Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2002
Date: 2003-07-24
Institutions: European Commission
Subjects: Armenia, Bosnia and Herzegovina, Georgia, Moldova, North Macedonia, Romania, Serbia and Montenegro, Tajikistan, Ukraine, financial aid, report

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 24.07.2003
COM(2003)444 final

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN
PARLIAMENT

on the implementation of macro-financial assistance to third countries in 2002

   
LIST OF ABBREVIATIONS

CAMEL

CBA

CEECs

CPI

DEM

EC

EFF

EIB

ESAF

EU

EUR

FDI

FESAL

FRY

FYROM

GDP

IFIs

IMF

MFA

NIS

PRGF

SAA

SAF

SBA

USD

VAT

WTO

Capital,  assets,  management,  earnings,  liquidity  (parameters  used  in
international system for rating banks)

Currency Board Arrangement

Central and East European Countries

Consumer Price Index

German Mark

European Community

Extended Fund Facility

European Investment Bank

Enhanced Structural Adjustment Facility

European Union

Euro

Foreign Direct Investment

Financial and Enterprise Structural Adjustment Loan

Federal Republic of Yugoslavia

Former Yugoslav Republic of Macedonia

Gross Domestic Product

International Financial Institutions

International Monetary Fund

Macro-Financial Assistance

New Independent States

Poverty Reduction and Growth Facility (formerly ESAF)

Stabilisation and Association Agreement

Structural Adjustment Facility

Stand-By Arrangement

Dollar of the United States of America

Value Added Tax

World Trade Organisation

2

TABLE OF CONTENTS

List of abbreviations................................................................................................................... 2

I.

II.

1.

2.

A)

B)

C)

3.

4.

INTRODUCTION ....................................................................................................... 5

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

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

Macro-financial assistance in 2002.............................................................................. 6

New decisions .............................................................................................................. 6

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

Repayments and undisbursed operations ..................................................................... 7

Trends and geographical distribution of macro-financial assistance ........................... 7

Burden-sharing........................................................................................................... 13

III.

ARMENIA ................................................................................................................. 14

1.

2.

3.

4.

Executive summary.................................................................................................... 14

Macroeconomic performance..................................................................................... 14

Structural reform ........................................................................................................ 15

Implementation of exceptional financial assistance................................................... 16

IV.

BOSNIA AND HERZEGOVINA ............................................................................. 17

1.

2.

3.

4.

V.

1.

2.

3.

4.

Executive summary.................................................................................................... 17

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

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

Implementation of macro-financial assistance........................................................... 19

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA................................ 20

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

Macroeconomic performance..................................................................................... 21

Structural reforms ...................................................................................................... 21

Implementation of macro-financial assistance........................................................... 22

VI.

GEORGIA.................................................................................................................. 24

1.

2.

3.

4.

Executive summary.................................................................................................... 24

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

Structural reforms ...................................................................................................... 25

Implementation of exceptional financial assistance................................................... 26

3

VII.

MOLDOVA ............................................................................................................... 27

1.

2.

3.

4.

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

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

Structural reform ........................................................................................................ 28

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

VIII.

ROMANIA................................................................................................................. 30

1.

2.

3.

4.

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

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

Structural reforms ...................................................................................................... 32

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

IX.

SERBIA AND MONTENEGRO............................................................................... 34

1.

2.

3.

4.

X.

1.

2.

3.

4.

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

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

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

Implementation of macrofinancial assistance ............................................................ 37

SERBIA AND MONTENEGRO / KOSOVO ........................................................... 38

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

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

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

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

XI.

TAJIKISTAN............................................................................................................. 42

1.

2.

3.

4.

Executive summary.................................................................................................... 42

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

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

Implementation of macro-financial assistance........................................................... 44

XII.

UKRAINE.................................................................................................................. 45

1.

2.

3.

4.

Executive summary.................................................................................................... 45

Macroeconomic Performance .................................................................................... 46

Structural Reforms ..................................................................................................... 46

Implementation of EU Macro-Financial Assistance .................................................. 47

ANNEX...................................................................................................................... 49

4

I.

INTRODUCTION

This report assesses the economic situation, the progress of reforms and the prospects of the
countries  that  benefited  in  2002  from  ongoing  macro-financial  assistance  programmes  with
particular  reference  to  the  implementation  of  the  economic  and  structural  reform  conditions
attached to it.

Chapter II provides an overview of the EC macro-financial assistance to third countries, with
an historical background, a summary of the operations in 2002, and an analysis of the burden-
sharing among the international donor community.

The following chapters discuss the economic situation in the countries for which either new
macro-financial  assistance  operations  have  been  decided  by  the  Council  or  disbursements
under previously decided operations have been made or are still outstanding in 2002.

In  line  with  the  recommendations  of  the  Court  of  Auditors  in  their  special  report  of  March
2002, particular  attention  is  paid  to  the  relevant  aspects  of  the  transition  process  and  of  the
implementation of structural reforms in the beneficiary countries. Progress in this respect also
reflects the degree to which the corresponding economic policy conditions attached to the EC
macro-financial assistance have been met.

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

The  complete  list  of  macro-financial  assistance  operations  decided  by  the  Council  with  the
corresponding disbursements up to the end of 2002 appears in Annex 1. Annex 2 summarises
the  macro-financial  assistance  provided  by  bilateral  and  multilateral  donors  to  the  countries
that  received  EC  macro-financial  assistance.  Finally,  selected  macroeconomic  indicators  of
the beneficiary countries are presented in Annex 3.

1

See the following Communications from the Commission to the Council and the European Parliament
with the title 'Report on the implementation of macro-financial assistance to third countries':
COM(1992)400 of 16 September 1992
COM(1994)229 of 7 June 1994
COM(1995)572 of 27 November 1995
COM(1996)695 of 8 January 1997
COM(1998)3 of 13 January 1998
COM(1999)580 of 15 November 1999.
COM(2000)682 of 27 October 2000.
COM(2001)288 of 1 June 2001.
COM(2002)352 of 11 July 2002

5

                                                
II.

1.

OVERVIEW

Background

Macro-financial  assistance  (MFA)  supports the  political  and  economic  reform  efforts  of  the
beneficiary  countries  and  is  implemented  in  association  with  support  programmes  from  the
IMF and the World Bank. It has continued to incorporate a set of principles reaffirmed by the
Council in their conclusions of 8 October 2002 which underline the exceptional character of
this  assistance,  its  complementarity  to  financing  from  the  IFIs  and  its  macroeconomic
conditionality. In particular, Community MFA has supported efforts by recipient countries to
bring about economic reforms and structural changes. In close co-ordination with the IMF and
the World Bank, it has promoted policies that are tailored to specific country needs with the
overall  objective  of  stabilising  the  financial  situation  and  establishing  market-oriented
economies.  The  Commission  implements  this  type  of  assistance  in  consultation  with  the
Economic and Financial Committee.

2.

A)

Macro-financial assistance in 2002

New decisions

New decisions of the Council on granting MFA totalled EUR 315 million in 2002, excluding
reformatting  of  two  undisbursed  loan  operations  (see  hereafter  point  b.).  When  taking  into
account these reshaped operations, new net commitments during the year are reduced to EUR
208 million.

The years 2000 and 2001 had already been years of enhanced MFA to the Balkan countries,
where  six  operations  (including  two  amendments  of  previous  decisions)  for  a  maximum
amount  of  EUR  448  million  had  been  decided  by  the  Council  for  the  former  Yugoslav
Republic  of  Macedonia,  Kosovo,  Montenegro  and  the  then  FRY.  In  2002,  this  increased
assistance to the Balkan region was confirmed by substantial MFA packages for, respectively,
Serbia and Montenegro and Bosnia Herzegovina.

a.

b.

The  Council  decided  on  5  November  2002  to  provide  a  second  macro-financial
assistance  to  Serbia  and  Montenegro  of  up  to  EUR  130  million  comprising  a  loan
element of up to EUR 55 million and a grant component of up to EUR 75 million.
On the same day, the Council approved a second assistance package of up to EUR 60
million  to  Bosnia  Herzegovina  made  up  of  a  loan  of  up  to  EUR  20  million  and  a
grant of up to EUR 40 million.

Regarding the NIS, the accent was put on reformatting undisbursed previous macro-
financial  assistance  operations.  First,  the  1998  Decision  of  the  Council  granting  a
loan  of  up  to  EUR  150  million  to  Ukraine,  of  which  only  EUR  58  million  were
eventually disbursed, was replaced by a new EUR 110 million loan package decided
in  July  2002,  while  the  EUR  92  million  undisbursed  part  of  the  previous  loan  was
cancelled. The new loan includes more favourable terms, both in maturity (15 years
instead of 10) and in grace period (10 years instead of 7). In the same vein, the EUR
15 million balance of payments loan decided in 2000 for Moldova was cancelled and
replaced by a grant of the same amount approved by the Council in December 2002.

6

B)

Disbursements

Disbursements  of  macro-financial  assistance  amounted  to  a  total  of  EUR  141  million
excluding grants of EUR 7 million for Tajikistan and of EUR 15 million for Bosnia disbursed
on  the  basis  of  procedures  initiated  in  2002  but  finalised  in  early  2003.  The  disbursements
consisted of EUR 11 million for Armenia, EUR 15 million for Kosovo and EUR 115 million
for Serbia and Montenegro (the then FRY). All these disbursements took the form of grants.

C)

Repayments and undisbursed operations

Some MFA operations decided in the first half of the 1990s have not been  fully paid out as
initially  foreseen.  This  has  been  the  result  of  either  improved  external  financial  conditions
(Hungary, Baltics, Slovakia, Algeria), or of a difficult economic or political climate (Albania,
Belarus).  In  these  cases,  the  disbursement  of  the  remaining  tranches  is  not  programmed
anymore.  For  more  recently  adopted  operations,  implementation,  in  some  cases,  has  been
delayed because of a slowing-down in the reform process (Romania, Georgia). In the case of
Moldova  and  Ukraine,  evolving  circumstances  have  led  the  Commission  to  reconsider  the
terms of the existing assistance operations and to reshape them in 2002 as mentioned above.

The last column of Annex 1 provides details concerning undisbursed outstanding, suspended
or cancelled amounts.

3.

Trends and geographical distribution of macro-financial assistance

The EC MFA is intended to support macroeconomic stabilisation of the beneficiary countries
and ease their balance of payments (and budget) difficulties. It plays also a very useful role in
promoting  structural  reform.  Over  the  years,  the  number  of  countries  to  which  it  was
appropriate  for  the  Community  to  extend  such  support  expanded,  as  a  growing  number  of
countries  neighbouring  the  EU  faced  balance  of  payments  difficulties  and  committed
themselves  to  rigorous  programmes  of  economic  reform.  This  led  to  a  change  in  the
geographic balance of assistance from the early years, when most beneficiary countries were
countries in Central and Eastern Europe. As a result of the conflicts in the Western Balkans,
in  particular  the  Kosovo  conflict  of  1999  and  of  the  political  changes  in  Serbia  and
Montenegro  (formerly,  the  FRY),  a  clear  tendency  for  a  relative  increase  of  MFA  to  the
countries of the Balkans developed through the 1999-2002 Council Decisions.

The  four  MFA  decisions  taken  in  2002  were  for  traditional  balance  of  payment  assistance
operations, three of them taking the form of grants.

A specificity of the decisions of the 2000-2002 period is indeed the substantial share of grant
support in the total amount decided : 44,5 % instead of 6 % over the 1990-1999 period. The
new grant/loan proportion of the assistance packages reflects the assessment made by the EU
bodies  of  the  relative  degree  of  poverty  of  the  recipient  countries  and  of  their  limited  debt
servicing  capacity.  As  observed  already  in  2000  and  2001,  MFA  is  aimed  not  only  at
promoting  macroeconomic  stabilisation  but  also  at  supporting  the  recipient  governments'
programmes  of  structural  reform.  Consistently,  MFA  has  been  effectively  combined  with
assistance  from  the  PHARE/ISPA,  TACIS  or  CARDS  programmes  with  a  view  to
strengthening  the  institutional  capacity  that  was  essential  to  the  success  of  the  structural
reform process.

Tables 1 and 2, and their accompanying Graphs 1a and 2a underline the exceptional character
of the EC MFA. The highest volumes of MFA operations were decided and disbursed in the

7

- 

for  actual  amounts  disbursed 

years immediately after the changes in the political and economic systems of the countries of
Central  and  Eastern  Europe.  Since  then,  the  fluctuations  in  the  amounts  of  MFA  reflect
decisions taken on a case-by-case basis after an assessment of the macro-economic situation
and residual external financing needs of the potential beneficiary countries. Graph 1a - for net
amounts of operations  decided over the whole  period  from 1990 to  2002  (totalling  around
EUR 6 billion) -  and  Graph  2a 
(totalling  over
EUR 4.8 billion) - show the important concentration of the assistance in the CEECs  that  are
candidates for EU accession (around 55 % of total macro-financial assistance decided over the
last 13 years). However, MFA to these countries was progressively phased out in parallel with
their  progress  in  macroeconomic  adjustment  and  reform.  More  recently,  MFA  has  been
mainly provided to the Western Balkans (63,5 % of the operations decided from 1999 to 2002
and  82%  for  2000-2002)  and  some  low  income  NIS.  The  relatively  low  amounts  for  the
Mediterranean  countries  (13  %  of  the  overall  amounts  authorised,  but  no  new  authorisation
since 1996)  should be  considered  against the  background  of  other  forms  of  macroeconomic
support  made  available  to  these  countries  (notably,  the  MEDA  Structural  Adjustment
Facilities).

8

Table 1. Macro-financial assistance, 1990-2002
Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean

870

1.220

588

Total amounts authorised

870

1.808

out of which, straight grants

28

410
70

480

70

255
35
130
200

620

35

0

255

255

15

15

250
40
265

555

95

150

150

300
160

460

70

Interest 
subsidies 
to Israel

Albania

Albania

Armenia and 
Georgia (95)

Bosnia (40) 
FYROM (30)

55
125

180

90

393

393

168

190
18 (a)

208

130

Kosovo (35) 
Montenegro 
(20) 
Tajikistan 
(35) Moldova 
(15)

FYROM (18) 
Serbia and 
Montenegro 
(120) Kosovo 
(30) 

Serbia and 
Montenegro 
(75) Bosnia 
(40) 
Moldova (15) 
(b)

(a) net amount taking into account (b) and, for Ukraine, new loan of EUR 110 million together with simultaneous cancellation of EUR 92 million out of the EUR 150 million loan decided in 1998.
(b) grant of EUR 15 million and simultaneous cancellation of the EUR 15 million loan decided in 2000

9

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

1.808

870

620

480

555

255

0

15

460

393

150

180

208

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Graph 1b. MFA 1990-2002, authorisations 
Distribution by region

Mediterranean
13%

NIS
16%

Western 
Balkans
16%

Central 
European 
Candidate 
Countries
55%

Graph 1c. MFA 2000-2002, authorisations 
Distribution by region

NIS
18%

Western 
Balkans
82%

10

Disbursements, millions euro 

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean

350

695

705
35

438

Total amounts disbursed

350

695

1.178

out of which, straight grants

63

70

25
150

245

270
35

305

35

80
15
135
100

330

15

40
20
115

175

20

70
25
100

195

250
15
156

421

18

40
25
71

136

28

160
105

265

85

312
80

392

105

130
11

141

141

Israel (28) 
Albania (35)

Albania

Albania

Albania

Armenia (8) 
Georgia (10)

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

NB: 2000 figures include disbursements in favour of Bosnia, FYROM and Montenegro which, for technical reasons, took place in early January 2001.
       2001 figures include disbusements in favour of FYROM and Tajikistan which, for technical reasons, took place in early January 2002.

Bosnia (15) 
FYROM (10) 
Kosovo (15) 
Serbia and 
Montenegro 
(ex FRY) (35) 
Georgia (6) 
Tajikistan 
(14) 

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

Armenia (11) 
Kosovo (15) 
Serbia and 
Montenegro 
(115)

11

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

1.178

695

350

305

245

330

175

195

421

392

265

136

141

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Graph 2b. MFA 1990-2002, disbursements, 
Distribution by region

Mediterranean
14%

NIS
14%

Western Balkans
15%

Central 
European 
Candidate 
Countries
57%

Graph 2c. MFA 2000-2002, disbursements, 
Distribution by region

Central 
European 
Candidate 
Countries
20%

NIS
11%

Western Balkans
69%

12

4.

Burden-sharing

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

The resources provided by various donors to support the residual external financing needs of
the countries that receive EC MFA are summarised in Annex 2. Details by recipient country
for the year 2002 are provided in Annex 2.1.

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

Back in 1990, Community assistance was substantial in comparison with funding provided by
IFIs. The Community indeed played a key role, both as a major provider of these funds and as
the co-ordinator of bilateral assistance for the CEECs through the G-24 process. However, as
the  IFIs  were  progressively  able  to  mobilise  more  resources  through  new  instruments,  their
share in the financing packages rose substantially over the period, with the exception of years
2000 and 2001.

At  the  same  time,  contributions  from  external  creditors,  both  public  and  private,  were
mobilised in the form of debt-relief and debt-reduction operations which took off in 1991 and
became  particularly  important  in  1994,  1995  and  2001.  Among  the  countries  receiving  EC
MFA, those concerned by  these debt-relief and similar operations were Algeria in 1991 and
1994; Bulgaria in 1991, 1994 and 1997; Moldova in 1996; Ukraine in 1994, 1995 and 1999,
and  the  former  Yugoslav  Republic  of  Macedonia,  Bosnia  and  Herzegovina  and  Albania  in
1999. In 2000, no debt relief took place for any country receiving EC MFA. In 2001, Serbia
and Montenegro (the then Federal Republic of Yugoslavia) benefited from a substantial debt
relief  arrangement  agreed  in  the  context  of  the  Paris  Club.  In  2002,  debt  relief  was  more
limited  and  benefited  again  to  Serbia  and  Montenegro  and  also  Ukraine,  through  the  Paris
Club.

13

III.

ARMENIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.  Price liberalisation

No administered prices exist outside the utilities sector.

