in money and credit observed since late 2001 also requires continued
monitoring.

3.

WESTERN BALKANS

Although  economic  indicators  are  generally  improving,  financial  risk  remains  high  in  the
region.

12

3.1.

Bosnia and Herzegovina (BiH)

Official aid flows are declining, and sustained domestically generated economic growth is not
yet apparent. Real output in BiH is expected to increase by just over 2% in 2002, similar to
the level in 2001. Official estimates put unemployment at 40% of the labour  force although
the World Bank estimates the figure at broadly one half of this. Continued strict adherence to
the rules of the currency board provides a solid anchor for low inflation. The downward trend
has continued this year with an average inflation in 2002 expected to be broadly 2%. Public
sector indebtedness is very high at potentially 150% of GDP including war claims and frozen
foreign  currency  deposits.  Fiscal  performance  remains  unstable,  there  was  still  net  arrears
accumulation,  and  the  general  government  budget  deficit  on  a  commitment  basis  remains
high, 6,3% of GDP in 2001, and an expected 5,5% of GDP this year. Fiscal consolidation is
however  expected  in  2002  and  2003,  through  the  demobilisation  of  Federation  soldiers,
reforms to strengthen fiscal systems, and a prudent expenditure policy.

The  current  account  deficit  increased  slightly  in  2001  to  22%  of  GDP.  Foreign  direct
investment (FDI) remains very weak with a decline in net FDI to $130m in 2001 compared
with  $150m  in  2000,  which  is  insufficient  to  fuel  growth.  Gross  official  reserves  which
increased to over five months of import cover in 2001, due to the increasing shift towards the
use of the national currency in the context of the introduction of the Euro, should reach over 6
months  of  imports  by  the  end  of  2002.  Although  BiH  remains  current  on  its  external  debt
service obligations, the balance of payments remains vulnerable due to large external deficits,
high public sector indebtedness, declining foreign assistance and low private investment given
the difficult political and business environment.

External debt was equivalent to broadly 58% of GDP at the end of 2001 and is  expected to
remain at this level  over  the  medium-term. The  ratio  of  debt  service to  exports  is  relatively
low  (5,1%  in  2001),  reflecting  the  concessional  nature  of  much  of  the  debt  and  favourable
debt  rescheduling,  although  this  will  increase  in  2002  (7,5%)  and  beyond  due  to  IMF  and
World Bank obligations. The Central State, which ensures external debt servicing obligations,
has no fiscal resources of its own and relies upon budget contributions from the two Entities
to  fulfil  its  obligations.  BiH  is  not  rated  by  the  credit  rating  agencies  and  EBRD  transition
indicators,  reflecting  progress  in  reforms  in  Central  and  Eastern  European  countries,  place
BiH towards the low end of the scale.

Following  the  completion  of  the  previous  IMF  Stand-By  Arrangement  (SBA)  in  May  2001
(signed  in  May  1998),  a  new  15-month  SBA  (August  2002  –  November  2003)  was  finally
approved by the IMF Board on 2nd August 2002 for the new US$ 89 million programme The
programme aims at strengthening economic activity and the external accounts in the near and
medium-term,  in  particular,  sizeable  declines  in  the  current  account  deficit  and  strong
international reserves.

3.2.

Federal Republic of Yugoslavia (FRY)

The outlook for the FRY’s debt servicing capacity is broadly unchanged. In the  first half of
2002, economic policies in the FRY continued to be geared towards restoring and sustaining
macro-economic  stability,  liberalising  the  price,  exchange,  trade  and  tax  regimes,  and
reforming  the  economy  on  the  basis  of  new  legal  and  regulatory  frameworks  established  in
2001.

Confidence  in  the  domestic  currency  strengthened  and  the  value  of  the  Dinar  remained
broadly  stable  at  around  YuD  59  per  EUR  in  2001  and  the  first  quarter  of  2002.  Gross

13

reserves  of  the  National  Bank  of  Yugoslavia  rose  from  around  US$  1.200  million  by  end-
2001, equivalent to 2,6 months of imports, to US$ 1.500 million in the first quarter of 2002.

