Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2003
Date: 2004-07-28
Institutions: European Commission
Subjects: Caucasus countries, USSR, Yugoslavia, cooperation policy, economic reform, economic situation, financial aid, financial cooperation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 28.7.2004 
COM(2004) 523 final 

. 

REPORT FROM THE COMMISSION TO THE COUNCIL  
AND THE EUROPEAN PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2003 

EN 

   EN 

 
 
 
LIST OF ABBREVIATIONS 

CAMEL 

CBA 

CEECs 

CPI 

DEM 

EC 

EFF 

EIB 

ESAF 

EU 

EUR 

FDI 

FESAL 

FOREX 

FRY 

FYROM 

GDP 

IFIs 

IMF 

MFA 

NIS 

PRGF 

SAA 

SAF 

SBA 

SOE 

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 

Foreign Exchange 

Federal Republic of Yugoslavia 

The 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 

State Owned Enterprise 

Dollar of the United States of America 

Value Added Tax 

World Trade Organisation 

EN 

2 

   EN 

 
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 2003.............................................................................. 6 

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

Disbursements .............................................................................................................. 6 

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

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

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

III. 

Armenia...................................................................................................................... 14 

1. 

2. 

3. 

4. 

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

Macroeconomic performance..................................................................................... 15 

Structural reform ........................................................................................................ 16 

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

IV. 

Bosnia and Herzegovina ............................................................................................ 19 

1. 

2. 

3. 

4. 

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

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

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

Implementation of macro-financial assistance........................................................... 21 

V. 

The former Yugoslav Republic of Macedonia........................................................... 24 

1. 

2. 

3. 

4. 

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

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

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

Implementation of macro-financial assistance........................................................... 26 

VI. 

Georgia....................................................................................................................... 29 

1. 

2. 

EN 

Executive summary.................................................................................................... 29 

Macroeconomic performance..................................................................................... 29 

3 

   EN 

 
 
3. 

4. 

Structural reform ........................................................................................................ 30 

Implementation of macro-financial assistance........................................................... 31 

VII.  Moldova ..................................................................................................................... 33 

1. 

2. 

3. 

4. 

Executive summary.................................................................................................... 33 

Macroeconomic performance..................................................................................... 33 

Structural reform ........................................................................................................ 34 

Implementation of macro-financial assistance........................................................... 35 

VIII.  Romania ..................................................................................................................... 37 

1. 

2. 

3. 

4. 

Executive summary.................................................................................................... 37 

Macroeconomic performance..................................................................................... 37 

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

Implementation of macro-financial assistance........................................................... 41 

IX. 

Serbia and Montenegro .............................................................................................. 43 

1. 

2. 

3. 

4. 

Executive summary.................................................................................................... 43 

Macroeconomic performance..................................................................................... 43 

Structural Reforms ..................................................................................................... 44 

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

X. 

Tajikistan.................................................................................................................... 48 

1. 

2. 

3. 

4. 

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

Macroeconomic performance..................................................................................... 48 

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

Implementation of Macro-Financial Assistance ........................................................ 50 

XI. 

Ukraine....................................................................................................................... 52 

1. 

2. 

3. 

4. 

Executive summary.................................................................................................... 52 

Macroeconomic Performance .................................................................................... 52 

Structural Reforms ..................................................................................................... 53 

Implementation of Macro-Financial Assistance ........................................................ 56 

XII. 

Operation initiated: Albania....................................................................................... 58 

ANNEXES ............................................................................................................................... 59 

EN 

4 

   EN 

 
I. 

INTRODUCTION 

This report assesses the economic situation, the progress of reforms and the prospects of the 
countries  that  benefited  in  2003  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 2003, 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 2003.  

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.  

Moreover,  as  regards  the  recommendation  of  the  Court  on  improvement  of  financial 
management  in  the  beneficiary  countries,  the  Commission  plans  to  conduct  operational 
assessments of their financial circuits and controls related to Macro-Financial Assistance. In 
this  context,  an  audit  firm  has  been  selected  following  an  open  call  for  tenders  and  a 
framework contract has been signed in 2003. 

In addition, selected in depth ex-post evaluations will be carried out by external consultants in 
order to measure the impact of MFA operations in the relevant countries.  

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 2003 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. 
COM(2003)444 of 24 July 2003. 

EN 

5 

   EN 

 
                                                 
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  its  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. 

Macro-financial assistance in 2003 

The previous years were already years of enhanced MFA to the Balkans countries with eight 
different  operations  decided  by  the  Council  in  the  period  2000-2002,  respectively  for  the 
Former  Yugoslav  Republic  of  Macedonia,  Kosovo,  Montenegro,  Bosnia,  Serbia  and 
Montenegro.  This  tendency  was  confirmed  in  2003  with  a  supplementary  MFA  granted  to 
Serbia and Montenegro. This situation makes the Balkan countries the main beneficiaries of 
MFA  with  a  total  of  new  decisions  amounting  to  a  maximum  of  EUR  708  million  for  the 
period 2000-2003. 

A) 

New decisions 

a. 
The  Council  decided  on  25  November  2003  to  provide  a  supplement  in  macro-
financial  assistance  to  Serbia  and  Montenegro  of  up  to  EUR  70  million,  comprising  a  loan 
element  of  up  to  EUR  25  million  and  a  grant  component  of  up  to  EUR  45  million,  thus 
increasing the maximum amount granted by the Council decision (2002/882/EC) to EUR 200 
million (of which EUR 120 million in grants). 

The Commission adopted on 23 December 2003 a proposal to provide macro-financial 
b. 
assistance to Albania of up to EUR 25 million (a loan element of up to EUR 9 million and a 
grant component of up to EUR 16 million). This proposal has been adopted by the Council in 
the second quarter of 2004. 

c. 

B) 

Regarding the NIS, no Council decision was made in 2003.  

Disbursements 

Disbursements  of  macro-financial  assistance  amounted  to  a  total  of  EUR  203  million,  of 
which EUR 85 million in the form of grants and EUR 118 million in the form of loans.  

The grant part included amounts of EUR 7 million for Tajikistan, EUR 25 million for Bosnia 
(of  which  EUR  15  million  was  disbursed  on  the  basis  of  procedures  initiated  in  2002  but 
finalised in early 2003), EUR 18 million for the former Yugoslav Republic of Macedonia and 
EUR 35 million for Serbia and Montenegro.  

EN 

6 

   EN 

 
The disbursements of loans represented EUR 50 million for Romania, EUR 28 million for the 
former Yugoslav Republic of Macedonia and EUR 40 million for Serbia and Montenegro.  

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  detailed  in  the 
previous report. A similar approach has also been proposed in the case of Albania. 

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 1999-2003 Council Decisions.  

The  five  MFA  decisions  taken  in  2002-2003  were  for  traditional  balance  of  payment 
assistance operations and four of them included grants.  

A specificity of the decisions of the 2000-2003 period is indeed the substantial share of grant 
support in the total amount decided: 42 % 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 
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 

EN 

7 

   EN 

 
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 2003 (totalling  around 
EUR 6 billion) - and Graph 2a - for actual amounts disbursed (totalling over EUR 5 billion) - 
show the important concentration of the assistance in the CEECs new Member States (around 
55  %  of  total  macro-financial  assistance  decided  over  the  last  14  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 83% for 2000-2003) and 
some low income NIS. The relatively low amounts for the Mediterranean countries (12 % 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). 

EN 

8 

   EN 

 
Table 1. Macro-financial assistance, 1990-2003
Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

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

Interest 
subsidies 
to Israel

Albania

Albania

250
40
265

555

95

Armenia 
and 
Georgia 
(95)

150

150

300
160

460

70

55
125

180

90

393

393

168

190
18 (a)

208

130

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

Bosnia 
(40) 
fYRoM 
(30)

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

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

70

70

45
Serbia and 
Montenegro 
(45) 

(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

EN 

9 

   EN 

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

1.808

870

620

480

555

255

0

15

460

393

150

180

208

70

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Graph 1b. MFA 1990-2003, authorisations 
Distribution by region

Mediterranean
13%

NIS
16%

Western 
Balkans
17%

Central 
European 
Candidate 
Countries
54%

EN 

10 

   EN 

 
Graph 1c. MFA 2000-2003, authorisations 
Distribution by region

NIS
17%

Western 
Balkans
83%

EN 

11 

   EN 

 
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Disbursements, millions euro 

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

Israel (28) 
Albania 
(35)

Albania

Albania

Albania

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

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

Armenia 
(8) 
Georgia 
(10)

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

130
11

50
146
7

141

203

141
Armenia (11) 
Kosovo (15) 
Serbia and 
Montenegro 
(115)

85
Bosnia (25, 
Serbia and 
Montenegro 
(35), fYRoM 
(18), 
Tajikistan 
(7)

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.
       2002 figures include disbursements in favour of Bosnia and Tajikistan which, for technical reasons, took place in early 2003.

EN 

12 

   EN 

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

1.178

695

350

305

245

330

421

175 195

136

392

265

203

141

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Graph 2b. MFA 1990-2003, disbursements, 
Distribution by region

Mediterranean
14%

NIS
14%

Western Balkans
17%

Central European 
Candidate 
Countries
55%

Graph 2c. MFA 2000-2003, disbursements, 
Distribution by region

NIS
10%

Central European 
Candidate 
Countries
21%

Western Balkans
69%

EN 

13 

   EN 

 
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 2003 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  to  Ukraine  and  also  Serbia  and  Montenegro,  through  the  Paris  Club. 
Serbia and Montenegro benefited again in 2003 of a moratorium of interests of up to USD 61 
million decided by both the Paris and the London Clubs. 

III. 

ARMENIA 

1. 

Executive summary 

The Armenian economy continued to grow at a record high rate in 2003 mainly driven by the 
construction  and  manufacturing  sectors.  Real  GDP  growth  reached  13.9  percent  although 
agricultural production suffered from poor weather conditions. Because of acute shortages in 
some food products, inflation accelerated during the second half of the year (average annual 
inflation  4.7  percent  for  2003  up  from  1.1  percent  in  2002).  Armenia  joined  the  WTO  in 
February  2003.  Despite  having  a  liberal  trade  regime,  Armenia  has  not  been  able  to  fully 

EN 

14 

   EN 

 
benefit from increased trade opportunities because of its isolated position, high transportation 
costs and shortcomings in customs procedures.  

There has been gradual progress in structural reforms, notably in the financial sector. An anti-
corruption strategy was adopted by the government in November together with an action plan 
for 2004-2006.  

Armenia has implemented satisfactorily the economic programme supported by the IMF. The 
IMF  Executive  Board  concluded  the  third  and  the  fourth  review  under  the  PRGF-supported 
three-year  arrangement  in  April  and  November,  respectively.  After  a  staff  mission  in 
December  2003,  the  Commission  services  concluded  that  Armenia  had  made  satisfactory 
progress also in fulfilling the specific conditions for the release of the fifth grant tranche of 
EUR 5.5 million under the exceptional financial assistance.  

2. 

Macroeconomic performance 

Real  GDP  growth  accelerated  in  2003  reaching  a  new  record  rate  of  13.9  percent  (12.9 
percent in 2002). Economic growth was mainly driven by the construction and manufacturing 
sectors. In addition to the diamond processing industry which has been growing fast already 
for  some  years,  new  investment  in  mining,  metallurgy  and  textiles  supported  industrial 
production over the past year. The industrial sector as a whole posted growth of 14.9 percent. 
The construction sector benefited from private external funding from an American Armenian 
Lincy  Foundation  which  has  allocated  funds  for  investment  in  housing,  roads  and  cultural 
sites (equivalent to 2-3 percent of GDP both in 2002 and 2003). Agricultural production was 
affected  by  frosts  in  the  beginning  of  the  season  limiting  the  growth  rate  to  4  percent.  At 
about  10  percent  the  official  unemployment  rate  did  not  deviate  much  from  the  level  of 
unemployment in 2002, despite the continued strong economic growth. 

Fiscal policy remained 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. In 2003 the nominal tax collection target was met but the tax revenues-to-
GDP  ratio  is  estimated  to  have  decreased  to  14.3  percent  of  GDP,  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  percent  of  GDP  in  2003-2004.  As  in  previous  years,  the  budget 
deficit is covered mainly through external financing on concessional terms.  

Average  annual  inflation  accelerated  to  4.7  percent  in  2003  (up  from  1.1  percent  in  2002), 
exceeding the target rate of three percent of the Central Bank of Armenia. This was mainly 
due to rapid increases in some food prices such as bread during the year. In December 2003, 
the 12-month rate of inflation was at 8.6 percent. In nominal terms, the dram has been broadly 
stable  against  the  US  dollar  while  depreciating  against  the  euro.  In  real  effective  terms  the 
dram is estimated to have appreciated very slightly in 2003 after a decline in 2002. 

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 higher imports’ prices on raw materials and 
food  stuffs.  Although  the  deterioration  of  the  trade  balance  is  partly  balanced  by  higher 
private transfers, the current account deficit is estimated to have increased from 6.6 percent of 
GDP in 2002 to 7.5 percent in 2003. The gross international reserves of the Central Bank of 
Armenia (at USD 526 million at end-2003) are comfortably high covering about four months 
of imports.  

EN 

15 

   EN 

 
The  debt-to-equity  swap  with  Russia  (USD  94  million)  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, while as a ratio to GDP it has declined to below 40 percent.  

Armenia also repaid its outstanding debt to Turkmenistan in kind (USD 11 million). 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 percent at the 
end of 2002 to an estimated 94 percent in 2003. Armenia has implemented satisfactorily the 
economic  programme  supported  by  the  IMF.  The  IMF  Executive  Board  concluded  in  April 
2003 the third review under the PRGF-supported three-year arrangement. The fourth review 
was  concluded  in  November  2003,  bringing  the  total  amount  of  disbursements  under  the 
PRGF-arrangement  to  SDR  50  million  (USD  72  million).  The  World  Bank  approved  in 
March  2003  the  Fifth  Structural  Adjustment  Credit  (SAC5)  in  the  amount  of  SDR  30.2 
million, which was disbursed to Armenia in two tranches during the year.  

3. 

Structural reform 

In  August  2003,  the  government  adopted  the  Poverty  Reduction  Strategy  Paper  which  was 
later endorsed by the IMF and the World Bank as a basis for future concessional financing. 
The priorities set in the PRSP (health, education and social welfare) were broadly reflected in 
the Medium Term Expenditure Strategy for 2004-2006 adopted by the government in October 
2003.  The  Budget  System  Law  was  amended  in  April  2003  to  integrate  the  Medium  Term 
Expenditure Framework (MTEF) in the annual budget cycle on a regular basis. The expected 
lower  level  of  external  financing  in  coming  years  will  need  to  be  compensated  by  fiscal 
consolidation  through  higher  tax  revenues  while  maintaining  a  sound  expenditure  policy 
prioritising  social  and  infrastructure  expenditure.  Following  the  recent  decentralisation  and 
organisational reform, a large share of the expenditure in the health and education sectors is 
incurred by newly created non-commercial enterprises, including hospitals and schools, which 
raised  concerns  about  transparency  and  effectiveness  of  their  spending,  however.  The 
government is expected to introduce appropriate reporting and comprehensive audits for these 
enterprises in 2004.  

In May 2003, the Central Bank of Armenia established the modalities for a deposit insurance 
scheme to which banks began to make contributions in July. The deposit guarantee fund for 
physical persons will become fully operational in 2005. The minimum capital requirement for 
existing banks was increased to the equivalent of USD 5 million in July 2003. The number of 
banks  has  been  reduced  to  20  (all  in  private  hands)  through  liquidation,  restructuring  and 
mergers and acquisitions. The ratio of domestic credit to GDP is still low at about 10 percent. 

Altogether  124  enterprises  were  privatised  in  2003  (up  from  93  in  2002)  bringing  the  total 
number  of  privatisations  since  independence  to  over  9000  enterprises  (of  which  about  7200 
are  small  enterprises).  The  targets  set  for  medium  and  large  enterprises  in  the  privatisation 
programme for 2001-2003 have not yet been met, however. On the other hand, the liquidation 
procedures of non-viable state-owned enterprises are being accelerated.  

After the privatisation of the electricity distribution company in 2002, tariff collection rates in 
electricity transmission and distribution improved clearly from 90 percent of domestic billings 
to  98  percent  and  technical  and  other  losses  have  been  brought  down  sharply.  All  major 
changes in the  power  generation sector over the past year were driven  by  the  government’s 
need to settle outstanding debts; these actions involved two power plants which were passed 
to Russian ownership and a management contract for the Medzamor NPP. 

EN 

16 

   EN 

 
In  November  2003,  after  a  long  preparation  period,  the  government  adopted  an  Anti-
Corruption Strategy and an Implementation Action Plan for 2004-2006.  

Although the initial reactions from the donor community were fairly positive, the government 
is  encouraged  to  expand  further  the  scope  of  the  strategy  and  to  involve  the  civil  society 
effectively in the monitoring of its implementation. 

Armenia joined the WTO in February 2003. Despite having a liberal trade regime, Armenia 
has  not  been  able  to  fully  benefit  from  increased  trade  opportunities  because  of  its  isolated 
position, high transportation costs and shortcomings in customs procedures. 

4. 

Implementation of macro-financial assistance 

Armenia  benefits  from  European  Community’s  exceptional  financial  assistance  which 
consists of a loan of EUR 28 million (disbursed in December 1998) and a total grant amount 
of up to EUR 30 million. Four grant instalments, in the total amount of EUR 23 million, were 
paid under the assistance during the period 1998-2003. Through early principal repayments, 
Armenia  has  reduced  the  outstanding  amount  of  its  debt  towards  the  Community  to  EUR  9 
million at end-December 2003.  