2.  Trade liberalisation

Liberal trade policy. Simple and relatively open import regime with a
low  tariff  structure.  No  quantitative  restrictions.  Accession  to  the
WTO approved in December 2002.

3.  Exchange regime

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

4.  Foreign direct investment

Liberal  policy 
investment,  absence  of
restrictions on repatriation of profits and capital. FDI inflows 3.3% of
GDP in 2001.

towards  foreign  direct 

5.  Monetary policy

Low  inflation  environment  maintained  through  prudent  monetary
policies conducted by the Central Bank of Armenia.

6.  Public finances

Total  fiscal  revenues  incl.  grants  estimated  at  around  19%  of  GDP  in
2002,  tax  revenues  about  15%  of  GDP;  total  expenditure  estimated  at
about 22% of GDP.

7.  Privatisation and enterprise restructuring

A  three-year  privatisation  programme  was  adopted  in  2001  including
more  than  900  enterprises.  The  final  stage  of  the  privatisation  process
has  however  been  slower  than  foreseen  due  to  lack  of  interest  among
foreign investors in a difficult business climate.

8.  Financial sector reform

Minimum  capital  requirement  for  existing  banks  is  scheduled  to
increase  by  2005  to  USD  5  million  which  is  already  applied  to  new
banks.

The Armenian economy continued to grow at a
record high rate in 2002. The preliminary GDP
data  give a real  growth  rate of  12.9%  (9.6%  in
2001).  Strong  growth  in  exports  (+48.5%),
owing  mainly  to  the  recovery  of  the  diamond
processing sector, led to an improvement in the
current  account  deficit  (estimated  at  8.5%  of
GDP  in  2002).  The  end-2002  consumer  price
inflation was 2% (3% at end-2001).

After a merger, the four electricity distribution
in  2002  and
companies  were  privatised 
bringing  private  management  to  the  power
generation  sector 
is  also  under  way.  In
November  2002,  Armenia  signed  a  debt-for-
equity  swap  with  Russia  for  the  outstanding
debt  of  about  USD  100  million.  This  deal
includes a transfer of ownership over a thermal
power plant.

Armenia’s  accession  to  the  World  Trade
Organisation  was  approved  by  the  WTO’s
General  Council  in  December  2002.  On  the
other  hand,  the  benefits  of  an  open  trade
regime  are  not  fully  realised  until  the  re-
establishment of regional trade relations which
is depending on the resolution of the Nagorno-
Karabakh conflict.

A Commission staff mission concluded in July
2002  that  Armenia  had  made  substantial
progress  in  satisfying  the  conditions  for  the
disbursement  of  the  grant  tranche  scheduled
for  2002.  The  grant  tranche  of  EUR  5.5
million  was  disbursed  in  December  2002
following  the  IMF’s  approval  of  the  first  and
second  reviews  of  the  three-year  arrangement
under  the  Poverty  Reduction  and  Growth
Facility  (PRGF)  and  after  Armenia  had
reduced  its  net  debtor  position  towards  the
Community.

2.

Macroeconomic performance

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

14

sectors  such  as  metallurgy  and  food  processing  did  well  in  2002.  There  has  also  been  a
construction boom in Armenia (both housing construction and public  works). In agriculture,
the  growth  rate  was  only  4.4%  due  to  poor  weather  conditions.  In  retail  trade,  the  turnover
increased  by  15.6%.  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
growth 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.

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
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.

The IMF Board approved a three-year arrangement for Armenia under the Poverty Reduction
and Growth Facility in May 2001. After some delays, the first two semi-annual reviews of the
programme were completed in September 2002. Of the total PRGF loan amount of SDR 69
million, Armenia has drawn SDR 30 million (USD 39 million) by end-2002. The third review
is scheduled in March 2003.

3.

Structural reform

Armenia’s accession to the WTO was approved by the  WTO General Council in December
2002.  The  benefits  of  an  open  trade  regime  are  not  fully  realised,  however,  because  the  re-
establishment  of  regional  trade  relations  with  Azerbaijan  and  Turkey  is  pending  to  the
resolution of the Nagorno-Karabakh conflict.

The  privatisation  programme  for  the  years  2001-2003  is  being  implemented  gradually  with
some larger deals such as the Nairit chemical plant, Ararat cement and the Zvartnots airport
concluded with foreign investors in 2002. Following the merger of four electricity distribution
companies, a majority stake of the company was sold to a foreign investor which contracted a
private  management  company  to  run  the  Electricity  Distribution  Networks.  The  Hrazdan
power generation complex will be handed over to the Russian government as part of the debt
for  equity  swap.  Russia  will  also  take  over  the  financial  management  of  the  Medzamor
Nuclear Power Plant  in  2003  in  exchange  for  clearing  the  plant’s  debts  for  Russian  nuclear

15

fuel suppliers. Privatisation or bringing of private management is under preparation for other
power generation assets as well.

The  Government  prepared  a  draft  Anti-Corruption  Strategy  in  2002  which  has  not  been
implemented yet. The EBRD has estimated on the basis of business surveys that the average
“bribe tax” has decreased in Armenia from 4.2% of firms’ annual total sales in 1999 to 0.9%
in  2002.  According  to  the  same  survey,  the  share  of  firms  which  paid  bribes  frequently
decreased from 40.3% to 14.3%.

In the banking sector, the minimum capital requirement was raised to USD 1.65 million with
a view to raise it gradually to USD 5 million for all banks by 2005. In 2002 eight banks of the
total 28 were under temporary administration prior to an eventual merger where possible or
liquidation.

According  to  a  census  at  late  2001,  Armenia’s  population  has  fallen  to  3  million  from  3.7
million in 1991 due to the migration of about a quarter of the population (migrants are mainly
young and educated).

4.

Implementation of exceptional financial assistance

Armenia has benefited from a European Community assistance package which consists  of a
loan of EUR 28 million (disbursed in 1998) and a total grant amount of up to EUR 30 million.
The year 2001 annual grant tranche of EUR 5.5 million was disbursed in early 2002 soon after
the  early  debt  repayment  of  EUR  7  million  was  made  by  Armenia  to  the  Community.  A
Commission staff mission concluded in July 2002 that Armenia had made substantial progress
in  satisfying  the  macroeconomic  and  structural  conditions  for  the  disbursement  of  the  full
amount of the 2002 grant tranche of EUR 5.5 million. Waivers were, however, granted on a
couple  of  conditions  which  had  not  been  fulfilled  owing  mainly  to  the  difficult  external
environment  which  led  to  the  failure  of  a  number  of  privatisation  attempts.  In  December
2002, Armenia made an early debt repayment of EUR 7 million to the Community as agreed.
The  grant  tranche  of  EUR  5.5  was  disbursed  soon  thereafter  by  the  Commission.  In  total,
EUR  23  million  have  been  disbursed  to  Armenia  as  grants  under  the  exceptional  financial
assistance in the period 1998-2002. After early debt repayments in three occasions, Armenia’s
outstanding debt to the Community amounted to EUR 9 million at the end of 2002.

The  Commission  services  also  reached  an  agreement  with  the  Armenian  authorities  on  the
structural  conditionality  for  the  2003  grant  tranche  (up  to  EUR  5.5  million).  The  specific
conditions were identified in the same areas as the year before (such as tax revenue collection,
re-organisation of state-owned enterprises, energy sector reform and civil service reform) and
they  are  consistent  with  policies  pursued  by  the  authorities  in  the  context  of  the  Poverty
Reduction Strategy Paper which is under preparation.

16

IV.

BOSNIA AND HERZEGOVINA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

In  the  course  of  2002  Bosnia  and  Herzegovina
(BiH)  maintained  macro-economic  stability,
low  inflation,  and  continued  efforts  towards
improved fiscal performance. The growth rate is
estimated  at  4%  for  2002,  slightly  down  from
4.5% 
in  2001.  BiH’s  reliance  on  donor
assistance  to  finance  a  large  share  of  its  public
deficits  and  a  very  high  current  account  deficit
is  a  clear  source  of  vulnerability  of 
the
economy,  also  in  the  light  of  the  on-going
phasing out of reconstruction assistance.

of 

In this context, both the Reform Agenda of  the
authorities  adopted  in  July  2002  and  the  new
IMF  Stand-By  Arrangement  approved 
in
August 2002 could provide a sound framework
to  achieve  growth  through  continued  reforms.
include  further  fiscal  consolidation,
These 
the
privatisation, 
completion 
achievement  of  a  fully  functioning  single
economic space, all of which would allow BiH
to turn a currently  aid-dependent economy into
one  driven  by  SME  development,  FDI  and
exports.  This  however  requires  a  revival  of  the
momentum  of  reforms,  which  are  currently
hampered  by 
political
institutional 
divisions.

and 

and 

Within  this  new  framework,  agreed  with  the
IMF, the Council decided on 5 November 2002
to  provide  BiH  with  further  macro-financial
assistance of up to EUR 60 million, (up to EUR
20 million loan and 40 million grant). Given the
positive  outcome  of  the  first  IMF  Review,  the
Commission launched disbursement procedures
in  December  2002,  which  will  lead  to  the
payment  of  the  first  tranche  of  a  EUR  15
million grant in the first quarter of 2003.

1.  Price liberalisation

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

2.  Trade liberalisation

After  the  Free  Trade  Agreement  (FTA)  with  Croatia,  which  became
effective on 1 January 2001, similar FTAs were signed in 2002 with
FYROM  and  Serbia  and  Montenegro.  Accession  to  the  WTO  is
moving ahead and is now expected for 2003.

3.  Exchange regime

Since June 1998 BiH has established a Currency Board Arrangement;
the common currency, the KM, is pegged to the Euro at the fixed rate
of 1.96 KM.

4.  Foreign direct investment

Some  actions  have  been  undertaken  to  improve  the  business
environment:  a  Foreign  Investment  Promotion  Agency  (FIPA)  was
created,  while  Entities  have  harmonised  their  Foreign  Investment
Laws. However,  the  environment  remains  uncertain  for  foreign
investors, with a perception of high risk and non-transparent policies.

5.  Monetary policy

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

6.  Public finances

The  size  of  the  government  in  BiH  is  relatively  high,  with  public
spending  at  around  56%  of  GDP,  coupled  with  corruption  problems
and  poor  quality  of  the  public  services.  However,  significant  fiscal
consolidation  has  been  achieved  over  time,  together  with  tax
harmonisation between entities. Entities now  have  the  same  customs
rates and VAT introduction is being considered.

7.  Privatisation and enterprise restructuring

While  the  privatisation  of  small  and  medium  enterprises  is  virtually
complete  in  both  Entities,  progress  on  the  sale  of  large-scale
‘strategic’  enterprises,  which  could  attract  foreign  investors,  has
lagged behind.

8.  Financial sector reform

Progress  in  bank  privatisation  has  been  encouraging  and  foreign
capital  in  the  banking  sector  is  significant.  Adequate  banking
regulations  including  supervision  rules  and  prudential  regulations
have been  established,  e.g. increased  minimum  capital  requirements.
Early  in  2002  stock  exchanges  opened  in  Banja  Luka  and  Sarajevo,
and a State Deposit Insurance Agency has been created from the two
Entity agencies in August 2002.

2.

Macroeconomic performance

Currently  available  indicators  suggest  a  fall  in  annual  GDP  growth  over  the  recent  years.
After high rates in the first half of the ‘90s fuelled by aid, the growth rate has moved down
from 5.6% in 2000, to 4.5% in 2001, and is estimated to have been at 4% for 2002. According
to official data, between January  and September  2002  industrial  output  in  the  Federation  of

17

BiH  (FBiH)  rose  by  7.5%  compared  to  the  same  period  in  2001.  In  the  Republika  Srpska
(RS),  industrial  production  continued  to  fall  in  2002,  although  at  a  smaller  pace,  with  first
three  quarters’  data  showing  a  decline  of  7%.  The  official  unemployment  rate  in  2002  was
around  41%  in  FBiH  and  40%  in  the  RS.  It  should  be  noted,  however,  that  official
unemployment statistics may be misleading, given the large but undisclosed number of people
in  the  grey  economy,  working  in  informal  markets  of  goods  and  services.  World  Bank
unofficial estimates suggest in fact that the actual rate is one half of the official figure.

Due  to  the  continued  adherence  to  the  currency  board  arrangement,  inflation  has  remained
subdued. In the first nine months of 2002 inflation was roughly zero in FBiH, and 2% in the
RS.  With  the  Convertible  Mark  (KM)  pegged  to  the  Euro  at  the  same  rate  since  the
introduction of the EU currency in January 1999, the exchange rate of the KM remains stable.
The net international reserves of the Central Bank of BiH amounted to EUR 54 million at the
end of 2002, an increase of 40% compared to the end of 2001, reflecting the conversion into
KM of previously unrecorded DM following the introduction of Euro notes and coins in the
12 EU countries.

Fiscal  performance  has  improved,  although  the  size  of  the  government  remains  large,  with
public  spending  at  around  56%  of  GDP.  The  efforts  initiated  in  2001  to  reduce  the  high
general  government  deficit  were  pursued  in  2002.  The  authorities  aimed  at  a  consolidated
budget deficit of 11.5% (5.5% after grants), and driven by the expenditure side of the budget,
made  cuts  in  pensions  but  also  in  investment  spending  which  lower  grant  financing  made
necessary. However, given the better revenue performance, the estimated consolidated budget
deficit has been revised downwards at 9.4% of GDP (4% after grants).

On  the  external  side,  the  balance  of  payments  continues  to  show  deficits,  both  on  current
account  and  trade  account.  The  current  account  deficit  remains  very  high  and  (excluding
official transfers) amounted in 2002 to 21% of GDP, a slight decrease from the recorded 23%
of  2001.  The  efforts  to  reduce  barriers  to  FDI  have  continued  in  2002,  when  net  FDI  is
estimated to have  increased to EUR 260 million,  compared  with  EUR  145  million  in  2001.
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).

3.

Structural reforms

BiH's  public  finances  have  improved  at  Entity  level  through  better  enforcement  of  revenue
collection and the implementation of newly established Treasury systems. Moreover, Entities
have taken steps to downsize the public sector, notably by reducing the level of military staff.

In  the  areas  of  customs  and  tax  reforms,  inter-entity  harmonisation  continues,  with  double
taxation on inter-Entity trade ending in July 2002.

The restructuring of tax and customs administrations is also underway in both Entities, under
the  pressure  of  the  international  community.  Attention  has  focused  recently  on  the
introduction  of  state-level  VAT  and 
the  Entity-based  customs
administration,  both  of  which  would  support  public  finances,  better  fund  existing  and  new
State  institutions  and  promote  sustainability  of  the  current  fiscal  stance.  However,  some
resistance can be expected at the Entity level, notably given that some of these changes may
entail rationalisation in employment, reduce the scope for tax evasion, and increase the role of
the State in tax collection.

the  unification  of 

Privatisation  performance  has  been  disappointingly  slow  in  both  Entities.  Delays  have  been
partly due to overoptimistic expectations of the authorities on the market value of enterprises,

18

but also because of the lack of current information on enterprise debts. While the privatisation
of small and medium enterprises is virtually complete in both Entities, progress on the sale of
“strategic”  enterprises,  which  could  attract  foreign  investors,  has  lagged  behind.  In  the
Federation, within the 56 ‘strategic companies’ prepared for privatisation with the help of the
international community (e.g. USAid, WB, EC), five were privatised in 2002, compared to six
in 2001. Tenders have been launched for another 28. In the RS, from a list of 80 companies,
only one has been sold in 2002 (three in 2001) with tenders launched for another 23.

In July 2002 Entity and State governments agreed with the international community a Reform
Agenda  for  the  Economy  (“Jobs  and  Justice”).  The  reforms  are  designed  to  support  the
development  of  a  competitive  market  economy  and  to  facilitate  private  investment.  By  the
end  of  2002  some  actions  had  been  undertaken  in  improving  the  business  environment:  a
Foreign Investment Promotion Agency (FIPA) was created, although it is not yet operational,
while  Entities  have  harmonised  their  Foreign  Investment  Laws;  in  September  a  new
bankruptcy  law  was  passed.  The  authorities  also  sought  to  improve  this  environment  by
facilitating both entry and exit of firms, and by lowering administrative costs.

The target of privatising all banks by the end of 2002 was achieved in the RS, but not yet in
the FBiH. Recent progress has been encouraging and foreign capital in the banking sector is
significant. A State Deposit Insurance Agency has been created from the two Entity agencies
in  August  2002.  Adequate  banking  regulations  including  supervision  rules  and  prudential
regulations  have  been  established,  although  responsibility  for  this  remains  with  the  Entities
rather than with the Central Bank. In this context, progress is also being achieved on moving
towards a  single  banking  sector  regulator,  with  legislation  being  harmonised.  Early  in  2002
stock  exchanges  opened  in  Banja  Luka  and  Sarajevo,  but  market  capitalisation  is  still
insignificant.

4.

Implementation of macro-financial assistance

In May 1999, the Council decided to provide BiH with community macro-financial assistance
comprising  a  loan  facility  of  up  to  EUR  20  million  and  a  grant  facility  of  up  to  EUR  40
million  (Decision  1999/325/EC),  in  the  context  of  an  IMF  programme  (three-year  stand  by
arrangement) agreed in May 1998. The implementation of this first macro-financial assistance
operation was concluded in December 2001, when the third grant tranche of EUR 15 million
was disbursed.

Based  on  a  European  Commission  proposal  of  31  July  2002,  the  Council  approved  on  5
November 2002 (Decision 2002/883/EC) further Community macro-financial assistance of up
to EUR 60 million to BiH, comprising a loan element of up to EUR  20  million and a grant
element of up to EUR 40 million. This assistance was provided in support of a comprehensive
economic  and  structural  adjustment  programme  in  the  context  of  an  IMF  Stand-by
arrangement  approved  in  August  2002.  Like  the  first  package,  the  implementation  of  this
assistance is linked to progress with specific economic policy conditions.

