Report from the Commission to the budgetary authority on guarantees covered by the general budget situation at 31 December 2003 {SEC(2004) 922}
Date: 2004-07-13
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.7.2004 
COM(2004) 491 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 31 December 2003 

{SEC(2004) 922} 

EN 

   EN 

 
 
 
  
 
 
 
 
 
3.3 

4. 
4.1. 
4.2. 
5. 

TABLE OF CONTENTS 
Part One: Events since the Report at 30 June 2003, the risk situation and activation of Budget 
Guarantees.................................................................................................................................. 3 
Introduction: types of operation ................................................................................... 3 
1. 
Operations with macroeconomic objectives ................................................................ 3 
1.1. 
Operations with microeconomic objectives ................................................................. 3 
1.2. 
Events since the report at 30 June 2003 ....................................................................... 3 
2. 
Risk situation................................................................................................................ 4 
3. 
Capital outstanding at 31 December 2003 ................................................................... 4 
3.1. 
Maximum annual risk borne by the Community budget: operations disbursed at 
3.2 
31 December 2003 ....................................................................................................... 5 
Maximum theoretical annual risk borne by the Community budget: operations 
disbursed and decided at 31 December 2003............................................................... 5 
Activation of budget guarantees................................................................................... 6 
Payments from cash resources ..................................................................................... 6 
Activation of the Guarantee Fund ................................................................................ 6 
Analysis of the Community's theoretical lending and guarantee capacity in respect of 
non-member States....................................................................................................... 6 
Situation of the Guarantee Fund at 31 December 2003 ............................................... 7 
Relative solidity ........................................................................................................... 8 

6. 
7. 
Part Two: Evaluation of potential risks: Economic and financial situation of the non-member 
States benefiting from the most important loan operations........................................................ 9 
Introduction.................................................................................................................. 9 
1. 
Candidate countries...................................................................................................... 9 
2. 
Bulgaria ........................................................................................................................ 9 
2.1. 
Romania ..................................................................................................................... 10 
2.2 
Turkey ........................................................................................................................ 11 
2.3 
Western Balkans ........................................................................................................ 12 
3. 
Bosnia and Herzegovina (BiH) .................................................................................. 12 
3.1 
Former Yugoslav Republic of Macedonia (FYRoM) ................................................ 13 
3.2 
Serbia and Montenegro .............................................................................................. 13 
3.3 
New Independent States............................................................................................. 14 
4. 
Armenia...................................................................................................................... 14 
4.1 
Belarus ....................................................................................................................... 15 
4.2 
Georgia....................................................................................................................... 16 
4.3 
Moldova ..................................................................................................................... 17 
4.4 
Tajikistan.................................................................................................................... 18 
4.5 
Ukraine....................................................................................................................... 19 
4.6 
Other Non-member States.......................................................................................... 19 
5. 
Algeria........................................................................................................................ 20 
5.1 
Argentina.................................................................................................................... 20 
5.2 
Brazil.......................................................................................................................... 21 
5.3 
Jordan ......................................................................................................................... 22 
5.4 
List of abbreviations................................................................................................................. 24 

EN 

2 

   EN 

 
Part One: 
Events since the Report at 30 June 2003, the risk situation and 
activation of Budget Guarantees1 

1. 

INTRODUCTION: TYPES OF OPERATION 

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

1.1. 

Operations with macroeconomic objectives 

The  first  of  these  are  the  balance-of-payments  loans  to  Member  States  or  non-
member States, normally carrying strict economic policy conditions. 

1.2. 

Operations with microeconomic objectives 

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

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

2. 

EVENTS SINCE THE REPORT AT 30 JUNE 2003 

Regarding  macro-financial  assistance  provided  to  third  countries,  a  new  Council 
decision  amending  Decision  2002/882  with  regard  to  additional  macro-financial 
assistance  to  Serbia  and  Montenegro  was  adopted  on  25 November 20033.  Loan 
disbursements  were  carried  out  on  the  basis  of  existing  decisions  in  favour  of 
Romania (EUR 50 million), Serbia and Montenegro (EUR 30 million) and FYROM 
(EUR 18 million). 

Regarding Euratom, no new Commission decision was adopted during the period and 
no  new  loan  tranche  disbursement  was  carried  out  on  the  basis  of  the  existing 
decisions. 

1 

2 
3 

Please note that a Commission Staff Working Paper contains an annex with a set of detailed tables and 
explicatory notes to this report. 
Not active since 1995 
JO L 311, 27.11.2003, p. 28 

EN 

3 

   EN 

 
                                                 
3. 

RISK SITUATION  

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

– 

– 

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

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

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

– 

– 

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

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

The  latter  exercise  gives  some  idea  of  the  future  level  of  risks  connected  with  the 
proposals made. However, a number of assumptions have to be made about dates of 
disbursement  and  terms  of  repayment  (details  are  given  in  the  Annex)  as  well  as 
interest4 and exchange rates5. 

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

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

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

3.1. 

Capital outstanding at 31 December 2003 

The  total  risk  at  31 December 2003  came  to  EUR  15.062  million,  as  against  EUR 
15.067 million at 30 June 2003. Details are shown in Annex Table A1. 

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

4 

5 

An interest rate of 5,49% (communicated by the EIB) has been applied for its new operations in Table 
A3. 
The exchange rates used for loans in currencies other than the euro are those of 31 December 2003. 

EN 

4 

   EN 

 
                                                 
Table 1: Capital outstanding at 31 December 2003*

EUR million (rounded)

Amount outstanding at 30 June 2003
Loan repayments

Loans disbursed

Euratom
NIC
Financial assistance
EIB

Euratom
NIC
Financial assistance
EIB

Exchange rate differences between EUR and other currencies
Amount outstanding at 31 December 2003

15.067

0
0
-115
-640

0
0
98
1.051
-399
15.062

* all guaranteed loans (Member States and non-member States) confounded, excluding unpaid 
interests due and payments defaults.

The capital outstanding in respect of operations in the Member States was EUR 24 
million at 31 December 2003, compared with EUR 32 million at 30 June 2003. 

The  capital  outstanding  from  non-member  States  at  31 December 2003  was  EUR 
15.037 million, compared with EUR 15.035 million at 30 June 2003. 

3.2 

Maximum  annual  risk  borne  by  the  Community  budget:  operations  disbursed 
at 31 December 2003 

– 

– 

– 

– 

For 2004 the total risk amounts to EUR 1.962 million. 

The risk in respect of the Member States comes to EUR 24 million. 

The risk in respect of non-member States comes to EUR 1.938 million. 

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

3.3 

Maximum theoretical annual risk borne by the Community budget: operations 
disbursed and decided at 31 December 2003 

For  2004  the  maximum  theoretical  risk  amounts  to  EUR  2.076  million.  It  will 
increase from 2005 onwards and reach EUR 3.712 million in 2012. 

– 

– 

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

For  the  non-member  States  it  amounts  to  EUR  2.053  million  for  2004. 
The risk will increase from 2005 onwards to reach EUR 3.712 million by 
2012. 

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

EN 

5 

   EN 

 
 
4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

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

4.2. 

Activation of the Guarantee Fund 

Council  Regulation  (EC,  Euratom)  No  2728/94  of  31  October  1994  established  a 
Guarantee Fund for external action. In the event of late payment by a recipient of a 
loan granted by the Community, the Guarantee Fund is called on to cover the default 
within three months of the date on which payment is due. 

