Report from the Commission to the budgetary authority on guarantees covered by the general budget - situation at 31 December 2002 [SEC(2003)767]
Date: 2003-07-04
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, 4.7.2003
COM(2003) 396 final

REPORT FROM THE COMMISSION

to the budgetary authority on guarantees covered by the general
budget - situation at 31 December 2002

[SEC(2003)767]

TABLE OF CONTENTS

Part One: Events since the Report at 30 June 2002, the risk situation and activation of Budget
Guarantees.................................................................................................................... 4

1.

1.1.

1.2.

2.

2.1.

2.2.

2.3.

2.4.

3.

3.1.

3.2

3.3

4.

4.1.

4.2.

5.

6.

7.

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

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

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

Events since the report at 30 June 2002....................................................................... 4

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

Republic of Serbia and Montenegro ............................................................................ 4

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

Moldova ....................................................................................................................... 5

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

Amount outstanding at 31 December 2002.................................................................. 6

Maximum annual risk borne by the Community budget: operations disbursed at 31
December 2002 ............................................................................................................ 6

Maximum theoretical annual risk borne by the Community budget............................ 6

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 31 December 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.

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

CANDIDATE COUNTRIES ..................................................................................... 10

2.1.

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

2.2

2.3

3.

3.1

Romania ..................................................................................................................... 11

Turkey ........................................................................................................................ 12

Western Balkans......................................................................................................... 13

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

2

3.2

3.3

4.

4.1

4.2

4.3

4.4

4.5

4.6

5.

5.1

5.2

5.3

5.4

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

Republic of Serbia and Montenegro .......................................................................... 14

Newly Independent States.......................................................................................... 15

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

Belarus ....................................................................................................................... 16

Georgia....................................................................................................................... 17

Moldova ..................................................................................................................... 17

Tajikistan.................................................................................................................... 18

Ukraine....................................................................................................................... 19

Other Non-member Countries.................................................................................... 19

Algeria........................................................................................................................ 19

Argentina.................................................................................................................... 20

Brazil .......................................................................................................................... 21

Jordan ......................................................................................................................... 21

List of abbreviations................................................................................................................. 23

3

Part One:
Events since the Report at 30 June 2002, 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 30 JUNE 2002

2.1. 

Ukraine

On 12 July 2002, the Council decided to provide 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. 

Republic of Serbia and Montenegro

On  5  December  2002,  the  Council  decided  to  provide  macro-financial  assistance  to  the
Republic of Serbia and Montenegro. 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 an annex with a set of detailed tables and
explicatory notes to this report, [SEC(2003)767].
Not active since 1995

4

                                                
2.3. 

Bosnia and Herzegovina

On  5  December  2002,  the  Council  decided  to  provide  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.

2.4.  Moldova

On  19  December  2002,  the  Council  decided  to  provide  macro-financial  assistance  for  an
amount  of  €  15  million  to  Moldova  in  form  of  non-repayable  grant.  At  the  same  time  the
Council decision of 10 July 2000 for macro-financial assistance to Moldova in form of a loan
for an amount of € 15 Mio was cancelled.

3. 

RISK SITUATION

There are two 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 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 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  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.

3

4

An interest rate of 5,49% 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 31. December 2002.

5

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

3.1. 

Amount outstanding at 31 December 2002

The total risk at 31 December 2002 came to € 15.216 million, as against € 15.118 million at
30 June 2002. 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 31 December 2002*

Amount outstanding at 30 June 2002

Loan repayments

Euratom
NIC
Financial assistance
EIB

Loans disbursed

Euratom
NIC
Financial assistance
EIB

Exchange rate differences between EURO and other currencies

Amount outstanding at 31 December 2002

* all guaranteed loans (Member States, non Member States) confounded

€  million

15.118

0
0
-242
-649

25
0
0
1.194

-230

15.216

The capital outstanding in respect of operations in the Member States was € 39 million at 31
December 2002, compared with € 45 million at 30 June 2002.

The  capital  outstanding  from  non-member  countries  at  31  December  2002  was  €  15.177
million, compared with € 15.073 million at 30 June 2002.

3.2

– 

– 

– 

Maximum  annual  risk  borne  by  the  Community  budget:  operations  disbursed
at 31 December 2002

For 2003 the total risk amounts to € 1.818 million.

The risk in respect of the Member States comes to € 15 million.

The risk in respect of non-member countries comes to € 1.803 million.

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

3.3

Maximum theoretical annual risk borne by the Community budget

For 2003 the maximum theoretical risk amounts to € 1.930 million. It will increase from 2004
onwards and reach €3.637 million in 2011.

6

– 

– 

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

For the non-member countries it amounts to €1.915 million for 2003. The  risk  will
increase from 2004 onwards to reach € 3.637 million by 2011.

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 reference period 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  limit  the  Community's  lending  and
guarantee  capacity  to  non-member  countries,  since  the  appropriations  available  for
provisioning  the  Fund  are  limited  by  the  amount  entered  for  the  guarantee  reserve  in  the
Financial Perspective5.

At any given time, the 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.

5

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

7

                                                
Table  A4  shows  an  estimate  of  the  Community's  lending  capacity  in  respect  of  non-EU
countries over the period 2003-2006 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  or  the  Commission  and  decisions
proposed  and  in  preparation  (see  Annex  Table  A4),  €194,58  million  is  expected  to  be  used
from the guarantee reserve in 2003, leaving €  22,42 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 2003, the  annual
capacity available for loans is as follows:

– 

– 

€ 249,11 million for loans with a 100% guarantee under the Community budget, or

€  383,25  million  for  loans  with  a  65%  guarantee  (in  accordance  with  Council
Decision 2000/24/EC of 22 December 1999).

At  31  December  2002,  outstanding  lending  and  loan  guarantee  operations  for  non-member
countries totalled € 15.320 million.