A  Commission  staff  mission  to  BiH  took  place  in  mid-November,  and  a  Memorandum  of
Understanding (MoU) was agreed with the authorities in early December. The MoU includes
undertakings from the BiH authorities to progress with reforms in the areas of public finance
and  administration,  financial  sector,  and  private  sector  development  and  the  business
environment.  Following  the  positive  outcome  of  the  first  IMF  Review,  the  EC  launched  in
December 2002 the payment of the first tranche of EUR 15 million grant. Out of this amount,
25% was made  available  directly to  the  State  (EUR  3.75  million),  while  the  remainder  was
allocated on a one third-two thirds basis between the RS and FBiH respectively, as in the case
of the previous MFA operation.

19

V.

1.

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

In  2002,  the  economic  performance  of  the
former  Yugoslav  Republic  of  Macedonia
(fYRoM)  has  been  below  expectations.  The
resumption  in  growth  has  been  weak  (+0.3%
against more positive initial forecasts of 3-4%).
The general  government deficit  (5.9%  of GDP)
went  well  beyond  initial  forecasts  (3%)  and
marginally  improved  compared  to  2001.  The
trade  deficit  widened  by  more  than  40%,
reaching  23%  of  GDP.  On  the  positive  side,
monetary  and  exchange  rate  stability  was
maintained.

large 

The  structural  reform  process  slowed  down  in
2002  because  of 
the  September  general
subsequent  change  of
the 
elections  and 
government.  Limited  progress  was  recorded  in
implementing structural reforms in a number of
scale  privatisation,
areas,  notably 
strengthening  budget  controls,  and  public
administration.  The  6-month 
IMF  Staff
Monitored  Programme,  which  started  on  1
January 2002, went off-track in Spring after the
authorities  took  expansionary  fiscal  measures.
In  November  2002, 
the  new  Government
resumed  talks  with  the  IMF  on  a  new  stand-by
arrangement,  which  will  provide  macro-
economic stability to the country.

In November  1999,  the  Council  approved  a
EUR 80 million (loan up to EUR 50 million and
grant  up  to  EUR  30  million)  macro-financial
assistance  in  favour  of  the  fYRoM,  which  it
increased  with  a  EUR  18  million  grant  in
December  2001.  In  January  2002,  the  second
tranche  (EUR  10  million  grant  and  EUR  12
million  loan)  was  disbursed.  In  September,  the
Commission  and  the  fYRoM  authorities  signed
a Supplemental Memorandum of Understanding
setting  the  conditions  for  the  disbursement  of
the outstanding assistance (EUR 46 million).

20

1.  Price liberalisation

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

2.  Trade liberalisation

The Interim Agreement on trade and trade-related matters with the EC,
which  entered  into  force  in  June  2001  after  the  signature  of  the
Stabilisation and Association Agreement, implies more liberal market
access  for  EU  products  and  gradual  reduction  of  tariffs  on  most
important  products.  Negotiations  for  accession  to  the  WTO  were
concluded  in  September  2002,  with  full  WTO  membership  expected
by  Spring  2003.  In  2002,  the  country  completed  the  network  of  free
trade  agreements  with  neighbouring  countries  promoted  by  the
Stability Pact.

3.  Exchange regime

From early 1994, de facto peg of the denar to the DM, and since the 1st
of  January  2002  to  the  euro.  Since  the  devaluation  of  July  1997,  the
denar stands at an equivalent of some 61 denar to one euro.

4.  Foreign direct investment (FDI)

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

5.  Monetary policy

The central bank is independent from the government by law. Central
bank  lending  to  the  government  is  not  allowed,  except  for  non-
renewable  one-day  loans.  Monetary  policy  is  oriented  towards  price
stability, the main statutory objective. The exchange rate anchor is the
intermediate target of the central bank.

6.  Public finances

VAT was introduced in April 2000 and represents a significant source
of  revenue.  The  temporary  Financial  Transaction  Tax,  which  was
introduced  in  2001,  was  extended  until  the  end  of  2002.  A  single
Treasury  account  within  the  Ministry  of  Finance  is  in  place,
identifying all budget users, as well as a system of internal auditing are
being introduced but are not fully operational.

7.  Privatisation and enterprise restructuring

The privatisation programme begun in 1993. By the end of December
2002, some 1684 small and medium size enterprises had already been
privatised, while 84 state companies were left for sale. Privatisation in
the  agricultural  sector  is  nearly  complete.  Firms  and  organisations
conducting  activities  of  special  national  interest,  public  services  and
utilities  are  not part  of  the  programme.  In  2001, the national  telecom
operator was sold to the Hungarian company Matav. The liquidation of
the remaining 24 large loss-making companies, out of an initial list of
40 firms, has been delayed.

8.  Financial sector reform

The  banking  law  of  2000  established  the  legal  framework  for
modernised  and  strengthened  banking  sector.  The  banking  sector  is
largely privatised and highly concentrated, with the three largest banks
having a combined market share of 65%.

2.

Macroeconomic performance

In 2002, the economic performance of the former Yugoslav Republic of Macedonia has been
below expectations. Several factors such as the persistence of the negative effects of the 2001
crisis,  the  weak  external  environment,  the  political  uncertainty  surrounding  the  general
elections  in  September  and  the  lack  of  an  IMF  agreement  had  a  negative  impact  on  the
economic and business climate. GDP, which had previously been expected to grow at a rate of
about  3-4%,  posted  a  slight  increase  by  0.3%.  The  contraction  in  industrial  production  by
some  5%  was  compensated  by  positive  growth  in  agriculture  (+2%)  and  the  service  sector
(+4%). The level of officially registered unemployment increased to around 32% of the labour
force, from 30.5% in the previous year. However, taking into account the informal sector, real
unemployment figures are probably lower than official data.

A tight monetary policy and the preservation of the exchange rate external anchor contributed
to maintain inflation under control in 2002 and consumer prices increased by less than 3% on
average. During 2002, the weighted (for different maturities) interest rate on central bank bills
sold on auction increased from 13.6% in January to more than 15% in December, implying a
high real interest rate of around 12% by year-end. The Macedonian Denar (MKD) remains de-
facto pegged to the euro – at around MKD 61 per euro.

In 2002, fiscal performance improved, but not by as much as planned at the beginning of the
year.  The  general  government  deficit  reached  around  5.9%  of  GDP,  well  beyond  the  initial
forecast of 3% and slightly  below the  6.2%  deficit  which  was recorded  in 2001.  The  worse
than  expected  outcome  was  due  to  the  negative  impact  of  some  pre-electoral  spending
decisions, such as the increase by 10% on average in public sector wages introduced in June
and  the  decision  to  reimburse  depositors  who  lost  their  savings  in  the  1997  TAT  pyramid
scheme.

On the external side, an unexpected drop in exports by around 4%, down to about USD 1100
million, against an increase in imports by 10%, up to a level of USD 1850 million, provoked a
widening of  the trade  deficit by more than  40%, to USD  750 million, equivalent  to 23% of
GDP.  Owing  to  large  official  and  private  transfers,  the  2002  current  account  deficit  (more
than  USD  300  million  or  8.7%  of  GDP)  is  significantly  lower  than  the  trade  deficit.  Hard
currency  reserves  slightly  declined  to  about  USD  700  million  at  the  end  of  the  year,
equivalent to 4-5 months of imports. Foreign debt remained sustainable, around 42% of GDP
in  2002.  The  former  Yugoslav  Republic  of  Macedonia  was  on  track  in  meeting  its  debt
servicing obligations.

The 6-month  IMF Staff Monitored Programme,  which started on 1  January  2002,  went  off-
track  during  its  review  in  Spring,  following  the  above  mentioned  pre-electoral  spending
decisions.  In  November  2002,  the  new  Government  resumed  talks  with  the  IMF  and,  in
February 2003, reached an agreement on a new stand-by  arrangement, which  is  expected to
provide  improved  macro-economic  stability  to  the  country.  The  macroeconomic  framework
agreed for 2003 foresees real GDP growth of 3% and an inflation rate of 3%. A target for the
general government deficit of 2% of GDP (1.6% at the central level) was agreed, which if the
programme  remains  on  track  will  represent  a  significant  fiscal  adjustment  of  almost  4%  of
GDP with respect to the previous year.

3.

Structural reforms

Price liberalisation is now essentially completed, except for most utilities, and various items
such as oil and oil by-products.

21

The privatisation process of small and medium size enterprises, is almost concluded. By the
end of December 2002, 1,688 enterprises had been privatised while 84 state companies were
left for sale among those included in the privatisation programme which began in 1993. Only
10 companies were privatised in 2002, of which 5 were on the original list. The 84 remaining
companies  represent  less  than  5%  of  the  workforce  and  less  than  2%  of  the  equities  of  the
state enterprises on the  privatisation  list.  The  process  of  restructuring,  sale  or  liquidation  of
several large loss-making public enterprises, which were  identified by the 2000  government
Action Plan, was suspended before its completion in the last quarter of 2002 because of the
September  general  elections.  However,  some  important  progress  was  made  in  2002.  In
September,  Jugohrom  -  a  large  metallurgical  company  that  used  to  employ  almost  2  000
people and posted the largest loss among all the 40 firms covered by the Action Plan – was
sold to the French company SCMM.

The fYRoM  was the  first  country  to sign  a  Stabilisation and Association Agreement (SAA)
with the EC in April 2001, followed by the entry into force of the Interim Agreement on trade
and  trade-related  matters  in  June  2001.  During  the  year,  the  fYRoM  signed  Free  Trade
Agreements  (FTAs)  with  Albania,  Bosnia  and  Herzegovina  and  Romania,  fully  meeting  its
obligations related to regional trade liberalisation under the Stability Pact. In September, the
Working  Party  on  the  accession  of  the  fYRoM  to  the  WTO  completed  the  negotiations,
removing  the  remaining  obstacles  to  the  participation  of  the  country  to  the  WTO  in  Spring
2003.

In 2002, limited progress was made in the reform of the public administration and in the area
of public expenditure management; the process slowed down because of the general elections
and the change of government, and is now expected to resume in 2003. The main challenge in
the  area  of  fiscal  reform  remains  the  development  of  decentralised  government.  In  January
2002, the parliament adopted a Law on Local Self-Government which defines a broad set of
municipal responsibilities. However, the implementation of this law crucially depends on the
adoption  of  a  new  Law  on  Local  Government  Financing,  which  will  establish  the  share  of
fiscal resources that local governments may manage and retain.

The banking sector is largely privatised and highly concentrated, with the three largest banks
having  a  combined  market  share  of  65%.  The  sector  continues  to  suffer  from  structural
problems such as lack of lending activity, resulting in a high liquidity situation – the capital
adequacy  ratio  is  equal  to  26%,  according  to  the  latest  information.  High  spreads  between
lending and deposit rates – around 9% in 2002 – are a clear indication that the banking system
is not competitive enough, while the volume of bad loans – around 20% of credit exposure,
according  to  the  latest  methodology  –  remains  relatively  high.  However,  confidence  in  the
banking sector has been steadily increasing thanks to the monetary stability.

4.

Implementation of macro-financial assistance

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

This Council  decision was revised on 10 December 2001,  allowing  for  the  extension  of  the
assistance  until  the  end  of  2003  and  increasing  the  grant  element  by  EUR  18  million  (to  a
grant total of EUR 48 million out of a total EUR 98 million).

A  first  tranche  of  EUR  30  million  (EUR  20  million  grant  and  EUR  10  million  loan)  had
already been released in December 2000/January 2001. In January 2002, a second tranche of
EUR 22 million (including EUR 10 million grant) was disbursed, exceptionally on the basis

22

of  an  IMF  Staff  Monitored  Programme,  taking  into  account  the  difficult  political  and
economic situation in the country in the aftermath of the Spring 2001 ethnic conflict.

The EC macro-financial assistance is part of a package of financial support to the fYRoM of
EUR 309 million, which included EUR 172 million for balance of payment support and was
pledged by the international community at the March 2002 donor conference.

The  conditions  for  the  disbursement  of  the  remaining  macro-financial  assistance  (EUR  46
million)  have  been  set  out  in  a  Supplemental  Memorandum  of  Understanding  (SMoU)
between the European Community and the fYRoM authorities signed in September  2002.  It
specifies that the release of the third tranche (EUR 10 million loan and EUR 10 million grant)
will  be  made  after  the  approval  by  the  IMF  Board  of  a  new  arrangement  with  the  fYRoM
authorities.  It  also  specifies  the  economic  policy  conditions  attached  to  the  release  of  the
fourth  and  last  tranche  (up  to  EUR  18  million  loan  and  up  to  EUR  8  million  grant).  They
focus  on  progress  in  the  areas  of  public  administration  reform,  public  expenditure
management  and  fiscal  reform,  enterprise  restructuring  and  private  sector  development,  and
financial sector reform.

23

VI.

GEORGIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

and 

transport 

Economic growth accelerated in 2002 driven by
agriculture, 
construction.
Preliminary figures give a real GDP growth rate
of  5.4%  (4.5% 
in  2001).  Consumer  price
inflation  was  5.6%  (5%  at  end-2001).  The
current  account  deficit  is  estimated  to  have
remained unchanged from 2001 at about 6.5% of
GDP due to modest growth in exports.

Notwithstanding  the  Paris  Club  agreement  with
bilateral  creditors  in  2001,  the  debt  service
obligations  on  Georgia’s  external  debt  remain
high in 2003 and 2004 and  Georgia is  expected
to seek an extension to the current rescheduling
agreement.

There  was little  progress in structural  reform  in
2002.  The  difficult  investment  climate  in  the
country  was  aggravated  further  by  deterioration
of the security situation.

The  second  review  under  Georgia’s  three-year
arrangement with the IMF under the PRGF was
completed in  July  2002 after  a delay  due to the
need  to  take  additional  measures  to  underpin
fiscal revenues in the 2002 budget.

Due to lack of progress in a number of areas in
the structural conditionality, a Commission staff
mission  proposed  in  December  2002  a  reduced
grant  tranche  (EUR  6.5  million)  under  the
exceptional financial assistance to Georgia.  The
disbursement  of 
is,  however,
pending  the  completion  of  the  third  review  by
the  IMF  and  an  early  principal  repayment  of
EUR 9 million to the Community by Georgia.

tranche 

the 

1.  Price liberalisation

Most prices have been liberalised.

2.  Trade liberalisation

Liberal  international  trade  policy.  Georgia  became  a  member  of  the
WTO  in  June  2000.  Most  import  and  export  restrictions  have  been
eliminated,  but  recently  there  have  been  some  temporary  export  bans
motivated by theft prevention.

3.  Exchange regime

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

4.  Foreign direct investment

Adequate overall legislation. Unlimited repatriation of capital and profits
and  no  limitations  on  holding  foreign  currency  bank  accounts.  FDI
inflows were 3.2% of GDP in 2001.

5.  Monetary policy

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

6.  Public finances

Total  fiscal  revenues  (including  grants)  estimated  at  16  %  of  GDP  in
2002, tax revenues at 14.5%; total expenditure and net lending estimated
at  18%  of  GDP.  A  new  budget  system  law  has  been  submitted  to  the
parliament.

7.  Privatisation and enterprise restructuring

Small  and  medium  size  privatisation  has  been  largely  completed.
Currently  the  focus  is  on  main  utilities  (telecommunications  and  the
power  sector)  where  the  government  aims  at  finding  strategic  investors
or  bringing  companies  under  private  management.  There  has  been  a
marked decline in foreign investor interest due to poor business climate.

8.  Financial sector reform

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

2.

Macroeconomic performance

Preliminary data for the year 2002 show an increase in real GDP growth from 4.5% in 2001 to
5.4%. Economic growth was driven by  agriculture,  transport  and  construction. Despite poor
weather  conditions  in  parts  of  the  country,  agricultural  production  increased  by  7%.  Better
energy  supply  with  less  disruptions  in  transmission  contributed  to  a  rebound  in  industrial
production (+4.9%) after a decline in 2001. 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.

24

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 1.7 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  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 months of imports.

Georgia’s  three-year  arrangement  under  the  PRGF  was  approved  by  the  IMF  Board  in
January 2001. The second review under the arrangement was completed in July 2002 after a
delay  due  to  the  need  to  take  additional  measures  to  underpin  fiscal  revenues  in  the  2002
budget.  By  end-2002  Georgia  was  able  to  draw  SDR  49.5  million  (USD  66  million)  of  the
total amount of SDR 108 million (USD 144 million) available to Georgia under PRGF.

3.

Structural reforms

Georgia has a liberal trade regime but export bans, motivated by theft prevention, have been
imposed  over  the  last  couple  of  years  on  timber  and  scrap  metal.  The  ban  on  the  export  of
scrap  metal  was  lifted  in  June  2002,  six  months  after  its  introduction  by  the  Parliament.
During 2002 further steps were taken towards the realisation of the  Baku-Tbilisi-Ceyhen oil
pipeline  and  the  parallel  Baku-Tbilisi-Erzerum  gas  pipeline  which  are  expected  to  be  in
operation from 2004-2005 onwards.

Owing to the difficult investment climate in the country, progress in large scale privatisation
has been overall slow. Following several failures in privatisation attempts in 2001 there was a
little more activity during 2002. These included the privatisation of the Azoti chemical plant
and a locomotives production plant. In the electricity sector, private management companies
were introduced during 2002 both in the wholesale market and in transmission and dispatch.
Remaining  state-owned  distribution  companies  were  merged  and  bringing  the  merged
company (United Distribution Company) under private management is under preparation. The
collection  rates  have  been  improved  but  the  sustainability  of  the  sector  is  not  secured  yet.
There has also been progress with bringing private management to the Tbilisi water company.
On the other hand, the future of the telecommunications sector and the Tbilisi gas distribution
is not yet settled.

Based on the Government’s anti-corruption strategy, several measures are under preparation
in  the  areas  of  reorganisation  of  public  service  and  of  financial  management  of  the  state

25

resources but the implementation record is still weak. The EBRD has estimated on the basis
of business surveys that the average “bribe tax” has decreased in Georgia from 3.5% of firms’
annual total sales in 1999 to 2.7% in 2002. According to the same survey, the share of firms
which paid bribes frequently increased however from 36.8% to 37.8%.