The specific conditions for the release of the fifth grant tranche of up to EUR 5.5 million were 
agreed with the Armenian authorities during a Commission staff mission to Yerevan in July 
2002. In December 2003, following discussions with the Armenian authorities in Yerevan, the 
Commission  services  conducted  a  review  on  the  implementation  of  these  conditions  with  a 
view  to  releasing  this  grant  tranche.  The  Commission  services  concluded  that  Armenia’s 
macroeconomic  performance  had  been  satisfactory  in  2002  and  2003.  The  Government  has 
been implementing successfully the economic programme agreed with the IMF as evidenced 
by the completion of the fourth review by the IMF Board in November 2003. On structural 
reforms,  the  Commission  services  concluded  that,  of  the  eleven  specific  conditions  in  total, 
ten  conditions  were  fulfilled.  On  the  basis  of  the  particular  circumstances  pertaining  to  the 
record high economic growth in 2003 and the tax policy measures planned for 2004, a waiver 
was given on one condition concerning the tax revenues-to-GDP ratio. Overall, the fifth grant 
tranche  conditionality  was  therefore  met  to  a  satisfactory  degree,  and  the  Commission 
services  considered  appropriate  to  proceed  with  the  release  of  the  EUR  5.5  million  grant 
tranche  as  soon  as  Armenia  will  have  reduced  its  debt  towards  the  Community  through  an 
early principal repayment of EUR 7 million as agreed.  

With  regard  to  the  recommendations  made  in  the  Court  of  Auditors’  Special  Report  No. 
1/2002  concerning  macro-financial  assistance  to  third  countries  and  the  requirements  of  the 
new Financial Regulation applicable to the general budget of the European Communities, the 
Commission services carried out a review on the public finance management aspects related 
to this assistance on the basis of information provided by the IMF, the World Bank and the 
national authorities.  On the basis  of this review, some additional  reporting requirements are 
being  introduced  in  agreement  with  the  Armenian  authorities  in  order  to  enhance  the 
monitoring  of  the  assistance.  The  Commission  intends  to  incorporate  these  requirements  in 
the list of conditions for the release of the sixth grant tranche under the programme. 

EN 

17 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

No administrative prices exist outside the utilities sector. Share of administrative prices at about 8 ½ % of CPI. 

2. 

Trade liberalisation 

Liberal trade policy. Simple and relatively open import regime with a low average tariff structure. No quantitative restrictions. Accession to 
the WTO effective in February 2003.  

3. 

Exchange regime 

Floating exchange rate of the dram.  Limited official intervention. Interbank  market dominant for foreign exchange. No restrictions on the 
making of payments and transfers for current international transactions in conformity with Article VIII of the IMF’s Articles of Agreement.  

4. 

Foreign direct investment 

Liberal policy towards foreign direct investment. Absence of restrictions on repatriation of profits and capital. Net FDI inflows 4.6% of GDP 
in 2002. 

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  18  ½  %  of  GDP  in  2003,  tax  revenues  about  14  ½  %  of  GDP.  Total  expenditure 
estimated at about 20 ½ % of GDP. Medium term expenditure framework (MTEF) has been developed and is being integrated to the annual 
budget process. 

7. 

Privatisation and enterprise restructuring 

The three-year privatisation programme (2001-2003) targeted at over 900 medium and large-scale enterprises of which only around one third 
were privatised. Measures are being taken to accelerate the liquidation of non-viable SOEs.  

8. 

Financial sector reform 

inimum capital requirement for existing banks was increased to USD 2 million in July 2003, and is scheduled to increase by 2005 further to 
USD 5 million, which is already applied to new banks. The number of banks reduced to 20 (30 in 2001) through mergers and acquisitions, 
restructuring and liquidation.  

EN 

18 

   EN 

 
IV. 

BOSNIA AND HERZEGOVINA 

1. 

Executive summary 

In  2003  Bosnia  and  Herzegovina  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.  The  external  situation  remains  vulnerable,  with  still  large  high  current  account 
deficits, especially in a context of declining official aid. 

The  Feasibility  Study  adopted  in  November  by  the  Commission  identifies  16  priorities  in 
which  Bosnia  and  Herzegovina  needs  to  make  significant  progress  in  the  course  of  2004, 
before  further  steps  can  be  taken  on  negotiations  of  a  SAA.  In  this  context,  the  authorities 
committed to achieve significant progress already by mid-2004, which could provide a strong 
stimulus to the reform agenda. In the economic sphere, the priority  areas range from public 
finance reform, to consistent trade policies and efforts towards a single economic space. The 
IMF programme remained on-track during 2003, with the second and third review completed 
in June 2003, and it was recently extended through end-February 2004, when it is expected to 
be satisfactorily concluded. 

The  implementation  of  the  November  2002  Council  Decision  to  provide  Bosnia  and 
Herzegovina with further macro-financial assistance of up to €60 million, (up to €20 million 
loan and €40 million grant) continues. The first tranche of a €15 million grant was disbursed 
in  February  2003,  upon  the  positive  outcome  of  the  IMF  review.  Following  satisfactory 
progress on the conditions, the Commission disbursed the second tranche of €10 million grant 
in December, and the €10 million loan in January 2004. 

2. 

Macroeconomic performance 

The  negative  external  environment  (low  growth  in  Europe)  and  a  drought  slowed  down 
growth in 2003 at 3.5% of real GDP, down from a 5.5% rate in 2002. According to official 
data, between January and September 2003 industrial output in the Federation of Bosnia and 
Herzegovina  declined  on  average  by  0.3%,  and  by  2.4%  in  the  Republika  Srpska  (RS). 
Official  unemployment  rates  remained  around  40%  in  both  Entities  in  2003,  although 
unofficial estimates point to an actual rate of around 20%.  

Strict adherence to the currency board has kept inflation under control, which in the first nine 
months of 2003 was 0.6% on average, and is expected to remain contained around zero for the 
whole year. With the Convertible Mark (KM) pegged to the Euro at an unchanged rate since 
the  introduction  of  the  EU  currency  in  January  1999,  the  exchange  rate  of  the  KM  remains 
stable. The level of gross official reserves remains comfortable, equivalent to 4.5 months of 
imports cover (4.6 months at end-2002). 

Although the size of public expenditure remains high, it is estimated to have declined at 47% 
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).  However,  due  to  persistent  good  revenue  performance,  as  well  as  savings  on  the 
expenditure  side  (notably  on  the  debt  service),  this  target  has  been  over-achieved,  and  the 

EN 

19 

   EN 

 
general  government  deficit  is  now  estimated  at  3.4%  of  GDP  (with  a  slight  surplus  after 
grants).  

Under the IMF programme, the authorities adopted  in mid-December  a  comprehensive plan 
on  domestic  debt,  estimated  at around  70%  of  GDP.  The  plan  foresees  cash  settlements  for 
4%  of  claims,  issuance  of  long-term  bonds  for  31%  of  claims,  and  the  cancellation  of  the 
remaining 35%. 

On  the  external  side,  both  the  trade  and  the  current  account  continue  to  post  important 
deficits. Owing to some tightening of monetary policy to counteract a credit boom, the current 
account  deficit  is  estimated  to  have  slightly  decreased  to  just  below  18%  of  GDP  (against 
18.5% in 2002). Efforts to improve the investment climate continue. In particular, following 
action taken to increase transparency and reduce administrative barriers (notably through the 
‘Bulldozer Committee’ initiated by the OHR) FDI in Bosnia and Herzegovina almost doubled 
in  2002,  at  around  €244  million,  and  this  positive  trend  is  estimated  to  have  continued  in 
2003, with FDI at around €280 million. 

External public debt, at around € 2.3 billion, reached 45% of GDP at the end of 2002 (revised 
downwards  from  the  projected  52%)  and  is  expected  to  decline  further  in  2003  (at  around 
37%). Debt service in percent of exports of goods  and services,  which started to pick  up in 
2002 (8.5%), mostly due to repayments to the IMF and the World Bank, is expected to remain 
at this level in 2003 before going down in the coming years. 

3. 

Structural reforms 

In  November  2003  the  Commission  finalised  a  Feasibility  Study  concerning  the  opening  of 
negotiations on a Stabilisation and Association Agreement (SAA). It identifies 16 priorities in 
which  Bosnia  and  Herzegovina  needs  to  make  significant  progress  in  the  course  of  2004, 
before  the  Commission  can  recommend  to  the  Council  the  opening  of  negotiations.  In  this 
context, the authorities committed to achieve significant progress already by mid-2004, which 
could  provide  a  strong  stimulus  to  the  reform  agenda.  In  the  economic  sphere,  the  priority 
areas range from public finance reform, to consistent trade policies, as well as efforts towards 
a  single  economic  space.  Also,  Bosnia  and  Herzegovina  adopted  in  December  2003  its 
‘Medium-Term Development Strategy - PRSP’. 

Reforms in the area of public finances continue at a sustained pace. The Treasury system that 
was introduced in early 2002 in both Entities and the State is being implemented smoothly, 
with further extension foreseen at sub-Entity level (Cantons and Municipalities). All budget 
users are now included in the system and a Single Treasury Account is being used, instead of 
previously sixty. 

A major reform of the tax and customs administrations is under way. The Indirect Tax Policy 
Commission established by the OHR in February 2003 drafted legislation foreseeing a single 
Indirect Tax Authority (ITA), which was adopted in the course of the year by government and 
parliament.  The  ITA  will  collect  indirect  taxes  at  the  State-level  by  establishing  a  unified 
customs  administration,  prepare  for  the  introduction  of  State-level  VAT,  and  through  its 
Governing Board involve also the State in fiscal policy formulation. Progress in this area is 
also closely monitored in the context of the priorities of the Feasibility Study. 

While the privatisation of small and medium enterprises is virtually complete in both Entities, 
progress on the sale of “strategic” enterprises (e.g.  in  mining,  refineries,  tobacco  plants,  car 

EN 

20 

   EN 

 
parts),  which  could  attract  foreign  investors,  has  been  lagging  behind.  Poor  political  will, 
social  concerns,  and  problems  of  corporate  governance,  high  debts,  and  corruption  are  all 
factors  discouraging  potential  (foreign)  investors.  Towards  the  end  of  2003  the  authorities 
tried to revitalise the process, and launched a campaign to gain public support. A number of 
tenders have been initiated since December, and further progress is expected in early 2004. 

More generally on the business environment, the ‘Bulldozer Committee’, which was launched 
by the High Representative in November 2002 in order to dismantle administrative barriers to 
business  operation  and  creation,  successfully  pushed  through  the  adoption  of  50  economic 
reforms in May 2003, and a second round of proposed reforms is being prepared. The Entity 
governments  adopted 
legislation,  still  under 
in  2003  fully  harmonised  bankruptcy 
parliamentary consideration by the end of 2003. However, the environment remains uncertain 
for  foreign  investors,  with  a  perception  of  high  risk,  costly  business  procedures  and  non-
transparent policies. 

Bank  privatisation  has  been  completed  in  both  Entities  and  foreign  capital  in  the  banking 
sector  is  significant.  Banking  supervision  was  strengthened  by  enforcing  the  current 
prudential  regulations  (e.g.  increased  minimum  capital  requirements).  Under  the  IMF 
programme, the authorities have also enacted further banking regulatory reforms (notably on 
foreign  exchange  exposure,  liquidity  and  core  capital),  bringing  the  sector  closer  to 
international standards. A large part of banks now comply with the requirements of the State 
Deposit Insurance Agency. 

4. 

Implementation of macro-financial assistance 

In November 2002 the Council approved Community macro-financial assistance of up to €60 
million to Bosnia and Herzegovina (Decision 2002/883/EC), comprising a loan element of up 
to  €20  million  and  a  grant  element  of  up  to  €40  million,  following  a  first  macro-financial 
assistance  operation  concluded  in  December  2001  (Decision  1999/325/EC).  This  new 
assistance  was  foreseen  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. 

Following the signature of a Memorandum of Understanding (MoU) in late December 2002 
and the positive outcome of the first IMF Review, the first grant tranche of €15 million was 
disbursed in February 2003. Out of this amount, 25% was made available directly to the State 
(€3.75 million), while the remainder was allocated on a one third-two thirds basis between the 
RS and Federation Bosnia and Herzegovina respectively, as in the case of the previous MFA 
operation.  

A Commission staff mission took place to Bosnia and Herzegovina in early June 2003, and a 
Supplemental MoU (SMoU) was signed with the authorities in late July. The SMoU fixed the 
second tranche at €20 million (€10 million grant and €10 million loan) and set out a number 
of  economic  policy  conditions  for  the  release  of  the  third  tranche.  It  also  identified  areas 
where further progress was needed to fulfil the economic conditionality attached to the second 
tranche,  i.e.  concerning  the  Entity  adoption  of  harmonized  laws  on  Bankruptcy  and 
Liquidation, a State decision on the establishment of a Competition Council, and progress on 
the Insurance legislation. In the meantime the IMF successfully completed in June its second 
and third reviews, and the programme remained on-track. Following: (i) satisfactory progress 
on  the  SMoU  outstanding  conditions  mentioned  above,  (ii)  ratification  by  the  Bosnia  and 

EN 

21 

   EN 

 
Herzegovina authorities of the Loan Agreement (in early December), and (iii) the acceptance 
by Bosnia and Herzegovina of a series of provisions (on inspection, fraud prevention, audits, 
and  recovery  of  funds  in  case  of  fraud  or  corruption)  to  take  account  of  the  obligations 
implied by the new Financial Regulation, the Commission launched disbursement procedures 
in  December  2003.  These  led  to  the  payment  of  the  second  tranche  of  €10  million  grant  in 
December, and the €10 million loan in January 2004. 

Out of the €10 million grant, 50% was made available directly to the State (€5 million), while 
the  remainder  was  allocated  on  a  one  third-two  thirds  basis  between  the  RS  and  Federation 
Bosnia and Herzegovina respectively.  

EN 

22 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

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

2. 

Trade liberalisation 

The  network  of  regional  Free  Trade  Agreements  (FTAs)  in  South  East  Europe  has  been  completed,  and  Bosnia  and 
Herzegovina  already  applies  those with  Croatia  (1/01/2001),  the former  Yugoslav  Republic  of  Macedonia  (01/07/2002)  and 
Serbia and Montenegro (01/06/2002). Accession to the WTO slowly moves ahead and is now planned in the course of 2004. 

3. 

Exchange regime 

Since June 1998 Bosnia and Herzegovina 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 

Efforts continue to improve the business environment: apart from the creation of the Foreign Investment Promotion Agency 
(FIPA),  a  Bulldozer  Committee  was  established  by  the  OHR  in  late  2002  in  order  to  dismantle  administrative  barriers  to 
business  operation  and  creation.  In  may  2003  it  successfully  pushed  through  the  adoption  of  50  economic  reforms,  and  a 
second round of proposed reforms is being prepared. 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 Bosnia and Herzegovina 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 share of public spending in GDP is diminishing, although it remains very large at around 47% of GDP in 2003. Of this 
share, 39% is spent on wages, and public expenditure is often associated with large inefficiencies. However, significant fiscal 
consolidation  has  been  achieved  over  time,  together  with  tax  harmonisation  between  entities.  An  important  customs  and 
taxation is underway (including VAT introduction), also thanks to the pressure of the international community. 

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 

Bank  privatisation  has  been  completed  and  foreign  capital  in  the  banking  sector  is  significant.  Banking  supervision  was 
strengthened  by  enforcing  the  current  prudential  regulations  (e.g.  increased  minimum  capital  requirements).  Under  the  IMF 
programme,  the  authorities  have  amended  regulations  on  banks’  foreign  currency  exposures,  in  line  with  international 
practices. 

EN 

23 

   EN 

 
V. 

1. 

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 

Executive summary 

In  2003,  real  GDP  growth  of  the  former  Yugoslav  Republic  of  Macedonia  reached  3%, 
broadly in line with initial forecasts. The general government deficit (1.5% of GDP) marked a 
significant  improvement  by  more  than  four  percentage  points  with  respect  to  the  previous 
year. The trade deficit as share of GDP declined to around 17% in 2003 from more than 20% 
in  2002.  The  2003  current  account  deficit  (before  grants)  is  estimated  at  8.3%  of  GDP. 
Monetary  and  exchange  rate  stability  was  maintained.  In  October  2003,  the  IMF  Executive 
Board  approved  the  first  review  of  the  14-month  Stand-By  Arrangement,  which  had  been 
approved in April 2003. 

The  structural  reform  process  regained  momentum  in  the  course  of  2003.  The  authorities 
made some progress in liquidating large loss-making enterprises and in public administration 
reform  and  management  of  public  finances.  In  September  2003,  the  Parliament  approved  a 
law  setting  up  the  Agency  for  Promotion  of  Entrepreneurship.  However,  the  business 
environment remains poor and, in particular, the inability to enforce effectively contracts and 
creditors’  rights  hampers  the  lending  activity  of  the  banks,  in  turn  affecting  investment  and 
economic development. 

The  Commission  completed  the  disbursement  of  the  EC  macro-financial  assistance  decided 
by  the  Council  in  November  1999  (€  80  million),  which  was  increased  by  €  18  million  in 
December 2001. The third tranche of this assistance (€ 10 million grant and € 10 million loan) 
was released in May-June 2003 following the approval the new IMF Stand-by arrangement. 
The  fourth  and  last  tranche  (€  18  million  loan  and  €  8  million  grant)  was  released  in 
December  2003  upon  fulfilment  of  the  economic  policy  conditions  set  in  the  Supplemental 
Memorandum  of  Understanding  (SMoU)  between  the  European  Community  and  the  former 
Yugoslav Republic of Macedonia authorities signed in September 2002. 