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

€  million

        Situation at 31 December 2002

1. Capital outstanding, borrowing and lending
2. Capital outstanding, EIB

3. Capital outstanding, payments defaults

4. Default Interest

Unpaid interest due*

TOTAL

1.441
13.736

0

0

143

15.320

* 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 10,71%, 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 2002 was € 263,33 million.

6. 

SITUATION OF THE GUARANTEE FUND AT 31 DECEMBER 2002

At  31  December  2002,  the  Guarantee  Fund  amounted  to  €  1.645,55  million.  The  following
movements were recorded in the second half of 2002:

– 

– 

no call to the Fund as a result of defaults;

no late repayment (no arrears);

8

 
 
 
 
– 

– 

– 

net revenue of € 44,6 million on inve stments from the Fund’s assets;

transfer of € 166,72 million 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 2002.

7. 

RELATIVE SOLIDITY

The ratio between the amount in the Fund at 31 December 2002 (€ 1.645,55 million) and the
maximum annual risk for loans to non-member countries (defined as the total amount falling
due) shown for 2003 in Annex Table A3 (€ 1.909 million) is 86 %.

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.

As in the previous reports, the country risk evaluation presented in Part Two comprises 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. Moreover, other third countries
each  representing  more  than  2%  of  the  total  outstanding  debt  to  the  EC  (notably  through
guarantees  of  EIB  project  related  lending)  and  either  categorised  as  “severely  indebted”
according to criteria set by the World Bank or facing notorious imbalances in their external or
debt situation are also included in the risk evaluation.

To complement this, textual analysis is provided for all the countries studied in order to take
into account new information influencing the risk evaluation.

Altogether, the country analysis now covers 40 % of the total outstanding debt owned by the
EC or guaranteed through its budget, thus providing a meaningful assessment of the risk

2. 

CANDIDATE COUNTRIES

A  trend  towards  economic  stabilisation  should  be  noted  but  uncertainties  remain  high  in
Turkey.

2.1. 

Bulgaria

In  spite  of  the  global  economic  slowdown,  Bulgaria  continues  to  benefit  from  high  growth
and stability. Real GDP growth was 4,4% in the first three quarters of 2002 and will not be
much lower for the year as a whole, thanks to sustained domestic demand arising from private
consumption  and  strong  investment  as  well  as  a  stronger  external  position  than  expected.
Inflation is on a downward path (5,8% on annual average, 3,8% December-on-December).

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  real  exchange  rate  appreciation  was  broadly  matched  by
differences in productivity growth. The current account deficit will be around 4% of GDP in
2002, considerably lower than in previous years where it stood between 5% and 6% of GDP,
not  least  due  to  higher  revenues  from  tourism,  lower  interest  payments  and  higher  current
transfers. However, net inflows of foreign direct investment have been lower than expected in
2002 and might not  fully  cover  the  current  account deficit.  Still,  the  foreign  reserves  of  the
central bank have further increased in 2002.

10

Fiscal  discipline  has  been  maintained  over  the  last  years  and  contributed  to  internal  and
external stabilisation.  Similar  to  previous  years,  the  general  government  sector  had  a  (cash)
deficit of 0,7% of GDP in 2002. Public debt is falling rapidly, from well above 100% of GDP
in 1997 to below 60% of GDP at the end of 2002. Total external debt has decreased to below
70% of GDP. The government is conducting an active debt management with the objective of
reducing risks by gradually shifting from a denomination in USD towards a denomination in
EUR, from short-term to long-term maturity, from floating into fixed interest rate bonds and
from foreign to domestic financing. In September 2002, a second Brady bond swap has been
carried out with a net present value saving of USD 30 million.

2.2

Romania

During  the  second  half  of  2002,  macroeconomic  trends  remained  positive  with  sustained
growth accompanied by sharper disinflation and renewed external retrenchment.

Romania’s three-year old recovery weathered the economic slow down in the EU as  growth
remained  robust  and  its  composition  improved.  In  the  first  nine  months  of  2002,  GDP
increased by 4,5% as net exports contributed positively to growth for the first time during the
current recovery. Despite the slowdown in the EU markets that account for some 67% of all
Romanian  goods  export,  in  the  first  nine  months  of  2002,  exports  rose  by  15,6%  over  the
corresponding period  in  2001  and  imports  by  11,9%.  Rising  domestic  demand  continued  to
underpin  the  recovery  but  the  tightening  of  the  macroeconomic  stance  implemented  in  the
latter  half  of  2001  successfully  slowed  down  booming  household  consumption  growth.
Investment expenditures, on the other hand, continued to expand rapidly at an annual rate of
7,8% over the first three quarters of 2002.

Positive  economic  growth  has  been  accompanied  by  greater  than  expected  domestic  and
external stabilisation.  In 2002,  the  average rate of inflation  dropped 12 percentage points to
22,5% while the current account deficit dropped sharply dispelling the concerns raised by its
growth  in  2001.  As  a  result  of  an  early  rebound  in  goods  exports,  lower  prices  for  energy
imports and increasing private transfers from abroad, in fact, the cumulative current account
deficit in US Dollar terms over the first 11 months of the year fell by nearly a third compared
to the same period in 2001. While of late goods imports have been rising faster, exports have
continued  to  expand  at  an  even  faster  rate.  Still,  although  the  positive  underlying  influence
exerted  by  rising  private  and  public  transfers  from  abroad  should  extend  into  the  medium
term, the trade deficit is likely to remain significant as rising per capita income and increasing
investment needs will continue to suck in imports at a sustained pace.

Reflecting  a  positive  macroeconomic  performance,  external  financing  conditions  have  been
improving  allowing  Romania  to  easily  meet  its  external  financing  needs,  inter  alia  by
launching  its  first  ten-year  euro  bond  in  April  2002.  With  the  debt-to-GDP  ratio  remaining
low  at  an  estimated  33,7%  of  GDP  at  end-November,  in  2002,  average  debt  maturity
lengthened, sovereign risk ratings were repeatedly upgraded and spreads on sovereign bonds
dropped  to  some  270  basis  points.  Standing  at  US$  6,1  billion  at  end-December,  official
reserves increased by over 50% over the year.