If  a  borrower  defaults  on  an  EIB  loan  guaranteed  by  the  Community  budget,  the 
Community  guarantee  is  called  upon  at  the  earliest  3  months  of  the  date  on  which 
payment  has  fallen  due.  The  Community  will  act  within  three  months  of  receiving 
such  a  letter  from  the  Bank  calling  for  the  guarantee  to  be  activated.  The 
Commission  will  then  authorise  the  Bank  to  take  the  corresponding  amounts  from 
the Guarantee Fund. 

Default interest owed by loan beneficiaries for the time between the date on which 
cash  resources  are  made  available  by  the  Community  budget  and  the  date  of 
activation of the Fund is drawn from the Fund and repaid to the cash resources. For 
EIB  loans,  default  interest  is  calculated  for  the  time  between  the  due  date  of  a 
defaulted loan instalment and the date of receipt of the cash resources by the Bank 
from the Commission. 

5. 

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

In  practice,  the  Guarantee  Fund  mechanism  limits  the  Community's  lending  and 
guarantee  capacity  to  non-member  States,  since  the  appropriations  available  for 
provisioning the Fund are limited by the amount entered for the guarantee reserve in 
the Financial Perspective6. 

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

6 

The annual figure entered in the 2000-2006 Financial Perspective is EUR 200 million at 1999 prices; in 
2003, the amount was EUR 217 million and will be EUR 221 million in 2004. 

EN 

6 

   EN 

 
                                                 
Table  A4  shows  an  estimate  of  the  Community's  lending  capacity  in  respect  of 
non-EU  countries  over  the  period  2004-2006  in  line  with  the  Guarantee  Fund 
mechanism.  The  method  of  calculation  and  references  to  legal  texts  are  set  out  in 
greater detail in the Annex. 

On  the  basis  of  the  decisions  adopted  by  the  Council  or  the  Commission  and 
decisions proposed and forecasted (see Annex Table A4), an amount of EUR 208,07 
million  is  expected  to  be  used  from  the  guarantee  reserve  in  2004,  leaving  EUR 
12,93 million available for further guarantee lending operations. 

If account is taken of the effect on the Guarantee reserve of the provisioning of the 
Fund in respect of loans already decided and loans proposed and forecasted for 2004, 
the annual capacity available for loans is as follows: 

– 

– 

EUR  143,71  million  for  loans  with  a  100%  guarantee  under  the  Community 
budget, or 

EUR  221,09  million  for  loans  with  a  65%  guarantee  (in  accordance  with 
Council Decision 2000/24/EC of 22 December 1999). 

At  31 December 2003,  outstanding  lending  and  loan  guarantee  operations  for  non-
member States totalled EUR 15.186 million. 

Table 2: Outstanding lending and loan guarantee operations for non-member 
States in EUR million (rounded)

1. Capital outstanding, borrowing and lending MTA, EURATOM
2. Capital outstanding, EIB
3. Payments defaults
4. Default Interest
5. Unpaid interest due*
Amount outstanding at 31 December 2003
* unpaid interest due within the meaning of the Regulation establishing the  Guarantee Fund

1.461
13.576
3
0
146
15.186

The ratio between the Fund’s resources and outstanding capital liabilities, within the 
meaning of the Regulation establishing the Fund, was 10,48%, which is higher than 
the  target  figure  of  9%  set  in  Regulation  No  1149/1999  amending  Regulation  No 
2728/94  establishing  the  Fund.  The  rules  state  that  at  the  end  of  a  year  the  surplus 
shall  be  paid  back  to  a  special  heading  in  the  statement  of  revenue  in  the  general 
budget of the European Union. The surplus at the end of the financial year 2003 was 
EUR 223,16 million. 

6. 

SITUATION OF THE GUARANTEE FUND AT 31 DECEMBER 2003 

At 31 December 2003, the Guarantee Fund amounted to EUR 1.592,13 million. The 
following movements were recorded in the second half of 2003: 

– 

on 22 August 2003 the Fund was called as a result of a default on a loan to the 
Republic  of  Argentina  for  an  amount  of  USD  2.688.551,39  (EUR  equivalent 
2.468.518,13); 

EN 

7 

   EN 

 
 
– 

– 

– 

the Commission was informed by EIB about arrears on a loan to the Republic 
of Argentina for an amount of USD 2.689.781,25 which could lead to a call on 
the Fund in the first half of 2004; 

net revenue of EUR 30,3 million on investments from the Fund’s assets; 

the first annual transfer amounted to EUR 145,67 million from the Reserve into 
the  Fund.  The  Fund’s  surplus  of  the  year  2002  amounted  to  EUR  263,33. 
Those two amounts were netted under the mechanism for offsetting, resulting 
in a payment of EUR 117,66 million on 25 August 2003 from the Fund to the 
budget of the European Union. The second transfer was the subject of payment 
of EUR 2,25 million dated 2 January 2004. 

7. 

RELATIVE SOLIDITY 

The  ratio  between  the  amount  in  the  Fund  at  31 December 2003  (EUR  1.592,13 
million) and the maximum theoretical annual risk for loans to non-member States in 
(see  Annex  Table  A3).
2004 

(EUR  2.053  million)  amounts 

to  78% 

EN 

8 

   EN 

 
Part Two: 
Evaluation of potential risks: Economic and financial situation of 
the non-member States benefiting from the most important loan 
operations 

1. 

INTRODUCTION 

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

As  in  the  previous  reports,  the  country  risk  evaluation  presented  in  Part  Two 
comprises a table of risk indicators (see Annexes) for each non-member country that 
has received EC macro-financial assistance and still has outstanding debts to the EC. 
Moreover,  other  third  countries  each  representing  more  than  2%  of  the  total 
outstanding  debt  to  the  EC  (notably  through  guarantees  of  EIB  project  related 
lending) and either categorised as “severely indebted” according to criteria set by the 
World Bank or facing notorious imbalances in their external or debt situation are also 
included in the risk evaluation. 

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

Altogether,  the  country  analysis  is  covering  44.8%  of  the  total  outstanding  debt 
owned  by  the  EC  or  guaranteed  through  its  budget,  thus  providing  a  meaningful 
assessment of the risk 

2. 

CANDIDATE COUNTRIES 

Real growth rates were maintained at above 4% in the region which helped the fiscal 
stabilisation  but  fuelled  a  substantial  increase  in  imports  leading  to  deterioration  in 
external current accounts. 

2.1. 

Bulgaria 

In  spite  of  the  difficult  global  economic  situation  in  2003,  the  Bulgarian  economy 
continued to benefit from high growth and stability. Real GDP continued growing at 
a  rate  of  4.2%  in  the  first  three  quarters  of  2003.  It  is  sustained  by  strong  private 
consumption  and  investment  as  a  consequence  of  high  increases  in  bank  credits, 
employment  and  FDI  inflows.  However,  strong  domestic  demand  spilled  over  into 
high  import  growth  which  was  not  fully  matched  by  export  growth.  Following  a 
period of low inflation rates in the first half of 2003, these moved somewhat up in the 
second  half  due  to  higher  food  and  energy  prices.  Inflation  was  therefore  2.3%  on 
average  and  5.6%  at  the  end  of  2003.  Unemployment  decreased  substantially  to 
12.7%  of  the  labour  force  until  September 2003,  and  was  more  than  4.5%  points 

EN 

9 

   EN 

 
lower compared to one year earlier. Many jobs were created in both the private sector 
and government  employment  schemes. The partly delayed privatisation programme 
could  see  a  boost  in  the  next  weeks  and  months  due  to  decisions  to  finalise  the 
telecom  privatisation  in  February  and  to  implement  a  new  strategy  of  a  piecemeal 
sale of the tobacco company. The IMF Stand-by Arrangement of February 2002 was 
successfully completed in February 2004 and a new Pre-cautionary Arrangement is 
being considered. 