Even  if  the  FRY  continues  with  macro-economic  stabilisation  and  sustains  a  good  track
record  in  structural  reforms  as  envisaged  under  the  new  IMF  programme  adopted  in  May
2002 (a three-year Extended Arrangement from 2002- 2005), the external sustainability of the
FRY  economy  will  remain  a  challenge.  Important  financing  requirements,  mainly  resulting
from  debt  service  obligations  and  the  need  to  further  strengthen  foreign  exchange  reserves,
will continue to put a heavy strain on the balance of payments. The FRY’s capacity to absorb
new  debt  is  limited  and  a  cautious  approach  to  new  sovereign  lending  is  warranted.
Noteworthy  is  the  substantial  debt  relief  (66%)  that  is  being  provided  by  the  Paris  Club
following  the  approval  of  the  new  IMF  programme.  However,  the  level  of  external  debt  to
GDP will remain relatively high in 2002-2004 at 69%. Also, debt service obligations will rise
considerably from around US$ 100 million in 2001 (3,9% of goods and services) to US$ 350
million (10,9%) and US$ 470 million (12,9%) in 2002 and 2003, respectively.

3.3.

Former Yugoslav Republic of Macedonia (fYRoM)

The fYRoM is recovering from the 2001 security crisis that affected the performance of the
economy. In 2002, GDP is expected to grow by 2,5-3%, against a decline of 4,1% last year. In
the first five months of 2002, consumer prices increased by 3,5% with respect to the first five
months of 2001.

The  recently  revised  2002  budget  foresees  central  government  deficit  at  2,3%  of  GDP  and
general  government  deficit  at  3%  of  GDP,  compared  to  a  deficit  of  6,4%  in  2001.
Nevertheless, the perspective of parliamentary elections (September 2002) led earlier this year
to a relaxation of the commitment to fiscal sustainability over the medium-term, which caused
the breakdown of talks with the IMF during the revision of the Staff Monitored Programme
and to the failure of negotiations on a new stand-by arrangement.

The trade deficit increased over the first semester 2002. A sharp increase of exports would be
needed  over  the  second  half  of  the  year  to  meet  official  projections  of  a  US$  532  million
deficit  in  2002.  Due  to  an  expected  increase  in  public  and  private  transfers,  the  current
account deficit should slightly decline to 9,2% of GDP in 2002 (without taking into account
donors’ financing), compared to a deficit of 10,1% in 2001.

The current account deficit is not expected to be fully covered by net capital transfers, leading
to a possible decline of reserves over the year 2002, from their level of six months at the end
of May 2002. The external debt as ratio to GDP should increase from 40,7% in 2001 to 42,4%
at the end of 2002, a level which however is considered as sustainable.

On the short-term, risks relate mainly to the decision to liberalise capital account transaction
in mid-October 2001 - especially in the absence of an IMF programme ensuring a consistent
macroeconomic framework. On the medium-term, in spite of broadly orderly held elections in
September, the main risks are associated to the settlement of ethnic tensions, as well as to a
number of uncertainties on the economic policy of the new majority in the Parliament.

4.

NEWLY INDEPENDENT STATES

The  risk  situation  remains  globally  stable  with,  however,  important  differences  amongst
countries.

14

4.1.

Armenia

Strong economic growth continued  in the first  half of 2002  with a  real GDP growth rate of
nearly  10%  compared  to  the  first  half  of  2001.  Growth  was  driven  by  the  industrial  sector,
mainly owing to a recovery in the diamonds processing sector but also other industrial sectors
such  as  metallurgy  and  food  processing  have  picked  up.  In  agriculture,  on  the  other  hand,
growth will slow down this year, because of unfavourable weather conditions.

The  Government  continues  its  efforts  to  tighten  the  fiscal  policy.  The  central  government
budget for 2002 aims at a deficit of not more than 3% of GDP (further down from a deficit of
3,8% in 2001). This seems to be attainable on the basis of the improved tax collection rates
which were realised in the first half of 2002.

Consumer prices were fairly stable in early 2002 but later in the spring inflation was triggered
as  government  expenditures  increased  when  some  of  the  outstanding  expenditure  arrears  in
pensions and social transfers were paid. Consumer price inflation is forecast to average about
3% in 2002 (3,2% in 2001) owing mainly to higher food prices.

As  a  result  of  strong  growth  in  exports  (+20,8%)  and  moderate  growth  in  imports  (+1,2%
only,  due  to  ongoing  import  substitution),  the  current  account  deficit  declined  in  2001  to
about 9,5% of GDP from 14,5% in 2000, official transfers included. This trend has continued
in 2002, and according to preliminary trade figures, the deficit will continue to narrow further
this year. Inflows of foreign direct investment, on the other hand, have been on a downward
trend after 1998, and the decline continued in early 2002. Armenia’s external debt stock was
US$  917  millions  (about  43%  of  GDP)  at  end-March  2002.  The  Central  Bank’s  gross
international reserves are at a fairly comfortable level, equivalent to 3,8 months of imports.