While  the  on-going  positive  macroeconomic  trends  are  likely  to  continue,  structural
weaknesses still cast a shadow over medium term prospects. The adoption of a more coherent
mix  in  the  context  of  the  IMF  stand-by  arrangement  agreed  in  October  2001  has  proved
instrumental in stabilising the external accounts and supporting disinflation. However, despite
some  progress  towards  harder  budget  constraints,  excessive  wage  growth  in  several  public
enterprises and persistent arrears to the budget and public utilities are sources of concern. The

11

privatisation process has also continued to stagger along, reflecting the poor attractiveness of
various enterprises but also persistently non-transparent procedures and repeated demands for
employment and investment commitments by prospective buyers.

2.3

Turkey

In 2002, the Turkish economy has been recovering from one of the sharpest recessions in the
Republic's  history.  After  a  drastic  output  decline  by  7,4%  in  2001,  real  GDP  rose  by  6,5%
during  the  first  3  quarters  of  2002.  For  the  whole  period,  an  even  slightly  higher  output
growth appears possible. However, to a large extent this strong recovery reflects a base year
effect,  where  the  economy  reaches  pre-crisis  output  levels.  National  account  data  identifies
restocking  as  main  source  of  growth,  while  domestic  demand  components,  such  as
consumption  and  investment,  play  only  a  minor  role.  Inflationary  pressures  have  declined
significantly during 2002, from a year-on-year CPI increase of 73,2% in January to 29,7% in
December. Annual average consumer price inflation declined from 54,4% in 2001 to 45,0% in
2002. Important factors for this decline have been public sector wage increases, which were
linked to an end-year inflation target of 35% and weak domestic demand. The 12-month CPI
inflation target for end-2003 is 20%.

Due to the economic  crisis, unemployment has increased from 8,5% in 2001 to 9,9% in the
third quarter of 2002.

At present, the main risk is related to the sustainability of public finances. Due to the costs of
bailing out the banking sector after the financial crisis in 2000/2001, the public sectors debt to
GDP  ratio  has  increased  from  56,4%  in  2000  to  101,4%  in  2001.  The  general  government
deficit  increased  from  6%  of  GDP  in  2000  to  about  28,4%  in  2001.  The  2002  deficit
amounted  to  about  15%  of  GDP.  The  overwhelming  part  of  the  additional  debt  has  been
financed  on  the  domestic  market.  About  two  thirds  of  this  debt  are  linked  to  short-term
interest rates or the exchange rate, which leads to a very high sensitivity of the debt service
towards fluctuations in interest rates and exchange rates. The Turkish government intends to
achieve substantial primary surpluses, amounting to 6½% of GDP in 2003 and 2004 in order
to reduce the public sector indebtedness.

During the last 5 years, the current account balance has been fluctuating between –4,9% and
+2,3% of GDP. In 2002, the current account has been close to balance.  In commodity trade,
Turkey  usually  registers  a  considerable  trade  deficit  amounting  to  about  3-7%  of  GDP.
However, traditional surpluses in the tourist account and workers' remittances largely finance
this deficit. Foreign exchange reserves usually are at comfortable levels and cover short-term
external liabilities. At the end of 2002, the Turkish central bank raised the reserves to USD 28
bn.

The  possibility  of  a  conflict  in  neighbouring  Iraq  significantly  increases  the  uncertainties
related  to  Turkey.  A  long  lasting  increase  in  oil  prices  and  interest  rates  could  severely
impede the ongoing recovery of the Turkish economy, by increasing the costs of debt service
and  raising  inflationary  pressures.  Continued  instability  in  this  region  could  also  severely
affect  Turkey's  tourism  industry,  which  usually  accounts  for  about  10-15%  of  Turkey's
foreign exchange earnings.

12

3.

WESTERN BALKANS

in 

the  most 

The  sustainability  of  public  and  external  debt  remains  an  important  issue  in  the  region,
particularly 
indebted  countries  (Bosnia  and  Herzegovina,  Serbia  and
Montenegro).  One  of  the  core  objectives  of  IMF  programmes  is  to  ensure  a  sustainable
situation of the budget and of the balance of payments. In the second half of 2002, the  IMF
approved new upper credit tranche arrangements in Bosnia and Herzegovina as well as Serbia
and  Montenegro.  A  new  stand-by  arrangement  with  the  Former  Yugoslav  Republic  of
Macedonia is  also to be  agreed  by the  Fund's  management in February 2003 and  scheduled
for  Board  approval.  These  recent  favourable  developments  alleviate  the  economic  tensions
and uncertainties faced by those countries.

3.1

Bosnia and Herzegovina (BiH)

Over  the  reporting  period  BiH  maintained  macro-economic  stability,  low  inflation,  and
continued efforts towards improved fiscal performance. However, with declining official aid
flows, a sustained domestically generated economic growth is not yet apparent. Real output in
BiH  is  estimated  to  have  increased  by  around  4%  in  2002,  similar  to  the  level  in  2001.
Continued strict adherence to the rules of the currency board provides a solid anchor for the
downward trend of average inflation, estimated below 1% in 2002. Public sector indebtedness
is very high, at 61% of GDP in 2002, and  even potentially reaching 87% of GDP including
frozen foreign currency deposits. War damage liabilities add a potential risk on indebtedness.
Fiscal performance has improved, although the size of the administration remains large, with
public  spending  at  around  56%  of  GDP.  Given  the  better  revenue  performance  recorded  in
2002, the estimated consolidated budget deficit has been revised downwards at 9,4% of GDP
(4% after grants).