The currency board arrangement, which is tying the national currency to the euro at a 
rate of BGN 1.95583= EUR 1, continues to  be supported by high foreign reserves. 
The strong appreciation of the euro vis-à-vis the US dollar has contributed to some 
deterioration  of  external  competitiveness,  although  the  effects  should  be  limited  by 
the structure of Bulgaria’s foreign trade, which has a high dollar-denominated share 
on the import side (energy, raw materials) and a high euro-denominated share on the 
export  side  (manufactured  goods,  tourism).  Balance-of-payments  figures  available 
until November 2003 reveal that the current account deficit was much higher than in 
previous  years  because  of  a  high  trade  deficit  which  was  not  offset  as  much  as  in 
previous  years  by  other  items  of  the  current  account.  However,  net  errors  and 
omissions  were  still  above  2%  of  GDP  and  could  result  in  a  better  outcome  once 
final figures are available. Net inflows of foreign direct investment will see a record 
high in 2003, already reaching 6.6% of GDP until November. The foreign reserves of 
the central bank continued to increase and amount to more than 6 months of imports 
of goods and non-factor services. 

Fiscal discipline continues to be a crucial element in preserving internal and external 
stability.  Over  the  year  2003,  the  general  government  sector  was  running  a  cash 
surplus peaking at 2.8% of GDP in October. Following some extraordinary spending 
towards the end of year, a nearly balanced budget could have been achieved for the 
full  year.  Public  debt  has  continued  falling  from  above  100%  of  GDP  in  1997  to 
below 50% of GDP in the second half of 2003. Total external debt has decreased to 
below 70% of GDP, also due to the high share of debt denominated in US dollar. The 
government  continues  its  active  debt  management  strategy  with  the  objective  of 
reducing  risks  by  gradually  shifting  from  a  denomination  in  US  dollar  towards  a 
denomination in euro, from short-term to long-term maturity, from floating into fixed 
interest rate bonds and from foreign to domestic financing. 

2.2 

Romania 

During  the  second  half  of  2003,  macroeconomic  trends  remained  broadly  positive 
with  sustained  growth  accompanied  by  a  further  decline  in  inflation.  However, 
growth  appeared  increasingly  unbalanced,  and  signs  of  a  widening  current  account 
deficit were clearly confirmed. 

In  October 2003,  Romania  successfully  completed  the  final  review  of  its  Stand-By 
Arrangement with the IMF, which had contributed to sound macroeconomic policies 
and  progress  in  structural  reforms.  Fiscal  policy  has  remained  fairly  prudent,  and 
monetary  policy  continues 
to  pursue  disinflation  while  preserving  external 
competitiveness. In 2003, inflation remained on its downward path and with a 14.1% 
year-end inflation recorded, the Government’s target for the year was met.  

EN 

10 

   EN 

 
Romania’s  four-year  old  economic  recovery  was  sustained  as  economic  growth 
remained robust. After growing by 4.9% in 2002, real growth stood at 4.7% year-on-
year during the first three  quarters of 2003. However, growth was driven  solely by 
domestic  demand,  characterised  in  particular  by  a  sharp  increase  in  household 
consumption at an annual rate of above 6% in the third quarter on the back of surging 
consumer credit and an average real wage increase of close to 9% in 2003.  

With investment expenditure continuing to expand rapidly at an annual rate of nearly 
8%  over  the  first  three  quarters  of  2003,  import  growth  remained  sustained  and 
amounted to nearly 12% over the corresponding period in 2002. Export growth at the 
same  time  decelerated  considerably  over  2003  to  slightly  above  8%  over  the 
corresponding  period  in  2002.  This  was  also  reflected  in  industrial  production 
growing at a significantly lower pace in 2003 than in previous years. As a result, the 
contribution of net exports to growth became negative in 2003.  

The  current  account  deficit  widened  significantly  over  2003  and  is  expected  to 
accumulate to well above 5% of GDP over the year. Against this background, fiscal 
measures  have  been  announced  for  2004  and  measures  in  the  banking  system  are 
under  way  aimed  at  limiting  the  credit  growth to  a  pace  consistent  with  containing 
the current account deficit.  

While still at a relatively modest level, net foreign direct investment inflows passed 
EUR  1  billion  in  the  first  ten  months  of  2003,  pointing  to  a  modest  increase 
compared to previous years.  

Romania’s  official  international  reserves  levelled  off  towards  the  end  of  2003,  but 
remained  at  a  comfortable  level  of  3.7  months  of  goods  and  services  import.  Its 
sovereign debt rating was in December upgraded by several credit agencies both for 
national and foreign currency denominations. After rising to EUR 14.9 billion at end-
2002,  foreign  debt  rose  further  to  EUR  16.0  billion  in  October 2003,  but  remained 
unchanged in terms of GDP (34.4% of GDP). 

2.3 

Turkey 

In the short and medium-term, the Turkish authorities are faced with the challenging 
task  of  implementing  IMF-backed  reforms  and  servicing  the  country’s  heavy  debt 
burden  in  a  context  of  a  widening  current  account  deficit  driven  by  recovering 
demand and a substantial real exchange-rate appreciation.  

Economic  output  increased  by  more  than 5% in  2003, based on strong exports and 
restocking, while consumption, so far, has remained subdued reflecting weak growth 
of real disposable income. One of the most important features during the last months 
has  been  the  continued  decline  in  inflationary  pressures,  reaching  a  new  long-term 
low of 18.4% year-on-year consumer price inflation in December 2003. The official 
end-year  target  for  2003  was  20%,  while  the  December  2004  target  is  12%.  The 
annual  average  inflation  rate  thus  declined  from  45.0%  in  2002  to  25.3%  in  2003. 
Key factors for this favourable development have been a strict fiscal policy and the 
significant  real  appreciation  of  the  Turkish  currency.  Important  reasons  for  the 
strength  of  the  Turkish currency are improved  market confidence,  inverse currency 
substitution  and  the  still  high  real  interest  differential.  The  continued  downward 
trends in inflationary pressures and declining inflation expectations have allowed the 

EN 

11 

   EN 

 
Turkish Central Bank to substantially reduce key interest rates. This should help to 
stimulate  investment  and  consumption.  Furthermore,  financing  costs  of  the  public 
sector deficits have declined markedly.  

Despite  a  number  of  generous  expenditure  measures  by  the  present  government, 
fiscal policy so far has remained largely on track. However, in view of local elections 
in March 2004 there is a risk of fiscal slippage in the near term. In 2003, the Turkish 
authorities  remained  on  track  with  the  IMF-agreed  primary  surplus  target  for  the 
central government of 5% of GDP. The general government primary surplus is likely 
to  be  close  to  the  official  6.5%  of  GDP  target.  The  gross  debt  ratio  is  expected  to 
decline from 95% of GDP in 2002 to 86.3% by the end of 2003.  

The external balance has been deteriorating during the second half of 2003, from a 
deficit  of  1.8%  in  the  first  6  months  to  about  2.5%  by  November.  Yet,  tourism 
revenues performed surprisingly well after the rapid end of the war in neighbouring 
Iraq,  while  FDI  inflows  remained  negligible.  The  central  bank’s  foreign  exchange 
reserves amounted to EUR 38 billion in December 2003 and covered approximately 
6 months of imports. 

3. 