4.2.

Belarus

Russia's willingness to accept payment arrears or extend soft loans is expected to be of major
help in financing  Belarus'  balance  of  payments  imbalances,  in  the  absence  of  foreign  direct
investment (FDI) inflows or Western credits. In mid-June 2002, Belarus received from Russia
the  second  tranche  of  its  stabilisation  loan,  shortly  after  it  agreed  to  a  plan  outlining
preparatory measures to be undertaken in advance of the introduction of a single currency in
2005.  Russia  has  agreed  to  lend  Belarus  Rb  4,5bn  (US$142  million))  to  help  stabilise  the
Belarusian  currency,  in  three  equal  Rb  1,5bn  tranches.  Aside  from  Russia,  Belarus  has  few
other  sources  of  external  funding.  This  is  the  primary  reason  behind  the  government's  low
level of indebtedness. In May 2002, the total foreign debt stock stood at US$ 785 million or a
mere 6% of GDP, according to official sources. In addition, Belarus still owes US$ 265m to
Russian natural  gas  suppliers,  most  of  which  was  accumulated  prior  to  2001.  This  debt  has
been a subject of negotiation for more than three years.

The Belarusian economy continues to grow year on year at around 3-4%. However, industrial
growth  has  slowed,  and  many  enterprises  remain  non-profitable.  Inventories  have  grown
sharply,  and  investment  lags.  State-controlled  agriculture  is  in  poor  financial  shape.  Export
growth stagnated over the first four months of 2002. Modest import growth over the period
brought a rise in the trade deficit. The authorities continue to avoid structural reforms, despite
the privatisation plans that were outlined in its new programme. The budget deficit over the
first  four  months  of  2002  equalled  0,7%  of  GDP.  Inflation  has  slowed,  which  has  allowed
interest  rates  to  fall,  but  recent  money  supply  growth  could  reverse  this  process.  The
currency's depreciation against the Russian rouble has remained within the targets set by the

15

central  bank's  crawling-peg  arrangement,  although  this  has  put  a  strain  on  international
reserves. There are no prospects for an IMF lending programme in 2003.

4.3.

Georgia

The recovery in economic growth in 2001 was driven by agriculture, transport and retail trade
(4,5% for year as a whole). Preliminary data for the first half of 2002 show real GDP growth
of  4,2%.  Fewer  disruptions  in  the  energy  sector  contributed  to  a  rebound  in  industrial
production (5,2% in January-June  2002) and construction  activity  was particularly  strong in
the  oil  transport  sector  where  major  investment  projects  are  underway.  Depressed  export
volume growth and low investments in manufacturing are, however, constraining any higher
growth  rates.  In  addition,  this  year’s  agricultural  production  has  been  affected  by  floods  in
parts of the country.

The government has taken some measures to improve revenue collection, and it has been able
to  reduce  the  stock  of  expenditure  arrears  while  an  overall  expenditure  restraint  has  been
maintained. The year 2002 budget aims at an increase in the tax-to-GDP ratio for the general
government  from  14,25%  in  2001  to  14,75%  ,  reducing  thereby  the  general  government
deficit further from 2% of GDP in 2001 to about 1% .

The lari was stable for most of 2001, but depreciated by about 6% between November 2001
and February 2002. This led to an increase in inflation which was further fuelled by increases
in utility prices in early 2002. The  year-on-year  inflation rate was at 7,5% in May 2002.  In
2001, consumer price inflation averaged 4,7%.

In December 2001 the Parliament introduced a ban on the export of non-ferrous scrap metal,
which is Georgia’s main export item. Accordingly, there  was a slump  in  export revenues in
the  first  half  of  the  year.  Given  that  the  ban  has  again  been  lifted  in  June  2002,  export
revenues  are  expected  to  resume  in  the  second  half  of  the  year.  Nevertheless,  since
agricultural exports have suffered from bad weather conditions, export revenue growth will be
modest for the year as a whole. Georgia’s external debt stock is about US$ 1,7 billion (about
51%  of  GDP),  and  its  net  present  value  currently  amounts  to  over  300%  of  central
government  revenues.  Because  of  the  projected  increase  in  the  debt  service  from  2003
onwards,  Georgia  is  expected  to  seek  an  additional  rescheduling  of  its  bilateral  debts.  The
National  Bank’s  gross  international  reserves  have  increased,  but  in  relation  to  imports  they
still remain low, equivalent to about 1,3 months of imports.

4.4.