The current account deficit remains very high and (excluding official transfers) will amount in
2002 to 21% of GDP, a slight decrease from the recorded 23% of 2001. Net FDI is expected
to  have  increased  to  EUR  260  million  in  2002,  compared  with  EUR145  million  in  2001.
Gross official reserves, which increased to over  six months of import cover in 2001, due to
the  increasing  shift  towards  the  use  of  the  national  currency  in  the  context  of  the  Euro
introduction, have stabilised in 2002 and cover around 5 months of imports. Although BiH is
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.

External debt reached 52% of GDP at the end of 2002 and is expected to remain at this level
over  the  medium-term.  The  ratio  of  debt  service  to  exports  has  started  to  pick  up  (8,3%  in
2002), and it will increase even further in 2003 (10%) and beyond, due to obligations to the
IMF  and  the  World  Bank.  The  Central  State,  which  ensures  external  debt  servicing
obligations, at present 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.
EBRD  transition  indicators,  which  reflect  progress  in  reforms  in  Central  and  Eastern
European countries, place BiH towards the low end of the scale, even though some progress
has been recorded.

BiH has successfully negotiated a new 15-month IMF Stand-By Arrangement (SBA) (August
2002–November 2003) of about EUR 100 million. The first tranche (around EUR 29 million)
was  disbursed  soon  after  approval,  and  the  second  tranche  (around  EUR  18  million)  on  20
December 2002.

13

3.2

Former Yugoslav Republic of Macedonia (fYRoM)

The fYRoM economic performance in 2002 has been unimpressive. The political uncertainty
surrounding the  general elections in September and the lack of an IMF  arrangement did not
favour  the  economic  and  business  climate.  In  2002,  GDP  grew  by  0,3%  against  a  more
positive initial forecast  of  3-4%. Consumer prices  increased  by  2,4%  on  average.  The  2002
general  government  deficit  reached  almost  6%  of  GDP,  a  slight  decline  compared  to  the
deficit of 6,2% in 2001.

In February 2003, the national authorities reached an agreement on a long overdue stand-by
arrangement  with  the  IMF.  The  agreed  macroeconomic  framework  for  2003  foresees  real
GDP growth of 3% and an inflation rate of 3%, and a target for the general government deficit
of 2% of GDP (1,6% at the central level). Over the medium-term, the implementation of the
new programme agreed with the IMF should deliver macroeconomic stability to the country.

In  2002,  the  trade  deficit  increased  from  USD  520  million  in  2001  to  around  USD  750
million,  which  is  equivalent  to  around  23%  of  GDP.  The  year-on-year  increase  in  imports
(+10%)  was  not  matched  by  a  similar  trend  in  exports,  which  declined  by  about  4%  with
respect to 2001. However, thanks to a strong resumption in private and official transfers, the
2002 current account deficit is significantly lower than the trade deficit and estimated at 8,7%
of GDP.

Pressures on the foreign exchange market led to a decline of official reserves towards the end
of  2002,  which  however  remained  above  USD  700  million,  equivalent  to  more  than  four
months of imports. The external debt as ratio to GDP is estimated to have increased from 38%
in 2001 to 39% at the end of 2002, a level which is considered as sustainable.

3.3

Republic of Serbia and Montenegro

The  outlook  for  the  debt  servicing  capacity  of  Serbia  and  Montenegro  (new  name  of  the
Federal Republic of Yugoslavia after the new Constitution became effective in early February
2003)  remains  broadly  unchanged.  In  the  second  half  of  2002  economic  policies  in  the
country  continued  to  be  geared  towards  sustaining  macro-economic  stability.  Structural
reforms continued on the basis of new legal and regulatory frameworks established in 2001,
and  in  particular  privatisation  gained  momentum,  also  reflected  by  stronger  than  expected
inflows of Foreign Direct Investment (some USD 475 million for the whole year 2002). The
cleaning  up  of  the  banking  system  has  made  progress,  though  the  financial  sector  remains
rather weak and exhibits a relatively low level of financial inter-mediation.

Confidence  in  the  domestic  currency  was  further  strengthened,  deposits  in  the  domestic
banking  system  increased  substantially,  and  the  value  of  the  Dinar  expressed  in  EUR
remained broadly unchanged during the year. A substantial real appreciation was mainly due
to  price  increases  of  non-tradables.  Gross  reserves  of  the  National  Bank  of  Serbia  (former
National Bank of Yugoslavia) almost doubled from around USD 1.200 million at end-2001 to
USD  2.280  million  at  end-2002,  to  the  equivalent  of  3,5  months  of  imports.  The  large
increase was due to a continued inflow of remittances from abroad and official financing by
International Financial Institutions.

Even  if  Serbia  and  Montenegro  continues  with  macro-economic  stabilisation  and  sustains  a
good  track  record  in  structural  reforms  as  envisaged  under  the  current  IMF  Extended
Arrangement  (2002-  2005),  the  external  sustainability  of  the  economy  remains  a  major
challenge  for  the  authorities.  Important  financing  requirements,  mainly  resulting  from  debt

14

service obligations and the need to further strengthen foreign exchange reserves, will continue
to put a heavy strain on the balance of payments. The country’s capacity to absorb new debt is
limited and a cautious approach to new sovereign lending is warranted. Substantial debt relief
(66%)  is  being  provided  by  Paris  Club  creditors  while  negotiations  with  the  London  Club
have  not  yet  been  concluded.  The  external  debt  (which  stood  at  USD  11,5  billion  in  end-
September 2002) will remain relatively high in 2003-2004 at 67% of GDP despite a planned
reduction of the current account deficit from 11.7% in 2002 to 10,7% of GDP in 2004. Debt
service  obligations  will  rise  considerably  from  around  USD  343  million  in  2002  (10,9%  of
exports  of  goods  and  services)  to  USD  467  million  (12,9%)  in  2003  and  USD  719  million
(17,4%)  in  2004,  reflecting  the  resumption  of  debt  servicing  after  the  Paris  Club  debt
restructuring agreement of November 2001.