WESTERN BALKANS 

No  marked  change  in  the  weight  of  public  and  external  debts  for  countries  of  the 
region  has  occurred  since  the  last  report.  The  situation  in  FYROM  has  however 
continued to improve. 

3.1 

Bosnia and Herzegovina (BiH) 

Under 
to  end 
the  current  IMF  programme  (on-track),  recently  extended 
February 2004, in 2003 BiH maintained macro-economic stability, low inflation, and 
continued efforts with fiscal consolidation. The latest estimates point to a slowdown 
of  real  GDP  growth,  at  3.5%  (down  from  5.5%  in  2002)  weakened  by  a  negative 
external environment and a drought, but also reflecting poor sources of domestically-
generated  growth,  in  a  context  of  declining  official  aid.  Strict  adherence  to  the 
currency  board  has  kept  inflation  under  control,  which  in  the  first  nine  months  of 
2003 was 0.6% on average. Although the size of public expenditure remains high, it 
is estimated to have declined at 48% of GDP in 2003, against 51% in 2002. After the 
improved  revenue  performance  recorded  in  2002,  with  an  estimated  consolidated 
budget deficit revised downwards at 7.1% of GDP (2.2% after grants), for 2003 the 
authorities targeted a level of 6.4% of GDP (2.2% after grants). Due to good revenue 
performance, but also savings on the expenditure side, this target seems to have been 
over-achieved (September data), and the general government deficit is now estimated 
at 3.4% of GDP (with a slight surplus after grants). The size of domestic public debt 
(which includes arrears, war damages, and frozen currency deposits) still needs to be 
fully identified. It may have reached a level of around 45% of GDP, hence bringing 
total public debt at around 80% of GDP. 

Owing  to  some  tightening  of  monetary  policy  to  counteract  the  credit  boom,  the 
current account deficit is estimated to have slightly decreased to just below 18% of 
GDP  (against  18.5%  in  2002).  The  level  of  gross  official  reserves  should  be 
equivalent to around 4.2 months of imports cover (against 4.8 months at end-2002). 

EN 

12 

   EN 

 
According  to  the  latest  data,  the  external  public  debt  (mostly  due  to  repayments  to 
the  IMF  and  the  World  Bank)  reached  39%  of  GDP  at  the  end  of  2002  (revised 
downwards  from  the  projected  47%)  and  is  expected  to  decline  slightly  over  the 
medium-term. The ratio of debt service to exports, which increased to 8.5% in 2002, 
remained at the same level in 2003, and is expected to go down in the coming years. 
BiH  is  not  rated  by  the  credit  rating  agencies.  EBRD  transition  indicators,  which 
reflect  progress  in  reforms  in  Central  and  Eastern  European  countries,  place  BiH 
towards the low end of the scale, even though some progress has been recorded. 

Overall,  over  the  second  semester  of  2003,  although  BiH  remained  current  on  its 
external  debt  service  obligations,  the  balance  of  payments  and  external  debtor 
situation continued to be vulnerable due to large external deficits, declining foreign 
assistance, and high internal public sector indebtedness. 

3.2 

Former Yugoslav Republic of Macedonia (FYRoM) 

GDP  growth  in  the  Former  Yugoslav  Republic  of  Macedonia  is  estimated  to  have 
reached  3%  in  2003,  which  is  broadly  in  line  with  the  initial  forecasts  of  the 
authorities and the IMF. Inflation continued to be low in 2003, with consumer prices 
increasing  by  2.6%  in  December  on  an  annual  basis.  Fiscal  performance  has 
improved  considerably  in  2003.  The  general  government  deficit  is  estimated  at 
around  1.5%  of  GDP,  against  a  forecast  of  2.7%  at  the  beginning  of  the  year  and 
compared to the 5.7% deficit which was recorded in 2002. In October 2003, the IMF 
Executive Board approved the first review of the Stand-By Arrangement, which will 
expire in June 2004. 

On the external side, in 2003, there was a slight decline in the overall trade exchange 
in nominal (euro) terms. Exports remained  stable  compared to  2002,  while  imports 
decreased  by  6%.  The  trade  deficit  is  expected  to  have  reached  approximately 
EUR 700 million or 17.2% of GDP, lower than in 2002 in euro terms and as a share 
of GDP, but widening when measured in dollar terms owing to exchange rate effects. 
The  2003  current  account  deficit  (before  grants)  is  estimated  at  8.3%  of  GDP  or 
6.2%  of  GDP  after  taking  into  account  foreign  assistance  (2.1%  of  GDP).  Foreign 
exchange  reserves  were  maintained  in  2003  to  a  level  equivalent  to  around  four 
months of imports, which is the target set by the IMF programme. The external debt 
significantly  declined  to  33%  of  GDP  at  the  end  of  2003,  a  rather  moderate  level 
compared to other countries in the region. 

Risks  to  the  balance  of  payments  may  arise  from  possible  speculative  pressures  on 
the  foreign  exchange  market,  larger  than  expected  imports  due  to  tariff  cuts  and  a 
decline  in  the  inflow  of  private  transfers.  Over  the  medium-term,  the  main  risks 
remain  associated  with  the  internal  political  situation  and,  in  particular,  persistent 
ethnic  tensions  within  the  country.  Overall,  over  the  second  semester  of  2003,  the 
risk profile of the country continued to improve thanks to the fiscal consolidation and 
the maintenance of a sound macro-economic framework in agreement with the IMF. 

3.3 

Serbia and Montenegro 

In  the  second  half  of  2003,  macro-economic  policies  in  Serbia  and  Montenegro 
continued to be geared towards sustaining macro-economic stability in line with the 
current IMF programme, a three-year Extended Arrangement approved in May 2002. 

EN 

13 

   EN 

 
However, structural reforms advanced at a slower pace in 2003, and in particular the 
restructuring of large socially - and state-owned companies and the process of bank 
privatisation have been delayed. Real GDP grew by an estimated 3% (compared to 
an initial growth target of 3.5 to 4.5%) and was mainly driven by a good performance 
of  services  and  transport  while  industrial  and  agricultural  production  declined  as 
compared to the previous year. Inflation continued to decline to 8% by end 2003. 

In  the  context  of  the  IMF  programme,  the  current  account  deficit  of  Serbia  and 
Montenegro for 2003 was programmed to be lowered to 11% of GDP before grants 
(12.8%  in  2002),  as  a  result  of  a  lower  import  demand  and  continued  export 
recovery.  The  export/import  ratio  is  still  only  38.5%,  and  the  trade  deficit  is 
estimated  to  have  increased  to  23.3%  of  GDP.  Net  current  transfers,  mostly  in  the 
form of remittances, increased by 37% (in the first eight months of 2003) and have 
helped financing a substantial part of the trade deficit. Some negative trends in the 
capital and financial account in the first half of 2003 were reversed in the remainder 
of the year, due to some successful privatisation deals in Serbia, which significantly 
contributed  to  a  large  net  inflow  of  foreign  direct  investment  (FDI)  at  EUR  1,060 
million  compared  to  an  initially  projected  level  of  EUR  550  million.  As  a  result, 
foreign  exchange  reserves  continued  to  rise  and  are  reported  to  have  reached  more 
than  EUR  3  billion  by  the  end  of  2003  (equivalent  to  4.5  months  of  imports). 
However,  it  is  expected  that  the  inflow  of  FDI  will  be  substantially  lower  in  the 
following years and it will become increasingly important that the reform process in 
Serbia  and  Montenegro  drives  moregreenfield  FDI 
the  external 
sustainability of the country.  

to  ensure 

As  for  external  debt  (estimated  at  EUR  11.5  billion  or  about  61%  of  GDP,  end-
September),  after  the  overall  agreement  with  the  Paris  Club  (a  phased  reduction  of 
the debt by 66%) had been reached in 2001, bilateral agreements with the main Paris 
Club  members  (except  Italy,  Japan  and  Finland)  have  been  concluded.  In 
November 2003, important agreements on debt relief were signed with China and the 
Russian  Federation.  However,  despite  a  renewal  of  negotiations  and  efforts  on  the 
part of the authorities, Serbia and Montenegro has not yet reached an agreement with 
the  London  Club  of  commercial  creditors,  which  have  been  reluctant 
to 
accommodate the authorities’ objective to be granted generous terms similar to those 
of  the  Paris  Club.  Overall,  after  a  difficult  first  semester,  the  external  situation 
generally  improved  over  the  second  half  of  2003.  However,  the  external 
sustainability of the economy will remain a major challenge in the coming years. 