The number of banks is still high in Georgia in relation to the size of the economy (26 at end-
2002). In 2002, the central bank adopted an analytical framework for resolution of distressed
banks. A bill on money laundering was submitted to the Parliament at the end of the year.

An Economic Development and Poverty Reduction Programme ( formerly Poverty Reduction
Strategy Paper) was under preparation during 2002 with broad civil society participation. The
document  recognises  among  other  things  the  significance  of  agricultural  policies  and  rural
development  in  general  for  poverty  reduction  and  the  challenges  facing  the  social  security
systems. Strengthening governance and administrative capacity are key to the implementation
of the proposed strategy.

4.

Implementation of exceptional financial assistance

Substantial progress was made in many areas of structural reform during 2002, although in a
number of areas, progress was lagging, in particular in fiscal policies, privatisation and energy
sector reform. Therefore, a Commission staff mission in December 2002 proposed a reduced
grant tranche of EUR 6.5 million for the year 2002 (the maximum annual tranche is EUR 11.5
million).  The  disbursement  of  the  tranche  is,  however,  pending  the  completion  of  the  third
review  by  the  IMF  under  Georgia’s  three-year  PRGF  arrangement  and  an  early  principal
repayment  of  EUR  9  million  to  the  Community  by  Georgia.  In  total,  EUR  25  million  have
been disbursed to Georgia  as  grants  under  the  exceptional  financial  assistance  in  the  period
1998-2002.  After  two  early  debt  repayments  on  the  loan  of  EUR  110  million  disbursed  in
1998, Georgia’s outstanding debt to the Community amounted to EUR 92 million at the end
of 2002. The Commission services also reached an agreement with the  Georgian  authorities
on  the  structural  conditionality  for  the  2003  grant  tranche  (up  to  a  maximum  of  EUR  11.5
million). The specific conditions were identified in the same areas as the year before (such as
tax  revenue  collection,  energy  sector  reform  and  financial  sector  reform)  and  they  are
consistent  with  policies  pursued  by  the  authorities  in  the  context  of  the  Economic
Development and Poverty Reduction Programme which is under preparation.

26

VII. MOLDOVA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1.  Price liberalisation

Most prices have been liberalised

2.  Trade liberalisation

Liberal  international trade  policy.  Moldova became  a member  of  the
WTO in June 2001.

3.  Exchange regime

The  lei  is  convertible  for  current  account  operations.  Floating
exchange rate.

4.  Foreign direct investment

Unlimited  repatriation  of  capital  and  profits  and  no  limitations  on
holding foreign currency bank accounts. Adequate overall legislation,
but implementation is often problematic, which weakens the business
climate. FDI remains modest, even by regional standards.

5.  Monetary policy

In spite of rapidly rising domestic demand, prudent monetary policies
conducted by the National Bank of Moldova resulted in a dramatic fall
in inflation.

6.  Public finances

The  government  has  been  attempting  to  increase  budget  revenues  and
strengthen  fiscal  discipline.  Tax  collection  has  improved,  but  customs
reform remains a priority.  In  2002,  a primary  budget  surplus  of 2%  of
GDP  was  recorded.  However,  due  to  the  heavy  debt  servicing  burden,
the overall budget deficit was  1.3%  of  GDP.  Debt  remains amounts  to
about 110% of GDP.

7.  Privatisation and enterprise restructuring

Structural reforms have been accelerated, but transformation to a market
economy is far from complete. Privatisation of the key economic sectors
were delayed by a bad market sentiment.

8.  Financial sector reform

The  financial  sector  is  in  a  relatively  good  shape,  but  further
strengthening is crucial to mobilize savings and promote investment.

Real  economic  growth  accelerated  further  in
2002 to 7.2%  year-on-year from 6.1%  in 2001.
Strong  industrial  production  continues  to  drive
the  economy's  expansion,  spurred  by  gradual
growth in exports and rising domestic demand.

The  trade  deficit  narrowed  slightly  from  24%
last  year  to  19%  of  GDP  in  2002,  while  the
current  account  gap  improved  at  around  6%  of
GDP. Consumer prices rose by just 4.4% in the
year  to  December  2002,  down  from  8%  a  year
earlier.

have 

reform 

reforms 

structural 

Although 
been
accelerated  in  recent  years,  transformation  to  a
market  economy  is  far  from  complete.  While
land 
the
almost 
government  has  only  recently  started  with  the
privatisation of its key economic sectors, which
the  country's
is  severely  complicated  by 
unfavourable business climate.

completed, 

is 

remained 

tight,  but
Fiscal  policy  has 
deteriorated,  as  the  government  has  struggled
with  the  heavy  burden  of  servicing  its  debts,
presently  amounting  to  over  110%  of  GDP.
Dependence  on  capital  flows  from  multilateral
and  bilateral  creditors  remains  therefore  very
high.

in  2002  prompted 

A  combination  of  these  fiscal  and  balance  of
payments  problems 
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  in  total  USD  35.6  million,  USD
39.4  million  was  transferred  into  a  seven  years
amortising bond.

Moldova 
received  no  EC-macro-financial
assistance  in  2002.  The  loan  of  EUR  15
million, which was approved in July 2000 was
replaced by a straight grant in December 2002
(2002/14307/EC).  The  latter  Council  decision
opens the prospects for a new operation still to
be decided.

27

2.

Macroeconomic performance

Moldova's economic recovery has continued from last year, with real GDP up by 7.2% year-
on-year  in  2002.  Strong  industrial  growth  (over  11%  y-o-y)  continues  to  drive  expansion,
spurred by continued import demand in traditional former Soviet markets and rising domestic
demand.

By  mid-2002,  inflation  fell  to  below  5%  year  on  year  for  the  first  time  since  the  1998
financial crisis. Following recent progress on debt restructuring and the expected resumption
of  multilateral  financing,  the  central  bank  is  expected  to  maintain  a  broadly  tight  monetary
stance, and a sharp increase in inflation is not expected.

The government's fiscal policy has remained generally prudent. However, revenue was weak
during 2002 mainly as a result of repeated failures in key privatisation projects and a decrease
of  the  profit  tax.  Continued  revenue  problems  have  forced  the  government  to  rely  on
sequestration and spending restraint to contain its deficit, which amounted to 1.3% of GDP in
2002.

Moldova's total external debt stands presently at around 110% of GDP. Due to the substantial
structural  current  account  deficits,  which  have  stabilised  in  previous  years  at  around  9%  of
GDP, the country remains highly dependent on additional support from the IFIs and bilateral
donors, as long as FDI-inflows remained modest. Indeed, the large official transfers (primarily
technical aid and  humanitarian  assistance),  and  a  high  level  of remittances  from  abroad  can
only partly mitigate the chronically high merchandise trade deficit, which amounted to almost
20% of GDP in 2002.

As  expected,  the  government's  large  debt-servicing  hump  in  2002  has  forced  it  to  seek  a
restructuring  of  bilateral  and  commercial  debt.  In  early  June,  it  announced  that  it  was
restructuring  the  USD  75  million  Eurobond  principal  payment  due  on  June  13th,  having
already indicated its desire to restructure its Paris Club debts. The finance ministry reached an
agreement  on  restructuring  USD  39.4  million  of  the  bond  over  a  seven-year  period,  having
earlier bought back the remaining 40% at a discount on secondary markets.

3.

Structural reform

Improving  the  business  climate  and  reducing  the  remainder  of  government  controlled
enterprises remains  a  priority.  Corruption  and  a  poor  regulatory  framework  pose  significant
obstacles  to  private  sector-led  growth.  In  2002,  the  government's  privatisation  plan  covered
450  enterprises,  of  which  the  22  amongst  the  largest  are  being  privatised  individually  (two
electricity  grids,  Moldtelecom,  the  tobacco  monopoly,  eight  wineries  and  a  number  of
industrial plants). Privatisation proceeds have been disappointing and  remained below target
in  2002.  One  of  the  major  deals  was  the  June  2002  sale  of  the  Topaz  electronic  plant  to
Russia's Salyut for USD 1 million.

Deloitte  &  Touche,  acting  as  the  government's  advisor  in  privatising  the  electricity  grids,
recommended  putting  off  privatisation  owing  to  unfavourable  market  conditions,  while
tobacco privatisation has been postponed until the industry has been liberalised. The  largest
privatisation so far was the sale of half the country's electricity distribution network to Union
Fenosa of Spain in 1998, backed by the European Bank for Reconstruction and Development
(EBRD).

However,  following  disagreement  on  electricity  tariffs  with  the  government,  the  Spanish
investor has alleged that the government and the business community have tried to impede its
activity. Moldova has had little success in attracting foreign investment; its main investors are

28

the  EBRD  and  the  US-supported  Western  Newly  Independent  States  Enterprise  Fund
(WNISEF), which often have to cover for departing western private investors.

4.

Implementation of exceptional financial assistance

The European Community provided two macro-financial assistance packages worth EUR 45
million and EUR  15  million  (Council  Decisions EC/94/346 and  EC/96/242)  to  Moldova.  In
both  cases,  the  Community  loans  were  part  of  an  overall  package  mobilised  by  the
international community to complement the resources provided by the IFIs. Moldova has so
far serviced scrupulously its external financial obligations towards the Community.

In  July  2000,  the  Council  approved  a  new  macro-financial  assistance  loan  for  Moldova  of
EUR  15  million  (EC/452/2000).  By  the  time  the  Council  Decision  was  taken,  Moldova’s
arrangement with the IMF under the Extended Fund Facility  (EFF),  approved in May 1996,
expired (in May 2000). It was replaced, in December 2000, by a new three-year arrangement
under the Fund’s Poverty Reduction and Growth Facility (PRGF). Against this background, it
was proposed that the Community macro-financial loan to Moldova be cancelled and replaced
by  a  straight  grant  of  an  equivalent  amount.  Following  the  consent  of  the  European
Parliament, the European Council adopted the Commission Proposal on December 19, 2002
(2002/14307/EC).  This  new  macro-financial  assistance  will  be  disbursed  in  at  least  two
tranches under similar conditions to those foreseen for the disbursement of the loan and will
be complementary to financing provided by the IFIs.

29

VIII. ROMANIA

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

trends  were 

Macroeconomic 
favourable 
accompanied  by 
renewed external retrenchment.

particularly
in  2002  with  sustained  growth
sharper  disinflation  and

A  broadly  supportive  macroeconomic  policy
mix underpinned these positive trends but delays
in  the  implementation  of  structural  reforms
continued  to  cast  a  shadow  over  medium  term
prospects.

Despite  some  progress  towards  harder  budget
constraints,  excessive  wage  growth  in  several
public  enterprises  and  persistent  arrears  to  the
budget  and  public  utilities  were  sources  of
particular  concern  together  with  slower-than-
planned  privatisation  and  accelerating  credit
growth.

In  January  2002,  the  EU  Council  agreed  in
principle  to  make  available  to  Romania  EUR
100  million,  pursuant 
to  Council  decision
99/732/EC,  in  two  sub-tranches,  subject  to  the
satisfactory  implementation  of  the  present  SBA
and adequate progress  in  the  country’ structural
adjustment 
the
process.  Conditions 
disbursement  of  the  first  sub-tranche  were  not
yet fulfilled at end-2002.

for 

1.  Price liberalisation

In 2002, price regulations applied to eighteen goods, ten of which were
included  in  the  consumption  basket  accounting  for  a  share  of  20.4%.
Regulated  prices  in  the  energy  sector  were  adjusted  over  and  above
inflation on a regular basis.

2.  Trade liberalisation

In 2002, Romania's applied MFN tariffs averaged 19.1% on all products
as compared to  the  EC  level  of  6.3%.  As  from  January  2002, Romania
eliminated  all  remaining  customs  duties  for  imports  of  industrial
products originating in the EU and the free trade area for these products
was  fully  accomplished.  In  2002,  Romania  also  ratified  a  free  trade
agreement  (FTA)  with  Lithuania  while  formal  negotiations  to  establish
FTAs  were  held  with  the  Republic  of  Yugoslavia  and  FYROM  and
exploratory  talks  with  the  Republic  of  Albania  and  with  Bosnia
Herzegovina.  Within  CEFTA,  Romania  signed  Additional  Protocols
relating  to  the  liberalization  of  agricultural  and  food  trade  and  to  the
origin of goods.

3.  Exchange regime

The  leu  floats  within  a  managed  float  regime  and  the  exchange  rate  is
used  as  the  main  anti-inflationary  instrument  as  long  as  this  does  not
endanger  the  external  balance.  Within  this  framework,  the  central  bank
moved to a policy of less frequent but sizeable interventions allowing for
greater exchange rate fluctuations.

4.  Foreign direct investment

The  FDI  regime  is  open  and  non-discriminatory;  profit  may  be  freely
repatriated.  Since  early  1997,  foreign  investors  can  own  land  necessary
to  carry  out  their  activities.  Laws  regulating  and  promoting  FDI  and
portfolio  investment  have  been  repeatedly  modified,  creating  legal
uncertainty.

5.  Monetary policy

The  National  Bank  of  Romania  enjoys  a  high  degree  of  independence.
The Law on the statute of the central bank defines its main objective as
ensuring  the  stability  of  the  national  currency  in  order  to  contribute  to
price  stability.  Although  the  law  still  allows  for  a  limited  amount  of
direct financing to the government, this facility was not utilised in 2002.

6.  Public finances

Basic  tax  reform  has  been  completed,  but  major  steps  to  consolidate
public finances remain to be implemented, including pension and health
reforms.  In  2002,  however,  the  enactment  of  new  VAT  and  profit  tax
laws,  measures  to  improve  the  institutional  framework  for  budgetary
policy  and  tax  administration,  and  a  reduction  in  the  number  of  extra-
budgetary  funds  brought  about  much  needed  progress  towards  the
elimination  of  widespread 
improvement  of
collections,  and  the  development  of  better  budgeting  and  expenditure
control procedures.

tax  exemptions, 

the 

7.  Privatisation and enterprise restructuring

The  majority  of  small  and  medium-sized  companies  have  been
privatised, but many large-scale companies remain public and subject to
poor  corporate  governance  and  financial  discipline.  During  2002,
privatisation  targets  agreed  in  the  context  of  the  IMF  SBA  were
repeatedly missed.

30

8.  Financial sector reform

Reform  of  the  banking  sector  was  slow  at  first,  leading  to  serious
difficulties  in  1997  and  1999.  Subsequently,  however,  the  authorities
took major steps to strengthen the regulatory framework while closing or
restructuring  and  privatising  the  most  problematic  banks.  At  end-2002,
foreign owned institutions accounted for nearly half of all banking sector
net  assets.  Despite  progress,  capital  markets  remained  small  and
underdeveloped.

2.

Macroeconomic performance

Following  a  decade  during  which  soundly  based  growth  has  proved  elusive,  in  2002
Romania’s three-year old recovery weathered the economic slow down in the EU as growth
remained  robust  and  its  composition  improved.  According  to  preliminary  figures,  real  GDP
expanded  by  4.9%  in  2002  as  household  consumption  growth  cooled  off  after  booming  in
2001 and investment spending remained sustained. In a positive reversal of the trends of the
past  two  years,  in  2002,  stock  accumulation  did  not  support  growth  while  net  exports  did.
Despite the slow down in the EU markets that account for some 67% of all Romanian goods
sales abroad, exports expanded at an accelerating pace, reaping the cumulative benefits of past
private  investment  in  consumer  goods  industries.  Imports,  on  the  other  hand,  grew  at  a
sustained,  but  relatively  lower,  pace  thanks  to  the  cooling  off  of  domestic  demand  and  the
disappearance of various one-off factors, such as fiscal incentives for capital goods imports,
that  had  boosted  their  growth  in  2001.  Methodological  changes  in  the  definition  of
employment and unemployment coverage significantly affected (ILO) labour market data for
2002 making it impossible to compare them to the figures for previous years.

Contrary  to  the  past,  positive  economic  growth  was  accompanied  by  greater  domestic  and
external stabilisation.  In  2002,  disinflation progressed more than  expected, with the average
rate dropping 12 percentage points to 22.5% and the December-on-December rate  falling to
17.8% against an official target of 22%. Disinflation was aided by a favourable evolution of
agricultural  prices,  slower  nominal  wage  growth  and  a  supportive  policy  mix.  The  budget
deficit target for 2002, in fact, was undershot and the monetary authorities reduced the pace of
exchange rate depreciation taking advantage of the positive evolution of the external accounts.

Dispelling the concerns raised by its sharp growth in 2001, the current account deficit dropped
more than  expected  in 2002 when it  totalled  3.4%  of  GDP.  After  worsening  sharply  during
most  of  2001,  the  external  balance  began  to  stabilise  thanks  to  a  tightening  of  the  policy
stance.  Building  upon  this  trend  and  in  spite  of  the  slow  down  in  Romania’s  main  export
markets,  external  developments  turned  particularly  favourable  in  2002  thanks  to  the
impressive  performance  of  Romania'  sales  abroad  and  increasing  private  transfers  from
abroad.

Reflecting this positive macroeconomic performance, external financing conditions have been
improving. Better growth, enhanced reform prospects, continued collaboration with the IMF,
improved vulnerability indicators and a favourable international market environment allowed
Romania to easily meet its external financing needs, inter alia by launching its first ten-year
euro bond in April 2002.  Although on  a  rising  trend,  the  debt-to-GDP  ratio  remained  fairly
low at 34% of GDP at end-2002. Over the year, average debt maturity lengthened, sovereign
risk ratings were repeatedly upgraded, spreads on sovereign bonds dropped and external debt
service as a ratio of exports of goods and services decreased from 22.4% to 21.6%. Standing
at USD 7.3 billion at end-December, official reserves equalled 3.9 months of imports, up from
3.2 months at end-2001.

31

As in the past, the authorities met the monetary and budgetary targets agreed in the context of
the  IMF  arrangement.  In  particular,  the  2002  general  government  deficit  outcome  equalled
2.6% of GDP against a target of 2.9% of GDP as lower-than-projected interest payments and
subsidies more than counterbalanced a shortfall  in  tax  revenues.  On  the  monetary  front,  the
central  bank  proved  increasingly  successful  in  achieving  its  internal  and  external  objectives
within the present managed float regime. Despite costly sterilisation operations in the face of
strengthening capital inflows, broad money continued to expand rapidly, increasing by nearly
14% on average real terms over 2002. Notwithstanding high, but declining, lending rates, the
real stock of credit to the private sector  expanded  by  almost  30%, albeit  from a small  base.
Towards end-year, various measures were taken to slow down this rapid growth, particularly
with respect to foreign-currency denominated loans that accounted for more than 60% of all
credit to the private sector.