4.

NEWLY INDEPENDENT STATES

Thanks  to  solid  growth  rates,  the  economic  climate  improves  in  general.  However,  the
insufficient progress in structural reform in several countries in the region impedes any lasting
improvement in the debt situation.

4.1

Armenia

The Armenian economy experienced strong growth also in the second half of the  year 2002
which  brought  the  real  GDP  growth  rate  to  a  record  high  level,  estimated  at  12,9%  for  the
year  as  a  whole  (9,6%  in  2001).  Economic  growth  continued  to  be  driven  by  the  industrial
sector  (+14,2%),  most  importantly  the  diamonds  processing  sector  but  also  other  industrial
sectors  such  as  metallurgy  and  food  processing  did  well  in  2002.  Consumer  price  inflation
stayed  low  at  2%  at  end-2002  (3%  at  end-2001).  Supported  by  remittances  from  abroad
(estimated at about 4% of GDP) and a low inflation rate, the dram was fairly stable in nominal
terms,  in  2002.  In  real  effective  terms,  the  dram  depreciated  in  2001-2002  supporting
significantly the competitiveness of the economy.

The  Government  managed  to  narrow  the  fiscal  deficit  last  year.  The  central  government
deficit  for  2002  is  estimated  at  about  3%  of  GDP  (further  down  from  a  deficit  of  3,8%  in
2001). VAT is the main factor behind the improved fiscal performance, reflecting both strong
growths in domestic demand and better tax administration. VAT revenues increased by nearly
20% and accounted for 40% of fiscal revenues.

The current account deficit was narrowed further during 2002 to about 8,5% of GDP (9,5% in
2001).  Exports  were  48,5%  higher  than  in  2001  and  imports  increased  by  12,9%,  which
narrowed  the  trade  deficit  to  20,9%  of  GDP  (25,2%  in  2001).  Precious  metals  and  stones
accounted for nearly half of total exports. Foreign direct investment picked up in 2002 with a
more  diversified  sectoral  distribution  than  before  and  a  stronger  focus  towards  SMEs.  The
WTO General Council approved Armenia’s accession to the WTO in December 2002.

Armenia’s  external  public  and  publicly  guaranteed  debt  stock  was  USD  1,02  billion  (about
42% of GDP) at end-December 2002. Nearly 80% of the debt is contracted on concessional
terms.  The  NPV  of  the  external  debt  stock  is  estimated  to  have  decreased  from  129%  of
exports in 2001 to about 120% in 2002. In November 2002, Armenia signed a debt-for-equity
swap with Russia for the outstanding debt of about USD 100 million. The swap includes the
transfer  of  five  enterprises  (including  a  thermal  power  plant)  to  Russia  in  settlement  of  the
outstanding debt. It is projected that as a result of the swap the NPV of the external debt will
be reduced to 96% of exports in 2003 when the swap takes place. Armenia is also negotiating

15

with Turkmenistan to barter commodities for its outstanding debts. The Central Bank’s gross
international reserves increased in the second half of the year and were at a comfortable level
at the end of the year, equivalent to 4 months of imports.

4.2

Belarus

The Belarusian economy continues to grow at around 4-5% year-on-year. 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 in 2002, and combined with modest import growth, this brought a rise in the
trade deficit.  The  2002  budget  deficit  equalled  1,2%  of  GDP.  Inflation,  however,  has  much
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  central  bank's  crawling-peg  arrangement.  However,  the  National  Bank  of
Belarus  (NBB)  is  far  from  independent  and  will  prioritise  the  government's  requests  for
additional money over price stability.

The  government  is  likely  to  attempt  conducting  a  monetary  policy  that  is  sufficiently
expansionary  to  meet  the  demands  of  the  inefficient  industrial  and  agricultural  sectors,  but
without  threatening  political  stability  by  allowing  inflation  to  soar.  Inflation  would  then  be
eased  by  pressuring  commercial  banks  into  buying  government  bonds  and  by  attempting  to
attract money into term savings accounts. However, these policies will have only a moderate
and temporary effect.

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 2002, Russia has lent Belarus Rb4,5bn (USD
142m) to help stabilise the Belarusian currency, in three equal Rb1,5bn 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  February  2003,  the  total  foreign  debt  stock
stood at USD  813  million  or a  mere  6%  of  GDP,  according to  official  sources.  In  addition,
Belarus  still  owes  USD  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 authorities continue to avoid structural reforms, despite the privatisation plans that were
outlined in a new programme. The economic policies espoused by the government since the
mid-1990s have sought to preserve much of the heavy industry inherited from the Soviet era
and  to  prevent  the  emergence  of  a  large  private  sector  outside  of  state  control.  As  a
consequence  and  in  contrast  with  the  more  advanced  former  communist  countries  in  the
region, therefore, small and medium-sized firms still only account for a tiny portion of GDP
and are located primarily in retail trade and catering. As a result of these policies, almost 95%
of the country's output still comes from large state-owned or state-controlled enterprises. The
manufacturing  sector,  in  particular,  remains  under  direct  government  control,  and  the
government  routinely  pressures  commercial  banks  into  providing  loans  to  industrial
enterprises at below-market interest rates.

There are no prospects for an IMF- lending programme in 2003.

16

4.3

Georgia

Preliminary data for the year 2002 show an increase in real GDP growth from 4,5% in 2001 to
5,4%.  Agriculture,  transport  and  construction  drove  economic  growth.  Consumer  price
inflation was 5,6% at end-2002 (5% at end-2001). The lari remained fairly stable in 2002 in
nominal terms, supported by remittances from abroad.

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 ¼ % in 2001 to 14 ¾ %, reducing thereby the general government deficit
further from 2% of GDP in 2001 to about 1,5%.