2. 

(1) 

(2) 

Macroeconomic performance 

In  2003,  real  GDP  growth  of  the  former  Yugoslav  Republic  of  Macedonia  reached 
3%, broadly in line with initial forecasts and improving against 2001-2002 (-4.5% and 
+0.7 %, respectively). According to preliminary data, industrial production increased 
by  4.7%  compared  to  2002.  However,  this  resumption  in  economic  activity  has  not 
been  yet  sufficient  to  recover  the  pre-crisis  GDP  level  of  2000  and  remained 
insufficient  to  reduce  unemployment  and  substantially  improve  living  standards.  In 
2003, the level of officially registered unemployment increased to around 37% of the 
labour  force,  from  32%  in  the  previous  year.  However,  taking  into  account  the 
informal sector, real unemployment figures are probably lower than official data.  

Inflation  continued  to  be  low  in  2003,  with  consumer  prices  increasing  by  1.2%  on 
average, well below the projected 3.0%. Along with a drop in food prices, which had 
surged in 2002, the downward trend can be explained by the depreciation of the dollar, 
since the Macedonian Denar (MKD) remains de-facto pegged to the euro – at around 
MKD 61 per euro. In the course of 2003, average interest rates on Central Bank bills – 
the  main  instrument  to  control  liquidity  –  dropped  from  14.7%  in  January  to  around 
6% at the end of the year. However, commercial banks did not fully pass this decline 

EN 

24 

   EN 

 
through  to  their  customers.  In  December,  average  lending  rates  were  still  high  at 
14.6% against an average deposit rate of around 7%. 

(3) 

In 2003, fiscal performance substantially improved with respect to the previous year. 
The  general  government  deficit  reached  around  1.5%  of  GDP  compared  to  5.7%  in 
2002. The drastic fiscal adjustment by 4 percentage points of GDP with respect to the 
previous year is accounted for by the significant reduction in expenditure from 41% of 
GDP  to  36%  of  GDP.  This  was  the  result  of  the  reduction  or  elimination  of  some 
significant  non-recurrent  expenditure  in  2002  -  such  as  security-related  expenditures 
and  the  one-off  repayment  to  depositors  involved  in  the  TAT  pyramid  scheme  –  as 
well  as  the  insufficient  execution  of  budgeted  capital  expenditure.  Total  revenues 
(34.5%  of  GDP)  have  been  in  line  with  the  projections,  thanks  to  the  over-
performance  in  the  collection  of  social  insurance  contributions,  customs  duties  and 
non-tax revenue, compensating for a lower than projected VAT revenue.  

On  the  external  side,  in  2003,  there  was  a  slight  decline  in  the  overall  trade  exchange  in 
nominal  (euro)  terms.  Exports  remained  broadly  stable  compared  to  2002,  while  imports 
decreased  by  5%.  The  trade  deficit  reached  more  than  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. 

A long overdue Stand-by Arrangement (SBA) with the International Monetary Fund of SDR 
20 million (around EUR 25 million) was approved on 30 April 2003, allowing the release of 
substantial  foreign  financial  assistance  from  other  donors.  The  first  review  of  the  SBA  was 
successfully completed in October 2003. 

3. 

Structural reforms 

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

The privatisation process of small and medium size enterprises (SMEs) is almost completed. 
As of end of September 2003, 1,683 enterprises had been privatised, while 81 state companies 
of  those  included  in  the  privatisation  programme  that  began  in  1993  were  left  for  sale.  The 
Action  Plan  for  the  restructuring,  liquidation  or  privatisation  of  40  large  loss-making 
enterprises,  which  was  launched  in  2000,  was  finally  completed.  The  authorities  are  now 
focusing  on  a  new  priority:  private  sector  development.  In  September  2003,  the  Parliament 
approved  a  law  setting  up  the  Agency  for  Promotion  of  Entrepreneurship.  However,  the 
generally  poor  business  environment  and,  in  particular,  the  difficulty  to  enforce  effectively 
contracts  and  creditors’  rights  hampers  the  lending  activity  of  the  banks,  in  turn  affecting 
investment and economic development.  

In 2003, the authorities also made progress in public administration reform and management 
of  public  finances,  launching  the  functional  analysis  in  most  of  administrative  entities, 
developing  the  General  Secretariat,  setting  up  a  single  Treasury  account,  improving  VAT 
administration  and  adopting  a  plan  for  the  development  of  a  government  securities  market. 

EN 

25 

   EN 

 
Moreover,  in  December  2003,  after  lengthy  discussions,  the  Government  finally  adopted  a 
law  on  Local  Government  Financing,  which  needs  to  be  approved  by  the  Parliament. 
However,  the  scope  for  improvement  in  this  broad  area  is  still  large,  encompassing  the 
implementation  of  the  “functional”  analysis,  the  decompression  of  the  civil  service  salary 
structure,  greater  control  of  expenditure  in  extra-budgetary  funds,  the  introduction  of  audits 
throughout the whole administration, and the actual development of a market for government 
securities.  The  implementation  of  the  fiscal  decentralisation  process  and,  in  particular,  the 
strengthening  of  the  capacity  of  local  entities  to  manage  expenditure  and  collect  revenues, 
remains a great challenge.  

The  financial  sector  is  dominated  by  the  banking  sector,  whereas  non-bank  financial 
institutions play a very limited role. The soundness of the banking sector has improved over 
the recent years. The three largest banks, accounting for around two thirds of total liabilities 
and assets, have relatively prudent and sound banking practices. However, the IMF Financial 
System  Stability  Assessment  report  published  in  December  2003  notes  that  the  financial 
system remains vulnerable to weak governance in smaller banks and also to weaknesses in the 
banks’  balance  sheet,  which  are  reflected  in  the  high  percentage  of  non-performing  loans 
(16%  of  total  portfolio  assets  as  of  mid-2003).  In  2003,  six  banks  were  under  enhanced 
supervision  by  the  National  Bank,  but  the  repercussions  on  financial  stability  of  the  whole 
system were rather limited, given the small size of these banks.  

The former Yugoslav Republic of Macedonia 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.  The  process  of 
ratification  of  the  SAA  has  been  completed  in  the  course  of  2003  and  the  Agreement  will 
enter  into  force  on  1  April  2004.  On  4  April  2003,  the  former  Yugoslav  Republic  of 
Macedonia became the 146th member of the World Trade Organisation. The country already 
completed the network of free trade agreements with neighbouring countries promoted by the 
Stability Pact. 

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  €80  million  (loan  up  to  €50 
million  and  grant  up  to  €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 €18 million (to a grant total of up to €48 million out of a total of up to €98 
million). 

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

In  2003,  the  Commission  completed  the  disbursement  of  the  macro-financial  assistance 
decided in 1999 and extended in 2001, implementing the third and fourth tranche. The third 
tranche  of  €20  million  (€10  million  grant  and  €10  million  loan)  was  released  in  May-June 
2003 following the approval the new IMF Stand-by arrangement (see above). The fourth and 
last tranche of €26 million (€18 million loan and €8 million grant) was released in December 
2003  upon:  i)  satisfactory  fulfilment  of  the  economic  policy  conditions  set  in  the 

EN 

26 

   EN 

 
Supplemental  Memorandum  of  Understanding  (SMoU)  between  the  European  Community 
and the former Yugoslav Republic of Macedonia authorities signed in September 2002; and 
ii) the acceptance by the former Yugoslav Republic of Macedonia of a series of provisions (on 
inspection, fraud prevention, audits, and recovery of funds in case of fraud or corruption) to 
take account of the obligations implied by the new Financial Regulation.  

The  conditions  attached  to  the  last  fourth  tranche  included  progress  in  the  areas  of  public 
administration  reform,  public  expenditure  management  and  fiscal  reform,  enterprise 
restructuring and private sector development, and financial sector reform. 

EN 

27 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

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

2. 

Trade liberalisation 

The Interim Agreement on trade and trade-related matters with the EU, 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. On 4 April 2003, the former Yugoslav Republic of Macedonia became the 146th member of 
the  WTO.  The  country  has  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, declining to less than 2% of GDP in 2002 and 2003. 

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. In 2003, the authorities amended the Budget 
Law and the Law on Public Procurement and merged separate budget users’ accounts into a single account within the Treasury, 
which  is  now  operational.  Internal  controls  and  audit  are  in  place  in  the  Ministry  of  Finance,  but  must  be  strengthened  and 
broadened to the whole public administration. 

7. 

Privatisation and enterprise restructuring 

The privatisation programme which begun in 1993 is almost completed with almost 1,700 small and medium sized enterprises 
being privatised. Firms and organisations conducting activities of special national interest, public services and utilities are not 
part  of  the  programme.  The  national  telecom  operator  was  sold  to  the  Hungarian  company  Matav  in  2001.  In  2003,  the 
liquidation of 40 large loss-making companies, which were identified in the Action Plan of 2000, was finally completed.  

8. 

Financial sector reform  

The banking law of 2000 established the legal framework for modernised and strengthened banking sector. The financial sector 
is  dominated  by  the  banking  sector,  with  a  very  limited  role  of  non-bank  financial  institutions.  The  banking  sector  is  largely 
privatised and highly concentrated, with the three largest banks accounting for around two thirds of total liabilities and assets. 

EN 

28 

   EN 

 
VI. 

GEORGIA 

1. 

Executive summary 

In  Georgia  economic  growth  was  not  affected  by  the  political  uncertainty  surrounding  the 
parliamentary  elections,  which  finally  led  to  the  resignation  of  president  Shevardnadze  in 
November 2003. At 8.6 percent real GDP growth reached the highest rate since 1997. Robust 
rates  of  growth  were  registered  in  several  sectors  including  construction,  agriculture  and 
manufacturing.  Average  rate  of  inflation  decreased  to  4.8  percent.  Because  of  the  high 
imports demand stemming from the construction of the BTC oil pipeline, the current account 
deficit deteriorated to an estimated deficit of 10 percent. In structural reforms there were some 
positive  developments  in  2003,  notably  in  the  financial  sector  and  in  privatisation,  but  the 
main  challenges  for  the  new  government  still  lay  in  the  energy  sector,  public  finance 
management and civil service reform. 

Due to slippages in fiscal policies, Georgia was not able to resume borrowing from the IMF 
and  in  September  2003  the  PRGF  arrangement  was  suspended.  The  regime  change  that 
followed the public protests in November created an opportunity for resuming relations with 
the  IMF  and  discussions  on  a  successor  PRGF  arrangement  are  under  way.  Under  these 
circumstances, no grant payment was made to Georgia under the EC’s exceptional financial 
assistance during 2003. 

2. 

Macroeconomic performance 

Real GDP growth accelerated in 2003 to 8.6 percent, the highest rate of growth since 1997, 
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. Agriculture is the largest sector of the economy (20 percent 
of  GDP),  and  in  2003  weather  conditions  were  favourable  contributing  to  about  10  percent 
growth  in  agricultural  production.  In  addition  to  agriculture  and  construction,  the  extraction 
sector (aluminium, alloys, copper, gold and scrap metals) and manufacturing (wine, fertilisers, 
mineral  water)  have  also  registered  strong  growth  rates.  Industrial  output  increased  by  10.6 
percent  in  2003.  Official  unemployment  rates  decreased  slightly  during  the  year  averaging 
11.8 percent in the first nine months. 

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  as  expected.  At  the  time  of  the  November  2003 
elections  and  in  the  immediate  aftermath  before  the  new  regime  established  in  power,  tax 
collection,  on  VAT  in  particular,  virtually  halted.  Furthermore,  the  autonomous  province  of 
Adjara  continued  to  withhold  revenues  which  were  collected  on  its  territory  to  the  central 
government  budget.  On  commitment  basis,  a  fiscal  deficit  of  about  3  percent  of  GDP  is 
estimated  for  2003  (2  percent  in  2002),  while  on  cash  basis  the  deficit  is  actually  slightly 
lower  than  in  2002  because  of  the  net  accumulation  of  expenditure  arrears.  The  political 
uncertainty brought additional difficulties for fiscal management in November and December 
but donor funds were made available to the government for some 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 are discussed with 
the IMF in early 2004.  

EN 

29 

   EN 

 
The National Bank of Georgia has maintained a consistently prudent monetary policy stance. 
The  good  conditions  in  the  agricultural  sector  contributed  to  the  decline  in  the  average 
inflation rate from 5.6 percent in 2002 to 4.8 percent in 2003. In November-December the 12-
month  inflation  rate  increased  however  to  7  percent.  This  was  mostly  attributable  to  the 
political uncertainty following the elections. The lari remained broadly stable against the US 
dollar  (also  during  November  and  December),  while  depreciating  against  the  euro.  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 percent of GDP (6 percent in 
2002)  owing  mainly  to  the  capital  imports  for  the  construction  of  the  BTC  pipeline.  These 
imports  are  financed  by  foreign  direct  investment  in  the  pipelines.  The  gross  international 
reserves of the National Bank of Georgia decreased to about USD 190 million at the end of 
2003, which is equivalent to 1.5 months of imports (excluding the pipeline-related imports). 
In US dollars, the external debt of Georgia continued to increase in 2003 reaching about USD 
1.85 billion, but as a ratio to GDP the nominal debt stock declined to 48 percent. Georgia was 
not able to approach its bilateral creditors in 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  September  2003.  Therefore,  pending  the  rescheduling, 
Georgia  is  technically  in  default  on  its  bilateral  debt  service  having  accumulated 
approximately USD 50 million in arrears on principal payments due to Paris Club creditors in 
2003.  

3. 

Structural reform 

In  June  2003  the  government  adopted  the  Economic  Development  and  Poverty  Reduction 
Programme of Georgia which was later endorsed by the IMF and the World Bank as a basis 
for future concessional financing. The preparation of the programme was not associated with 
the budget planning process, and therefore a medium term expenditure framework still needs 
to be developed. Progress in ongoing reforms in budget preparation and treasury management 
on the basis of the new Budget Systems Law which was adopted in April 2003 is necessary to 
facilitate  the  implementation  of  the  EDPRP.  Following  the  regime  change  after  the 
resignation  of  president  Shevardnadze,  the  new  government  is  now  expected  to  address  the 
question of potential elaboration of the EDPRP where necessary. 

A new tax code was approved by the parliament in August 2003, including a marked increase 
in  the  VAT  threshold,  introduction  of  a  small  business  tax  and  elimination  of  a  number  of 
nuisance taxes. The immediate impact of these reforms was envisaged to be neutral in terms 
of total revenue  collection. The system  for VAT refunds  has also been  overhauled recently. 
Various  interest  groups  continue  to  be  protected  by  numerous  exemptions  on  the  corporate 
income tax and VAT. Moreover, combating wide scale tax evasion of fuel excises and import 
duties could bring significant revenues to the budget. 

Some  progress  was  made  with  privatisation  of  large-scale  enterprises  in  2003,  notably  with 
the Azot chemical plant and the Zestafoni Ferro Alloys plant. Concessions for some parts of 
the  Poti  Port  were  concluded  and  management  contracts  were  awarded  in  aircraft 
manufacturing, electricity transmission and dispatch as well as in electricity distribution (the 
United Distribution Company). The larger role that private operators now have in the power 
sector was not yet reflected in the collection rates which remained at about 70 percent in the 
capital  and  well  below  that  in  other  regions.  To  improve  the  management  of  state-owned 
enterprises,  an  Enterprise  Management  Agency  was  established  under  the  aegis  of  the 
Ministry of Economy.  

EN 

30 

   EN 

 
In agreement with the IMF, the government has launched comprehensive audits in three major 
SOEs but regular audits have not yet been made a requirement for all SOEs.  

The  National  Bank  of  Georgia  has  made  progress  in  strengthening  banking  regulation  and 
supervision including through the adoption of a new analytical framework for the resolution 
of insolvent banks and “fit and proper” criteria for bank managers and owners in 2003. Anti-
money  laundering  legislation  was  adopted  in  2003  but  this  was  not  deemed  to  fully  meet 
international standards. 

4. 

Implementation of macro-financial assistance 

Following  a  Commission  staff  mission  to  Tbilisi  in  December  2002,  an  agreement  ad 
referendum was concluded with the Georgian authorities on the payment of the fourth grant 
tranche  under  the  EC’s  exceptional  financial  assistance  in  the  amount  of  EUR  6.5  million. 
The Commission services made, however, the payment conditional on the positive completion 
of the third review by the IMF Board under Georgia’s three-year PRGF arrangement. Georgia 
faced increasing difficulties in meeting the structural conditionality under the PRGF program 
during  the  first  half  of  2003,  mainly  due  to  significant  slippages  in  fiscal  policy.  By 
September  2003,  it  had  become  clear  the  authorities  were  not  able  to  obtain  parliamentary 
support  for  a  revised  2003  budget  which  would  have  closed  the  emerging  fiscal  gap.  As  a 
result, the IMF did not complete the third review under the PRGF arrangement, and the three-
year arrangement expired in January 2004. Under these circumstances, no payment was made 
to Georgia under the Community’s exceptional financial assistance in 2003. 

The  regime  change  that  followed  the  November  2003  parliamentary  elections  and  the 
resignation of president Shevardnadze, created an opportunity for resuming relations with the 
IMF,  and  the  new  Georgian  Government  is  engaged  in  discussions  on  a  successor 
arrangement under the PRGF. The Community’s exceptional financial assistance to Georgia 
can only be resumed after the IMF Board’s approval of a new financing arrangement.  