Moldova

The recent resumption of multilateral financing and the  recovery of the Moldovan economy
have  provided  the  country  with  some  financial  breathing  space.  In  addition,  Moldova  is
expected  to  complete  its  Eurobond  restructuring.  This  will  help  to  ease  the  government's
liquidity problems. However, debt-servicing will remain difficult.

Moldova's economic recovery has continued from last year's 6% expansion, with real GDP up
by 4,8% year on year in the first quarter of 2002 . Strong industrial growth continues to drive
growth, spurred by export sales to Russia and rising domestic demand. In particular, double-
digit real wage growth has helped achieve an 11% year-on-year increase in retail sales over
the first five months of 2002.

Moldova's  economy  nevertheless  remains  extremely  fragile,  and  continues  to  present
significant overall economic and financial risks. It remains narrowly based on agriculture and

16

agro-processing,  so  that  adverse  weather  conditions  could  produce  a  sharp  downturn  in
overall economic  growth. As the economy continues to suffer from a decline in investment,
the  rate  of  diversification  away  from  agriculture-related  sectors  and  wine  sales  to  Russia
remains slow. Moreover, the government has shown numerous signs that it hopes to reassert a
degree of state control in the  agricultural  sector,  which  would  almost  certainly  preclude  the
investment inflows needed to succeed with post-privatisation reforms.

A seasonal reduction in food prices in June helped bring inflation down to 4,3% year on year,
its lowest point since the 1998 financial crisis. Inflation will rise again during the remainder
of 2002, as scope diminishes for further sharp reductions in food prices. There is also a risk of
policy  loosening,  given  the  government's  revenue-collection  difficulties.  Combined  with
increases  in  electricity  tariffs,  this  is  likely  to  boost  inflationary  pressures  in  the  next  few
months above what might be expected from seasonal factors. Nevertheless, following recent
progress on debt restructuring and the resumption of multilateral financing, the central bank is
expected to maintain a broadly appropriate monetary stance and a sharp increase in inflation
remains unlikely.

4.5.

Tajikistan

Tajikistan’s real GDP growth accelerated to 10,2% in 2001, and strong economic growth has
continued  in  2002  with  an  annual  GDP  increase  of  10,3%  reported  for  the  first  half  of  the
year.  Output  in  agriculture  picked  up  17,2%  and  industrial  production  increased  by  7.8%
year-on-year driven by the aluminium sector.

The Government targets a deficit of one percent of GDP in the general government in 2002
(0,1% deficit  in 2001). Total  expenditures have  been  driven  up  owing  to  a  40%-increase  in
public sector wages. Also defence related expenditures are projected to increase. Nonetheless,
preliminary  figures  for  the  first  half  of  year  indicate  that  the  government  finances  are  in
surplus so far.

Inflation moderated rapidly over the year 2001 to 12,5% at year-end. In the January-July 2002
period,  consumer  price  inflation  was  6,6%.  The  National  Bank  of  Tajikistan  pursues  a
restrictive monetary policy consistent with the goal of reducing the inflation rate to 10% for
the year 2002, and it is therefore committed to refraining from issuing directed credits which
have been a source of excess liquidity in the past.

Because  of  a  decline  in  world  market  prices  for  both  cotton  and  aluminium,  the  current
account  position  deteriorated  in  2001  to  a  deficit  of  7,2%  of  GDP  but  it  is  projected  to
improve  in  2002  to  about  6%  of  GDP.  Tajikistan’s  external  debt  amounts  to  about  US$  1
billion (close to 100% of GDP). Annual debt service payments remain high at about 50% of
government  revenues,  and  Tajikistan  pursues  discussions  on  debt  rescheduling  with  its
bilateral creditors, most importantly with Russia and Kazakhstan. The National Bank’s gross
international reserves corresponded to 2,1 months of imports at the end of 2001. In 2002, the
reserves are projected to  decline to about 1,5  months  of imports due to  early  repayments to
the IMF.

4.6.

Ukraine

Ukraine’s rate of economic growth decelerated from 9,1% in 2001 to 4,3% in the first half of
2002 year-on-year. A weakening of export performance, partly reflecting the real appreciation
suffered  by  the  hryvnya  in  2000-01  and  weaker  demand  in  Russia,  and  a  smaller  harvest
following last  year’s record one are among the  factors explaining this deceleration. Growth,

17

which is now largely driven by domestic demand, is expected to be around 4,5% this year but
should pick up again moderately in 2003-04 supported by the strengthening of global demand.
There  are  however  significant  downward  risks  to  this  forecast  stemming  from  the  need  to
tighten  fiscal  policy,  insufficient  progress  with  structural  reform  and  lack  of  political
consensus.