Georgia’s  trade  balance  deteriorated  during  2002.  Exports  increased  only  by  1,5%  while
imports  went  up  6,1%  (imports  consist  mainly  of  oil  and  oil  products  and  natural  gas).  In
December  2001,  the  Parliament  introduced  a  ban  on  the  export  of  non-ferrous  scrap  metal
(main export item of the country) as an attempt to prevent theft. The export ban was lifted in
June  2002  under  pressure  from  IFIs.  Export  revenues  failed  to  recover  sufficiently  in  the
second  half  of  the  year,  however.  Georgia’s  current  account  deficit  is  estimated  to  have
remained unchanged from 6 ½ % registered in 2001 (excluding transfers the deficit would be
10  ½  %).  An  agreement  was  reached  in  December  2002  on  the  construction  of  the  Baku-
Tbilisi-Ceyhan  oil  pipeline  and  a  parallel  gas  pipeline  from  Azerbaijan  to  Turkey  through
Georgia. Therefore, foreign direct investment will increase from 2003 to about 12% of GDP
while in 2002 FDI is estimated to have stagnated at the level of 2001, at about 3% of GDP.

Georgia’s public and publicly guaranteed external debt stock is about USD 1,8 billion (about
54%  of  GDP),  and  its  net  present  value  currently  amounts  to  over  300%  of  central
government  revenues.  Because  of  the  projected  increase  in  the  external  debt  service  from
2003  onwards,  Georgia  is  expected  to  seek  an  additional  rescheduling  of  its  bilateral  debts.
The National Bank’s gross international reserves increased during 2002, amounting currently
to the equivalent of 1,7 month of imports.

4.4

Moldova

A favourable regional environment, driven by solid growth in Ukraine and Russia, has helped
to  bolster  the  Moldavian  economy.  Real  GDP  expanded  by  5,9%  in  2002,  following  6,1%
growth in 2001. Strong industrial production (up 11% in the year to 2002) continues to drive
growth, spurred by export sales to Russia and rising domestic demand. In 2002, the exchange
rate  stabilised  at  13-13,5  MDL/USD  and  inflation  fell  further  to  just  4,4%  year-on-year  in
December 2002.

The  economy  is  highly  dependent  on  Russia,  while  the  large  agricultural  sector  means  that
climate conditions also have an important bearing on growth. Export products and markets are
still relatively underdeveloped. Investment is limited as domestic confidence is low and FDI
inflows have been disappointing. Structural reform, leading to a more transparent and a more
business friendly environment would help to revive investment. The institutional framework
and  the  overall  investment  climate  is  still  relatively  poor,  with  high  levels  of  bureaucracy,
corruption and harassment, resulting in high costs of doing business.

Although structural reforms have been accelerated in recent years, transformation to a market
economy is far  from  complete.  While  land reform is almost  completed, the  government  has
only  recently  started  with  the  privatisation  of  its  key  economic  sectors.  Traditionally,

17

drawbacks in the legal and administrative framework which directly affects the privatisation
process  and  political  interference  have  hindered  the  divestment  of  the  large  enterprises,  in
particular in the telecom, energy and wine sectors.

In  the  absence  of  serious  interest  in  Moldova's  national  telecom  operator,  Moldtelecom,
privatisation receipts have been again disappointing in 2002. Fiscal policy has remained tight,
but deteriorated, as the government has struggled with the heavy burden of servicing its debts,
presently  amounting to over  110%  of  GDP.  Debt servicing obligations  absorb  about half of
government  revenues,  severely  constraining  the  resources  available.  Dependence  on  capital
flows from multilateral and bilateral creditors remains therefore very high. By April 2003, the
IMF  had  not  been  able  to  complete  the  second  review  under  a  three-year  USD  147  million
PRGF.  Going  off  track  with  the  Fund  could  jeopardise  around  EUR  50  million  in  WB  and
IMF  money  and  EUR  15  million  in  macro-financial  assistance  from  the  European
Community, opening up a balance-of-payments and budgetary funding gap. It would also put
a deal with the Paris club (which covers about USD 200 million in bilateral debt) at risk, and
would raise doubts over structural reform and the medium-term outlook of the economy.

A  combination  of  these  fiscal  and  balance  of  payments  problems  in  2002  prompted  the
government to restructure its sole Eurobond, issued in 1997 at a maturity of five years and a
face  value  of  USD  75  million.  After  an  early  buying  back  of  USD  35,6  million,  USD  39,4
million was transferred into a seven years amortising bond.

4.5

Tajikistan

Tajikistan’s  real  GDP  growth  in  2002  is  estimated  at  9,1%  (10,2%  in  2001).  Output  in
agriculture  picked  up  15%  and  industrial  production  increased  by  8,2%  driven  by  the
aluminium  sector.  After  a  declining  trend  in  monthly  inflation  rates  in  the  first  half  of  the
year, rapid growth in reserve money contributed to a spike in inflation in the third quarter as
the National Bank of Tajikistan issued directed credits to the cotton sector countervailing its
previous  policy  announcements.  The  year  therefore  ended  with  consumer  price  inflation  at
about 14,5%  (12,5%  at end-2001),  with  highest  increases  seen  in  food  prices.  The  National
Bank of Tajikistan maintains a managed floating exchange rate regime allowing the somoni to
depreciate in nominal and real terms. In 2002 the somoni depreciated some 15% against the
USD, for the most part after the lapse in monetary policy in the third quarter.

The fiscal stance  deteriorated slightly  in  2002  with  a  deficit  of  1%  of  GDP  (0,1%  in  2001)
owing to expenditure increased in public salaries and reductions in cotton sales tax rates and
income tax rates which are part of a larger tax reform agreed with the IMF. In 2002 the public
investment programme (PIP) financed by concessional foreign lending was not yet included
in the general government balances. Including the PIP explicitly in the fiscal balances brings
the general government deficit to about 3% of GDP.