European Community’s exceptional financial assistance has been made available to Georgia 
in the form of a loan of EUR 110 million (disbursed in July 1998) and a total grant amount of 
up to EUR 65 million foreseen to be paid in several instalments. Owing to uneven progress in 
the fulfilment by the authorities of the conditionality for the successive grant payments, only 
three grant instalments, in the total amount of EUR 25 million, were paid under the assistance 
during  the  period  1998-2003.  Through  early  principal  repayments,  Georgia  has  reduced  the 
outstanding amount of its debt towards the Community to EUR 92 million at the end of 2003 
(unchanged from end-2002).  

EN 

31 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

No administrative prices exist outside the utilities sector. Share of administrative prices at about 3% of CPI. 

2. 

Trade liberalisation 

Liberal  trade  policy.  Georgia  has  been  member  of  the  WTO  since  June  2002.  Based  on  margins  allowed  during  WTO  accession, 
Georgia has raised the number of tariff bands and the maximum tariff leading to an increase in the weighted average tariff to the level 
of about 11.3%. Non-tariff barriers allowed for environmental, security and health reasons only. 

3. 

Exchange regime 

Floating exchange rate of the lari. Limited official intervention. Interbank market dominant for foreign exchange. No restrictions on 
the making of payments and transfers for current international transactions in conformity with Article VIII of the IMF’s Articles of 
Agreement.  

4. 

Foreign direct investment 

Adequate overall legislation. Unlimited repatriation of capital and profits. Net FDI inflows 3.9% of GDP in 2002. 

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 (over 80% of bank assets and lending in foreign currencies).  

6. 

Public finances 

Total fiscal revenues (including grants) estimated at 15.6% of GDP in 2003, of which tax revenues 14.4% of GDP. Total expenditure 
and  net  lending  estimated  at  18.4%  of  GDP. A  number  of  improvements  in  the  budget  system  are  being  introduced  under  the  new 
Budget System Law was adopted in April 2003 and became effective on January 1, 2004 (not yet an organic law, however).  

7. 

Privatisation and enterprise restructuring 

Small  and  medium  size  privatisation  has  been  largely  completed.  Some  progress  in  privatisation  of  large  SOEs  in  2003  after  a 
standstill.  The  Ministry  of  State  Property  Management  dissolved  in  2003,  and  the  new  division  of  tasks  between  the  Ministry  of 
Economy and the new Enterprise Management Agency expected to accelerate the restructuring of remaining SOEs. 

8. 

Financial sector reform 

Several  measures  have  been  taken  to  strengthen  bank  regulation  and  supervision  in  recent  years.  At  present  there  are  operating  25 
banks. Further consolidation is encouraged in the sector through the gradual increase of the minimum capital requirement up to the 
equivalent of EUR 5 million.  

EN 

32 

   EN 

 
VII.  MOLDOVA 

1. 

Executive summary 

The  upswing  that  began  in  2000  continued  in  2003,  as  year-on-year  GDP  growth  reached 
6.3%, despite a sharp weather-related drop in the output of the important agricultural sector (-
14.1%  on  the  year).  Growing  exports  and  buoyant  remittances  from  Moldovans  working 
abroad continue to drive the economy's expansion. Domestic demand is strong and industrial 
production is continuing its recovery.  

Although exports grew strongly, the dynamics of imports were even more pronounced, so that 
Moldova’s  large  trade  deficit  rose  further.  As  a  result,  the  current  account  deficit  rose  too, 
reaching around 8% of GDP.  

Inflation  accelerated  sharply  on  the  back  of  sustained  money  supply  growth:  the  consumer 
price index rose by 15.7%, compared to 4.4% in 2002.  

Fiscal policy remained tight in 2003, but plans for 2004 indicate relaxation; a financing gap 
could  emerge,  as  budgetary  assumptions  look  optimistic.  Although  thanks  to  debt 
restructurings and write-offs in 2002, the public debt-to-GDP ratio has dropped significantly, 
to  around  52%,  the  burden  of  servicing  debts  remains  high  (debt  service  due  would  absorb 
over  one  third  of  central  government  revenues).  Hence,  dependence  on  capital  flows  from 
multilateral  and  bilateral  creditors  is  set  to  remain  high  in  the  medium  term.  Moldova  has 
continued to accumulate arrears in 2003, most notably to the Russian gas supplier Gazprom 
and to Russia itself. In 2003, Moldova attempted unsuccessfully to obtain a debt restructuring 
agreement from the Paris Club.  

After  a  promising  start  at  the  beginning  of  the  1990s,  structural  reforms  have  slowed.  The 
transformation to a market economy is far from complete. While land reform has progressed, 
the  privatisation  of  key  economic  sectors  of  the  economy  has  advanced  little  (the  EBRD 
estimates  that  50%  of  the  economy is  still  controlled  by  the  State).  Privatisation  is  severely 
complicated  by  the  country's  unfavourable  business  climate  and  by  excessive  State 
interference. 

Moldova received no EC-macro-financial assistance in 2003. Disbursements under the grant 
of  €15  million  approved  in  December  2002  could  not  start  in  the  absence  of  a  working 
financing arrangement with the IMF 

2. 

Macroeconomic performance 

Moldova's economic recovery has continued from last year, with real GDP up by 6.3% year-
on-year in 2003. Strong industrial growth (+14% y-o-y) continues to drive expansion, spurred 
by continued demand from Russia and Ukraine as well as rising domestic demand.  

After a deceleration in 2002, when the growth in the consumer price index (CPI) fell to 5% in 
the annual average, a strong pickup in inflation was recorded in 2003; the CPI rose by 12% in 
the  annual  average,  due  largely  to  rapid  money  growth  fuelled  by  largely  unsterilised 
purchases  of  foreign  exchange.  The  National  Bank  of  Moldova  has  now  indicated  it  would 
pursue a tighter monetary policy, given that the increase in rates enacted during 2003 proved 
insufficient to prevent a build-up of inflationary pressures.  

EN 

33 

   EN 

 
Given  strong  constraints  to  deficit  financing,  the  general  government  cash  balance  posted  a 
surplus of 0.5% of GDP in the first three quarters of 2003; this result, however, was obtained 
not  only  thanks  to  robust  collection  of  VAT  and  customs  duties  but  also,  notably,  by  an 
accumulation  of  external  arrears  for  0.6%  of  GDP.  In  2004,  despite  wage  increases  in  the 
public  sector,  the  government’s  budget  plans  project  an  unchanged  expenditure-on-GDP 
share, whereas tax cuts will result in a decline of the revenue share. Hence, prospects for 2004 
are for a cash deficit of around ¾% of GDP, implying a loosening of the fiscal stance by over 
1  percent  of  GDP.  According  to  the  IMF,  current  budgetary  policies  might  result  in  further 
accumulation  of  new  arrears  (the  “flow”  financing  gap,  excluding  arrears  payments,  could 
reach 2% of GDP).  

Moldova's  total  external  public  debt  stands  presently  at  around  52%  of  GDP  (although  the 
stock  of  non-publicly  guaranteed  external  debt  is  much  higher).  This  level  is  significantly 
lower  than  in  1999,  reflecting  a  series  of  re-scheduling  that  have  reduced  the  value  of  the 
outstanding debt. Nevertheless, servicing of the debt remains a difficult and challenging task: 
in 2003, payments falling due amount to over 36% of central government revenue. Moldova 
has not resumed payments to Gazprom, the Russian gas supplier, suspended in 2001, or to a 
number of other bilateral creditors suspended after August 2003; in the first three quarters of 
2003, it has accumulated new external arrears for 1.3% of GDP. Given low foreign exchange 
reserves  (less  than  two  months  of  imports)  and  the  substantial  structural  current  account 
deficit,  which  has  worsened  over  time  and  in  2003  accounted  for  around  8%  of  GDP,  the 
country  is  expected  to  remain  dependent  on  additional  support  from  the  IFIs  and  bilateral 
donors.  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.  

3. 

Structural reform 

Although Moldova had a good start on structural reform in the beginning of the 1990s (which 
led  notably  to  an  early  accession  to  the  WTO),  a  subsequent  slowing  of  reform  efforts  and 
poor  implementation  of  laws  have  resulted  in  a  still  largely  unsatisfactory  business 
environment. Corruption and a generally unsatisfactory regulatory framework pose significant 
obstacles  to  private  sector-led  growth;  furthermore,  the  government  continues  to  own  or 
control a large part of the economy (50% according to the EBRD 2003 Transition Report). 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 however, 
have been disappointing and remained well below target.  

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. This state of things has been discouraging private foreign investment, as 
shown by declining FDI inflows. Overall, Moldova’s main investors remain public bodies like 
the  EBRD  and  the  US-supported  Western  Newly  Independent  States  Enterprise  Fund 
(WNISEF), which often have to cover for departing western private investors.  

EN 

34 

   EN 

 
4. 

Implementation of macro-financial assistance 

The  European  Community  provided  in  the  1990s  two  macro-financial  assistance  packages 
worth  EUR  45  million  and  EUR  15  million  to  Moldova.  Moldova  has  so  far  serviced 
scrupulously its external financial obligations towards the Community. 

On 19 December 2002, the Council adopted a decision granting a new MFA to Moldova. This 
new assistance in the form of a grant in the amount of EUR 15 million replaced and cancelled 
the loan of an equivalent amount approved by the Council in 2000 and never disbursed, in the 
absence of a working financing arrangement with the IMF. In March 2003 the Commission 
staff  conducted  a  mission  to  Chisinau  to  hold  discussions  on  the  policy  conditions  to  be 
attached to the first tranche of the grant. However, these discussions could not be completed 
in 2003, in the absence of a working financing arrangement with the IMF.  

The three-year PRGF for Moldova approved by the IMF Board in December 2000 went off 
track  in  the  beginning  of  2003.  The  programme  finally  expired  in  December  2003,  due  to 
weak implementation – and even to reversals – of agreed structural reforms. At the same time, 
implementation  of  macroeconomic 
targets  PRGF-supported  programme  was  broadly 
satisfactory.  For  the  same  reason  of  poor  record  in  structural  reforms,  the  World  Bank’s 
Structural Adjustment Credit (SAC III) expired in September 2003 was largely undisbursed. 

EN 

35 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation  

Most prices have been liberalised 

2. 

Trade liberalisation  

Relatively  liberal  international  trade  policy  on  paper,  but  formal  or  informal  restrictions  on  some  key  commodities  exist  (notably  sunflower 
seed ad scrap metal). Moldova became a member of the WTO in June 2000.  

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. There has been a trend toward increasing administrative interference 
on foreign investors, notably in the energy sector. FDI has been declining. 

5. 

Monetary policy 

High money supply growth, due largely to non sterilized foreign exchange reserves’ accumulation, have led to a sharp acceleration of inflation. 
Hikes in policy rates have been largely unsuccessful so far in slowing inflation. The National Bank has indicated it will pursue a tighter policy 
course.  

6. 

Public finances  

The  government  has  been  attempting  to  increase  budget  revenues  and  strengthen  fiscal  discipline.  Tax  and  duties  collection  has  picked  up, 
although  customs  reform  remains  a  priority.  In  2003,  a  small  cash  budget  surplus  was  recorded,  but  that  was  achieved  largely  through 
accumulation of arrears. Authorities plan a cash deficit of 0.7% of GDP in 2004. However, budgetary plans seem optimistic and a financing gap 
of up to 2% of GDP might appear (excluding arrears repayment). Public external debt amounts to about 52% of GDP; 2004 debt service would 
absorb over one third of central government revenue.  

7. 

Privatisation and enterprise restructuring  

Structural  reforms  have  slowed.  The  transformation  to  a  market  economy  is  far  from  complete.  Privatisation  of  the  key  economic  sectors 
suffered delays and are currently made difficult by 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. Although the 
share of bad loans has been declining, given rapid credit growth, attention will have to be maintained to prevent vulnerabilities.  

EN 

36 

   EN 

 
 
VIII.  ROMANIA 

1. 

Executive summary 

Macroeconomic trends remained favourable in 2003 with sustained growth of investment and 
household  consumption  accompanied  by  further  disinflation.  However,  the  current  account 
widened considerably due to a surge of merchandise imports and prompted the authorities to 
announce a tighter policy stance and a close monitoring of external developments for 2004. 

The  macroeconomic  policy  mix,  consisting  of  a  fairly  prudent  fiscal  policy  and  a  monetary 
policy  aimed  at  disinflation  while  preserving  external  competitiveness,  underpinned  these 
overall positive trends and contributed positively to further disinflation.  

With  regard  to  the  implementation  of  structural  reforms,  progress  occurred  in  a  number  of 
fields,  notably  in  privatisation  of  state-owned  enterprises,  control  of  the  wage  bill  in  the 
public sector and adjustments in the price level and structure in the energy sector.  

Strengthening  enterprise  financial  discipline  remains  a  key  unresolved  issue,  and  measures 
should  focus  on  the  root  causes  of  the  persistent  arrears  to  the  budget  and  public  utilities. 
Also, notwithstanding various initiatives to improve the business environment, the efficiency 
of the public administration and of the judiciary must substantially improve in order to level 
the playing field in the market and ensure unhindered market entry and exit. 

Romania can be considered a functioning market economy once the good progress made has 
continued  decisively.  In  addition,  a  vigorous  and  sustained  implementation  of  its  structural 
reform  programme  is  required  in  order  for  Romania  to  be  able  to  cope  with  competitive 
pressure and market forces within the Union in the near term. 

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 process. Conditions for the disbursement of the first sub-tranche of EUR 
50  million  were  fulfilled  in  the  first  half  of  2003,  and  disbursement  took  place  on  17  July 
2003. 

2. 

Macroeconomic performance 

Romania  has  since  2001  experienced  a  sustained  economic  recovery,  with  robust  economic 
growth,  significant  decline  in  inflation  and  increased  openness  and  competition  in  the 
economy. In light of the turbulent times for Romania in the second half of 1990’s, which were 
characterised by continued failure to stabilise the economy, a protracted transitional recession 
and a lukewarm attitude to liberalisation of prices and markets, this is a major achievement.  

In  2003,  Romania’s  four-year  old  economic  recovery  weathered  the  economic  slowdown  in 
the EU as growth remained robust. According to preliminary figures, real GDP growth stood 
at  4.8%  in  2003.  However,  growth  was  increasingly  unbalanced  and  driven  solely  by 
domestic  demand.  In  particular,  household  consumption  increased  sharply  on  the  back  of 
surging consumer credit and high wage growth. On the other hand, government consumption 
expanded only slightly. Together with stronger growth in tax revenue and further savings on 
interest payments the target for the budget deficit for 2003 was therefore slightly undershot.  

EN 

37 

   EN 

 
Private sector investment continued to rise rapidly, pointing to the replacement of Romania’s 
capital stock, and reflected also in a sustained import growth. Growth of exports decelerated 
at the same time over 2003 and appeared considerably less vigorous compared to the strong 
export performance since 2000. This was also reflected in industrial production growing at a 
significantly  lower  pace  in  2003  than  in  previous  years.  Consequently,  a  significant 
deterioration  of  the  trade  balance  occurred,  and,  after  contributing  positively  to  growth  in 
2002, net exports turned strongly negative during 2003. 

The current account deficit widened significantly over 2003 to close to 6% of GDP. While not 
necessarily  of  a  deep-rooted  structural  character,  the  current  account  deficit  needs  to  be 
monitored  closely.  The  policy  mix  consists  of  a  fairly  prudent  fiscal  policy  and  a  monetary 
policy  aimed  at  disinflation  while  preserving  external  competitiveness,  and  remains 
appropriate although adjustments may be warranted in light of external developments. A more 
restrictive fiscal policy than originally intended has been announced for 2004, and measures 
in the banking system were implemented by 1 February aimed at limiting the credit growth to 
a pace consistent with keeping the current account deficit at sustainable levels. 

In 2003, inflation remained on a downward path. The average rate of consumer price inflation 
reached 15.3%. By December, the year-on-year rate declined to 14.1% despite the increases in 
energy prices mandated over the year, thereby allowing the government’s target for the year 
to be met. After accelerating in the first half of the year on the back of a substantial rise in the 
minimum wage, the pace of real wage growth was more moderate in the latter part of the year, 
resulting in an average real wage increase of close to 9% in 2003. 

The  unemployment  rate  (harmonized  rate  based  on  labour  force  survey)  stood  at  6.6%  in 
2003.  It  has  been  fairly  stable  in  the  vicinity  of  7%  since  1999.  Registered  unemployment 
stood  at  an  average  of  7.6%  in  2003  and  has  been  declining  since  1999.  However, 
methodological changes and redefined eligibility criteria for safety net entitlements limit the 
comparability  across  time  for  both  measurements.  The  apparently  low  unemployment  rate 
may, however, also be due to the need of a further deepening of economic restructuring. 

Inflows of foreign direct investment (FDI) passed EUR 1 billion in 2003, pointing to a modest 
increase compared to previous years. This improvement did, however, not match the pace of 
deterioration in the current account. So far, Romania has not yet seen a strong increase in FDI 
inflows, and 2003 did not record a step change in FDI inflows. Since 1999, annual net inflows 
have  remained  at  around  2.5%  of  GDP,  and  measured  by  per  capita  inflows  Romania  still 
ranks  low  compared  to  more  advanced  transition  economies.  Sustained  growth,  improved 
track  record  in  macroeconomic  stability  and  advances  in  the  functioning  of  the  market 
mechanisms point, however, to a potential pick-up of inflows in the future.  