4. 

NEW INDEPENDENT STATES 

Healthy growth rates contributed to budgetary stabilisation and overall improvement 
in external current accounts. If pursued and accompanied with progress in structural 
reform, this trend could lead to positive effects on debt sustainability. 

4.1 

Armenia 

Armenia’s economic  growth performance continues to exceed expectations. During 
the first three quarters of 2003, real GDP growth reached 15.2%, mainly driven by 
the  diamond  polishing,  construction,  mining  and  metals  sectors.  Private  grants  and 
loans from Diaspora Armenian sources financed investments in housing, roads, and 

EN 

14 

   EN 

 
cultural  sites  equivalent  to  2-3%  of  GDP  both  in  2002  and  2003.  According  to 
preliminary figures, economic growth for 2003 as whole is estimated at a new record 
rate  of  13.9%.  Industrial  production  increased  nearly  15%  while  in  agriculture  the 
growth  rate  was  only  4%.  The  12-month  rate  of  inflation  was  at  8.5%  in 
December 2003,  exceeding  the  target  rate  of  three  percent  of  the  Central  Bank  of 
Armenia, owing to rapid increases in some food prices during the year. Fiscal policy 
remains  prudent  and  the  government  was  able  to  reduce  the  stock  of  domestic 
expenditure arrears to a negligible amount in 2003. Tax revenues as a ratio to GDP 
are  still  at  a  fairly  low  level  (14.6%  in  2002).  In  2003  the  nominal  tax  collection 
target  was  met  but  the  tax  revenues-to-GDP  ratio  is  estimated  to  have  decreased, 
partly  because  of  high  growth  in  grant-financed  economic  activities  which  are  not 
being taxed. The fiscal deficit is projected at between 2-2.5% of GDP in 2003-2004. 
As in previous years, the budget deficit is covered mainly through external financing 
on concessional terms.  

Supported by private and official transfers, the current account position has gradually 
improved over the past years. The trade balance deteriorated in 2003, owing to high 
imports’  demand  by  the  booming  construction  sector  and  the  particular  imports-
exports  cycles  of  the  diamond  processing  sector.  The  current  account  balance  is 
estimated to have increased from 6.6% of GDP in 2002 to 7.7% in 2003. The gross 
international reserves of the Central Bank of Armenia are comfortably high covering 
nearly  four  months  of  imports.  The  dram  has  been  broadly  stable,  and  in  real 
effective  terms  it  is  estimated  to  have  appreciated  very  slightly  in  2003  after  a 
decline  in  2002.  The  debt-to-equity  swap  with  Russia  curbed  the  increase  in  the 
nominal  external  debt  in  2003,  and  in  nominal  US  dollar  terms  the  external  debt 
remained stable at about 1020 million in 2003, while as a ratio to GDP it is estimated 
to  have  declined  to  below  40%.  Armenia  also  repaid  its  outstanding  debt  to 
Turkmenistan in kind. On the other hand, robust growth in exports, mainly polished 
diamonds,  has  meant  that  the  net  present  value  of  the  external  debt  as  a  ratio  of 
exports declined from about 130% at the end of 2002 to an estimated 94% in 2003. 

4.2 

Belarus 

According  to  the  preliminary  official  figures,  real  GDP  growth  in  Belarus  in  2003 
accelerated from 4.7% in 2001-2002 to 6.8%. Belarus seems therefore to be back on 
the  growth  track  after  a  marked  slowdown  recorded  in  recent  years  when  the 
country’s  performance  was  significantly  lagging  in  the  former  Soviet  Union 
economic  space.  The  Belarus’  economy  follows  closely  that  of  Russia  and  its 
rebound  in  2003  is  largely  explained  by  Russia’s  buoyant  economic  performance. 
Indeed, much of the Belarus manufacturing sector is closely integrated with Russian 
enterprises, Russia absorbs a substantial portion of Belarus' exports – both industrial 
and agricultural – and many Belarus nationals work in Russia.  

In  2003  inflation  still  exceeded  25%  (the  highest  annual  inflation  in  the  former 
Soviet  Union).  Although  these  inflation  rates  represent  a  clear  improvement 
compared  to  the  hyperinflation  of  the  last  few  years  (in  2000,  CPI  inflation  had 
amounted to 169%), they reflect a still relatively loose monetary policy stance, which 
is inconsistent with a hard peg of the exchange rate to the Russian rouble (Belarus is 
aiming for full monetary union with Russia, planned for January 2005). In order to 
reduce  inflation  permanently,  wage  increases  should  not  exceed  productivity  gains 
and  the  provision  of  easy  credit  should  be  curtailed,  which  is  politically  difficult 

EN 

15 

   EN 

 
given  the  large  role  of  State-owned  enterprises  and  the  persistence  of  an  economic 
model  intent  on  perpetuating  the  administration's  tight  control  over  the  country's 
political  and  economic  space.  A  tighter  monetary  policy  would  also  provide  real 
incentives  for  restructuring  the  outmoded  and  inefficient  economic  structures  in 
place, given that typically, important firms are kept solvable through generous credit 
financing.  This  stance  has  consistently  blocked  the  resumption  of  any  financing  by 
the IMF. 

Since the start of 2000 the government has accepted the need to unify the currency's 
various  exchange  rates,  has  replaced  all  quasi-fiscal  operations  by  the  central  bank 
with subsidies through the government budget and has promised to curb pressure on 
the commercial banks to issue credit to key sectors. The government's exchange-rate 
liberalisation and the proposed currency union with Russia could prove to be a major 
improvement, if underpinned by comprehensive structural reforms.  

Since  late  2001  the  government  has  been  negotiating  the  sales  of  petrochemical 
enterprises to Russian companies – as settlement for gas deliveries and in the hope 
that this might provide the additional financing needed to preserve economic growth 
and low unemployment without needing to change current policies.  

Although the current account position of Belarus is threatened by a growing negative 
trade  balance  and  very  low  international  reserves,  the  country's  fiscal  situation  is 
stable and the general government cash deficit is low (it was estimated at little more 
than 1% of GDP in 2003). Belarus has a low level of State foreign debt (reportedly 
4.4%  of  GDP  at  end-2003).  It  is  servicing  debt  to  the  EU  regularly.  Foreign  debt 
declined by 9.4% in 2003. 