Inflation has continued to surprise in the downside. In the first 8 months of the year, the CPI
fell by 3,5 percent. This partly reflects the delayed effects of last year’s exceptional harvest on
the food component of the CPI, which has a large weight in the index, and the stability of the
currency. But it is also explained by the postponement of energy price adjustments, which are
still  controlled  by  the  government.  The  need  to  increase  energy  prices  and  the  recent
acceleration of wage growth (wages are increasing at an annual rate of about 20%) are likely
to push inflation back to a 5-7 percent range in 2003-04.

Despite a significant revenue shortfall, the central government managed to close the first half
of 2002 with  a small  surplus, partly  reflecting the implementation of  expenditure  cuts.  This
seems  consistent  with  the  target  of  1,8%  of  GDP  for  the  consolidated  government  deficit
foreseen  in  the  2002  budget.  This  result,  however,  has  been  possible  in  part  because  the
government  has  failed  to  clear  the  substantial  arrears  accumulated  on  VAT  refunds.
Moreover, a marked shortfall in privatisation revenues, which partly reflects the government’s
decision  to  delay  until  next  year  the  privatisation  of  the  regional  electricity  distribution
companies  and  the  state-owned  telecommunications  monopoly,  could  complicate  the
government financing outlook in the remainder of the year. The lack of progress in resolving
the  VAT  refunds  issue  and  the  insufficient  implementation  of  other  fiscal  and  structural
measures led the IMF to announce in early August the cancellation of any new disbursements
under the EFF.

With domestic demand keeping import growth strong and export growth decelerating due to
subdued  foreign  demand  and  the  appreciation  of  the  real  exchange  rate,  the  surplus  in  the
current  account  is  projected  to  narrow  to  about  1,5%  of  GDP  in  2002.  Gross  international
reserves  have  continued  to  increase,  reaching  US$  3,82  billion,  or  about  two  months  of
imports, at end-July 2002. Ukraine,  which  lost access to the international capital markets in
the wake of the Russian crisis of 1998 and defaulted on its Paris Club debt in early 2000, has
made  substantial  progress  in  recent  years  towards  the  normalisation  of  relations  with  its
creditors. This has included the rescheduling of part of its private bond debt in April 2000 and
of  its  Paris  Club  debt  in  July  2001.  The  government  intends  to  return  to  the  international
capital  markets  in  the  coming  months  with  the  issuance  of  a  bond.  Ukraine’s  external  debt
stock  stood  at  the  equivalent  of  about  30%  of  GDP  at  end-2001.  There  is  significant
uncertainty as to whether the EFF,  which  expired in September 2002,  will be replaced by a
new IMF arrangement.

5.

OTHER NON-MEMBER COUNTRIES

5.1.

Algeria

A  relatively  stable  macroeconomic  environment  continues  to  prevail  in  Algeria,  while  no
major structural changes can be observed. The economy is expected to grow by around 3,3%
in 2002 (from 2,1% in 2001), with stimulus coming from both the fiscal and monetary policy.
The  2002  consolidated  fiscal  deficit  is  expected  to  account  for  3%  of  GDP  and  might,
together with a credit expansion, lead to an inflation rate of around 6% in 2002. Despite  its
rich resources, Algeria’s economy remains plagued by a number of structural problems such
as  its  dependence  on  hydrocarbon  exports  sector  (>95%  of  exports,  30%  of  GDP)  and  the

18

weight  of  its  agricultural  sector.  Furthermore,  its  domestic  security  problem  strongly
undermines investment activities.

The latest period of high oil prices is still impacting positively on Algeria’s external accounts.
Algeria is expected to maintain a current account surplus in 2002 (2,3% of GDP), although at
a lower level than in 2000-2001, as receipts from oil and gas exports have started to decline.
The oil windfall of the last two years reduced Algeria’s foreign debt level to around US$ 21
bn (39% of GDP) in June 2002, while the debt-servicing ratio remains at a moderate level of
around 27%  of  total  current  receipts. Consequently,  foreign  exchange reserves  rose to more
than  US$  19  bn  in  June  2002,  covering  more  than  a  year  of  imports,  thus  comforting  the
strong external position of the country.

19

List of abbreviations

Deutsche Mark

European Community

Extended Fund Facility

European Investment Bank

European Union

Euro

Foreign Direct Investment

Gross Domestic Product

International Monetary Fund

Stand-By Arrangement

Dollar of the United States of America

DM

EC

EFF

EIB

EU

EUR

FDI

GDP

IMF

SBA

US$

20