Owing to a  good  cotton harvest  together  with  an increase  in aluminium  production, exports
increased by 13% while imports were up by only 4,4%, which brought the trade balance into a
surplus in 2002. Aluminium accounted for nearly 55% of total exports. The current  account
deficit is estimated to have reduced to about 4,2% of GDP in 2002 (7,2% in 2002). Excluding
transfers, the current account deficit is estimated at about 12% of GDP (15,3% in 2001).

In  December  2002,  Tajikistan  reached  an  agreement  with  Russia  on  restructuring  the
outstanding  debt,  involving  also  a  partial  write-down.  The  agreement  contributed  to  the
reduction  in  Tajikistan’s  external  debt  from  USD  1,02  billion  (98%  of  GDP)  at  the  end  of
2001  to  USD  985  million  (88%  of  GDP)  at  the  end  of  last  year.  Debt  service  was  a  high

18

burden  on  the  country  in  2002  corresponding  to  over  40%  of  fiscal  revenues.  The  National
Bank’s gross international reserve increased during 2002 and corresponded to 2,3 months of
imports at the end of the year (1,9 months at end-2001).

4.6

Ukraine

Ukraine’s rate of economic growth decelerated from 9,1% in 2001 to 4,1% in 2002. Inflation
has  continued  to  surprise  on  the  downside,  with  the  CPI  actually  falling  by  0,6  percent  in
2002.

Despite the weaker than expected economic growth, the consolidated government managed to
close 2002 with a surplus of about 1- percent of GDP. This reflected the implementation of
expenditure cuts but also the accumulation of additional arrears on VAT refunds, despite the
commitment under the IMF programme to clear such arrears. The budget for 2003 adopted by
the  parliament  last  December  foresees  a  consolidated  cash  deficit  of  about  1¾  percent  of
GDP, which implies a considerable fiscal expansion.

The balance of payments has improved considerably in recent years. The current account has
been in surplus since 1999. The surplus is estimated to have been in the order of 3½ percent
of GDP in 2002, supported by strong  receipts  from  current  transfers  and  services.  The  debt
rescheduling  agreed  with  private  bondholders  in  April  2000  and  by  the  Paris  Club  in  July
2001  have  significantly  eased  Ukraine’s  debt  service  obligations  and  official  international
reserves have continued to rise, reaching about USD 2,8 billion, or 2¼ months of imports, at
end-September  2002.  Moreover,  in  early  December  2002,  Ukraine  regained  access  to  the
international capital markets (which it lost in the wake of the Russian crisis of 1998) with the
issuance of a USD 399 million sovereign Eurobond maturing in 2007. The government plans
to issue a new  Eurobond  in  early  2003.  FDI  inflows,  however,  remain  disappointingly  low.
The  hryvnya  has  been  remarkably  stable  in  nominal  terms  since  the  sharp  depreciation
experienced in 1999.

Progress with structural reforms slowed down in 2001-02. In particular, privatisation revenues
were in both years much lower than budgeted, partly reflecting delays in the privatisation of
the  regional  electricity  distribution  companies  (the  “oblenergos”)  and  the  state-owned
telecommunications monopoly.

Ukraine’s EFF arrangement with the IMF, which had gone off track in early 2002, expired in
September  2002.  The  authorities  are  currently  negotiating  a  precautionary  stand-by
arrangement.  In  July  2002,  the  EU  Council  approved  a  new  macro-financial  assistance  for
Ukraine  in  the  form  of  a  loan  of  up  to  EUR  110  million.  Discussions  on  the  policy
conditionality related to the first tranche of this assistance have been delayed due to absence
of an operational agreement with the IMF.

5.

OTHER NON-MEMBER COUNTRIES

Save for Algeria, the level of uncertainty remains high despite recent positive evolutions.

5.1

Algeria

A relative stable macroeconomic environment continues to prevail in Algeria, while no major
structural  changes  can  be  observed.  GDP  is  estimated  to  have  increased  to  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  (official  target:

19

+0,4%  of  GDP)  and  together  with  a  credit  expansion  is  estimated  to  have  pushed  up  the
inflation  rate  to  around  6%  at  the  end  of  2002.  Despite  its  rich  resources,  Algeria  remains
plagued by a number of structural problems such as its  dependence on hydrocarbon  exports
sector  (>95%  of  exports,  30%  of  GDP)  and  its  high  agricultural  sector.  Furthermore,  its
domestic security problem undermines strongly investment activities.

The  latest  period  of  high  oil  prices  is  still  impacting  positively  Algeria’s  external  accounts.
Algeria  is  estimated  to  have  maintained  a  current  account  surplus  in  2002  (8,1%  of  GDP),
although  at  a  lower  level  than  in  2000-01,  as  receipts  from  oil  and  gas  exports  started  to
decline. The oil windfall of the last two years reduced Algeria’s foreign debt level to around
USD  21  bn  (38%  of  GDP)  in  December  2002,  while  the  debt-servicing  ratio  remains  at  a
moderate  level  of  around  27%  of  total  current  receipts.  Foreign  exchange  reserves  rose  to
more  than  USD  21  bn  in  December  2002,  covering  almost  two  years  of  imports,  thus
comforting the strong external position of the country.

5.2

Argentina

Over  the  last  six  months,  the  Argentinean  economy  has  shown  increasing  signs  of
stabilisation and a nascent economic recovery. Real GDP is now estimated  to  have  dropped
by about 11 % in 2002, much less than the 15-20 % declines most forecasters were initially
anticipating.  The  exchange  rate  has  recovered  inflation  and  interest  rates  have  declined  and
funds are returning to the banking system.

By mid-February, the exchange rate had appreciated by about 22 percent relative to the trough
of 3,9 reached at end-June 2002. After peaking at 10,5 % in April 2002, monthly CPI inflation
slowed  to  less  than  0,5  %  in  the  final  months  of  2002.  Private  sector  deposits  increased
significantly  in  the  third  and  fourth  quarters  of  2002,  leading  the  authorities  to  ease  the
restrictions of the withdrawal of bank deposits introduced in early 2002.