3.

Structural reforms

Despite  further  advances,  progress  in  enterprise  reform  remained  uneven  as  the  authorities
struggled to make a clear break with the practises of the past. Although the sale of steel maker
SIDEX  in  2001  represented  an  important  achievement,  in  2002  the  privatisation  process
continued to stagger along  despite  repeated  offers  and  the  approval  of  a  new  law  aiming  at
accelerating  privatisation.  The  slow  pace  of  divestitures  reflected  the  poor  attractiveness  of
various  enterprises  but  also  persistently  non-transparent  procedures,  political  factors  and
persisting demands for employment and investment commitments by prospective buyers.

Significant but partial advances were achieved in the energy sector where utilities continued
to  offer  quasi-fiscal  support  to  a  hard  core  of  loss-making  enterprises,  thus  preventing  an
effective tightening  of  their  budget  constraints. Although  politically  difficult,  the  authorities
continued  to  increase  energy  prices  and  toughened  somewhat  their  stance  towards  chronic
non-payers.  However,  further  adjustments  in  (gas)  prices  and  more  gains  in  collection  rates
are required to improve the financial health of the energy utilities on a sustained basis. While
the authorities envisage a wide privatisation of the energy sector as a way to abolish its quasi-
fiscal role, implementation of planned intermediate steps has been lengthier than expected.

After  many  delays,  Romania  has  achieved  important  progress  towards  putting  the  banking
system  on  a  sounder  basis.  In  2002,  however,  the  planned  privatisation  of  BCR  run  into
difficulties. Following the 1999 crisis, several banks were cleaned up and stricter supervisory
requirements  where  introduced  and  implemented.  As  a  result  of  these  factors,  capital
adequacy ratios and asset quality improved significantly over the last three years. Yet, various
sources of vulnerability remained. With lending to the private sector expanding at a fast pace,
the renewed soundness of the banking sector and the enhanced powers of the supervisors are
likely to be put to the test. Out of three remaining state-owned banks, the authorities planned
to restructure the smallest two and privatise the largest, BCR. However, the two privatisation
tenders for the latter launched in the second half of 2002 did not result in any expression of
interest deemed legally adequate. A new privatisation schedule involving the early acquisition
by the EBRD and the IFC of a blocking minority share was being touted at end-2002.

4.

Implementation of macro-financial assistance

Since 1991, the EU has supported Romania’s transition process through four macro-financial
assistance  operations,  the  latest  of  which  was  approved  in  November  1999  when  the  EU
Council granted Romania a balance-of-payments loan, of up to EUR 200 million, within the
framework of a SDR 400 million SBA (Council Decision 99/732/EC). After the release of the
first EUR 100 million tranche in June 2000, however, the IMF programme went off track and

32

eventually  expired.  No  further  disbursements  of  EU  macro-financial  assistance  could
therefore take place.

In  October  2001,  however,  the  IMF  Board  approved  a  new  18-month  SBA  for  SDR  300
million (approximately USD 383 million). In 2002, lengthy negotiations with the World Bank
for  a  second  Private  Sector  Adjustment  Loan  (PSAL)  of  USD  300  million  were  also
concluded.  Performance  under  the  IMF  programme  has  been  mixed  and,  by  end-2002,  the
completion of the third review had been delayed owing to repeated slippages in wage policy
in state-owned enterprises.

Within the context of the current SBA and following a request from the Romanian authorities,
the EU Council agreed in principle in January 2002 to make available to Romania EUR 100
million,  pursuant  to  Council  decision  99/732/EC,  in  two  sub-tranches,  subject  to  the
satisfactory  implementation  of  the  SBA  and  adequate  progress  in  the  country’  structural
adjustment process, notably in the areas of privatisation of the electricity distribution and of
the BCR Bank, collection of social contributions and reducing delays in VAT refunds. After
lengthy negotiations, a Supplemental Loan Agreement and a Supplemental Memorandum of
Understanding (SMOU) were signed in November 2002. Despite significant progress, at end-
2002,  conditions  for  the  disbursement  of  the  first  sub-tranche  of  EU  macro-financial
assistance were not yet fulfilled.

33

IX.

SERBIA AND MONTENEGRO

1.

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

1. Price liberalisation

While  most  price  categories  are  liberalised  in  Serbia  and  Montenegro,
some  exceptions  still  remain  in  the  area  of  public  services  (e.g.
transport,  utilities).  Electricity  prices  in  Serbia  are  being  gradually
adjusted towards cost-recovery levels.

2. Trade liberalisation

In Serbia, there remain only moderate restrictions on trade. Most import
and export licences and quotas abolished. The average Serbian tariff rate
of  9.5%  is  low,  compared  to  other  countries  of  the  Western  Balkan
region.  Montenegro  has  lower  tariffs  but  a  higher  degree  of  non-tariff
barriers. Different trade and customs regimes in Serbia and Montenegro,
though  work  on  an  Action  Plan  on  harmonising  tariffs  is  continuing.
Free trade agreements in place with neighbour countries are initialled.

3. Exchange regime

Stable  exchange  rate  in  Serbia  since  early  2001.  Convertibility  for
current  and  some  capital  transactions  (Art  8  of  IMF).  Managed  float
regime under which the exchange rate of the Dinar has been kept stable.
Euro  serves  as  an  anchor  in  Serbia  and  as  the  sole  legal  tender  in
Montenegro.

4. Foreign Direct Investment

The  federal  Foreign  Investment  Law  adopted  in  early  2002  improved
conditions  for  foreign  investors  substantially  but  heavy  procedures  for
issuing  building  permits  and  for  enterprise  registration  still  in  place.
Newly established Foreign Investment Agency to promote FDI.

5. Monetary policy

Strict monetary policy of the National Bank of Serbia (ex-National Bank
of Yugoslavia); creation of base money almost exclusively on the basis
of  foreign  exchange 
to  general
increases  and 
government; no sovereign monetary policy in euro-ised Montenegro.

limited  credits 

6. Public finance

Tax  policy  reforms  in  Serbia  continued  to  encourage  investment  and
employment creation. Tax regime has been made simpler with low rates
for  corporate  (14%)  and personal  (10%) income  tax. Modern  (interim)
Treasury  systems  and  tax  administrations  in  place  in  Serbia  and
Montenegro. VAT in preparation in both republics.

7. Privatisation and enterprise restructuring

In  Serbia,  privatisation  has  gained  momentum.  In  2002,  12  companies
were  sold  through  tenders  (out  of  a  total  of  150  companies  to  be
tendered), and 221 were sold through auctions (out of a total of 3000).
32  large  conglomerates  are  in  the  process  of  restructuring.  In
Montenegro, the large oil company Yugopetrol was sold.

8. Financial sector reform

Enforced  banking  supervision  in  place  in  Serbia.  Minimum  capital
requirement  of  EUR  10  million.  Cleaning-up  of  domestic  banks
continued, four large banks in Serbia  were  closed  in  early  2002,  and a
large  number  of  banks  are  currently  being  restructured.  The  legal  and
regulatory framework for the banking sector in Montenegro has further
improved, although financial intermediation is low.

supporting 

Economic policies in Serbia and Montenegro in
2002 continued to be geared towards sustaining
macro-economic 
an
stability, 
ongoing  process  of  dis-inflation  and  a  modest
increase  in  the  standard  of  living.  Real  output
grew  by  4%,  inflation  further  declined  from
40% to 15%, and the nominal exchange rate has
foreign  exchange
been  kept  stable  while 
reserves  almost  doubled  to  EUR  2.3  billion  by
end-2002.  The  fiscal  deficit  (5%  of  GDP)  was
still  relatively  high  and  points  to  the  need  for
further fiscal streamlining.

Structural  reforms  continued  throughout  2002,
notably  in  the  banking  and  enterprise  sectors
and in  the  areas  of  expenditure  control  and  tax
policy.  Privatisation  has  gained  momentum
in  Serbia.
since  early  2002, 
large
the 
However, 
enterprise  sector  and  financial  sector  reform
need  to  be  continued  vigorously,  and  further
improvements  in  the  overall  business  climate
are essential to support investment and growth.

in  particular 
restructuring  of 

the 

Out  of  a  first  macro-financial  package  of  EUR
345 million adopted in 2001, the second (grant)
tranche  (EUR  40  million)  was  disbursed  in
January  2002  and  the  third  and  final  (grant)
tranche (EUR 45 million)  in  August  2002 after
the
the  authorities  had  satisfactorily  met 
economic  policy  conditions  attached  to  the
assistance.

In  early  November  2002,  the  Council  decided
to  provide  to  Serbia  and  Montenegro  further
Community macro-financial assistance of up to
EUR 130 million, of which EUR 75 million in
the form of grants. Following the signature of a
Memorandum  of  Understanding,  the  grant
component  of  the  first  tranche  of  this  new
package  of  assistance,  EUR  30  million,  was
released  in  December  2002,  with  the  loan
in
component,  EUR  10  million,  released 
February  2003.  This  assistance 
is  being
provided  in  the  context  of  an  IMF  Extended
Arrangement, approved in May 2002.

34

2.

Macroeconomic performance

In 2002, growth performance in Serbia and Montenegro was sustained with an increase in real
GDP  by  some  4%  in  2002.  Real  growth  was  mainly  driven  by  a  strong  service  sector  (10-
20%),  especially  transport,  and  a  1.8%  increase  in  industrial  production  while  agricultural
output decreased  by  5%  compared  to  2001.  In  Montenegro,  economic  growth  (2%)  and  the
increase  in  industrial  output  (0.5%)  was  lower  than  in  Serbia.  Official  unemployment
remained high at 30%, but  employment in the informal sector could point to a considerably
lower level of real unemployment.

In Serbia, end-of-period retail inflation continued to decline from 40% at end-2001 to a level
below  15%  in  2002,  well  below  the  policy  target  for  2002  of  20%  despite  a  50%  upward
adjustment of electricity prices during the year. In Montenegro, end-of-year inflation declined
from some 24% to 10% in 2002, in line with the government’s target.

Recent  estimates  point  to  a  consolidated  general  government  deficit  of  Serbia  and
Montenegro (exc. Kosovo) for 2002 in the order of 5.0% of GDP, somewhat lower than the
programme  target  of  5.7%,  due  to  a  delay  in  foreign  project  financing.  The  deficit  was
financed  by  foreign  grants  and  loans  (2.9%  of  GDP)  and  receipts  from  privatisation  (about
2.6%).

Revenue  performance  in  Serbia  has  been  mixed.  While  tax  revenues  were  slightly  below
planned  levels  (due  to  lower  than  projected  inflation),  budget  revenues  from  privatisation
exceeded their target substantially and amounted to some EUR 400 million in 2002. On the
expenditure  side  some  costs  were  kept  below  budgeted  levels.  Montenegro  appeared  to
remain under fiscal pressure. Lower than expected revenues, in particular in the first half of
2002,  necessitated  some  discretionary  spending  cuts  (including  capital  spending,  subsidies
and transfers to the pension fund).  The consolidated deficit of  the  republic in 2002 stood at
2.5%  of  Montenegro’s  GDP  (after  5.3%  in  2000  and  8.1%  in  2001),  however,  budget
planning for 2003 foresees a substantially higher deficit of 6.1%.

The  National  Bank  of  Yugoslavia  has  continued  its  stability-oriented  monetary  policy  in
Serbia. The money supply (M1) rose further by 80% during 2002, however, this was mainly
due to foreign exchange purchases by the NBY against the background of large net inflows of
remittances and foreign financing. Gross reserves of the NBY almost doubled during 2002 to
reach EUR 2.3 billion at the end of the year, equivalent to around 3.5 months of imports.

Despite a higher than expected trade deficit of some 25% of GDP, the current account deficit
before  grants  could  be  maintained  at  12.8%  of  GDP  in  line  with  the  IMF  programme.  A
continuous  stronger-than-expected  net  inflow  of  remittances  from  abroad  as  well  as  net
capital inflows including higher than expected Foreign Direct Investment (estimated at EUR
570 million) and loans from official creditors have more than offset the current account deficit
leading  to  the  above-mentioned  substantial  increase  in  foreign  exchange  reserves.  The
exchange rate of the Dinar has remained broadly stable at the level of JUD 59 to 1 EUR since
the end of 2000, reflecting both increased confidence in the domestic currency and favourable
developments in the foreign exchange market.

The external debt stood at USD 11.5 billion or 74% of GDP. The external sustainability of the
economy  of  Serbia  and  Montenegro  will  remain  a  challenge  even  after  the  Paris  Club
agreement of November 2001 that reduces the NPV of the debt by 66% in a phased manner.
The authorities have not yet reached a debt restructuring agreement with the London Club of
creditors, which has so far been reluctant to grant the country similar generous terms.

35

Important  financing  requirements,  mainly  resulting  from  the  current  account  deficit,  debt
service  and  the  need  to  further  increase  foreign  exchange  reserves,  will  continue  to  put  a
heavy strain on the balance of payments. According to an IMF study scenario, debt servicing
will rise in the period 2002-2009, from 1.3 to 6 % of GDP or from 3 to 15% of government
revenues.

3.

Structural reforms

In  Serbia,  public  finance  reforms  continued  with  the  adoption  in  February  2002  of  a  new
budget  law.  Expenditure  control  has  been  improved  considerably  through  steps  to  set  up  a
Treasury  system,  that  is  expected  to  become  fully  operational  in  Spring  2003.  Also,  tax
reforms continued with a view to reduce taxes, improve tax collection and combat corruption
and grey market activities. In late September 2002, the Serbian government approved a set of
new tax policy measures aimed at stimulating investment and employment creation. Measures
include a reduction of corporate taxation from 20% to 14%, tax holidays for new investments
and  employment  above  certain  thresholds,  exemptions  from  the  sales  tax  for  a  number  of
goods,  as  well  as  the  abolition  of  the  capital  gains  tax.  Most  of  the  new  tax  laws  were
endorsed by the Serbian Parliament in November 2002.

In Montenegro, an interim Treasury became fully operational at the beginning of 2002. A new
procurement  law  was  enacted  in  mid-2002.  Montenegro  has  continued  tax  reforms  with
support  from  foreign  advisors.  At  the  end  of  2001,  the  Montenegrin  Parliament  approved  a
package of six tax laws. Four of these laws, namely the laws on income and profit taxation, on
excises and on tax administration have already been implemented in the course of 2002. The
authorities  were  expecting  positive  effects  of  these  new  laws  on  revenue  collection  in  the
second half of 2002 and in 2003 after revenue performance had been below target in the first
half of 2002. The two remaining laws of the 2001 package, the tax on real estate and the VAT
law were planned to come into force in early and mid-2003, respectively. A Large Taxpayer
Office was established in Podgorica in mid-2002.

In  Serbia,  the  process  of  privatisation  through  tenders  and  auctions  has  gained  some
momentum  in  2002.  First  rounds  of  auctions  were  held  at  the  Belgrade  Stock  Exchange  in
Spring  and  Summer  2002  with  limited  success.  In  August  2002,  the  authorities  decided  to
streamline  auction  procedures,  which  led  to  a  substantial  acceleration  of  privatisation.
Progress in the area of enterprise restructuring has continued to be limited. In Montenegro, the
main success was the sale of Yugopetrol to a Greek  company in October  for  some  EUR  65
million cash and some EUR 35 million investment commitments.

The  Federal  authorities  made  further  progress  in  strengthening  banking  supervision  by  the
central bank. A revision of the law on banks came into force in April 2002; it obliges banks to
comply with stricter prudential regulations, to  harmonise minimum ratios in  line with Basle
and EU standards, to define credit policies and to organise internal audits. A bank bankruptcy
law was already enacted in October 2001.

Further  progress  in  restructuring  and  cleaning  up  the  banking  sector  in  Serbia  has  been
achieved.  At  end-2002,  eight  banks  were  under  liquidation  procedures  of  the  Bank
Rehabilitation  Agency  (BRA),  including  four  large  insolvent  state-owned  banks  that  were
closed in January 2002. Some 15 banks, in which the state had obtained shares through debt-
equity-swaps, were in the process of rehabilitation under the BRA. Following the adoption of
new  banking  legislation  in  Montenegro  at  end-2000,  all  banks  were  subjected  to  on-site
assessments  and  applied  for  new  licences.  Seven  banks  were  re-licensed,  and  two  new
licenses  were  issued,  one  of  which  for  a  bank  with  private  ownership.  The  government’s
decision to rehabilitate the largest bank, Montenegro Banka, was taken in late December 2001

36

and  in  early  2002  the  government  assumed  EUR  11.5  million  guaranteed  liabilities  in
exchange for non-performing assets of EUR 24 million. The authorities intend to privatise the
bank in early 2003.

4.

Implementation of macrofinancial assistance

Out  of  the  first  macro-financial  package  of  EUR  345  million  assistance  in  favour  of  the
country  decided  in  2001,  the  second  (grant)  tranche  of  EUR  40  million  was  disbursed  in
January  2002,  followed  in  August  by  the  release  of  the  third  and  final  tranche  of  EUR  45
million  after  the  authorities  had  satisfactorily  met  the  structural  adjustment  conditions
attached to the release of the respective tranches. These conditions specified policy measures
in line with the authorities’ objectives and the IMF programme, mainly in the areas of public
finance, private sector development and banking sector reform.