Due to a high demand in the FOREX market and the efforts of the central bank to limit the 
downward  pressure  on  the  Romanian  Lei,  Romania’s  official  international  reserves  levelled 
off  towards  the  end  of  2003.  Reserves  remained,  however,  at  a  comfortable  level  of  3.7 
months  of  goods  and  services 
the  broadly  positive 
macroeconomic  performance,  external  financing  conditions  have  been  improving.  Better 
growth,  enhanced  reform  prospects  and  continued  collaboration  with  the  IMF  allowed 
Romania to meet its external financing needs in 2003. Romania’s sovereign debt rating was 
upgraded by several credit agencies in December 2003 both for national and foreign currency 
denominations. Foreign debt rose further in 2003, but the debt-to-GDP ratio remained fairly 
low at an estimated 20.5% of GDP at end-2003. 

import.  Moreover,  reflecting 

EN 

38 

   EN 

 
Much  of  the  progress  over  recent  years  can  be  attributed  to  a  renewed  commitment  by 
Romania to achieve durable macroeconomic stabilisation of the economy and further pursue 
the  economic  reform  path.  These  efforts  have  been  embedded  in  the  process  of  negotiating 
Romania’s accession to the EU and fulfilling the Copenhagen economic criteria as well as in 
the  arrangements  with  international  financial  institutions.  In  October  2003,  Romania 
successfully concluded the final review of an IMF arrangement for the first time ever in the 
post-Communist period. 

3. 

Structural reforms 

In  2003,  Romania  recorded  substantial  progress  in  privatisation,  which,  by  imposing  hard-
budget constraints and exposing the enterprises to market mechanisms, has strengthened the 
exit  mechanisms,  thereby  improving  effective  competition.  Under  the  administration  of  the 
privatisation agency APAPS, privatisation has advanced in the industrial sector, with the sale 
of  the  majority  of  state-owned  large  enterprises.  Preparations  for  divestitures  in  the  public 
utilities  sector  have  moved  beyond  the  first  steps,  although  more  slowly  than  originally 
planned. Layoffs in some of the largest state-owned enterprises were carried out in order to 
improve their financial performance and privatisation prospects. 

The incentives for a more efficient allocation of resources have also been strengthened thanks 
to efforts to tighten enterprise financial discipline and improving the institutional framework 
for a market economy. Accumulation of arrears remains, however, one of the major unsolved 
problems  in  the  Romanian  economy.  Over  2002  and  2003,  arrears  to  the  budget  and  the 
energy  utilities  continued  to  accumulate.  In  the  case  of  a  number  of  monitored  state-owned 
enterprises,  the  stock  of  arrears  to  the  general  government  increased  from  4.0%  of  GDP  at 
end-2001 to 4.5% at end-2002 and continued rising over the first half of 2003. This increase 
occurred despite various rescheduling and write-off arrangements in the context of enterprise 
restructuring and privatisation.  

The  functioning  of  the  energy  sector  represents  a  particular  problem  at  both  the  macro  and 
micro  level.  Despite  further  advances,  progress  in  energy  sector  reform  remained  uneven. 
Complex  issues,  such  as  enterprises’  large  stock  of  arrears,  the  pricing  system  and  the 
valuation  of  past  environmental  liabilities,  slow  down  the  privatisation.  In  the  enterprise 
sector, persisting difficulties have been observed in imposing payment discipline on end-users 
of  energy,  and  arrears  have  accumulated  at  all  levels.  Moreover,  for  a  hard  core  of  state-
owned  enterprises  the  budget  has  continued  to  assume  payments  of  energy  bills  until 
privatisation. In the residential sector, ¾ of households using district heating spend over 10% 
of  their  income  on  heating  bills  and  despite  high  transfers  to  low-income  households  many 
households choose not to pay their heating bills. 

Recently, however, steps have been taken to establish a credible medium-term strategy for the 
sector. The authorities have stepped up the enforcement of payment obligations and started to 
disconnect  perennial  non-payers,  which  has  improved  collection  rates.  Moreover,  the 
adjustment of energy  tariffs  has  been stepped up  gradually in order to ensure cost coverage 
and  incorporate  a  sufficient  margin  for  long-term  investments.  New  pricing  methodologies 
have  been  developed  and  are  expected  to  be  implemented  from  2005.  Preparations  for 
planned  sales  of  energy  utilities  have  moved  forward,  although  more  slowly  than  originally 
planned. Negotiations are underway for the privatisation of two electricity distributors as well 
as  for  two  main  gas  distributors.  In  addition,  the  authorities  have  launched  the  privatisation 

EN 

39 

   EN 

 
process  for  two  more  electricity  distributors.  Letters  of  interest  have  been  received  for  the 
national oil company.  

Preparations  for  the  sale  of  production  facilities  for  thermal  and  hydroelectric  power  have 
started. Restructuring of the companies in preparation for privatisation also facilitates opening 
of  the  energy  market  to  competition.  Preliminary  steps  such  as  unbundling  of  production, 
distribution and transport have been taken, and the government has announced a 40% opening 
of both the gas and electricity market as from 2004. 

After  many  delays,  Romania  has  achieved  important  progress  towards  putting  the  banking 
system  on  a  sounder  basis,  and  the  financial  sector  appears  today  generally  sufficiently 
capitalized,  liquid  and  well  supervised.  Capital  adequacy  ratios  remained  in  2003  robustly 
above 20%, while bad loans amounted to less than 10% of total lending. However, the interest 
rate spread between lending and deposit rates remains at between 10-15%, which indicates a 
substantial cost of financial intermediation and limited competitiveness in the sector. 

Yet, various sources of vulnerability remained. In 2003, lending to the corporate and private 
sector  has  expanded  at  double-digit  rates.  In  particular,  consumer  lending  surged  as  banks 
began  targeting  automotive-  and  real  estate-buyers.  The  recent  high  credit  growth  risks 
outpacing necessary improvements in the intermediation expertise, as well as in the regulatory 
and  supervisory  framework.  In  part  to  minimize  prudential  and  macroeconomic  risks 
stemming  from  the  lending  boom,  the  National  Bank  of  Romania  raised  the  reference  rate 
several  times  of  late,  setting  it  at  21.25%  in  February  2004,  compared  with  17.4%  in  April 
2003, when the bank first reversed its policy of progressively reducing rates. 

Following various unsuccessful tenders, the government managed in September 2003 to sell 
one  fourth  of  the  largest  bank  (BCR)  to  the  European  Bank  for  Reconstruction  and 
Development  (EBRD)  and  the  International  Finance  Corporation  (IFC).  With  this  sale  the 
share of state ownership in the bank has fallen below 50%. Since BCR alone holds roughly 
one  third  of  Romania’s  total  banking  assets,  its  successful  further  privatization  and 
restructuring is seen as vital to increase financial markets’ dynamics. 

The non-banking financial sector is still in its infancy. However, the authorities have prepared 
the  legislative  framework  for  the  introduction  of  a  three  pillar  pension  system,  which  could 
over  time  deepen  the  securities  markets  and  further  develop  the  insurance  sector.  The  main 
elements of the envisaged pension reform are the establishment of a second-pillar mandatory 
scheme  to  which  both  employers  and  employees  contribute,  and  an  optional  third-pillar 
occupational pension scheme. The aim of the reform is to alleviate over time the burden on 
the insufficiently funded first pillar. The reform will be embedded in a three-year action plan, 
supported by the World Bank, and is expected to be fully implemented in 2007. 

The business and investment climate continued to be hampered by a lack of efficiency of the 
public administration and the judicial system. Complex administrative procedures still hamper 
market entry and exit. Efforts to enhance the investment climate have, however, been stepped 
up in 2003. Attempts to cut red tape included establishing one-stop offices for registering and 
authorising firms, and introducing a silent approval procedure for the issuing and renewal of 
the  large  majority  of  licences  issued  by  the  public  administration.  Other  measures  include 
amendments  to  the bankruptcy framework,  which has already led to  an increase in both the 
number of new bankruptcy cases and the rate of their resolution. 

EN 

40 

   EN 

 
In  terms  of  tax  policy,  2003  has  witnessed  the  adoption  of  a  new  tax  code  and  its 
implementing  provisions,  which  should  ensure  greater  transparency  and  stability  of  the  tax 
legislation. Moreover, the VAT system has been reformed, inter alia by introducing reduced 
rates in line with current EU legislation and abolishing a number of exemptions.  

Various administrative measures to improve tax administration have also been taken in 2003, 
as the creation of a large tax-payers unit in Bucharest. In 2004 a number of tax offices at the 
local level will moreover be transformed into “excellence units”, and the authorities will also 
over  the  course  of  2004  unify  the  collection,  audit  and  enforcement  of  health,  pension  and 
unemployment  contributions.  As  a  newly  announced  step,  the  government  will,  in  2004, 
switch the personal income tax from a progressive regime with rates from 18% to 40% to a 
flat rate of 23%. By eliminating the higher rates and simplifying the regime, the government 
hopes to reduce tax evasion and bring more jobs onto the official market. 

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 
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  was  mixed  and,  by  end-2002,  the 
completion  of  the  third  review  had  been  delayed.  Notwithstanding  these  –  typically  due  to 
slippages in wage policy and privatisation – and extension of the programme by 6 months – 
due  to  the  failure  to  find  a  suitable  strategic  investor  for  Romania’s  largest  bank  (BCR)  - 
Romania  eventually  completed  the  arrangement  in  October  2003.  The  programme  achieved 
important  results  in  terms  of  sound  macro-economic  policies  and  structural  reforms,  in 
particular  notable  progress  with  regard  to  disinflation,  energy  tariffs  realignment  and 
budgetary policy. 

Within  the  context  of  the  now  finalised  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.  After  lengthy  negotiations,  a  Supplemental  Loan  Agreement  and  a 
Supplemental Memorandum of Understanding (SMOU) were signed in November 2002.  

After long delays, the structural policy conditions for the disbursement of the first sub-tranche 
were met in the first half of 2003 paving the way for the release of the first EUR 50 million 
sub-tranche  of  the  last  tranche  of  outstanding  EU  macro-financial  assistance,  which  was 
disbursed on 17 July 2003.  

EN 

41 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

In 2003, special regulatory provisions applied to eighteen goods and services. The number of administered goods and services in 
the  consumption  basket  accounted  for  a  share  of  21.7%.  Regulated  prices  in  the  energy  sector  were  adjusted  over  and  above 
inflation on a regular basis. 

2. 

Trade liberalisation 

According to the 2003 WTO trade report, Romania’s applied MFN Tariffs for non-agricultural products averaged 16.2%, which 
compares to an EU-level of 4.2%. Trade liberalisation has been a key element of Romania’s economic transformation towards a 
market  economy.  In  tandem  with  major  domestic  economic  reforms,  Romania  has  pursued  an  active  role  in  the  multilateral 
trading  system  and  its  integration  into  the  European  regional  agreements.  It  is  consistently  implementing  its  commitments  on 
market access and other Uruguay Round Agreements and participating actively in ongoing multilateral negotiations. Romania’s 
objective of accession to the EU has a major impact on its foreign trade regime. 

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 

A  basic  tax  reform  has  been  completed,  but  major  steps  to  consolidate  public  finances  remain  to  be  implemented,  including 
pension  and  health  reforms.  In  2003,  however,  the  application  of  new  VAT  and  profit  tax  laws,  measures  to  improve  the 
institutional  framework  for  budgetary  policy  and  tax  administration.  The  elimination  of  the  majority  of  extra-budgetary  funds 
brought about much needed progress towards the elimination of widespread tax exemptions and the improvement of collections. 
The new Fiscal Code which came into force in January 2004 unifies and simplifies a range of tax regulations and represents a 
step forward in terms of transparency and predictability of tax legislation. The adoption of a new Budget Law in 2003 improved 
further the budgeting and expenditure control procedures.  

7. 

Privatisation and enterprise restructuring 

Privatisation advanced in the industrial sector, with the sale of additional large enterprises while preparations for divestitures in 
the energy sector moved beyond the first steps, although much more slowly than originally planned. Large layoffs in some of the 
largest  state-owned  loss-makers  were  carried  out  in  order  to  improve  their  financial  performance  and  their  privatisation 
prospects.  In  the  banking  sector,  the  largest  remaining  state-owned  bank  (BCR)  could  not  be  sold  to  a  strategic  investor  as 
originally intended. Following various unsuccessful tenders, the government managed instead in September 2003 to sell 25% of 
the bank’s shares to the EBRD and the IFC.  

8. 

Financial sector reform 

Against the background of improving macroeconomic stability and strengthening banks’ balance sheets, the banking sector was 
developing  further  in  2003.  While  still  low,  financial  intermediation  continued  to  increase  quickly,  and  in  late  2003  total 
financial assets represented just over 40% of GDP. The financial sector appears generally sufficiently capitalized, liquid and well 
supervised. Mergers and licence revocations have further reduced the number of banking institutions and more than two thirds of 
banks are majority foreign-owned. Foreign banks account for well above half of total banking sector assets, lending to the non-
governmental sector and total deposits.  

EN 

42 

   EN 

 
IX. 

SERBIA AND MONTENEGRO 

1. 

Executive summary 

The economic situation in 2003 was characterised by a decline in industrial and agricultural 
production  with  services  and  construction  remaining  the  main  sources  of  a  3%  real  growth 
(after 4% in 2002). Inflation was further reduced from 15% to 8% while the exchange rate of 
the Dinar depreciated by some 11% vis-à-vis the euro. Foreign exchange reserves continued 
to increase markedly by more than one billion euro, as a result of strong net capital inflows, in 
particular resulting from unexpectedly high FDI as well as from official financing.  

Following  a  quick  start  with  remarkable  achievements  in  2001/2002,  structural  reforms 
advanced  at  a  slower  pace  in  2003  and  stalled  towards  the  end  of  the  year  during  the  pre-
election  phase  in  Serbia.  In  particular,  the  restructuring  of  large  socially-  and  state-owned 
enterprises and the process of bank privatisation have been delayed. A new reform impetus is 
clearly  necessary  to  improve  prospect  for  future  growth  and  employment  creation.  This 
should also include the continuation of institutional reforms and further visible progress with 
the creation of a functioning single market in Serbia and Montenegro. 

In  early  November  2002,  the  Council  decided  to  provide  to  the  country  further  Community 
macro-financial  assistance  of  up  to  €130  million  in  the  context  of  a  three-year  IMF 
programme (2002-2005), following a first €345 million package implemented in 2001/2002. 
The  amount  was  revised  upwards  to  up  to  €200  million  through  a  revision  of  the  Council 
Decision in November 2003, to help addressing additional financing needs identified by the 
IMF  in  the  course  of  the  year.  Two  tranches  amounting  to  €105  million  (€40  million  in 
December 2002/February 2003 and €65 million in August 2003) have already been disbursed.  

2. 

Macroeconomic performance 

In  2003,  the  growth  performance  in  the  country  worsened  somewhat  with  an  expected  3% 
increase of real GDP (down from 4% in 2002), compared to the initial target range of 3.5 to 
4.5%. In Serbia, 2003 real GDP growth is estimated at 3.1%, while the Montenegrin economy 
has grown by an estimated lower rate of 1.5%. As in the previous year, growth in Serbia is 
mainly  driven  by  a  good  performance  of  the  service  sector  (trade,  financial  services  and 
construction).  However,  agricultural  output  is  estimated  to  have  dropped  by  10  to  15% 
compared to 2002 due to an extended Spring-Summer drought, and industrial production has 
reportedly fallen by some 3%. The main sources of growth of the Montenegrin economy were 
industrial production and tourism with annual increases of 8.4% and 11%, respectively, in the 
first eight months of 2003 compared to the same period in 2002. 

Annual retail inflation in Serbia (end of period) in 2003 came down from 15% (end 2002) to 
around 8%, despite an increase of electricity prices in July (by 15% on average) in line with 
the IMF programme, and higher food prices as a result of the Spring drought. In Montenegro, 
annual  inflation  was  further  reduced  in  2003  from  9.5%  to  around  8%  by  end-year.  This  is 
still a relatively high inflation for a euro-ised economy, partly driven by the introduction of 
VAT in April and a 23% average increase of electricity prices.  

The consolidated fiscal deficit of the country for 2003 was initially planned to be maintained 
at 4.5% of GDP, composed of a 4.1% deficit in Serbia and a 0.4% deficit in Montenegro, the 
latter representing some 5.6% of Montenegrin GDP. The overall level of spending was set to 

EN 

43 

   EN 

 
be reduced by 2 percent of GDP to make room for a lower tax burden, in particular in Serbia. 
In Serbia, the consolidated general government deficit was later revised downwards to 3.5% 
of GDP. Higher than planned privatisation revenues led to an over-financing of the budget by 
2%  of  GDP,  allowing  for  an  equivalent  reduction  of  net  public  debt.  Montenegro  remained 
under fiscal pressure in 2003. In Montenegro, the introduction of VAT in April contributed to 
an increase in budget revenues, however, the overall fiscal  stance  in 2003 is yet difficult to 
assess, also due to the lack of reliable data. Uncertainties remain especially with respect to the 
actual size and financing of the Montenegrin deficit.  