Reflecting the weakness of domestic demand  and the  lack  of  external financing, the  current
account (on a cash basis and, therefore, excluding interest payments on the defaulted debt) is
estimated  to  have  swung  from  a  deficit  of  1,7  %  of  GDP  in  2001  to  a  surplus  of  7-8  %  of
GDP.  The  central  bank’s  foreign  exchange  reserves  have  increased  to  USD  10,5  billion  at
end-2002, which compares to a trough of about USD 8,9 billion at end-July 2002. The more
comfortable  balance  of  payments  position  has  also  allowed  the  authorities  to  ease
substantially, effective on 2 January 2003, their foreign exchange restrictions.

The  IMF  is  bound,  in  January  2003,  to  approve  a  transitional  agreement  for  Argentina
effectively refinancing  the country’s debt  obligations to  the  IMF through  August  2003.  The
deal includes a SDR 2,2 billion SBA and the extension of certain repurchases totalling SDR
2,8  billion.  It  is  hoped  that  the  IMF  agreement  will  help  consolidate  the  stabilisation  and
recovery  trends.  Assuming  that  this  is  the  case,  GDP  is  projected  to  recover  moderately  in
2002 before accelerating to about 5 % in 2004. There are, however, serious downward risks to
this  scenario.  The  programme  supported  by  the  new  IMF  SBA  is  not  sufficient  to  ensure
medium-term fiscal and external solvency and significant uncertainties remain as to whether
the  government  that  will  be  formed  after  the  April  2003  elections  will  adopt  a  more
comprehensive programme.

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5.3

Brazil

Brazilian currency and bond prices fell sharply in August-September 2002, reflecting fears of
contagion from the Argentinean crisis and concerns about the future policies of the left-wing
candidate, who was ridding high in the polls for the October presidential election. The prudent
economic policies announced  by  the  new  administration  (in  particular,  their  commitment  to
fiscal discipline, inflation control and the IMF arrangement), however, have improved market
sentiment, leading to a marked recovery in the real and bond prices. The sharp improvement
in the current account balance (which has moved from a deficit of 4,6 % of GDP in 2001 to
around half that level last  year) is also helping to reassure investors. To further  reassure the
markets,  the  Brazilian  government  has  just  announced,  without  the  IMF  requesting  it,  an
increase in the primary fiscal surplus target for 2003 (from the 3,75 % of GDP target that the
IMF had agreed with the previous government to 4,25 % of GDP).

But while the risk of a financial crisis has receded, the situation remains fragile and the risk of
a debt default significant. Financial markets remain cautious and are waiting to see  whether
the  authorities’  conservative  rhetoric  is  matched  by  a  capacity  to  implement  the  announced
policies. Assuming that this is the case, growth is projected to pick up this year (to around 2,5
%) and to further accelerate in 2004, as a still competitive exchange rate continues to produce
strong export growth. Inflation is projected to accelerate moderately in 2003 (to around 10-11
%),  reflecting  the  delayed  pass-through  effects  of  last  year’s  depreciation,  but  to  return  to
single-digit levels in 2004.

The IMF approved in September 2002 a 15-month SBA for Brazil in the amount of SDR 30
billion,  the  largest  IMF  loan  ever.  This  arrangement,  approved  in  response  to  the  turmoil
experienced  by  Brazilian  markets  during  the  summer,  followed  a  USD  15,7  billion  SBA
approved in September 2001. The first tranche of the new SBA (USD 3 billion) was disbursed
upon  approval  of  the  arrangement  and  the  same  amount  was  disbursed  upon  the  successful
completion of the first review of the programme in December 2002.

5.4

Jordan

Jordan  has  made  considerable  efforts  at  stabilisation  and  adjustment,  supported  by  the
international community, most recently under a two-year IMF Stand-by Arrangement having
started in July-2002. This progress is reflected in strong growth performance (4,2 % in 2001,
5 % in 2002) despite the impact of increased regional tensions, the global slowdown, and the
events of September 11th  2001.  Inflation has been  kept  in check  (average  CPI  of  between  3
and 4% in 2001 and 2002) but fiscal deficits remain large at 8,1% of GDP in 2001 (3,7% after
grants) and 10,1 % of GDP in 2002 (4,1 % after grants).

Jordan's  external  account  has  been  characterised  by  high  trade  deficits  (30  %  of  GDP)  and
large  service  balances  surpluses  (remittances  of  20  %  of  GDP  (net)),  and  grant  inflows.
Capital and financial account developments have allowed gross foreign exchange reserves to
increase to broadly 7 months of imports or USD 2,8bn at the end of 2002. External debt has
been reduced  from  95 % of  GDP in 1998  to around 80 % and  the  authorities are aiming to
reduce the debt stock to  around 60  %  of  GDP  by  2007  using  privatisation  proceeds  and  by
increasing fiscal revenues to reduce deficits. Jordan's external vulnerability has been lowered
in recent years, although its debt level can be still regarded as high. Most of the debt reduction
was achieved through the use of privatisation proceeds, debt swaps and buy-back operations.
The debt service ratio (around 20 % in 2001) is expected to improve further, due to the July
2002 agreement with the Paris Club of creditor nations.

21

Despite  the  improved  policy  performance,  reflected  in  stronger  economic  indicators,  which
will  increase  Jordan’s  resilience  to  external  shocks,  large  risks  remain  to  the  balance  of
payments and capacity to service external debt. Any military intervention in Iraq or increased
regional  tensions  would  have  severe  consequences  for  Jordan’s  economy,  notably  its  fiscal
and external accounts. These effects would include, a loss of exports, lower tourist receipts,
higher oil costs and lower remittances.

22

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$

23