4.3 

Georgia 

Real GDP growth was 8.3% year-on-year in the first three quarters of 2003, owing 
mainly  to  strong  growth  performance  in  construction  and  agriculture.  The 
construction  of  the  Baku-Tbilisi-Ceyhan  (BTC)  oil  pipeline  started  on  Georgian 
territory  in  April  and  the  construction  continues  until  2005.  The  preliminary 
estimates  give  a  real  GDP  growth  rate  of  about  8.5%  also  for  2003  as  a  whole. 
Agriculture  is  the  largest  sector  of  the  economy,  and  in  2003  weather  conditions 
were  favourable  contributing  to  about  10%  growth  in  agriculture.  In  addition  to 
agriculture  and  construction,  the  extraction  sector  (aluminium,  ferro-alloys,  copper, 
gold and scrap metals) and manufacturing (wine, fertilisers, mineral water) have also 
registered strong growth.  

A  large  part  of  economic  activity  remains  unrecorded  and  smuggling  is  pervasive. 
Therefore,  the robust growth rates registered across  several  sectors of the economy 
did  not  translate  into  an  improvement  in  tax  revenue  collection.  On  commitment 
basis, a fiscal deficit of 2.9% of GDP is projected for 2003, while on cash basis the 
deficit is actually lower than in 2002 because of the net accumulation of expenditure 
arrears.  The  political  turmoil  in  November  brought  additional  difficulties  for  fiscal 
management  but  donor  funding  was  available  for  immediate  needs.  The  draft  2004 
budget,  which  was  submitted  to  the  parliament  in  October 2003,  was  recalled  for 
revision  by  the  new  government.  The  parameters  of  the  fiscal  programme  shall  be 
discussed with the IMF in early 2004.  

EN 

16 

   EN 

 
The National Bank of Georgia has maintained a consistently prudent monetary policy 
stance.  Despite  the  favourable  year  in  agricultural  production  which  subdued  some 
inflationary  pressures,  the  consumer  price  inflation  increased  to  7%  at  end-
December 2003. This was partly due to increases in tariffs and utility prices, but also 
because  price  increases  were  evidenced  during  the  political  turmoil  in  November. 
The lari remained remarkably stable against the US dollar also during November and 
December. In real effective terms the lari is estimated to have appreciated slightly in 
2003.  

The current account deficit increased rapidly in 2003 to about 10% of GDP owing to 
the  imports  for  the  construction  of  the  BTC  pipeline.  The  increase  in  the  deficit  is 
financed  by  foreign  direct  investment.  The  gross  international  reserves  of  the 
National Bank of Georgia declined from an already low level to about the equivalent 
of  1.5  month  of  imports  (excluding  the  pipeline-related  imports).  In  terms  of  US 
dollars, the external debt of Georgia continued to increase in 2003 but as a ratio to 
GDP the nominal debt stock is projected to have declined to 48% at the end of 2003. 
Georgia  was  not  able  to  approach  its  bilateral  creditors  at  the  Paris  Club  for  a 
rescheduling  of  2003  loan  maturities  as  foreseen  in  the  2001  Paris  Club  agreement 
because the country’s arrangement with the IMF was suspended in August 2003. 

4.4 

Moldova 

In  2003,  Moldova’s  GDP  grew  by  around  6%,  largely  thanks  to  a  very  favourable 
economic situation in Russia and Ukraine, Moldova’s main trade partners. This year, 
a  generally  sound  policy  mix  is  expected  to  ensure  moderately  strong  growth  at 
around 5%, and contain significant price and currency instability.  

Although exports have continued to increase at a rapid pace, imports, fuelled by very 
high remittances from Moldovans working abroad, have grown faster still, worsening 
Moldova's structurally high current-account deficit. Even if oil prices eased relatively 
quickly, for the next few years Moldova is expected to record annual trade deficits 
equivalent  to  roughly  25%  of  GDP,  and  annual  current-account  deficits  ranging 
between 7% and 8% of GDP in the coming years.  

The risks created by the concentration of Moldova's export base on a narrow range of 
products (notably wine and agricultural produce) are mitigated by the likelihood that 
inflows of remittances from abroad will remain large. In the short term, remittances 
remain of crucial importance for Moldova, given that the country is expected to have 
difficulty  to  access  external  financing  or  attract  investment  in  the  short  run.  In  the 
medium  and  long  term,  however,  the  pace of  economic  development  will  hinge  on 
Moldova’s ability to attract inflows of foreign direct investment (FDI) and to regain 
access to the Eurobond market. 

Despite  satisfactory  GDP  growth  rates  the  budgetary  situation  remains  grave.  The 
foreign debt to GDP ratio is unsustainable7, despite a series of bilateral rescheduling 

7 

As at end-2002, total external debt was 102% of GDP. Public and public-guaranteed debt was lower at 
65% of GDP. 

EN 

17 

   EN 

 
                                                 
between  1999  and  2002;  servicing  debt  fully  would  require  close  to  half  the  State 
revenues.  Moldova  suspended  debt  payments  to  Gazprom  at  end-2001  and  to 
bilateral  creditors  in  August 2003,  while  continuing  to  pay  multilaterals  and 
Eurobond holders.  

Under pressure, the government has tightened considerably the fiscal stance, cutting 
social expenditure sharply. In 2003, a primary budget surplus of around 2% of GDP 
was  achieved.  Despite  positive  GDP  growth  since  2000,  budgetary  planning  has 
continued to rely heavily on privatisation proceeds, which, however, have fallen far 
short  of  hopes  because  of  slow  progress  in  structural  reform  and  of  the  difficulties 
encountered by Western investors in Moldova, which have led to very low levels of 
inward FDI. 

The government is unlikely to reverse the fiscal improvements achieved since 1999, 
but has little room for manoeuvre, given the limited financing options. It has failed to 
secure  IMF  and  World  Bank  financing  in  2003,  except  small  sums  for  targeted 
projects, and its privatisation targets seem optimistic. In 2004 problems with budget 
planning  and  implementation  are  unlikely  to  diminish;  given  that  IMF  projections 
indicate a sizeable financing gap and the prospects for a new IMF programme look 
slim. Generally, budgetary policy remains hampered by poor administrative capacity 
and by a continued risk that parliament might force through populist measures, and 
by very high debt servicing requirements.  

4.5 

Tajikistan 

Real GDP growth was strong in the first three quarters of 2003, increasing by 7.9% 
compared  to  the  same  period  a  year  earlier.  The  sources  of  growth  continue  to 
become more diversified. Traditional sectors (cotton and aluminium) showed modest 
expansion,  while  services  (mostly  trade),  non-aluminium  manufacturing  and  non-
cotton  agriculture  accounted  for  two-thirds  of  growth  in  the  first  nine  months  of 
2003. Growth in domestic demand was supported by a large expansion of migrants’ 
remittances (for 2003 these are projected to be equivalent at 15% of GDP). Given the 
strong  output  performance  and  the  high  world  prices  for  cotton  and  aluminium, 
growth is projected to be 9% for 2003 as a whole.  

The  overall  fiscal  surplus  for  2003  is  estimated  at  0.6%  of  GDP.  The  Public 
Investment  Programme  and  quasi-fiscal  deficits  are  not  included  in  the  official 
budget  figures.  The  IMF  estimates  that  the  quasi-fiscal  deficit  in  the  energy  sector 
amounts  to  5.5%  of  GDP.  About  two  thirds  result  from  low  tariffs  and  technical 
losses, while the remainder  stems from low collection  rates. Due to high economic 
growth and better tax collection, the tax to GDP ratio increased from 14.1% in 2001 
to 14.7% in 2002. Tax collection for 2003 as a whole is estimated at 15.5% of GDP 
and is projected to increase further this year to 16.2%. This increase is mainly due to 
improved tax administration, particularly for VAT. Little budgetary support is to be 
expected from the privatisation programme, from which revenue remains extremely 
weak.  In  any  case,  the  government  will  remain  reliant  on  multilateral  financing  to 
cover its budget deficit. 