The National Bank of Serbia (NBS) continued its stability-oriented monetary policy in 2003. 
In  early  2003,  the  NBS  temporarily  increased  reserve  requirements  on  deposits  to  absorb 
excess commercial banks’ liquidity that resulted from a shift of government deposits to banks 
in  the  context  of  the  payment  reform.  Since  May  2003,  monetary  policy  was  somewhat 
relaxed through subsequent reductions of the compulsory reserve rate. Throughout 2001 and 
2002,  the  exchange  rate  policy  was  geared  at  stabilising  the  nominal  exchange  rate  of  the 
Dinar, which significantly facilitated a process of disinflation in Serbia. Since early 2003, the 
National  Bank  of  Serbia  conducted  a  more  flexible  approach  taking  also  into  account  real 
exchange  rate  developments  and  aspects  of  international  competitiveness.  From  end-
December 2002 to end-December 2003, the dinar/euro exchange rate depreciated by around 
11% in nominal terms, but remained rather stable in real effective terms.  

The current account deficit of Serbia and Montenegro in 2003 is estimated to have lowered to 
11% of GDP before grants (12.8% in 2002), mainly as a result of a lower import demand and 
modest export recovery. The capital and financial account balance came under some pressure 
in  the  first  half  of  2003,  but  for  the  year  as  a  whole  important  net  capital  inflows  were 
eventually  recorded,  especially  in  the  form  exceptionally  large  net  inflows  of  FDI  (€1,060 
million compared to an initially projected level of €550 million). Foreign exchange reserves 
rose by about one billion euro and reached more than €3 billion (equivalent to 4.5 months of 
projected imports) by the end of the year.  

Overall,  the  external  sustainability  remains  a  major  challenge  for  Serbia  and  Montenegro. 
Despite substantial debt relief that is being provided by Paris Club creditors, the external debt 
(estimated at €12.7 billion at end-2003 or 61% of GDP) remains relatively high. In particular, 
debt service obligations are projected to rise considerably from around 2.2% of GDP and 10% 
of exports of goods and services in 2003 to 4.1% and 16.1%, respectively, in 2005.  

3. 

Structural Reforms 

In  Serbia,  public  finance  reform  continued  and  expenditure  control  has  been  improved 
through  the  gradual  introduction  of  a  Single  Treasury  Account  in  the  NBS  for  budget 
execution,  which  covers  most  ministries  and  other  direct  spending  units.  However,  the 
management and control of extra-budgetary funds and budgets of local government need to be 
further enhanced. Tax collection improved through the re-organisation and modernisation of 
the Public Revenue Agency. Envisaged tax policy legislation, including on the introduction of 
VAT as well as on income and profit taxation, did not come into force due to the blockage in 
the work of the Parliament and the fact that it was dissolved later in the year. In Montenegro, 
following  the  introduction  of  a  Treasury  in  the  Ministry  of  Finance,  the  authorities  have 
embarked  on  further  reforms  to  contain  public  spending.  In  March  2003,  the  government 
adopted  an  employment  and  wage  policy  action  plan  that  foresees  a  reduction  of  redundant 
public  employees  and  a  larger  differentiation  of  salaries.  The  introduction  of  VAT  in 

EN 

44 

   EN 

 
Montenegro  in  April  2003  marked  a  major  reform  step  despite  subsequent  and  temporary 
difficulties in revenue collection.  

A Montenegrin Law on Public Administration which provides the policy and legal framework 
for reforms in the public administration was adopted in July 2003. Moreover, a new Pension 
and  Disabled  Insurance  Law  based  on  a  three  pillar  system  came  into  force  in  September 
2003.  

In  Serbia,  a  number  of  laws,  which  aim  to  improve  the  legal  and  regulatory  framework  for 
private  sector  development,  including  legislation  on  enterprises,  competition,  company 
registration  as  well  as  on  bankruptcy  procedures  and  procurement,  have  been  prepared  or 
adopted in 2003 by the government. However, these laws have not yet come into force. A new 
Accounting Law was adopted in February 2003 and a number of laws that broaden the scope 
for secured lending came into force in August 2003. It is now important that these laws are 
fully  implemented  and  applied  in  order  to  facilitate  financial  intermediation  and  thus  real 
investment and growth in the economy.  

The  privatisation  process  in  Serbia  gained  momentum  with  the  sale  of  some  important 
companies, such as two tobacco factories, the second largest oil company, a steel mill and a 
brewery.  By  end-2003,  some  900  enterprises  had  been  sold  by  auction  (of  which  206  in 
2002), 32 by tender (of which 12 in 2002) and 103 through the Share Fund (of which 48 in 
2002).  As  a  result,  revenues  from  privatisation  reached  more  than  €  900  million  in  2003  (€ 
345 million in 2002). In Montenegro, the process of privatisation of the largest Montenegrin 
company,  Aluminium  Factory  KAP-Podgorica,  started  with  the  selection  of  the  financial 
advisor, but as the sale is also related to some strategic decisions (imports of electricity) the 
process  is  not  expected  to  be  finalised  soon.  The  privatisation  of  the  Nikšić  steel-mill  and 
Podgorica  tobacco  factory  are  at  an  advanced  stage.  Towards  the  end  of  2003,  the 
Montenegrin Government also announced an accelerated privatisation of 20 smaller and less 
attractive  factories.  The  process  of  restructuring  of  some  50  large  insolvent  companies  in 
Serbia  has  not  much  advanced  owing  to  the  unsolved  problem  of  outstanding  liabilities  of 
these  companies.  In  an  attempt  to  accelerate  the  restructuring  process,  the  authorities  have 
developed  a  new  approach  of  “conditional  tendering”,  which  would  imply  to  offer  the 
companies  for  sale  with  the  un-restructured  debts  and  leave  the  bidders  to  come  with  a 
proposal on how much debt they will be ready to accept. It still remains to be seen whether 
this new strategy will be more successful.  

In  the  financial  sector,  the  Serbian  authorities  strengthened  the  regulatory  and  supervisory 
control over the local banking system by adopting the new Law on the National Bank in July 
2003 together with the amendments to the Banking Law. The process of privatisation of the 
15 banks in which the Serbian government acquired shares through a debt-for-equity swap in 
2002  was  delayed,  also  due  to  a  change  in  the  top  management  of  the  Bank  Rehabilitation 
Agency.  The  privatisation  of  the  first  three  banks  out  of  the  15  banks  is  not  likely  to  occur 
before mid-2004. The banking sector is still burdened with the unresolved problem of claims 
on heavily indebted companies and a strategic decision  concerning non-performing loans in 
the portfolios of the banks will have to be taken. In Montenegro, the institutional framework 
for banking supervision has been strengthened over the past year with the introduction of new 
regulations  on  licensing,  minimal  capital,  asset  classification  and  provisioning  and  large 
exposures.  The  authorities  also  adopted  an  anti-money  laundering  law  in  September  2003. 
The previously largest bank in the republic, Montenegro Banka, was eventually sold in July 
2003 and the preparation for the privatisation of the last remaining bank with majority state 
ownership,  Podgorica  Banka,  has  progressed.  Another  important  development  in  2003  was 

EN 

45 

   EN 

 
the  decision  of  the  Ministry  of  Finance  to  revoke  all  licences  given  to  the  offshore  banks 
registered  in  Montenegro.  A  continued  growth  in  deposits  through  2003  confirms 
strengthened confidence in the banking sector. 

4. 

Implementation of macro-financial assistance 

In early November 2002, the Council decided to provide the country with further Community 
macro-financial  assistance  of  up  to  €130  million,  following  a  first  €345  million  package 
implemented in 2001/2002. 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 
2002,  and  in  particular  to  support  the  balance  of  payments  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.  It 
specifies the economic policy conditions and structural measures for the release of the second 
and the third tranche of this assistance. It also requires action towards the establishment of a 
single market within the country. The authorities have agreed to allocate 90% of the proceeds 
under this assistance to Serbia and 10% to Montenegro. 

The grant component of the first tranche (€ 30 million) was released in end-December 2002, 
following  the  signature  of  the  MoU.  The  loan  part  of  the  first  tranche  (€10  million)  was 
disbursed  in  February  2003  following  the  ratification  by  the  state  union  Parliament  of  the 
Loan Agreement between the EC and the country. Following the assassination of the Serbian 
Prime Minister in March 2003 and a subsequent financial request from the Serbian Ministry 
of Finance, the Commission, supported by the Council, proposed to front-load the remaining 
macro-financial  assistance  with  a  relatively  large  second  tranche  in  order  to  address  a 
tightened financial situation of the country. The second tranche of €65 million, comprising a 
€35  million  grant,  was  released  in  August,  after  the  Commission  had  verified  that  the 
economic policy conditions in the areas of public finance reform and administration, banking 
sector  reform  and  private  sector  development  had  been  fulfilled  to  a  satisfactory  degree.  In 
October 2003, a Commission staff mission was carried out to review the conditionality for the 
third tranche. This mission found that substantial additional progress was necessary before the 
third tranche can be released. 

In  November  2003,  the  Council  decided  to  increase  the  current  macro-financial  package  by 
€70  million  to  up  to  €200  million  through  a  revision  of  the  Council  Decision  of  November 
2002, to help addressing additional financing needs identified by the IMF in the context of the 
current  stabilisation  programme.  The  modalities  of  this  additional  assistance,  including  the 
precise  tranching  and  attached  conditionality,  still  remain  to  be  negotiated  with  the 
authorities.  

EN 

46 

   EN 

 
1. 

Price liberalisation 

SUMMARY STATUS OF ECONOMIC REFORM 

Most price categories are liberalised except for some public services and utilities. Energy prices are being gradually adjusted towards cost 
recovery levels. Electricity prices were raised by 15% in Serbia and by 23% on average in Montenegro. 

9. 

Trade liberalisation 

Substantial progress in harmonising tariff rates of Serbia and Montenegro, but no agreement so far on the harmonisation of agricultural tariffs 
and  alignment  of  import  levies.  Liberalisation  measures  included  phasing  out  of  non-tariff  barriers,  the  planned  elimination  of  all  import 
quotas and the liberalisation of crude oil imports. Trade relations with the EU were negatively affected by inadequate controls of origin of 
some sugar exports. Bilateral trade agreements are being concluded with neighbouring countries. 

10. 

Exchange regime 

Managed floating system in Serbia under which the nomin0al exchange rate was kept rather stable in 2001 and 2002 leading to a substantial 
real appreciation of around 50% during that period, though from a supposedly undervalued level at end-2000. In 2003, the Dinar depreciated 
by some 11% against the euro while it remained rather stable in real effective terms. Montenegro is fully euro-ised with the euro as the sole 
legal tender; much higher inflation in the republic compared to the euro-zone implies a substantial real appreciation.  

11. 

Foreign Direct Investment 

Appropriate FDI legislation as well as foreign investment promotion agency is in place. However, important legislation to improve business 
environment is still pending, in particular with respect to company registration. FDI is largely related to big privatisation deals; green field 
and equity investments remain low.  

12. 

Monetary policy 

Continuation of stability-oriented monetary policy in 2003 directed at reducing annual inflation to single digit levels for the first time since 
the  start  of  reforms  in  late  2000.  This  includes  tight  restraint  on  central  bank  credit  to  the  general  government  sector.  Change  of  reserve 
requirements  remains  the  most  important  policy  instrument  to  affect  liquidity  in  the  banking  sector.  In  Montenegro,  the  scope  for  an 
independent monetary policy is very limited.  

13. 

Public Finance 

Further progress with reforms aimed at improving expenditure control in both republics, but continued need for further fiscal consolidation 
and prioritisation of public spending. VAT was introduced in Montenegro in April; its introduction was postponed to mid-2005 in Serbia. 
Major reform step in Serbia was the reform of the Public Revenue Agency and the abolition of the old payments bureau.  

14. 

Privatisation and Enterprise Restructuring 

Privatisation in Serbia gained some momentum with the successful sale of many small companies through auctions and some big flagship 
enterprises  through  tenders.  Privatisation  revenues  were  larger  than  expected  amounting  to  around  €900  million  in  2003.  However,  the 
process  of  the  restructuring  and  privatisation  of  large  insolvent  companies  has  slowed  down  in  2003.  In  Montenegro,  the  privatisation  of 
parts of the giant Aluminium factory is under way.  

15. 

Financial Sector Reform 

Banking supervision has been strengthened in Serbia and Montenegro. The process of bank restructuring and privatisation in Serbia has been 
delayed. Montenegro Banka was sold in August 2003, and the privatisation of the last state-owned bank in Montenegro, Podgorica Banka, is 
under preparation.  

EN 

47 

   EN 

 
X. 

1. 

TAJIKISTAN 

Executive summary 

Tajikistan’s macroeconomic performance remained strong in 2003 and the sources of growth 
continue  to  become  more  diversified.  Traditional  sectors  (cotton  and  aluminium)  showed 
modest  expansion,  while  strong  growth  has  been  recorded  in  other  sectors,  such  as  services 
(mostly trade), construction, energy and textiles. Growth in domestic demand was supported 
by a large expansion of migrants’ remittances. 

Mixed results are noted in the area of structural reforms. Total tax collection of the general 
government increased, mainly thanks to improved administration of the VAT. Privatisation of 
medium  and  large  enterprises  has  proceeded  at  a  slow  pace  over  the  last  few  years.  The 
authorities  are  preparing  a  debt  reduction  strategy  for  state-owned  farms  that  includes  a 
provision for writing-off the domestic debt of farms that are being restructured. In the banking 
sector, the restructuring of the state-owned Amonatbank is nearly completed and the largest 
bank, Agroinvestbank (AIB), has completed an inventory of its non-performing loans. 

Two  grant  tranches  (up  to  €  7  million  each)  remain  undisbursed  under  the  exceptional 
financial assistance and Tajikistan’s outstanding debt to the EC is now €44 million. The exact 
amounts of the 2003 grant tranche and the early debt repayment (up to € 7 million and € 12 
million  respectively)  will  depend  on  the  findings  of  the  review  mission  conducted  in  mid-
March 2004.  

2. 

Macroeconomic performance 

Tajikistan’s  macroeconomic  performance  remained  strong  in  2003,  with  real  GDP  growth 
estimated  at  10.2%,  compared  to  9.1%  in  2002.  The  sources  of  growth  continue  to  become 
more diversified. Traditional sectors (cotton and aluminium) showed modest expansion, while 
strong  growth  has  been  recorded  in  other  sectors,  such  as  services  (mostly  trade), 
construction,  energy  and  textiles.  Growth  in  domestic  demand  was  supported  by  a  large 
expansion of migrants’ remittances (for 2003 these are estimated to be equivalent at 15% of 
GDP).  

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. The tax to GDP ratio increased from 14.7% in 2002 to an estimated 15.5% of 
GDP  in  2003  and  is  projected  to  increase  further  in  2004  to  16.2%.  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 
an  estimated  73%  at  end-2003,  due  to  debt  restructuring  agreements  with  bilateral  creditors 
and  the  strong  growth  of  GDP  in  last  years.  The  grace  period  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. 

EN 

48 

   EN 

 
Several  factors  have  contributed  to  an  acceleration  in  inflation  in  2003,  most  of  which 
occurred  in  the  first  quarter  of  the  year.  In  this  period,  there  was  a  loosening  of  monetary 
policy, as directed credits were issued to the cotton sector.  

The  unusually  severe  winter  weather  resulted  in  a  strong  pick-up  in  food  prices,  rising  by 
7.8% year on year in the first four months of 2003. Higher than expected global energy prices, 
combined with a rise in fuel and energy tariffs, have also pushed inflation upwards. Besides, 
services  prices  rose  by  almost  32%  year  on  year  in  January-April  2003.  The  2003  year-end 
inflation is estimated at 13.7%.  

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 estimated to be unchanged at end-2003 (1.8 months) compared to end-2002.  

3. 

Structural reforms 

The strong increase in tax collection is mainly  due  to  improved administration of  the  VAT, 
including  completion  of  the  transition  to  the  destination  principle.  To  enhance  VAT 
collections, the authorities have begun a taxpayer education program and have reduced delays 
in  issuing  VAT  refunds.  They  are  also  gradually  reducing  tax  arrears  of  key  state-owned 
enterprises. The authorities have completed a draft of a new tax code, intended to simplify and 
enhance  tax  administration.  Further,  the  authorities  plan  to  restructure  the  Ministry  of  State 
Revenues and Duties (MSRD), introduce a system of single taxpayer identification numbers 
and update the database of taxpayers.  

Privatisation of medium and large enterprises has proceeded at a slow pace over the last few 
years. By end-2002 about 500 enterprises had been privatised, representing about 40 percent 
of the total listed for privatisation. However, there has been activity last year. In July 2003, 
the  State  Committee  for  State  Property  has  launched  a  tender  for  six  large  industrial 
enterprises (flour-grinding, steel, leather processing, electronics and a shoe factory).  

The  authorities  are  currently  preparing  a  debt  reduction  strategy  for  state-owned  farms  that 
includes a provision for writing-off the domestic debt of farms that are being restructured. The 
ADB is assisting the authorities to prepare proposals for reducing or restructuring the external 
debts  of  these  state-owned  farms.  One  option  that  is  being  considered  is  a  mechanism  for 
selling the external debt of the farms in exchange for temporary cotton marketing rights.  

The authorities plan to work with independent third parties to enhance the transparency of the 
farm  restructuring  process.  They  expect  to  reach  understandings  by  end-March  2004  with 
these  groups  –  including  international  NGO’s  –  to  monitor  the  privatisation  of  at  least  25 
state-owned farms. Further, to improve the governance of the farm privatisation process, the 
authorities  will  submit  amendments  to  the  law  on  local  government  and  the  land  code  to 
parliament  (by  end-March  2004)  that  will  prevent  local  authorities  from  interfering  in  the 
farm privatisation process or the operations of restructured farms. Also, the authorities plan to 
make officials of the State Land Reform Committee independent of the local authorities. To 

EN 

49 

   EN 

 
ensure that privatised farms have clear and unequivocal land rights, the authorities agreed to 
issue 5,000 additional land share certificates (between 1st October 2003 and end-March 2004).  