In  early November 2002, the Council decided  to  provide  to  the  country  further  Community
macro-financial assistance of up to EUR 130 million, of which EUR 75 million in the form of
grants. The objective of this assistance is to underpin economic policies in the context of the
three-year  IMF  Extended  Arrangement  (2002-2005)  approved  in  May,  and  in  particular  to
support the balance of payment and strengthen the foreign exchange position of the country.
A  Memorandum  of  Understanding  (MoU)  was  negotiated  and  agreed  between  the
Commission  Services  and  the  authorities  in  December  2002.  This  MoU  specifies  the
economic policy conditions and structural measures for the release of the second and the third
tranche  of  this  assistance.  In  particular  it  defines  measures  in  the  areas  of  public  finance
reform  and  administration,  banking  sector  reform  and  private  sector  development  and
contains also measures that support the harmonisation of economic systems within Serbia and
Montenegro, especially with respect to the introduction of common tariffs, VAT and company
registries.

The grant component of the first tranche of this new package of assistance, EUR 30 million,
was  released  in  end-December  2002,  following  the  signature  of  the  MoU.  The  authorities
have allocated 10% of the proceeds to Montenegro and 90% to Serbia. The loan part  of  the
first tranche of EUR 10 million followed in February 2003; the delay was due to the pending
completion  of  the  ratification  procedures  in  the  federal  Parliament  of  the  Loan  Agreement
between the EC and the country.

37

X.

1.

SERBIA AND MONTENEGRO / KOSOVO2

Executive summary

SUMMARY STATUS OF ECONOMIC REFORM

the 

reduction  of 

GDP  growth  slowed  to  some  7%  in  2002
(compared  to  11%  the  year  before)  partly
reflecting 
international
presence  and  donor  assistance.  Inflation  is
estimated to have declined from 11 percent in
2001 to the order of 4% in 2002. The gradual
reduction  of  aid  flows  and  the  international
presence  will  smoothen  inflation  pressures
further.  Manufacturing  and  export  activities
remain subdued and unemployment is high.

further  progressed 

UNMIK,  and  particularly  its  EU-led  Pillar  IV
responsible  for  economic  reconstruction  and
development,  has 
in
important  economic  areas.  It  has  enhanced
revenue  collection  and  tax  compliance.  The
financial  sector  has  developed  favourably  in
terms  of  growth  and  product  range.  In  mid-
2002,  the  Kosovo  Trust  Agency  (KTA)  was
formally  established  and  is  responsible  for
privatisation of socially-owned enterprises and
the  control  of  public  enterprises.  So  far,  no
enterprise has been privatised.

to  provide 

In  continuation  of  its  support,  the  Council
decided in June 2001, following a Commission
proposal, 
further  exceptional
Community  financial  assistance  to  Kosovo  of
up  to  EUR  30  million  in  the  form  of  a  grant
the
(2001/511/EC).  The  disbursement  of 
second and final EUR 15 million tranche took
place  in  December  2002  upon  a  satisfactory
implementation  of  economic  policy  measures
agreed for this assistance.

1.  Price liberalisation

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

2.  Trade liberalisation

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

3.  Exchange regime

The  use  of  the  euro/D-Mark  (and  other  currencies)  has  been  legalised,
albeit the Yugoslav Dinar remains the legal tender. Kosovo followed the
schedule  of  the  EU  to  convert  the  cash  circulation  to  euro  in  the
beginning of 2002.

4.  Foreign direct investment

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

5.  Monetary policy

Given  its  status,  Kosovo  does  not  have  a  Central  Bank  nor  a  monetary
policy. The Banking and Payments Authority of Kosovo (BPK) exercises
a number of functions usually attributed to a central bank  including the
preparation of the changeover to the euro from January 2002 onwards.

6.  Public finances

The domestic revenue base has been developed over  time  including  the
introduction  of  new  taxes  and  measures  to  enhance  revenue  collection.
The  split  in  responsibility  between  reserved  and  transferred  power
impeded the development towards a comprehensive budget .

7.  Privatisation and enterprise restructuring

Privatisation  of  public  enterprises  is  hampered  by  legal  uncertainties.
Prior  to  this,  a  number  of  public  undertakings  still  need  to  be
incorporated.  The  KTA  is  expected  to  play  a  key  role  in  enterprise
reform and privatisation.

8.  Financial sector reform

Within  the  regulatory  and  supervisory  framework  of  BPK,  the  seven
licensed  banks  established  a  province-wide  the  branch  network  and
provide  basic  banking  products.  The  payments  system  increased  the
number  of  non-cash 
transactions  A  regulatory  and  supervisory
framework for the insurance sector is in place.

2

Under international administration in line with UNSCR 1244 of 10 June 1999.

38

                                                
2.

Macroeconomic performance

According  to  the  still  weak  database,  the  real  growth  rate  slowed  to  some  7%  in  2002
(compared  to  11%  the  year  before)  partly  reflecting  the  reduction  of  international  presence
and donor assistance. Growth is expected to decline further to be in the order of 5% in 2003.
Reconstruction is still going on, agriculture is recovering and there is a vibrant private service
sector.  The  high  unemployment  (according  to  the  authorities  in  the  order  of  50%)  and  the
weakness  of  the  social  security  system  remain  challenging  issues.  Inflation  is  estimated  to
have declined from 11 percent in 2001 to the order of 4% in 2002. The gradual reduction of
aid flows and the international presence will also place downward pressure on inflation.

The provision of public services has improved but public utilities, notably the energy utility,
continue to suffer from unreliable supply and still very low cost recovery. The situation in the
energy sector has been aggravated  again by  a lightning strike in July 2002,  which seriously
damaged  one  power  plant.  As  regards  infrastructure,  the  improvement  of  road  quality  is
visible but the main arteries suffer from degradation due to the permanent use of heavy traffic
including military. Nearly 100% of the rail track is considered operational, which is reflected
in  increasing  passenger  and  freight  flows.  Telecommunication  largely  relies  on  the  mobile
network  but  the  PTK  (Post  and  Telecommunication  company  of  Kosovo)  is  preparing
investment programmes to upgrade the fixed line network.

As regards the budget 2002, economic growth, the introduction of modern taxes (like income
and profit tax) and the broadening of the tax base contributed to a further increase in expected
domestic  revenues:  preliminary  data  suggest  that  revenues  totalled  some  EUR  476  million,
15%  above  the  estimate  of  the  mid-year  review.  This  positive  development  allowed  for  an
increase in budget expenditure devoted to a large extent to the establishment of a government
structure. Total consolidated government expenditures are estimated at EUR 552 million for
2002,  essentially  in  line  with  the  mid-year  review.  As  a  consequence  of  the  better  revenue
performance,  the  overall  deficit  before  grants,  including  the  one-off  capital  expenditure
related to the use of the accumulated cash balance, is estimated at EUR 75 million compared
to EUR 134 million in the mid-year review.

Adding  the  outlays  for  the  Public  Investment  Programme  (PIP)  of  an  estimated  EUR  378
million (compared to originally estimated EUR 411 million) results in the Kosovo Integrated
Budget (KIB). The  financing gap  of  the  KIB  remains  unaffected  since PIP expenditures are
entirely funded by donor grants.

Kosovo does not carry out a monetary or exchange rate policy since its de-facto currency has
been the DM, followed by the euro since the successful conversion in the beginning of 2002.
Even  though  the  forces  of  past  growth  weaken,  economic  activity  is  still  driven  by  donor
funded  reconstruction  resulting  in  considerable  official  transfers  and  a  huge  trade  deficit.
Despite  first  signs  of  a  shift  from  retail  trade  to  other  economic  activities  including
manufacturing, the economic recovery is still too weak to have a sizeable impact on exports.
Owing  to  the  official  transfers,  remittances  and  factor  income  from  donor-related
employment, the current account showed a surplus in the past years.

3.

Structural reforms

In 2002, UNMIK introduced a three-pillar pension system. The first pillar comprises a pay-as-
you-go-system  financed  from  contributions  (including  a  universal  benefit  scheme  for  those
who did  not contribute to the past  pension  system).  As  second  pillar,  a  “Individual  Savings

39

Pensions” has been introduced, which is based on compulsory contributions by employers and
employees (currently 5% of salary by each party). The contributions are collected via the Tax
Administration  and  paid  to  the  Kosovo  Pensions  Savings  Trust  (KPST).  The  third  pillar
comprises the “Supplementary Employer Pension Funds”/“Supplementary Individual Pension
Funds” provided by licensed pension providers.

Today, the 7 commercial banks licensed by the Banking and Payments Authority of Kosovo
(BPK)  have  a  total  of  122  banking  offices  (branches,  sub-branches  and  offices)  located
throughout  Kosovo,  including  minority  areas.  In  addition,  17  Micro-Finance  Institutions
(MFI) and 4 exchange offices have been licensed by the BPK. Total deposits in the banking
system are EUR 434 million and outstanding loans total EUR 90 million from banks and EUR
34  million  from  MFIs,  which  represents  an  increase  of  164%  in  outstanding  loans  to  the
economy from a year ago. For the insurance sector, there are 8 insurance companies licensed
by  the  BPK  and  one  receiving  a  preliminary  license.  In  addition  to  Third-Party-Liabilities
insurance, other types of insurance are now available. Six additional classes of business have
been  approved  for  three  companies:  Fire,  Personal  Accident  (PA),  Construction  all  Risk
(CAR), Physical Damage to vehicles (CASCO), Directors and  Officers  Liability  (D&0) and
Professional  Liability. Two  Insurance  Rules  provide  for  a  comprehensive  investment  policy
for insurance companies.

As of 1 July 2002, the Kosovo Trust Agency (KTA), formally established in mid-June 2002,
had  taken  over  the  control  over  all  public  enterprises  previously  shared  among  Pillars.  The
KTA was granted wide responsibilities: authority and rights of a trustee, the administration of
all public enterprises (55) and "socially owned enterprises" (SOEs, up to 550). The KTA has
the  authority  to  transfer  of  assets  to  new  companies  (“spin-off  approach”)  and  to  liquidate
enterprises and to initiate bankruptcy proceedings. Only SOEs will be privatised. The KTA is
expected to play a key role in enterprise reform and privatisation. After a year of preparation,
the  KTA  privatisation  team  has  identified  candidate  enterprises  for  special  spin-off  (12),
regular spin-off (app. 45) and liquidation. The outstanding issue of the use of land seems to be
close to being adopted. It is estimated that only 20% of the SOEs can be privatised as going
concerns.  The  receipts  of  privatisation  shall  be  kept  on  trust  accounts  until  any  possible
claims  have  been  settled.  Audits  of  public  enterprises  could  not  be  undertaken  before  the
transfer  of  the  enterprises  to  the  KTA.  Audits  on  KEK  (the  Kosovar  Electricity  company),
PTK  (Post  and  Telecommunication  Kosovo)  and  Pristina  airport  are  currently  being  carried
out; within the next 4-6 months other major enterprises are due to be audited, too. The KTA is
preparing  plans  for  a  restructuring  of  public  enterprises,  including  their  incorporation.  A
regulation establishing a legal framework in the energy sector is being implemented. Progress
in the commercial law framework has been slow in the last 18 months.

Even  though  a  number  of  draft  regulations  had  been  completed  and  transmitted  for  legal
clearance, the legislative progress was seriously hampered by the preparation of the elections
in November 2001 and subsequent delays in establishing the Provisional Institutions of Self-
Government (PISG). According to the Constitutional Framework, economic legislation is part
of  the  powers  transferred  to  the  PISG  and  thus  the  Kosovo  Assembly  is  assigned  with  its
adoption.

4.

Implementation of exceptional financial assistance

Following the provision of a first exceptional financial assistance grant of EUR 35 million in
2000 as part of a broader Community assistance package of EUR 360 million, another grant
of up to EUR 30 million has been approved in June 2001 (2001/511/EC). Its purpose was to
alleviate the financial situation in Kosovo, to facilitate the establishment and continuation of

40

essential  administrative  functions  and  to  support  the  development  of  a  sound  economic
framework.  These  funds  were  provided  in  close  contacts  with  the  International  Financial
Institutions,  notably  the  IMF  and  the  World  Bank,  both  at  working  level  as  well  as  via  the
regular meetings of the Working Level Steering Group monitoring the economic and financial
developments in Kosovo (under its current status, Kosovo does not benefit from the  IMF or
World Bank under conventional programmes).

A  first  tranche  of  EUR  15  million  was  disbursed  in  mid-September  2001  following  the
signature of a Memorandum of Understanding (MoU) between UNMIK and the Community.
The release of the second tranche is subject to satisfactory compliance with economic policy
conditions  as  laid  down  in  the  MoU.  These  include  measures  to  promote  the  financial  and
private  sector  development,  to  produce  macro-economic  data,  and,  most  importantly,  to
develop the revenue base further so as to pursue prudent budgetary policies.

Following a first mission in November 2001, another Commission staff mission was carried
out in June 2002, to review the progress with respect to meeting the conditions attached to the
release of the second tranche of this assistance. Based on broadly satisfactory implementation
of conditionality and further identification of needs in the context of the donor co-ordination
meeting  on  5  November  2002,  the  second  tranche  of  EUR  15  million  was  disbursed  in
December 2002.

41

XI.

TAJIKISTAN

1.

Executive summary

performance
Tajikistan’s  macroeconomic 
remained  relatively  strong  in  2002  with  an
estimated real GDP growth rate of 9.1% (10.2%
in  2001).  Aluminium  production  continued  on
its  increasing  trend  and  also  the  cotton  harvest
was  good.  At  end-2002  the  consumer  price
inflation  was  14.5%  (12.5%  at  end-2001).  The
current  account  position  improved  significantly
in 2002. The  deficit narrowed  to  about  4.2%  of
GDP (7.2% in 2001).

two-year  privatisation 

After  a  slowdown  in  2001  privatisation  gained
some  more  speed  in  2002  in  the  construction,
transportation, trade  and  light manufacturing.  A
new 
strategy  was
approved in July 2002 with a renewed focus on
large  enterprises.  In  the  banking  sector,  several
banks  have  difficulties  in  fulfilling  the  new
prudential requirements.

The  IMF  Board  approved  in  December  2002  a
three-year  arrangement  under  the  PRGF  with  a
total available amount of SDR 65 million (about
USD  87  million)  to  support  the  government’s
economic programme.

review  on 

A  Commission  staff  mission  to  Dushanbe
concluded  positively  a 
the
Community exceptional financial assistance in
June 2002. The disbursement of the 2002 grant
tranche  of  EUR  7  million  took  place  in  early
2003  following  the  IMF  approval  of  the  new
PRGF arrangement for Tajikistan and an early
debt  repayment  of  EUR  8  million  by  Tajik
authorities to the Community.

2.

Macroeconomic performance

SUMMARY STATUS OF ECONOMIC REFORM

1.  Price liberalisation

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

2.  Trade liberalisation

Relatively  liberal  trade  system  with  persistent  non-tariff  barriers,
however. Import tariffs were unified at 5 percent in May 2002. Tajikistan
has  applied  for  membership  in  the  WTO  (observer  status  since  2001).
The  Eurasian  Economic  Community  (including  Russia,  Belarus,
Kazakhstan, Kyrgyz Republic and Tajikistan) aims at promoting regional
economic co-operation.

3.  Foreign exchange regime

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

4.  Foreign direct investment

Modest  foreign  direct  investment  due  to  high  perceived  country  risk,
despite  a  relatively  liberal  legal  regime.  No  legal  obstacles  to  foreign
direct investment or to foreign ownership of shares, no restrictions on the
repatriation of profit and capital. FDI inflows 0.9% of GDP in 2001.

5.  Monetary policy

Independence  of  the  National  Bank  of  Tajikistan  is  reasonably  assured
under the Law, but in practise the National Bank has been under pressure
to provide directed credits.

6.  Public finances

Total  revenues  (incl.  grants)  about  16%  of  GDP  in  2002,  tax  revenues
about  15%  of  GDP;  current  expenditure  about  14.5%  of  GDP.  Public
Investment Projects amount to about 2.8% of GDP.

7.  Privatisation and enterprise restructuring

The privatisation of small enterprises is largely completed. Some 40% of
medium and large enterprises privatised. Land reform has slowed down
since  2000 because  of  interference  from  local  governments.  About  half
of arable land is in private hands through long-term leases.

8.  Financial sector reform

Recently,  significant  progress  in  improving  banking  regulation  and
supervision.  Restructuring  agreements  between  the  NBT  and  the  four
main  banks.  Lending  to  insiders  and  non-collection  of  loans  remain
widespread. Confidence in the system is still low and ability to mobilise
savings remains limited (bank deposits about four percent of GDP).

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.

42

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  been  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
burden  on  the  country  in  2002  corresponding  to  over  40%  of  fiscal  revenues.  The  National
Bank’s gross international reserves increases during 2002 and corresponded to 2.3 months of
imports at the end of the year (1.9 months at end-2001).

During  the  first  half  of  2002,  Tajikistan  implemented  an  IMF  Staff  Monitored  Programme
aimed  at  reinforcing  the  commitment  to  economic  reform.  In  2002  the  Tajik  Government
adopted  the  Poverty  Reduction  Strategy  Paper  (PRSP).  The  IMF  Board  approved  in
December  2002  a  new  arrangement  for  the  Republic  of  Tajikistan  under  the  Poverty
Reduction  and  Growth  Facility  to  support  the  government’s  economic  programme  through
September 2005. Tajikistan was  able to draw SDR 8 million  (about  USD 11 million) under
the arrangement by end-2002.

3.

Structural reforms

Owing to the civil war which followed the independence of Tajikistan, the structural reform
did not begin in earnest until after 1997.

Although private ownership of land is banned in the constitution, the restructuring of state and
collective farms  and  the  issuance  of  land  use  rights  has  brought  positive  results  with  yields
reaching 2-3 times the yields on public farms. Raw cotton yields have particularly picked up
in 2000-2002. In 2002 the government reduced land registration costs and agricultural taxes in
three pilot districts with a view to encourage the reform process. It is estimated that about half
of  total  arable  land  is  currently  in  private  hands.  The  authorities  intend  to  privatise  the
remaining state-owned farms (about 220) by 2005.

Privatisation  of  medium  and  large  enterprises  has  progressed  albeit  slowly,  by  end-2002,
about 40 % had been sold to the private sector. The Government adopted a new privatisation
strategy  in  July  2002  for  the  coming  years.  In  light  manufacturing  there  are  signs  of
productivity gains from privatisation while industrial production as a whole is still dominated
by the state-owned TADAZ aluminium smelter. In June 2002 the Government and the World
Bank signed a plan on bringing private management to the TADAZ.