Although Tajikistan’s external debt is large, it has declined from 82% of GDP at end-
2002  to  a  projected  73%  at  end-2003,  due  to  debt  restructuring  agreements  with 
bilateral  creditors  and  the  strong  growth  of  GDP  in  last  years.  The  grace  period 

EN 

18 

   EN 

 
provided in the restructuring agreement with Russia (December 2002) ends in 2005 
and therefore debt service costs are expected to rise significantly for the period 2005-
2009. 

The current account balance strengthened in the first nine months of 2003, compared 
to  the  same  period  a  year  earlier.  This  reflects  higher  than  projected  migrants’ 
remittances combined with higher international prices for cotton and aluminium. The 
increased  volume  of  migrants’  remittances  sent  through  commercial  banks  reflects 
increased  confidence  in  the  banks  as  well  as  a  higher  number  of  migrants  working 
abroad  due  to  the  lack  of  domestic  employment  opportunities.  Gross  international 
reserves increased by 38% during the first nine months of 2003. Significantly higher 
imports  associated  with  rapid  growth,  however,  means  that  import  coverage  is 
projected to be unchanged at end-2003 (1.8 month) compared to end-2002. 

4.6 

Ukraine 

Ukraine’s  GDP  growth  accelerated  from  4.1%  in  2002  to  8.5%  in  2003,  amply 
exceeding  expectations.  This  high  rate  of  economic  expansion,  combined  with  the 
effect of the poor harvest on food prices, has rekindled inflationary pressures (after 
the unprecedented deflation seen in 2002) but inflation remains in the single digits. 
Reflecting the faster than expected economic growth, fiscal performance in 2003 was 
better than budgeted, with the consolidated government ending the year with a small 
surplus.  The  budget  for  2004  is  consistent  within  a  consolidated  budget  target  of 
1.5% of GDP.  

Ukraine’s balance of payments has strengthened very significantly since 1990. Since 
1999, the current account has been consistently in surplus, with the surplus reaching 
about  5%  of  GDP  in  2003.  The  current  account  surplus  has  contributed  to  a 
significant  build-up  in  official  foreign  exchange  reserves,  which  rose  from  about 
USD 1 billion at end-1999 to USD 7 billion (just over 3 months of imports) in early 
January 2004. The debt rescheduling agreed with private bondholders in April 2000 
and  by  the  Paris  Club  in  July  2001  has  significantly  eased  Ukraine’s  debt  service 
obligations. Debt and debt service ratios have shown a downward trend since 2000, 
although  the  country’s  debt  service  is  expected  to  rise  temporarily  in  2003-06.  In 
December 2002, Ukraine regained access to the international capital markets (which 
it had lost in the wake of the Russian financial crisis of 1998) with the issuance of a 
USD 350 million Eurobond. This was followed in early June 2003 by the issuance of 
a  USD  800  million,  10-year  Eurobond,  which  was  oversubscribed  and  carried  an 
annual  interest  rate  of  only  7.65%.  Since  2001,  secondary  market  yield  spreads  on 
Ukrainian  Eurobonds  have  narrowed  markedly  and  the  main  international  rating 
agencies have upgraded Ukraine several times. 

Progress  with  structural  reforms,  which  slowed  down  significantly  in  2001-02, 
remains the country’s key economic challenge. During 2003, encouraging measures 
were  taken  in  a  number  of  areas,  including  tax  reform  and  the  adoption  of  new 
pension  legislation,  but  progress  in  other  areas,  notably  the  energy  sector,  remains 
very disappointing. 

Ukraine is close to agreeing on a pre-cautionary stand-by arrangement with the IMF 
and is considering repaying ahead of schedule part of its debts to the IMF. It is also 
discussing  with  the  European  Commission  the  possible  policy  conditions  to  be 

EN 

19 

   EN 

 
attached 
EUR 110 million approved by the Council in July 2002. 

the  disbursement  of  a  macro-financial  assistance  of  up 

to 

to 

5. 

OTHER NON-MEMBER STATES 

The  overall  trend  in  these  economies  is  of  improvement  of  their  current  accounts 
which have posted surplus for all of them in 2003. 

5.1 

Algeria 

In 2003, economic growth has accelerated significantly to around 7%, mainly on the 
back  of  a  strong  recovery  in  the  agriculture  sector  and  a  surge  in  hydrocarbon 
revenues.  Cereal  output  expanded  by  more  than  20%  this  year,  owing  to  better 
meteorological  conditions,  but  also  to  government  financial  assistance  and  higher 
investments  in  the  agricultural  sector.  The  strongest  contribution  to  growth  came 
from  the  hydrocarbon  sector,  as  crude  oil  production  amounted  to  an  average  1.11 
million barrels/day. With regard to fiscal policy the overall fiscal balance reached a 
surplus  in  2003,  as  strong  expenditure  growth  was  outpaced  by  the  increase  in  oil 
revenues. However, the primary non-hydrocarbon deficit deteriorated to around 32% 
of  GDP.  The  2004  budget  retains  the  current  expansionary  fiscal  stance,  with  the 
primary  non-hydrocarbon  deficit  projected  to  amount  to  its  –  already  high  –  2003 
level. 

Algeria’s  external  account  situation  improved  further  in  2003.  Exports  advanced 
strongly  in  the  first  eight  months  of  2003,  reaching  USD  15.2  billion,  up  30% 
compared  to  the  same  period  a  year  earlier.  This  was  mostly  due  to  a  surge  in 
hydrocarbon exports, coupled with favourable oil price developments, while non-oil 
exports  dropped  by  10.7%.  Algeria  achieved  another  substantial  current  account 
surplus in 2003 (11.5% of GDP), while the debt-servicing ratio remained below the 
20%  level.  External  debt  indicators  have  improved  in  2003  thanks  to  debt 
repayments. The external debt, which already decreased from USD 28.3 billion at the 
end  of  1999  to  an  estimated  level  of  USD  23  billion  at  the  end  of  2002  (40%  of 
GDP), declined further to around 33% of GDP by the end of 2003. The favourable 
composition of the maturity structure of foreign debt - 99.3 % of the debt is medium- 
and long term debt - softens Algeria's immediate vulnerability, in particular given the 
presence  of  strongly  increasing  foreign  exchange  reserves  (USD  31.5  billion  at  the 
end of December 2003).  

Despite the current comfortable external account and debt situation a number of risks 
related to the sustainability of the debt situation and macroeconomic stability remain. 
First,  a  long  and  sustained  lasting  decline  in  oil  prices  could  result  in  a  significant 
rise in public debt, as oil revenues currently account for 95% of export revenues and 
60% of budgetary revenues. Secondly, the fiscal expansionary stance and the related 
increase 
inflationary  risks  and  are  detrimental  for 
macroeconomic  stability.  Finally,  the  slow  process  of  structural  reforms  as  well  as 
the related slow pace of job creation does not allow alleviating pressures stemming 
from high labour force growth rates and significant poverty. 

increases 

liquidity 

in 

EN 

20 

   EN 

 
5.2 

Argentina 

Argentina’s economic and financial situation has continued to strengthen. Real GDP 
is  estimated  to  have  expanded  by  7-8%  in  2003,  reflecting  a  strong  rebound  in 
manufacturing  and  construction.  At  the  same  time,  inflation  remains  under  control, 
with the CPI estimated to have increased by only 3.7% in 2003, significantly below 
the 5.6% projected under the IMF programme. The delay in the adjustment of utility 
tariffs  is  partly  responsible  for  this  better  than  programmed  inflation  performance, 
however.  