A  new  energy  law  has  been  enacted  to  promote  the  incorporation  of  Barki  Tajik  (the  state-
owned  electricity  company)  and  to  establish  an  independent  regulation  body  in  the  energy 
sector.  

A working group chaired by the minister of energy was established by presidential decree on 
3 June 2003 to lead the restructuring of the energy sector. Several models have been studied 
and an unbundling of the Barki Tajik into a generation company, an independent transmission 
company and (four) regional distribution companies is envisaged at present.  

The number of commercial banks has declined from 17 in 2001 to 13 (as of March 2003). The 
restructuring  of  the  state-owned  Amonatbank  is  nearly  completed,  according  to  the  IMF. 
Compliance  with  prudential  requirements  has  improved  significantly  and  the  bank  is  now 
making  a  profit.  The  largest  bank,  Agroinvestbank  (AIB)  has  completed  an  inventory  of  its 
non-performing  loans. AIB  will be restructured into two independent entities: a commercial 
bank and a non-bank financial institution financing cotton sector operations. 

In  2002  only  five  banks  met  the  minimum  capital  requirement  of  USD  1.5  million  and  the 
National  Bank  of  Tajikistan  gave  waivers  to  the  non-complying  banks.  The  scheduled 
increases in the minimum capital requirement have been postponed so that the requirement for 
existing banks will be increased to USD 2 million at end-2004 instead of end-2003. Not all 
banks have yet provided the required independent audits of their accounts. 

4. 

Implementation of Macro-Financial Assistance 

Tajikistan has benefited from an assistance package which consists of a loan of € 60 million 
(disbursed in March 2001) and a total grant amount of up to € 35 million to be disbursed in 
successive annual tranches over the period to end-2004.  

As  Tajikistan  has  made  satisfactory  progress  in  macroeconomic  policies  and  in  structural 
reform,  it  has  benefited  from  maximum  annual  grant  tranches,  €  21  million  so  far.  On  the 
other hand, the EC has not pushed for the maximum annual debt repayments which the MoU 
would have allowed. Both in 2001 and 2002, Tajikistan was asked to repay €8 million only, 
whereas the MoU would have allowed requesting € 12 million. Tajikistan’s outstanding debt 
to the EC is now €44 million. The exact amounts of the 2003 grant tranche and the early debt 
repayment (up to € 7 million and € 12 million respectively) will depend on the findings of the 
review mission conducted in mid-March 2004.  

EN 

50 

   EN 

 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation 

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

2. 

Trade liberalisation 

Relatively liberal trade system with persistent non-tariff barriers. Import tariffs were unified at 5% 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. 

Exchange regime 

Relatively liberal exchange regime. The official exchange rate was unified with the curb market rate in July 2000 when an interbank foreign 
exchange market began operating. The new currency, somoni, was introduced in October 2000. A managed floating regime of the somoni is 
in place. 

4. 

Foreign direct investment 

Modest foreign direct investment due to high perceived country risk, despite a relatively liberal legal regime. There are no legal obstacles to 
foreign direct investment or to foreign ownership of shares, no restrictions on the repatriation of profit and capital. FDI inflows 3.0% of GDP 
in 2002 and 1.4% estimated for 2003. 

5. 

Monetary policy 

The  NBT  continued  to  issue  directed  credits  in  late  2002  and  early  2003,  granted  by  NBT  branch  managers  to  cotton  sector  enterprises. 
However, in February 2003, the NBT issued a decree withdrawing lending authority from all branch managers, department heads and deputy 
chairpersons. 

6. 

Public finances 

Total tax collection of the general government increased from 14.7% in 2002 to an estimated 15.5% of GDP. This increase is mainly due to 
improved administration of the VAT, including completion of the transition to the destination principle.  

7. 

Privatisation and enterprise restructuring 

The privatisation of small enterprises is largely completed, but for medium and large enterprises it has proceeded at a slow pace over the last 
few  years.  In  July  2003,  the  State  Committee  for  State  Property  has  launched  a  tender  for  six  large  industrial  enterprises  (flour-grinding, 
steel, leather processing, electronics and a shoe factory). 

8. 

Financial sector reform 

Progress was made in improving banking regulation and supervision. Restructuring agreements were signed between the NBT and the four 
main banks. The restructuring of the state-owned Amonatbank is nearly completed. The largest bank, Agroinvestbank (AIB), has completed 
an inventory of its non-performing loans. AIB will be restructured into two independent entities: a commercial bank and a non-bank financial 
institution financing cotton sector operations. 

EN 

51 

   EN 

 
XI. 

UKRAINE 

1. 

Executive summary 

Ukraine continued to show a broadly satisfactory macroeconomic performance in 2003. GDP 
growth  accelerated  to  9.3%;  inflation  remains  in  the  single  digits,  although  it  has  risen 
reflecting the rapid pace of economic growth and the unwinding of a previous decline in food 
prices; and the fiscal position ended the year near balance. 

The  balance  of  payments  remains  in  a  relatively  comfortable  position.  The  current  account 
finished  2003  with  a  sizeable  surplus,  the  hryvnia  has  remained  stable,  and  official  foreign 
exchange reserves have continued to increase. Moreover, Ukraine has regained access to the 
international capital markets with the issuance of several sovereign eurobonds. FDI inflows, 
remain low, however. 

This  favourable  macroeconomic  situation  contrasts  with  the  insufficient  progress  detected 
with the structural reforms. Although the authorities took encouraging measures in a number 
of  sectors  during  2003,  reform  progress  in  areas  such  as  the  energy  sector  and  large-scale 
privatisation remains disappointing. 

The  IMF  is  expected  to  approve  in  late  March  2004  a  precautionary  stand-by  arrangement 
(SBA)  for  Ukraine.  In  July  2002,  the  Council  adopted  a  Decision  granting  a  new  macro-
financial assistance (MFA) to Ukraine in the amount of up to €110 million and cancelling the 
non disbursed part of the 1998 loan facility. The discussions on the conditionality of the new 
facility were launched in June 2003. 

2. 

Macroeconomic Performance 

Ukraine  has  continued  to  show  a  broadly  satisfactory  macroeconomic  performance.  After 
slowing  down  to  4.1  percent  in  2002,  the  rate  of  growth  of  real  GDP  accelerated  to  an 
estimated 9.3 percent in 2003, amply exceeding expectations. Growth is being driven by both 
a strong export performance and the expansion of domestic demand. 

This high rate of economic expansion, combined with rapid wage growth and the unwinding 
of the previous decline in food prices in the context of a less favourable harves, has rekindled 
inflationary pressures. After the unprecedented deflation seen in 2002 (when the CPI fell by 
0.6%), annual inflation accelerated to 9.3% by end-2003. 

Reflecting the faster than expected economic growth and prudent expenditure policies, fiscal 
performance in 2003 was better than budgeted, with the consolidated government ending the 
year  with  a  small  cash  deficit  (of  about  ½  %  of  GDP).  The  budget  for  2004  adopted  by 
parliament  is  consistent  with  a  consolidated  budget  target  of  1½  %  of  GDP.  However,  the 
need to clear arrears on VAT refunds, civil servant wage pressures and medium-term trends in 
the  pension  system  together  with  the  need  to  move  to  a  simpler  tax  system  less  prone  to 
distortion, continue to pose significant challenges for fiscal policy. 

After  depreciating  sharply  during  1999,  the  hryvnya  has  shown  an  impressive  degree  of 
stability.  Real  exchange  rate  indices  have  experienced  some  appreciation  in  recent  years, 

EN 

52 

   EN 

 
reflecting  Ukraine’s  cumulative  inflation  differential  with  its  main  trading  partner,  but  the 
exchange rate is thought to remain at a relatively competitive level.  

The  National  Bank  of  Ukraine  has  backed  up  its  floating  exchange  rate  regime  with  a 
relatively  prudent  monetary  policy.  While  monetary  aggregates  continued  to  grow  very 
rapidly in  2003 (47% for  broad money, 30% for base money), this has  largely reflected the 
increase  in  demand  for  real  money  balances  related  to  the  ongoing  process  of  re-
monetisation.2 

The balance of payments remains in a relatively comfortable position. Since 1999, the current 
account has been consistently in surplus. The surplus is estimated to have shrunk from 7.7% 
of  GDP  in  2002  to  6%  of  GDP  in  2003  reflecting  the  strength  of  domestic  demand3.  This 
current account surplus has contributed to a significant build-up in official foreign exchange 
reserves,  which  reached  about  US$7.2  billion  (over  3  months  of  imports)  in  early  February 
2004.4 The debt re-scheduling agreed with private bondholders in April 2000 and by the Paris 
Club in July 2001 have 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 US$350 million eurobond. This was followed in early June 2003 
by  the  issuance  of  a  US$800  million,  10-year  eurobond,  which  was  oversubscribed  and 
carried an annual interest rate of only 7.65%5. Since 2001, secondary market yield spreads on 
Ukrainian eurobonds have narrowed markedly and the main international rating agencies have 
upgraded Ukraine several times. 

A persistent weakness in Ukraine’s balance  of payments is its low inflow  of FDI, however. 
Despite the strengthening of macroeconomic performance, FDI inflows (see the data provided 
in the summary table on the status of economic reforms) remain well below those seen in the 
countries of Central and Eastern Europe. A weak investment climate, including a volatile and 
business-unfriendly regulatory environment, insufficient progress with structural reforms and 
political instability, are possible factors explaining this disappointing FDI record. 

3. 

Structural Reforms 

The remarkable achievements shown by Ukraine on the macroeconomic front in recent years 
contrast  with  the  insufficient  progress  detected  with  the  structural  reforms.  Although  the 
authorities took encouraging measures in a number of sectors during 2003, reform progress in 
areas  such  as  the  energy  sector  and  large-scale  privatisation  remains  disappointing.  This 
section reviews recent developments in the reform areas emphasised by the conditionality of 
the EU’s macro-financial assistance. 

2 
3 

4 

5 

The share of broad money in GDP increased from 10% in 1996 to 29% at end-2002. 
However,  the  ratio  of  the  current  account  surplus  over  GDP  is  likely  to  be  exaggerated  because  the 
official  GDP  data,  which  do  not  fully  incorporate  the  magnitude  of  Ukraine’s  large  underground 
economy, significantly underestimate GDP. 
In  recent  months,  however,  the  reported  increase  in  reserves  has  largely  reflected  valuation  effects 
stemming from the marked depreciation of the dollar, which increases the dollar value of the share of 
official foreign exchange reserves that Ukraine holds in other currencies. 
An additional issue of US$200 million of the same series (with similar terms) was placed in October 
2003 to compensate for lower than initially planned disbursements by the World Bank. 

EN 

53 

   EN 

 
                                                 
During  2003,  there  were  some  signs  of  reactivation  in  the  privatisation  process.  Following 
two  years  of  much  lower  than  targeted  privatisation revenues, the government  exceeded the 
2.23 billion hryvnyas privatisation target for 2003.  

In mid-2003, the government submitted to parliament an ambitious medium-term privatisation 
programme  that  proposes  the  reduction  in  the  number  of  large  enterprises  excluded  from 
privatisation  for  strategic  reasons  and  the  completion  of  the  privatisation  process  by  2008. 
The adoption of this programme has encountered difficulties in parliament, however. 

In the area of financial sector reform, progress is being made to restructure the operations of 
the loss-making State Savings Bank. Thus, in the context of the World Bank’s Programmatic 
Adjustment  Loan  (PAL), 
in  mid-2003  a  Memorandum  of 
Understanding defining a set of transitory measures for restricting the lending activities of this 
bank and preparing the ground for a comprehensive restructuring of its activities. Significant 
weaknesses  remain  in  the  banking  system,  however.  In  particular,  non-performing  loans 
continue to represent about one fifth of the total bank loans and the banking system remains 
highly concentrated, with the largest eight banks accounting for over 60% of its total assets.  

the  authorities  signed 

The degree of banking intermediation remains low but the banking system has been growing 
quickly since 2000. This rapid growth largely reflects a welcome return of confidence in the 
banking  system  in  the  context  of  an  improved  macroeconomic  situation.  But  it  also  carries 
with it considerable risks. In particular, the fast pace of credit expansion is placing strains on 
banks’  ability  to  evaluate  loan  applications  with  due  care.  In  order  to  put  a  brake  on  this 
excessive credit expansion, the central bank raised the capital adequacy ratio for banks from 
8% to 10% in June 2003. 

In  the  trade  area,  Ukraine  still  maintains  certain  regulations  that  are  incompatible  with  the 
Partnership  and  Cooperation  Agreement  (PCA).  In  particular,  it  imposes  export  duties  and 
other  export  restrictions  on  a  number  of  products  and  continues  to  discriminate  against 
imported products (notably automobiles and alcoholic beverages) in the application of certain 
internal taxes. Also, and despite significant progress in recent years, the regulations relating to 
customs,  import  licensing,  technical  standards  and  the  enforcement  of  intellectual  property 
rights need to be strengthened to better align them with EU requirements.  

Ukraine applied for accession to the WTO in 1994 and has completed bilateral negotiations 
on  market  access  with  a  total  of  23  WTO  members  (including  the  EU).  It  has  yet  to  agree, 
however, on the non-tariff aspects of the negotiations. Ukraine is aiming at joining the WTO 
in  2004,  possibly  coinciding  with  the  accession  of  Russia.  The  EU  is  supporting  Ukraine's 
preparation for accession to the WTO through the provision of technical assistance. 

The  government  is  pushing  through  parliament  an  ambitious  tax  reform  agenda  aimed  at 
reducing the use of exemptions and tax privileges, improving tax administration, limiting tax 
evasion, and making the tax system less distortive. This agenda includes important changes in 
the personal income tax, the profit tax and the VAT law. Effective in January 2004, the profit 
tax  rate  was  cut  from  30%  to  25%  and  a  new  personal  income  tax  replaced  the  current 
progressive  rate  structure  with  a  flat  rate  and  a  higher  non-taxable  threshold.  Also,  the 
parliament has passed legislation significantly reducing the number of sectors exempted from 
the VAT. 

There  has  also  been  progress  recently  in  dealing  with  the  problem  of  the  arrears  on  VAT 
refunds  to  exporters.  In  November  2003  an  action  plan  for  dealing  with  these  arrears 

EN 

54 

   EN 

 
amounting  at  that  time  to  about  3.2  billion  hryvnyas,  or  some  1.3  percent  of  GDP,  was 
adopted.  In  December,  the  government  cleared  in  cash  about  1.3  billion  hryvnyas  of  these 
arrears. The remaining 1.9 billion hryvnyas were swapped against 5-year government bonds 
in January 2004.  

In  June  2003,  the  World  Bank  approved  a  US$200  million  loan  aimed  at  strengthening 
Ukraine’s tax administration, part of which could deal with the underlying factors causing the 
recurrent arrears on VAT refunds. The Commission is considering complementing this project 
with additional technical assistance on the matter. 

Reform progress in the energy sector remains elusive and Ukraine continues to exhibit one of 
the  lowest  energy  efficiency  ratios  in  the  world. The privatisation  of the  regional electricity 
distribution  companies  (the  oblenergos)  remains  on  hold  and  energy  prices  are  estimated  to 
remain  significantly  below  economic  cost  recovery  levels.  Although  cash  collection  ratios 
have  increased  significantly  in  recent  years,  the  energy  sector  is  plagued  by  arrears,  both 
towards suppliers and the government (tax arrears) and on its receivables. The restructuring 
and  privatisation  of  the  gas  sector  continues  to  be  postponed.  Moreover,  the  accounts  and 
operation of the state-owned company that controls the gas monopoly (Naftagas) suffer from 
a  lack  of  transparency.  On  the  nuclear  sector,  discussions  on  the  EBRD/Euratom-financed 
K2R4  project,  which  aims  at  compensating  the  closure  of  Chernobyl  by  completing  the 
construction  of  reactors  in  two  other  nuclear  power  plants,  have  encountered  a  number  of 
difficulties.  

In  recent  years,  Ukraine  has  made  substantial  efforts  to  increase  the  transparency  of  its 
budgetary  procedures  and  accounts,  and  to  bring  accounting  and  disclosure  rules  for 
companies  and  financial  institutions  in  line  with  international  standards.  In  the  budgetary 
sphere, a new Budget Code was adopted in 2001 that clarifies the fiscal roles of the executive 
and  legislative  branches  of  government  and  strengthens  the  transparency  of  budgetary 
operations.  The  government  has  put  in  place  a  relatively  modern  Treasury  system  and  is 
adapting the reporting of its fiscal statistics to the IMF’s government finance statistics (GFS) 
rules. But some deficiencies remain in this area. In particular, the Accounting Chamber—the 
supreme  external  audit  institution  established  in  1997—  is  not  allowed  to  audit  the  revenue 
side of the budget. At present, the Accounting Chamber is only authorised to audit the tax and 
customs  administrations  as  spending  units  (their  expenditures  on  electricity,  salaries, 
equipment, etc.). Another anomaly concerns the extra budgetary funds, the accounts of which 
continue to be presented outside the general budget. 

EN 

55 

   EN 

 
4. 