The EBRD has estimated on the basis of  business  surveys that  the  average  “bribe tax” is at
about  2.6%  of  firms’  annual  total  sales.  According  to  the  same  survey,  the  share  of  firms
which pay bribes frequently is 35.1%.

43

Quasi-fiscal deficits of the energy sector are estimated at 5-6 % and remain to be addressed by
the Government. Tajikistan is the most intensive energy user in the CIS,  partly owing to its
aluminium  production.  The  authorities  have  began  to  take  measures  in  the  gas  sector  to
prevent further accumulation of arrears.

The  Parliament  adopted  a  new  telecommunications  law  in  April  2002  establishing  a
regulatory agency in the sector, and a tariff reform was launched.

The consolidation of the banking sector through mergers, and possibly also through closing of
some banks, is pending. Prudential regulations have been tightened but the adherence to the
minimum capital requirement of USD 1.5 million for existing banks is not yet sanctioned by
the  National  Bank  of  Tajikistan.  In  mid-2002,  9  out  of  the  14  banks  did  not  meet  the
minimum requirement. The restructuring plans for the two largest banks (Agroinvestbank and
the state-owned Amonatbank) were finalised in 2002 and a separation of non-bank functions
from the retail banking proper is being planned.

Tajikistan has finalised the Poverty Reduction Strategy Paper (PRSP) which was endorsed by
the  IDA  and  the  IMF  in  December  2002.  The  PRSP  provides  a  multi-sector  approach  to
poverty  reduction  but  given  that  three  quarters  of  the  population  live  in  rural  areas  the
agricultural  sector  policies  will  play  a  central  role.  In  the  allocation  of  scarce  budgetary
resources, the priority will be given to increasing social expenditures.

4.

Implementation of macro-financial assistance

Tajikistan  has  benefited  from  an  assistance  package  which  consists  of  a  loan  of  EUR  60
million (disbursed  in March 2001)  and  a  total  grant  amount  of  up  to  EUR  35  million  to  be
disbursed  in  successive  annual  tranches  over  the  period  extending  to  2004.  A  Commission
staff mission assessed in June 2002 the progress made in fulfilling the conditionality for the
third grant tranche.

Given  that  Tajikistan  made  satisfactory  progress  in  structural  reforms  (notably  with  the
improvement of the taxation system, with the privatisation process, and with measures related
to  restructuring  of  the  banking  sector),  a  disbursement  of  the  maximum  annual  amount  of
EUR 7 million was proposed. The disbursement was  however conditional on the agreement
between  Tajikistan  and  the  IMF  on  a  new  arrangement  under  the  PRGF.  Following  the
approval of the new arrangement by the IMF Board in December 2002, the grant tranche was
disbursed in early 2003 after Tajikistan had first reduced  its net debtor position towards  the
Community  by  EUR  8  million  as  agreed.  Therefore,  Tajikistan’s  outstanding  debt  to  the
Community  was  reduced  from  EUR  52  million  at  the  end  of  2002  to  EUR  44  million  in
January 2003. The Commission services also reached an agreement with the Tajik authorities
on  the  structural  conditionality  for  the  2003  grant  tranche  (up  to  a  maximum  of  EUR  7
million). The specific conditions were identified in the same areas as the year before (such as
tax  revenue  collection,  energy  sector  reform  and  financial  sector  reform)  and  they  are
consistent  with  policies  pursued  by  the  authorities  in  the  context  of  the  Poverty  Reduction
Strategy Paper.

44

SUMMARY STATUS OF ECONOMIC REFORM

1.  Price liberalisation

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

2.  Trade liberalisation

Import regime free of quantitative restrictions, with a few exceptions for
health and safety reasons. Trade-weighted average import tariff was 7%
at end-2002. A uniform 2% import surcharge was imposed in July 1999
for  six  months.  A  few  export  restrictions  (such  as  export  duties  on
sunflower  seeds,  animal  skins  and  scrap  metal)  remain.  PCA  with  EU
entered into force on 1 March 1998.

3.  Foreign exchange regime

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

4.  Foreign direct investment

Tax relief granted to some investments constituting at least 20% of an
enterprise's  capital  and  to  investments  in  the  automobile  industry
above USD 100 million. FDI inflows have remained very low on a per
capita  basis  (they  reached  only  USD 748  million,  or  USD 15.3  per
capita, in 2001).

5.  Monetary policy

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

6.  Public finances

Consolidated  government  expenditure  reduced  from  about  70%  of
GDP in 1992 to about 37% of  GDP  in 2001.  Public  employment  cut
by  1  million  (to  4.7  million)  between  1994  and  1998.  Consolidated
government  deficit  reduced  from  5.2%  of  GDP  in  1997  to  1.5%  of
GDP in 2001. Social security contributions, the VAT and the profit tax
are the main sources of revenue, accounting together for about 70% of
consolidated government tax revenues.

7.  Privatisation and enterprise restructuring

Small-scale  privatisation  virtually  completed.  Over  9  500  enterprises
privatised through a mass (voucher) privatisation scheme launched in
early  1995.  Privatisation  programme  is  now  focusing  on  the  large
enterprises,  including  those  in  the  energy  and  telecommunications
sectors.  Limited  involvement  of  foreign  or  strategic  investors.
According to the government, private sector accounted for about 60%
of industrial output in 1998.

XII.

UKRAINE

1.

Executive summary

to 

show 

continued 

a  broadly
Ukraine 
in
satisfactory  macroeconomic  performance 
2002.  GDP  growth  decelerated 
the
from 
exceptionally  high  rate  of  9.1  percent  recorded
in  2001  but  remained  significant  at  4.1%.
Inflation continued to surprise on the downside,
with  consumer  prices  actually  falling  by  0.6
percent.  Despite  the  slowdown  in  economic
growth,  the  fiscal  position  was  kept  under
control,  although 
the
accumulation  of  additional  arrears  on  VAT
refunds.

this  partly  reflected 

Ukraine’s  external  financial  position  has  also
strengthened  considerably.  The  current  account
remained in surplus  in  2002.  Following  a  sharp
depreciation  between  July  1999  and  January
2000,  the  hryvnia  has  been  relatively  stable  in
nominal  terms  and  official  foreign  exchange
reserves  have  shown  an  upward  trend  since  the
spring  of  2000.  Moreover,  in  early  December
the
2002,  Ukraine 
international  capital  markets  with  the  issuance
of a USD  399 million sovereign eurobond.  FDI
inflows, however, remain low.

regained  access 

to 

The  implementation  of  structural  reforms  lost
considerable  momentum 
in  2002,  partly
reflecting  a  unstable  political  environment.
While  some  positive  steps  where  taken  in  the
financial  sector  and  trade  areas,  progress  with
large-scale  privatisation  and  energy  sector
reform continued to be disappointing.

The IMF’s extended arrangement (EFF) expired
in  September  2002  and  negotiations  on  a
that  could  be  supported  by  a
programme 
precautionary stand-by arrangement (SBA) have
not  made  sufficient  progress.  In  July  2002,  the
Council  adopted  a  Decision  granting  a  new
macro-financial  assistance  to  Ukraine  in  the
amount of up to EUR 110 million and cancelling
the  undisbursed  part  of  the  1998  loan  facility.
The discussions on the conditionality of the new
facility,  however,  have  been  delayed  due  to  the
interruption  of  the  EFF  and  delays  in  the
negotiations on a successor IMF arrangement.

45

8.  Financial sector reform

Significant  efforts  made  since  1997  to  strengthen  banking
supervision  and  regulation, including  the  adoption  of  laws  on  the
central  bank  and  on  banking  activities 
the
introduction  of  the  International  Accounting  Standards,  and  the
establishment of a new reporting system for banks. Most banks are
privately  owned.  The  banking  system,  however,  remains  weak,
with some of the largest banks in poor condition. Banking licence
of one such bank was withdrawn in 2001. Capital markets remain
underdeveloped.

in  1999-2000, 

2.

Macroeconomic Performance

Ukraine  has  continued  to  show  a  broadly  satisfactory  macroeconomic  performance.  The
economy has continued to expand at a relatively high rate, although the rate decelerated from
9.1% in 2001 to 4.1% in 2002. Annual inflation, which had already declined from 25 percent
in  2000  to  6.1  percent  in  2001,  became  negative  in  2002,  with  the  consumer  price  index
falling by 0.6 percent. This impressive inflation performance partly reflects prudent monetary
and fiscal policies and the relative strength of the exchange rate. It also reflects however the
postponement of energy price adjustments, which are still controlled by the government. The
need to adjust administered prices and recent large wage increases in both the private and the
public sectors raise some doubts about the sustainability of these favourable inflation trends.

Despite  the  slowdown  in  economic  growth,  the  consolidated  government  managed  to  close
2002 with a small surplus. This reflected the implementation of expenditure cuts but also the
accumulation  of  additional  arrears  on  VAT  refunds.  The  budget  for  2003  foresees  a
consolidated deficit at about 1 percent of GDP, implying a significant fiscal expansion. The
authorities intend to pass through parliament in 2003 a new Tax Code that would cut rates in a
number of taxes, reduce exemptions and rationalise the tax system.

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
reschedulings  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 4.4 billion, or 2½ months of imports, at
end-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 more
eurobonds  in  2003.  FDI  inflows,  however,  remain  disappointingly  low.  Ukraine’s  external
debt stock stood at the equivalent of about 25 percent of GDP at end-2002.

Ukraine has had a floating exchange rate regime since January 2000. The hryvnya has been
remarkably stable in nominal terms since the sharp depreciation it experienced in 1999. Given
the  inflation  differential  that  Ukraine  exhibited  vis-à-vis  its  main  trading  partners  until  last
year, this has led to a significant appreciation of hryvnya in real terms. The exchange rate is
nonetheless believed to remain at a relatively competitive level.

3.

Structural Reforms

Progress  with  structural  reforms  lost  considerable  momentum  in  2002,  partly  reflecting  a
confrontational  political  environment  and  the  stalemate  surrounding  the  parliamentary
elections  of  March  and  the  government  reshuffle  of  November.  This  section  reviews
developments  in  the  reform  areas  emphasised  by  the  conditionality  of  the  EU’s  macro-
financial assistance.

46

Progress on the privatisation front was again disappointing in 2002, partly due to the freezing
of  the  privatisation  of  the  regional  electricity  distribution  companies  and  new  delays  in  the
privatisation  of  Ukrtelecom,  the  state-owned  telecommunications  monopoly.  At  only  about
600 million hryvnyas, privatisation revenues were much lower than the amount that had been
foreseen  in  the  2002  budget  (5,83  billion  hryvnyas).  The  budget  for  2003  assumes  a
significant  increase  in  privatisation  revenues  (to  2.15  billion  hryvnyas)  but  this  target  looks
difficult to attain in view of the limited receipts obtained in the first two months of the year
(120 million hryvnyas) and the uncertainties over the privatisation of some key companies.

In  the  area  of  financial  sector  reform,  the  authorities  have  continued  to  take  steps  to
strengthen banking supervision, with technical assistance from foreign donors. Also, a central
regulator  for  non-financial  institutions  was  established  in  late  2002.  Significant  weaknesses
remain, however, in some of the largest banks, in particular in the state-owned Savings Bank
and in UkrExport-Import Bank. In the context of the PAL operation with the World Bank (see
below),  the  authorities  signed  a  Memorandum  of  Understanding  for  the  restructuring  of  the
Savings Bank in July 2002 but its implementation has fallen behind schedule. Also of concern
is  the  adoption  by  the  National  Bank  of  Ukraine  in  the  summer  of  2002  of  a  scheme  to
provide  loans  to  the  commercial  banks  at  its  short-term  refinancing  rate  for  the  funding  of
medium-term lending to certain sectors or enterprises.3

In  the  energy  area,  the  improvement  in  cash  collection  rates  that  had  been  observed  in  the
electricity and gas sectors in 2001 continued in 2002. On the other hand, there was no further
progress  with  the  privatisation  of  the  regional  electricity  distribution  companies,  with  the
authorities insisting on the need to restructure their debts before selling additional companies.
No  progress  was  made  either  with  the  reform  and  privatisation  of  the  gas  sector,  which
continues to be characterised by a high degree of state ownership and concentration and a lack
of  transparency.  In  the  nuclear  area,  the  authorities  asked  in  November  2001  for  a
renegotiation  of  certain  aspects  of  the  Euratom  and  EBRD  loan  contracts  for  the  K2R4
project, which has resulted in an additional postponement of the final approval of this project.

In the area of trade liberalisation, Ukraine made substantial progress in the WTO accession
negotiations, with a number of key protocols having been signed. Ukraine also took steps to
bring its  regulations  on  intellectual  property  in  line  with  WTO  requirements  and  improving
their degree of enforcement. The new Customs Code adopted in July 2002 is also compatible
with WTO rules, and technical standards are being harmonised with those of the EU. On the
negative  side,  Ukraine  introduced  an  tax  on  exports  of  scrap  metal  in  December  2002  and
continues to impose taxes on exports of sunflower seeds and animal skins.

4.

Implementation of EU Macro-Financial Assistance

In October 1998, the Council granted to Ukraine a third macro-financial assistance of up to
EUR  150  million.4  The  first  tranche  (EUR  58  million)  was  disbursed  in  July  1999.
Discussions on the conditions for the release of the second tranche, however, were interrupted
due to problems with the IMF’s EFF. A Council Decision approving this new assistance (and
cancelling the undisbursed part of the 1998 loan facility) was adopted on 12 July 2002. This
new  assistance  amounts  to  EUR  110  million  (including  the  EUR  92  million  that  remained

3

4

This scheme, which has been criticised by the IMF, involves an implicit subsidisation of the banks and,
indirectly, the beneficiary enterprises.
The  first  and  second  MFA  operations,  in  the  amount  of  EUR  85  million  and  EUR  200  million,
respectively, were approved by the Council in December 1994 and October 1995.

47

                                                
from the 1998 operation) and has a longer maturity than the 1998 operation (15 years instead
of 10) and a longer grace period (10 years instead of 7). The discussions on the conditionality
of this new facility, however, have been delayed due to the interruption of the EFF and delays
in the discussions over a successor IMF arrangement.

In September 1998, the IMF approved an EFF for Ukraine in the amount of USD 2.2 billion,
later augmented to USD 2.6 billion. The EFF  ran off-track several times since its inception.
Disagreements  over  fiscal  policies  and  slow  progress  with  structural  reforms  put  the
programme off-track in January 2002. The EFF expired in September 2002 but the authorities
have expressed their desire to replace it with a precautionary SBA. In February 2003, an IMF
mission held discussions with the authorities in Kiev on the main  elements of a programme
that  could  be  supported  by  such  an  arrangement.  While  agreement  was  reached  on  certain
issues,  including  a  broad  framework  for  monetary  and  fiscal  policies  and  measures  to
strengthen  the  banking  system,  a  number  of  unresolved  issues  remain.  These  include,  in
particular,  the  clearance  of  arrears  on  VAT  tax  refunds,  the  sharp  increase  in  public  sector
wages  planned  for  the  period  2003-04  and  the  lack  of  transparency  in  the  accounts  of  the
national gas company.

World Bank lending has focused on public sector reform, the agriculture and energy sectors,
privatisation  and  financial  sector  reform.  In  this  last  area,  three  adjustment  operations  (the
EDAL I and II and the FSAL) have been approved since 1996, for a total of USD 910 million.
In  September  2001,  the  World  Bank  approved  a  Programmatic  Adjustment  Loan  (PAL)  of
USD 250 million, which was fully disbursed in two tranches in September and December of
that  same  year.  This  operation,  which  covers  several  areas  of  reform,  emphasises  financial
discipline, 
fiscal  accountability  and  social
sustainability.  A  second  PAL  operation  of  the  same  amount  and  similar  characteristics  is
under preparation.

framework,  ownership, 

regulatory 

the 

48

ANNEX

Annex 1A - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
 TO THIRD COUNTRIES BY DATES OF COUNCIL DECISIONS
Status of effective disbursements as of end-December 2002 (in millions of euro) 

Authorisations

Disbursements

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Hungary I
(Structural adjustment loan)

22.02.90

90/83/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary II
(BOP loan)

Bulgaria I 
(BOP loan)

Romania I
(BOP loan)

24.06.91

91/310/EC

24.06.91

91/311/EC

22.07.91

91/384/EC

260
( Suspended)

870

375

180

290

375

Apr. 1990
Feb. 1991

Mar. 1991
Mar. 1992

Aug. 1991
Jan. 1993

Aug. 1991
Mar. 1992

Jan. 1992
Apr. 1992

350
260

185
190

100
80

150
140

190
185

610

375

180

290

375

Israel   (1)
(Structural adjustment soft loan)

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

Algeria I
(BOP loan)

Albania I
(BOP grant)

Bulgaria II
(BOP loan)

Baltics
(BOP loans)
of which :
    Estonia
    Latvia
    Lithuania

Romania II
(BOP loan)

Moldova I
(BOP loan)

Romania III
(BOP loan)

Albania II
(BOP grant)

Algeria II
(BOP loan)

Slovakia
(BOP loan)

Ukraine I
(BOP loan)

Belarus
(BOP loan)

Ukraine II
(BOP loan)

Moldova II
(BOP loan)

FYROM I
(BOP loan)

Bulgaria III
(BOP loan)

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

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

Feb. 1993

déc-94
Aug. 1995

Nov. 1995
Sep. 1997
Dec. 1997

Jun. 1995
Oct. 1996

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

15
20

Nov. 1995

100

Jul. 1996

Dec. 1995

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Dec. 1996

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

85

30

50
50
100

15

25
15

125
125

85
(Suspended)

(20)
(40)
(25)

100
(Suspended)

130
(Cancelled)

25
(Suspended)

400

70

110

135

(20)
(40)
(75)

80

45

125

35

100

85

30

200

15

40

250

23.09.91

91/510/EC

28.09.92

92/482/EC

19.10.92

92/511/EC

23.11.92

92/542/EC

27.11.92

92/551/EC

13.06.94

94/346/EC

400

70

110

220

(40)
(80)
(100)