Fiscal policy remains in line with the IMF programme, with tax revenues moderately 
exceeding  the  programme’s  projections.  Congress  has  approved  a  Budget  for  2004 
that is consistent with the IMF programme’s objective of a primary fiscal surplus of 
at  least  3%  of  GDP.  As  regards  monetary  policy,  the  quantitative  performance 
criteria set under the IMF programme for end-October were met with wide margins 
and  there  has  been  further  progress  in  the  process  of  redemption  of  quasi  monies. 
Funds have continued to return slowly to the banking system and the exchange rate 
has  been  relatively  stable,  fluctuating  most  of  the  time  within  a  relatively  narrow 
band  of  2.9-3  pesos  per  dollar.  The  current  account  continues  to  show  a  sizeable 
surplus and official foreign exchange reserves rose to about USD 14 billion at end-
2003. 

On  20  September 2003,  the  IMF  approved  a  new,  three-year  stand-by  arrangement 
(SBA) for Argentina in the amount of about USD 12.5 billion, as well as a one-year 
extension  of  repurchases  amounting  to  about  USD  2.43  billion.  The  completion  of 
the  first  review  of  the  SBA  programme,  which  was  initially  scheduled  to  be 
completed in December, was delayed until 28 January. Although Argentina met all 
the  macroeconomic  performance  criteria  for  end-October 2003, 
to 
implement some of the structural measures, which required the IMF Board to grant 
several  waivers.  Also,  many  Directors  expressed  doubts  about  the  authorities’ 
compliance  with  the  good  faith  criterion  in  its  debt  negotiations  with  private 
creditors,  a  criterion  that  needs  to  be  satisfied  for  the  IMF  to  lend  to  countries  in 
arrears.  

it  failed 

The  completion  of  the  first  review  allowed  Argentina  to  make  a  purchase  of  about 
USD 335 million. An important purchase (of about USD 2.9 billion) is scheduled for 
mid-March 2004, coinciding with a repurchase of the same magnitude. The release 
of  this  purchase  is  linked  to  the  completion  of  the  second  review  of  the  IMF 
programme. The authorities have indicated that the repayment due in March will be 
conditional  on  the  approval  of  the  second  review,  underlying,  once  again,  the  risk 
that  Argentina  may  again  default  on  its  debts  to  the  international  financial 
institutions.  Finally,  regarding  EIB  loans,  a  new  default  of  payment  had  to  be 
recorded in the second half of 2003 (see § 4.2. and § 6. in Part I). 

5.3 

Brazil 

The Brazilian economy recorded a disappointing growth performance in 2003, with 
GDP  being  nearly  flat.  Economic  activity  began  to  recover  in  the  third  quarter  of 
2003, however, and GDP growth is projected to accelerate to 3.5% in 2004 and 4.5% 
in 2005. Inflation, which had jumped from around 7% in mid-2002 to nearly 18% in 

EN 

21 

   EN 

 
May 2003, has been on a downward trend since then. The government is targeting an 
inflation rate range of 5.5 ± 1.5 percentage points for end-2004. 

The prudent policies implemented by the new administration and increased investor 
appetite  for  emerging  market  assets  have  resulted  in  an  impressive  correction  in 
financial  market  indicators.  The  exchange  rate  has  appreciated  by  about  30%  since 
President  Lula  da  Silva  was  elected  and  official  reserves  have  risen  considerably. 
Spreads  on  Brazilian  bonds  have  narrowed  to  levels  not  seen  since  1998,  Brazilian 
issuers have regained access to the international capital markets and foreign portfolio 
inflows have pushed the stock market index to an all-time high. One factor that has 
contributed to the improvement in market sentiment is the steady progress with the 
structural  reform  agenda,  including  the  congressional  adoption  of  key  laws  on  tax 
reform, pension reform and bankruptcy.  

Since June 2003, the central bank has cut interest rates by about 8% points, reversing 
the  sharp  tightening  of  monetary  policy  that  took  place  between  October  and 
February. Fiscal policy has been tight, overperforming the IMF programme’s targets. 
The 2004 budget targets a primary surplus of 4.25% of GDP, the same as in 2003, 
which  is  consistent  (under  reasonable  macroeconomic  assumptions)  with  a 
significant reduction in the debt/GDP ratio over the medium term. The public sector 
borrowing requirement is projected to decline from 5.5%  of GDP in 2003  to about 
3.25% of GDP in 2004.  

Supported  by  strong  exports  and  subdued  domestic  demand,  the  current  account 
posted a small surplus last year but it is projected to move back into deficit in 2004-
2005 as the recovery of domestic demand gathers momentum. The authorities have 
continued  to  make  progress  in  improving  the  composition  of  public  debt  so  as  to 
reduce vulnerability to external financial shocks. Brazil’s external financial position 
remains vulnerable, however: FDI inflows have fallen sharply, debt repayments are 
scheduled to increase quite markedly this year and Brazil’s ratio of gross reserves to 
short-term debt remains below 1. 

5.4 

Jordan 

The conflict in Iraq adversely affected performance in 2003, with real GDP growth 
decelerating to about 3% from 5% the previous year. Considering the unfavourable 
regional environment, such performance is however relatively positive and is mainly 
due  to  massive  foreign  support  as  well  as  improved  economic  conditions  in  the 
second half of 2003 (in particular, the recovery of the transport and tourism sectors, 
the resumption of exports to Iraq and some recovery of domestic demand). Inflation 
is estimated to have risen to about 3.6% y-o-y at the end of 2003, due to increases in 
goods and services taxes and increased money supply.  

The current account ended with a large surplus of about 7% of GDP, particularly due 
to  additional  donor  assistance.  Jordan's  external  vulnerability  has  been  lowered  in 
recent  years  due  to  improved  policy  performance  and  structural  reforms  including 
privatisation. This is reflected in stronger economic indicators and a higher level of 
reserves  (USD  4.5  billion  or  over  10  months  of  imports),  which  increases  Jordan’s 
resilience  to  external  shocks.  Although  its  debt  level  is  very  high,  particularly  the 
external  debt,  sound  policies  and  reforms  are  expected  to  lead  to  further 
improvements.  Government  external  debt  has  been  reduced  from  95%  of  GDP  in 

EN 

22 

   EN 

 
1998 to below 80% in 2003, and the authorities are aiming to reduce the debt stock to 
around  50%  of  GDP  by  2007  by  reducing  deficits  and  allocating  privatisation 
proceeds  to  debt  reduction.  Importantly,  the  debt  service  ratio  has  also  decreased 
substantially  from  around  34%  ten  years  ago  to  21%  in  2003,  reducing  the  risk  of 
external default. 

In mid 2003 Moody's rating agency upgraded the rating of Jordan's sovereign foreign 
currency bonds to Ba2 from Ba3, and the government's domestic debt to Baa3 from 
Ba3.  All  the  new  ratings  carry  stable  outlooks.  This  upgrade  reflects  the  positive 
impact on macro-economic performance of the reforms undertaken over the past few 
years and the rise of foreign currency reserves. 

EN 

23 

   EN 

 
List of abbreviations 

European Community 

European Investment Bank 

European Union 

Euro 

Foreign Direct Investment 

Gross Domestic Product 

International Monetary Fund 

Stand-By Arrangement 

Dollar of the United States of America 

EC 

EIB 

EU 

EUR 

FDI 

GDP 

IMF 

SBA 

USD 

EN 

24 

   EN