Implementation of Macro-Financial Assistance 

On  12  July  2002,  the  Council  adopted  a  decision  granting  a  new  MFA  to  Ukraine  in  the 
amount  of  €110  million  and  cancelling  the  non  disbursed  part  of  the  1998  loan  facility.  In 
June  2003  the  Commission  staff  began  discussions  in  Kiev  on  the  policy  conditions  to  be 
attached to the first tranche of the loan. However, these discussions could not be completed in 
2003, in the absence of a working financing arrangement with the IMF. 

The  extended  arrangement  approved  by  the  IMF  in  1998  expired  in  September  2002.  In 
December  2003,  the  IMF  staff  agreed  with  the  authorities  on  a  draft  Letter  of  Intent  and 
Memorandum of Economic Policies describing an economic programme to be supported by a 
precautionary SBA. Ukraine has implemented the prior actions requested by the IMF. These 
included, in particular, the net clearance of 800 million hryvnyas of arrears on VAT refunds to 
exporters by December 2003 and the elimination of most VAT exemptions6. The IMF Board 
is expected to approve the precautionary SBA in late March 2004.  

In  early  December  2003,  the  World  Bank  approved  a  new,  US$250  million  PAL,  which 
covers several areas of structural reform7. The first tranche of this loan (US$75 million) was 
disbursed upon Board approval. 

6 

7 

The law on the 2004 Budget eliminated temporarily (for one year) most VAT exemptions. A law passed 
by Parliament in early February made this elimination permanent. 
A first PAL, of the same amount, was approved in September 2001 and has been fully disbursed. 

EN 

56 

   EN 

 
                                                 
SUMMARY STATUS OF ECONOMIC REFORM 

1. 

Price liberalisation  

Most prices have been liberalised. Communal service tariffs (such as gas, electricity, heating, and rents) are subject to 
administrative controls 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. In 2001, Ukraine 
adopted a relatively liberal Customs Code. The trade-weighted average import tariff was about 7% at end-2002 and the 
effective  average  import  duty  is  even  lower  reflecting  the  widespread  use  of  exemptions.  On  the  other  hand,  tariff 
duties show a relatively high degree of dispersion, ranging from 0% to 70%, and a few export restrictions (on sunflower 
seeds, live animals, cow hides and skins, and scrap metals) remain. A Partnership and Cooperation Agreement with the 
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  

FDI inflows have remained low. Annual net FDI inflows averaged only about 1.8% of GDP in 1999-2002. Cumulative 
per capita net FDI inflows between 1989 and 2001, for their part, stood at less than 100 US dollars. 

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 2002. 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 0.5% of GDP in 2003. 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 
EBRD, the private sector accounted for about 65% of industrial output in 2002. 

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  in  1999-2000,  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  vulnerable,  with  some  of  the  largest  banks  in  poor  condition.  Capital  markets  remain 
underdeveloped. 

EN 

57 

   EN 

 
XII.  OPERATION INITIATED: ALBANIA 

In  June  2002,  the  IMF  approved  a  second  PRGF-supported  3-year  programme  covering  the 
period June 2002-June 2005. Reviews under this programme were successfully completed in 
January  and  July  2003.  During  the  latest  review,  the  IMF  identified  for  2004  a  balance  of 
payment  residual  financing  gap  of  some  US$  46  million.  In  August  2003,  the  Albanian 
authorities  addressed  to  the  Commission  a  request  for  EC  concessional  macro-financial 
assistance. 

In  1999,  the  Council  had  approved  8a  macro-financial  assistance  of  up  to  €  20  million  in 
favour of Albania, in the form of a loan. This assistance, which had been made available in 
the  context  of  the  Kosovo  crisis,  was  never  implemented,  because  the  Kosovo  crisis  turned 
out  to  be  relatively  short,  refugees  returned  home  rapidly  and  the  country’s  balance  of 
payments position turned out to be better than expected. Therefore, the Albanian authorities 
indicated  to  the  Commission  services  (a  first  time  in  December  1999  and  a  second  time  in 
June 2000) that they did not require the release of the Community macro-financial assistance 
in the form of a loan. As a result, the Commission deprogrammed this assistance in 20019. 

Following  the  Albanian  request of  August 2003, and after reviewing the situation in liaison 
with the IMF, the Commission services prepared a proposal for a Council Decision repealing 
the 1999 Council Decision and providing macro-financial assistance to Albania for an amount 
of  €  25  million.  The  purpose  of  this  new  assistance  is  to  underpin  the  PRFG-supported 
programme  as  well  as  to  facilitate  the  efforts  of  the  Albanian  authorities  to  implement 
reforms,  in  the  context  of  the  Stabilisation  and  Association  process.  Given  the  country’s 
relatively low level of development (Albania has a GDP per capita of some US$ 1400 and is 
still  an  IDA  recipient),  it  was  considered  appropriate  to  provide  a  significant  part  of  this 
assistance in the form of a grant (€ 16 million) and the remainder (€ 9 million) in the form of 
a loan. 

The  proposal  was  prepared  so  as  to  take  into  account  requirements  of  the  new  Financial 
Regulation. An ex-ante evaluation of the proposed assistance was presented together with the 
proposal  and  fraud-proofing  provisions  were  inserted  in  the  Council  Decision.  Before 
proceeding with the actual implementation of this assistance, the Commission will check the 
reliability  of  Albania’s  financial  circuits  and  administrative  procedures  expected  to  be 
concerned by this assistance.  

The  Commission  adopted  this  proposal  on  23  December  200310.  After  consultation  of  the 
European Parliament, the next step is for the Council to adopt a decision, which is expected 
for the second quarter of 2004. 

8 
9 

10 

OJ. L 110, pp. 13-15 – Council Decision (1999/282/EC) of 22 April 1999. 
See Report to the Council and the Parliament on the implementation of EC macro-financial assistance 
in 2001 – COM(2002) 352. 
COM(2003) 834 final. 

EN 

58 

   EN 

 
                                                 
 
ANNEXES  

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 2003 (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)

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

35

200

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

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

Feb. 1993

Dec. 1994
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

22.12.94

94/939/EC

130

Jul. 1996

22.12.94

94/940/EC

10.04.95

95/132/EC

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

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

EN 

59 

   EN 

 
 
 
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

260

115

   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)

(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)
Feb. 2003 (grant)

150

Jul. 1999

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

08.11.99

99/732/EC

200

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

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)
May 2003 (grant)
June 2003 (loan)
Dec. 2003 (loan)
Dec. 2003 (grant)

Jun. 2000
July 2003 (loan)

Mar. 2000
Aug. 2000

Aug. 2000
Dec. 2000

Sep. 2001
Dec. 2002

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

60
7
7
7

58

15
10
10
10
15

40
60

20
10
12
10
10
10
18
8

100
50

20
15

7
13

15
15

7

40

14

92
(Cancelled)

20

51

135

81

58

60

100

98

150

50

20
15

20

30

15
(Cancelled)

EN 

60 

   EN 

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

Ukraine IV
(BOP loan)

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/EC

12.07.02

02/639/EC

110

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

Serbia and Montenegro II (ex FRY) (7)

05.11.02

02/882/EC

130 (7)

Bosnia II (8)

Moldova IV

TOTAL

modified by

25.11.03

03/825/EC

05.11.02

02/883/EC

19.12.02

02/1006/EC

70

60

15

-------
6170, 5 (10)

Dec. 2002 (grant)
Fev. 2003 (loan)
Aug. 2003 (grant)
Aug. 2003 (loan)

Fev. 2003 (grant)
Dec. 2003 (grant)

225
35
40
45

30
10
35
30

15
10

345

105

25

110

25

70

35

15

-------
5023,5

-------
1201

(1)
(2)

Assistance to Israel includes a loan principal amount of € 160 million and grants of € 27.5 million in the form of interest subsidies.
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.

(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

EN 

61 

   EN 

 
                                                            
 
Annex 1B - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
 TO THIRD COUNTRIES BY REGION

Status of effective disbursements as of end-December 2003 (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

A. EU Accession countries

Baltics
(BOP loans)
of which :
    Estonia
    Latvia
    Lithuania

Bulgaria I 
(BOP loan)

Bulgaria II
(BOP loan)

Bulgaria III
(BOP loan)

Bulgaria IV
(BOP loan)

23.11.92

92/542/EC

220

24.06.91

91/311/EC

19.10.92

92/511/EC

22.07.97

97/472/EC

08.11.99

99/731/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary I
(Structural adjustment loan)

Hungary II
(BOP loan)

Romania I
(BOP loan)

Romania II
(BOP loan)

Romania III
(BOP loan)

Romania  IV
(BOP loan)

Slovakia
(BOP loan)

TOTAL A

22.02.90

90/83/EC

24.06.91

91/310/EC

22.07.91

91/384/EC

27.11.92

92/551/EC

20.06.94

94/369/EC

08.11.99

99/732/EC

22.12.94

94/939/EC

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

Aug. 1991
Mar. 1992

Dec. 1994
Aug .1996

Feb. 1998
Dec. 1998

Dec. 1999
Sep. 2000

Mar. 1991
Mar. 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

Feb. 1993

Nov. 1995
Sep. 1997
Dec. 1997

Jun. 2000
July 2003

20
40
50
25

150
140

70
40

125
125

40
60

185
190

350
260

100
80

190
185

80

55
40
30

100
50

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

-------
3305

85
(Suspended)

(20)
(40)
(25)

260
( Suspended)

135

(20)
(40)
(75)

290

110

250

100

375

610

180

375

80

125

150

50

Cancelled
(Jul. 1996)
-------
2780

130
Cancelled
-------
525

EN 

62 

   EN 

 
 
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

99/325/EC

modified by

10.12.01

01/899/EC

22.07.97

97/471/EC

08.11.99

99/733/EC

modified by

10.12.2001

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

05.11.02

02/882/EC

130

modified by

25.11.03

03/825/EC (7)

05.11.02

02/883/EC

70

60

-------
1013

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)
May 2003 (grant)
June 2003 (loan)
Dec. 2003 (loan)
Dec.) 2003 (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)

Dec. 2002 (grant)

Fev. 2003 (loan)

Aug. 2003 (grant)
Aug. 2003 (loan)

Fev. 2003 (grant)
Dec. 2003 (grant)

35
35

15
20

15
10
10
10
15

25
15

20
10
12
10
10
10
18
8

20
15

15
15

7
13

35
225
40
45

30
10
35
30

15
10

70

35

60

40

98

35

30

20

345

105

25

-------
863

20
( Cancelled)

25

70

35

-------
150

(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
(7) Includes a loan principal amount of € 25 million and grants of € 45 million

EN 

63 

   EN 

 
 
C. New Independent States (NIS)

Armenia, Georgia and Tajikistan (8)
(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

EN 

64 

   EN 

 
 
D. Mediterranean countries

Israel   (9)
(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

6170,5

400

100

-------
687,5

5023,5

100
(Suspended)

-------
100

1147

(8)   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

(9)    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.

EN 

65 

   EN 

 
        
 
Annex 2: Balance of payments support to recipients of EU
macro-financial assistance by contributor, 1990-2003 (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

2003

419
219
200
1619
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
168
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

1128
860
268
305
196
81

17
6
28
24
4

407
307
100
145
84

61

61

EN 

66 
EN 

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

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

IFI's

IMF
World Bank

Bilaterals

EU (2)
Other bilaterals (3)
     of which

USA
Japan

Debt relief

Paris Club
London Club
Other (4)

21
11
10
79
54
25

10

69
40
29
32
19
13

5

50
37
13
51
20
13

0
8
18
5

13

EN 

27
21
6
74
6
5

1
2
63
32
29
2

67 

33
26
7
68
6
3

3
59

59

79
62
17
21
6
3

3

12

12

55
44
11
44
25
5

1
4
14

14

94
74
20
6
6

13
4
9
87
69
18

5
3

66
38
28
33
21
10

3
1
2
2

11
7
4
90
10
3

1

77
77

79
60
19
21
14
1

6
6

74
56
18
26
15

11

11

   EN 

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

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

IFI's

IMF
World Bank

Bilaterals

EU (2)
Other bilaterals (3)
     of which

USA
Japan

21
11
10
79
54
25

10

61
45
16
39
24
15

0
9

69
40
29
32
19
13

5

73
57
16
27
15
12

2
6

80
63
17
20
14
6

6

90
70
20
11
7
4

4

65
52
13
36
29
7

1
5

92
59
33
8
8

68
39
29
31
21
10

3
1

13
4
9
87
69
18

5

48
31
17
51
41
10

2

85
54
31
20
14
6

83
63
20
17
17

(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, debt rescheduling in favour of Bulgaria and fYRoM in 1997 and combined 
Paris/London Clubs relief to Serbia-Montenegro in 2003.

EN 

68 

   EN 

 
Annex 2.1.: Balance of payments support to recipients of EU 
macro-financial assistance by contributor, 2002-2003 a)
(in millions of US$ and in percent of total commitments and disbursements)

Balance of payments support 2002

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

1128
860
268

304
196
17
5
58
28
4
24

79
60
19

21
14
1
6
4
2
5
2

559
321
238

216
143

5
40
28
4
24

72
41
31

28
18

1
5
4
1
3

3

100

3

100

17
14

3

100
82

18

30

30

131
64
17
2
48

19

19

81
40
11
1
30

15

15

53
21

2
30

22

22

78
31

3
44

Total

1432

100

775

100

3

100

17

100

161

100

68

100

Bosnia and Herzegovina

Serbia and Montenegro

*As of November 2002

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
 %

mio US$

Disbursements
%

mio US$

103
40
63

28
24

4
4

79
31
48

21
18

3
3

89
26
63

4

4
4

96
28
68

4

4
4

995
820
175

142
108

10
24

24

88
72
15

12
9

1
2

2

455
295
160

142
108

10
24

24

76
49
27

24
18

2
4

4

IFI's
   IMF
   WB (policy based)

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

Total

131

100

93

100

1137

100

597

100

EN 

69 

   EN 

 
 
Balance of payments support 2003

Total

Kosovo*

FYROM

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
 %

mio US$

Disbursements
%

mio US$

Commitments
%

mio US$

Disbursements*
%

mio US$

407
307
100

84

74
56
18

15

79

100

79

100

61

11

IFI's
   IMF
   WB (policy based)

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

Total

79

100

552

74

Bosnia Herzegovina

Serbia and Montenegro

*As of November 2002

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

Total

407
307
100

145
84

74
56
18

26
15

79

100

79

100

61

11

79

100

552

100

a) Disbursements are shown under the year of corresponding commitments.
* (excl.deisgnated donorgrants for the budget)

EN 

70 

   EN 

 
 
ANNEX 3: Selected economic indicators

2000

2001

2002

2003
Programme (1) Estimates

GDP at constant prices

(Percent change)

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
Serbia and Montenegro
fYRoM
Georgia
Moldova
Romania
Tajikistan
Ukraine

Consumer price (end year)

(Percent change)

Albania
Armenia
Bosnia-Herzegovina (period average)
     Federation
     Republika Srpska
Bulgaria
Serbia and Montenegro
fYRoM
Georgia
Moldova
Romania
Tajikistan
Ukraine

Fiscal balance

(Percent of GDP)

Albania
Armenia *
Bosnia-Herzegovina (General government)
     Federation
     Republika Srpska
Bulgaria
Serbia and Montenegro
fYRoM
Georgia *
Moldova
Romania
Tajikistan
Ukraine
Current account
Albania
Armenia **
Bosnia-Herzegovina
Bulgaria
Serbia and Montenegro
fYRoM
Georgia **
Moldova
Romania
Tajikistan
Ukraine

(Percent of GDP)

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

4,2
0,4

2,0
15,0
11,4
115,0
6,1
4,6
18,5
40,7
61,0
27,0

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

-19,8
-20,9
-5,4
-3,9
-2,1
-13,7
-4,4
-3,9
-3,9
4,0

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

3,5
2,9

1,9
7,0
4,8
39,0
3,7
3,4
6,5
30,3
12,5
6,1

-8,2
-4,0

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

-3,2
-10,0
-15,5
5,0
-8,8
-6,8
-6,5
-6,5
-5,5
-7,2
3,5

4,7
12,9
5,5
4,8
4,0
0,7
5,3
7,2
5,0
9,1
4,8

1,7
2,0

-0,2
1,7
3,8
14,2
1,0
5,4
4,4
17,8
12,2
-0,6

-6,9
-2,6

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

-6,5
-6,6
-18,5
6,1
-8,8
-8,6
-6,0
-6,0
-3,4
-2,7
7,7

6,0
7,0
5,5

4,5
2,8
7,0
5,0

9,0

2,8
2,0

0,0
1,7

2,0
2,2
4,5
8,0

9,0

-5,6
-3,4

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

0,9

-6,3
-6,5
-17,5

-8,6
-6,3
-11,0
-11,0

-1,3

6,0
13,9
3,5
4,5
3,0
3,0
8,6
6,5
4,9
10,3
9,0

3,6
8,6

0,0
1,7
5,6
8,0
2,6
7,0
11,7
14,1
13,7
9,3

-6,4
-2,2

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

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

EN 

71 

   EN 

 
Official foreign exchange reserves (end year)

(Months of imports)

Albania
Armenia
Bosnia-Herzegovina
Bulgaria
Serbia and Montenegro
fYRoM
Georgia
Moldova
Romania
Tajikistan
Ukraine

On a cash basis.
Excluding official transfers.

(1) Programme targets set in IMF programmes, if any.  
*
**
*** Kosovo Conslidated Budget before grants
Sources: National authorities and IMF

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

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

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

4,4
4,3
4,7

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

1,8

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

EN 

72 

   EN