80

45

20.06.94

94/369/EC

125

28.11.94

94/773/EC

22.12.94

94/938/EC

22.12.94

94/939/EC

22.12.94

94/940/EC

10.04.95

95/132/EC

35

200

130

85

55

23.10.95

95/442/EC

200

25.03.96

96/242/EC

22.07.97

97/471/EC

15

40

22.07.97

97/472/EC

250

49

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

17.11.97

97/787/EC

375

modified by

28.3.00

00/244/EC

   Armenia

   Georgia

   Tajikistan

Ukraine III
(BoP loan)

Albania III
(BOP loan)

Bosnia I  (3)
(BOP loan and grant)

Bulgaria IV
(BOP loan)

FYROM II (4)
(BOP loan and grant)

Romania  IV
(BOP loan)

Kosovo I (5)
(Grant budgetary support)

Montenegro (5)
(Grant budgetary support)

Moldova III
(BOP loan)

Kosovo II (3)
(Grant budgetary support)

Serbia and Montenegro (ex FRY) I (6)
(BOP loan and grant)

Ukraine IV
(BOP loan)

(58)

(175)

(95)

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

150

Jul. 1999

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

Dec. 1999
Sep. 2000

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

260

115

(51)

(7)

(135)

(40)

(74)

(21)

58

60

100

52

92
(Cancelled)

20

28
18

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

58

15
10
10
10
15

40
60

20
10
12
10

Mar. 2000
Aug. 2000

Aug. 2000
Dec. 2000

Sep. 2001
Dec. 2002

Oct. 2001
Oct. 2001
Jan. 2002
Aug. 2002

20
15

7
13

15
15

225 (loan)
35 (grant)
40 (grant)
45 (grant)

Dec. 2002

30

20
15

20

30

345

-------
4827,5

15
(Cancelled)

110

100

60

15

-------
1273

15.10.98
12.07.02

98/592/EC
02/639/EC

22.04.99

99/282/EC

10.05.99

99/325/EC

modified by

10.12.01

01/899/EC

20

60

08.11.99

99/731/EC

100

08.11.99

99/733/EC

modified by

10.12.01

01/900/EC

80
18

19.02.00

00/140/EC

22.05.00

00/355/EC

10.07.00
19.12.02

00/452/EC
02/1006/EC

27.06.01

01/511/EC

35

20

15

30

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/EC

12.07.02

02/639/EC

110

08.11.99

99/732/EC

200

Jun. 2000

100

100

100

Serbia and Montenegro II (ex FRY) (7)

05.11.02

02/882/EC

Bosnia II (8)

Moldova IV

TOTAL

05.11.02

02/883/EC

19.12.02

02/1006/EC

130

60

15

-------
6100,5 (9)

(1)
(2)

Assistance to Israel includes a loan principal amount of € 160 million and grants of € 27.5 million in the form of interest sub
Exceptional financial assistance, which includes a ceiling of euro 245 million for the loans and a ceiling of euro 130 million for the grants
Out of the global amount of euro 375 million, maximum amounts of euro 58 million, euro 175 million and euro 95 million were actually agreed with the beneficiary
 countries.
Includes a loan principal amount of up to € 20 million and grants of up to € 40 million.
Includes a loan principal amount of up to € 50 million and grants of up to € 48 million.

sidies.

(3)
(4)
(5) Exceptional financial assistance.
(6)
(7)
(8)
(9) Gross amount

Includes a loan principal amount of € 225 million and grants of € 120 million.
Includes a loan principal amount of € 55 million and grants of € 75 million
Includes a loan principal amount of € 20 million and grants of € 40 million

50

                                                            
ANNEX 1B - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE 
 TO THIRD COUNTRIES BY REGION
Status of effective disbursements as of end-December 2002 (in millions of euro) 

Authorisations

Disbursements

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

85
(Suspended)

(20)
(40)
(25)

260
( Suspended)

135

(20)
(40)
(75)

290

110

250

100

375

610

180

375

80

125

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

Aug. 1991
Mar. 1992

Dec. 1994
Aug .1996

Feb. 1998
Dec. 1998

Dec. 1999
Sep. 2000

Mar. 1991
Mar. 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

Feb. 1993

Nov. 1995
Sep. 1997
Dec. 1997

20
40
50
25

150
140

70
40

125
125

40
60

185
190

350
260

100
80

190
185

80

55
40
30

Jun. 2000

100

100

100

Cancelled
(Jul. 1996)
-------
2730

130
Cancelled
-------
575

A. EU Accession countries

Baltics
(BOP loans)
of which :
    Estonia
    Latvia
    Lithuania

Bulgaria I 
(BOP loan)

Bulgaria II
(BOP loan)

Bulgaria III
(BOP loan)

Bulgaria IV
(BOP loan)

23.11.92

92/542/EC

220

24.06.91

91/311/EC

19.10.92

92/511/EC

22.07.97

97/472/EC

08.11.99

99/731/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary I
(Structural adjustment loan)

Hungary II
(BOP loan)

Romania I
(BOP loan)

Romania II
(BOP loan)

Romania III
(BOP loan)

Romania  IV
(BOP loan)

Slovakia
(BOP loan)

TOTAL A

22.02.90

90/83/EC

24.06.91

91/310/EC

22.07.91

91/384/EC

27.11.92

92/551/EC

20.06.94

94/369/EC

08.11.99

99/732/EC

22.12.94

94/939/EC

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

-------
3305

51

B. Western Balkans

Albania I
(BOP grant)

Albania II
(BOP grant)

Albania III
(BOP loan)

Bosnia I  (1)
(BOP loan and grant)

FYROM I
(BOP loan)

FYROM II (2)
(BOP loan and grant)

Kosovo I (3)
(Grant budgetary support)

Kosovo II (3)
(Grant budgetary support)

Montenegro (3)
(Grant budgetary support)

Serbia and Montenegro I 
(ex FRY) (4)

Serbia and Montenegro II 
( ex FRY) (5)
(BOP loan and grant)

Bosnia II (6)
(BOP loan and grant)

TOTAL B

28.09.92

92/482/EC

28.11.94

94/773/EC

22.04.99

99/282/EC

10.05.99
modified by
10.12.01

99/325/EC

01/899/EC

22.07.97

97/471/EC

08.11.99
modified by
10.12.2001

99/733/EC

01/900/EC

19.02.00

00/140/EC

27.06.01

01/511/EC

22.05.00

00/355/EC

70

35

20

60

40

80

18

35

30

20

16.07.01

10.12.2001

01/549/EC
modified by
01/901/EC

345

Dec. 1992
Aug. 1993

Jun. 1995
Oct. 1996

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

Sep. 1997
Feb. 1998

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

Mar. 2000
Aug. 2000

Sep. 2001
Dec. 2002

Aug. 2000
Dec. 2000

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

05.11.02

02/882/EC

130

Dec. 2002 (grant)

05.11.02

02/883/EC

60

-------
943

35
35

15
20

15
10
10
10
15

25
15

20
10
12
10

20
15

15
15

7
13

35
225
40
45

30

20
( Cancelled)

28

18

70

35

60

40

52

35

30

20

345

30

100

60

-------
226

-------
717

(1)  Includes a loan principal amount of € 20 million and grants of € 40 million.
(2)  Includes a loan principal amount of up to € 50 million and grants of up to € 48 million.
(3) Exceptional financial assistance.
(4)  Includes a loan principal amount of € 225 million and grants of € 120 million.
(5) Includes a loan principal amount of € 55 million and grants of € 75 million
(6) Includes a loan principal amount of € 20 million and grants of € 40 million

52

C. New Independent States (NIS)

Armenia, Georgia and Tajikistan (7)
(Structural adjustment loans and grants)
of which
   Armenia

17.11.97
modified by
28.3.00

97/787/EC

00/244/EC

   Georgia

   Tajikistan

Belarus
(BOP loan)

Moldova I
(BOP loan)

Moldova II
(BOP loan)

Moldova III
(BOP loan)

Moldova IV
(BOP grant)

Ukraine I
(BOP loan)

Ukraine II
(BOP loan)

Ukraine III
(BoP loan)

Ukraine IV
(BOP loan)

TOTAL C

10.04.95

95/132/EC

13.06.94

94/346/EC

25.03.96

96/242/EC

10.07.00
19.12.02

00/452/EC
02/1006 EC

19.12.02

02/1006/EC

22.12.94

94/940/EC

23.10.95

95/442/EC

15.10.98
12.07.02

98/592/EC
02/639/EC

12.07.02

02/639/EC

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

Dec. 1995

déc-94
Aug. 1995

Dec. 1996

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Jul. 1999

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

30

25
20

15

85

50
50
100

58

375

(58)

(175)

(95)

55

45

15

15

15
(15)

85

200

150

110
(15)

-------
1065 (9)

260

(51)

115

(7)

(135)

(40)

(74)

(21)

30

45

15

85

200

58

-------
693

25
(Suspended)

15
(cancelled)

15

92
(cancelled)

110

-------
372

D. Mediterranean countries

Israel   (8)
(Structural adjustment soft loan)

Algeria I
(BOP loan)

Algeria II
(BOP loan)

TOTAL D

TOTAL A+B+C+D

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

23.09.91

91/510/EC

22.12.94

94/938/EC

Jan. 1992
Aug. 1994

Nov. 1995

250
150

100

400

200

-------
787,5

6100,5 (9)

400

100

-------
687,5

4827,5

100
(Suspended)

-------
100

1273

(7)   Exceptional financial assistance, which includes a ceiling of euro 245 million for the loans and a ceiling of euro 130 million for the grants

Out of the global amount of euro 375 million, maximum amounts of euro 58 million, euro 175 million and euro 95 million were actually agreed with the
beneficiary countries

(8)    Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27,5 million in the form of interesr subsidies.
(9)   Gross amount

53

        
Annex 2: Balance of payments support to recipients of EU
macro-financial assistance by contributor, 1990-2002 (1)

2a. In millions US$

IFI's

Bilaterals

IMF
World Bank

EU (2)
Other bilaterals (3)
     of which

USA
Japan

Debt relief

Paris Club
London Club
Other (4)

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

419
219
200
1618
1108
511

200

5607
4177
1430
5600
2190
1406

35
850
2004
554

1450

1564
909
655
708
423
285

120

4086
3206
880
11202
855
702

100
350
9645
4920
4380
345

1877
1477
400
3885
330
150

150
3405

3405

250
195
55
67
19
10

10

38

38

732
584
148
582
329
73

15
54
180

180

2800
2200
600
336
168

1751
1009
742
872
556
264

75
22
52
52

36
12
24
238
189
49

13
7

439
284
155
3483
375
93

22

3015
3015

1403
895
508
364
241
10

113
109
4

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

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

IFI's

Bilaterals

IMF
World Bank

EU (2)
Other bilaterals (3)
     of which

USA
Japan

Debt relief

Paris Club
London Club
Other (4)

21
11
10
79
54
25

10

50
37
13
50
20
13

0
8
18
5

13

69
40
29
31
19
13

5

27
21
6
73
6
5

1
2
63
32
29
2

33
26
7
67
6
3

3
59

59

79
62
17
21
6
3

3

12

12

56
44
11
44
25
5

1
4
14

14

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

94
74
20
6
6

13
4
9
87
69
18

5
3

67
38
28
33
21
10

3
1
2
2

11
7
4
89
10
3

1

77
77

79
51
29
21
14
1

6
6

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

IFI's

Bilaterals

IMF
World Bank

EU (2)
Other bilaterals (3)
     of which

USA
Japan

21
11
10
79
54
25

10

61
45
16
39
24
15

0
9

69
40
29
31
19
13

5

72
57
16
28
15
12

2
6

80
63
17
20
14
6

6

90
70
20
10
7
4

4

65
52
13
35
29
7

1
5

92
59
33
8
8

68
39
29
32
21
10

3
1

13
4
9
87
69
18

5

48
31
17
53
41
10

2

85
54
31
15
14
1

(1)

(2)
(3)
(4)

Based on Council Decisions for  EU operations.
No operation was decided in 1993. 
EU macro-financial assistance.
Including EU Member States.
Syndicated commercial banks loan in favour of Algeria in 1991, debt relief in favour of Ukraine by Russia and Turkmenistan in 1994 and 1995, debt 
rescheduling in favour of Moldova by Russia in 1996 and debt rescheduling in favour of Bulgaria and FYROM in 1997 

54

Annex 2.1.: Balance of payments support to recipients of EU 
macro-financial assistance by contributor, 2001-2002 a)
(in millions of US$ and in percent of total commitments and disbursements)

Balance of payments support 2001

Total

Kosovo

Federal Republic of Yugoslavia

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
 %

mio US$

Disbursements
%

mio US$

IFI's
   IMF
   WB (policy based)

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

439
284
155

3483
375
22

71
3015

3015

11
7
4

89
10
1

2
77

77

137
125
12

325
269
20

36

30
27
3

70
58
4

8

15

15

71
49
10

12

17

17

83
57
12

14

12

12

47
35
10

2

20

20

80
60
17

3

125
125

278
234
10

34

31
31

69
58
2

8

390
250
140

3351
310
12

59
2970

2970

10
7
4

90
8
0

2
79

79

Total

3922

100

462

100

86

100

59

100

3741

100

403

100

FYROM

Commitments
 %

mio US$

Disbursements
%

mio US$

2
2

100
100

IFI's
   IMF
   WB (policy based)

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

34
34

61
16

45

45

36
36

64
17

47

47

Total

95

100

2

100

55

Balance of payments support 2002

Total

Serbia and Montenegro

Bosnia and Herzegovina

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

1403
895
258

364
241
104

10
113
4
109

79
51
15

21
14
6

1
6
0
6

816
333
483

146
108

10
113
4
109

85
35
50

15
11

1
12
0
11

995
820
175

147
113

10
24

24

87
72
15

13
10

1
2

2

455
295
160

142
108

10
24

24

103
40
63

28
24

4
4

76
49
27

24
18

2
4

4

79
31
48

21
18

3
3

89
26
63

4

4
4

96
28
68

4

4
4

IFI's
   IMF
   WB (policy based)

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

Total

1767

100

962

100

1142

100

597

100

131

100

93

100

Moldova

Ukraine

Commitments
%

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements
%

mio US$

IFI's
   IMF
   WB (policy based)

55
35
20

100
64
36

22
12
10

100
55
45

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

250

250

100

100

250

250

189
104

85

85

57

57

43
24

19

19

Total

55

100

22

100

439

100

250

100

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

56

ANNEX 3: Selected economic indicators

1998

1999

2000

2001

2002
Programme (1) Estimates

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

2,1

-1,0
14,0
50,0
2,6
10,9
-
43,8
54,8
30,1
19,2

-5,5
-9,1
-1,3
-5,2
n.a.
0,0
-5,0
-
-5,3
-3,6
-3,1
-2,4

-16,6
-21,4
-7,5
-5,9
-8,5
-
-3,6
-4,0
-3,4
2,6

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

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

0,4

2,0
15,0
115,0
4,9
4,6
-
18,5
40,7
60,6
25,8

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

-14,6
-20,9
-7,6
-8,5
-5,4
-
-8,4
-3,9
-6,5
4,7

3,8
2,5
1,3
3,5
1,0
-
2,4
2,5
2,1
1,0

9,6
5,5
4,0
-4,6
4,5
11,0
6,1
5,7
10,2
9,1

3,0

2,0
7,0
39,0
5,3
3,4
11,0
6,4
30,3
12,5
6,1

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

-9,5
-23,1
-12,6
-10,6
-6,7
9,1
-7,4
-5,9
-7,2
3,5

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

7,5
2,3
4,0
4,0
3,5
-
4,8
5,0
7,5
5,0

3,0

1,5
4,4
20,0
2,7
5,0
-
8,0
22,0
13,0
9,8

-3,3
-5,5
-1,8
-0,3
-5,3
-3,4
-1,8
-
-2,3
-2,9
-0,3
-1,8

-8,7
-20,7
-13,0
-9,3
-6,2
-
-7,2
-5,6
-4,5
1,5

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

12,9
3,9
4,0
0,3
5,4
7,0
7,2
4,9
9,1
4,1

2,0

-0,2
1,9
14,0
1,1
5,6
3,0
4,4
17,8
14,5
-0,6

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

-8,5
-22,3
-12,0
-8,6
-6,5
-2,0
-6,0
-3,4
-4,2
3,5

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

GDP at constant prices

Armenia
Bosnia-Herzegovina
Serbia and Montenegro
FYROM
Georgia
Kosovo
Moldova
Romania
Tajikistan
Ukraine

Consumer price (end year)

Armenia
Bosnia-Herzegovina
     Federation
     Republika Srpska
Serbia and Montenegro
FYROM
Georgia
Kosovo
Moldova
Romania
Tajikistan
Ukraine

Fiscal balance
Armenia *
Bosnia-Herzegovina
     Federation
     Republika Srpska
Serbia and Montenegro
FYROM
Georgia *
Kosovo
Moldova
Romania
Tajikistan
Ukraine

Current account
Armenia **
Bosnia-Herzegovina
Serbia and Montenegro
FYROM
Georgia **
Kosovo
Moldova
Romania
Tajikistan
Ukraine

(Percent change)
7,3
10,0
2,5
2,9
2,9
-
-6,5
-4,8
5,3
-1,9

(Percent change)
-1,2

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

(Percent of GDP)

-4,7
-7,8
-1,8
-5,1
n.a.
-1,7
-4,9
-
-10,6
-5,4
-3,8
-2,8

(Percent of GDP)

-21,2
-18,9
-5,5
-9,6
-10,7
-
-17,3
-7,0
-8,3
-3,1

Official foreign exchange reserves (end year)

(Months of imports)

Armenia
Bosnia-Herzegovina
Serbia and Montenegro
FYROM
Georgia
Kosovo
Moldova
Romania
Tajikistan
Ukraine

On a cash basis.

(1) Programme targets set in IMF programmes, if any.  
*
** Excluding official transfers.
Sources: National authorities and IMF

3,9
0,8
n.a.
2,0
1,0
-
1,8
2,4
1,5
0,6

57