Chapter

Article IV Consultations

Author(s):
International Monetary Fund
Published Date:
January 1995
Share
  • ShareShare
Show Summary Details

Regular consultations between the Fund and member countries are mandated under Article IV of the Fund’s Articles of Agreement. Bilateral discussions with each member are usually held once a year, when a staff team visits the country, gathers economic and financial information, and discusses economic developments and policies with officials. On return to Fund headquarters, the staff team prepares a detailed report of the country’s performance and prospects. The report is discussed by the Board, which constitutes the consultation with the member. The Managing Director of the fund, in his capacity as Chairman of the Board, summarizes the views of Directors, and this assessment is then passed on to the country authorities. Table 2 lists the Article IV consultations concluded by the Fund in 1994/95.

Table 2ARTICLE IV CONSULTATIONS CONCLUDED IN FINANCIAL YEAR 1995
AlgeriaMay 27, 1994GeorgiaJuly 8, 1994OmanAug. 22, 1994
AngolaAug. 24, 1994GermanySept. 2, 1994PeruJuly 22, 1994
ArgentinaJuly 18, 1994GhanaJune 24, 1994PhilippinesJune 24, 1994
ArmeniaJuly 8, 1994GreeceJuly 18, 1994PortugalAug. 29, 1994
AustraliaFeb. 22, 1995GuineaSept. 23, 1994QatarMay 23, 1994
AzerbaijanJune 8, 1994HaitiMar. 8, 1995Russian FederationSept. 21, 1994
Bahamas, TheMay 16, 1994HondurasJan. 30, 1995San MarinoJuly 15, 1994
BahrainMay 25, 1994Hong Kong1Mar. 3, 1995Saudi ArabiaOct. 21, 1994
BangladeshFeb. 1, 1995HungaryMar. 24, 1995SeychellesNov. 7, 1994
BarbadosMar. 31, 1995IrelandJune 6, 1994Slovak RepublicJuly 22, 1994
BelarusJuly 18, 1994IsraelMay 25, 1994SloveniaAug. 1, 1994
BelgiumDec. 16, 1994ItalyMar. 17, 1995South AfricaJan. 30, 1995
BelizeJan. 18, 1995JamaicaFeb. 10, 1995SpainFeb. 15, 1995
BhutanOct. 14, 1994JapanJuly 27, 1994St. LuciaAug. 5, 1994
BoliviaDec. 19, 1994JordanMay 25, 1994St. Vincent and the GrenadinesOct. 21, 1994
BotswanaNov. 21, 1994KazakhstanNov. 30, 1994
BrazilNov. 16, 1994KoreaSept. 12, 1994SudanJan. 13, 1995
Burkina FasoOct. 17, 1994KuwaitJuly 15, 1994SurinameJan. 18, 1995
BurundiSept. 6, 1994Kyrgyz RepublicMar. 31, 1995SwazilandJuly 18, 1994
CambodiaMay 6, 1994Lao P.D.R.Jan. 25, 1995SwedenJan. 20, 1995
SwitzerlandJan. 23, 1995
CameroonNov. 23, 1994LatviaJuly 15, 1994
CanadaMay 4, 1994LebanonAug. 22, 1994SyriaMar. 13, 1995
Cape VerdeDec. 19, 1994LesothoSept. 23, 1994TajikistanSept. 14, 1994
ChadFeb. 17, 1995LibyaJuly 27, 1994TanzaniaMay 2, 1994
ChileJuly 29, 1994MalaysiaSept. 23, 1994ThailandJuly 8, 1994
TogoSept. 16, 1994
ChinaMar. 22, 1995MaldivesMay 6, 1994
ColombiaJan. 11,1995MaliOct. 17, 1994Trinidad and
ComorosNov. 23, 1994MaltaDec. 19, 1994TobagoJan. 20, 1995
CongoMay 27, 1994Marshall IslandsMay 20, 1994TunisiaJan. 20, 1995
Costa RicaDec. 2, 1994MauritaniaJan. 25, 1995TurkeyApr. 21,1995
TurkmenistanFeb. 10, 1995
CroatiaOct. 14, 1994MauritiusAug. 26, 1994UgandaApr. 21, 1995
CyprusDec. 7, 1994MicronesiaMay 20, 1994
Czech RepublicJuly 29, 1994MoldovaJune 3, 1994UkraineOct. 26, 1994
DenmarkApril 14, 1995MongoliaNov. 23, 1994United KingdomOct. 17, 1994
DjiboutiJune 15, 1994MoroccoJuly 11, 1994United StatesAug. 31, 1994
UzbekistanJan. 25, 1995
DominicaJune 15, 1994MyanmarSept. 16, 1994VanuatuFeb. 8, 1995
EcuadorMay 11, 1994NamibiaJune 8, 1994
El SalvadorOct. 14, 1994NetherlandsMay 4, 1994VenezuelaMar. 1, 1995
Equatorial GuineaMay 2, 1994NetherlandsViet NamJune 8, 1994
EritreaDec. 7, 1994Antilles2June 22, 1994Western SamoaOct. 19, 1994
ZaireJune 1, 1994
EstoniaApr. 11, 1995New ZealandJuly 25, 1994
ZambiaSept. 23, 1994
EthiopiaNov. 9, 1994NicaraguaJune 24, 1994
FijiDec. 21, 1994NigerFeb. 17, 1995ZimbabweSept. 14, 1994
FinlandAug. 26, 1994NigeriaMay 2, 1994
FranceSept. 7, 1994NorwayFeb. 8, 1995

Consultation discussions with Hong Kong are held in the context of the consultation with the United Kingdom.

Consultation discussions with the Netherland Antilles are held in the context of the consultation with the Kingdom of the Netherlands.

Consultation discussions with Hong Kong are held in the context of the consultation with the United Kingdom.

Consultation discussions with the Netherland Antilles are held in the context of the consultation with the Kingdom of the Netherlands.

This section sets out summaries of the Board discussions during Article IV consultations. All the major industrial countries are reported individually. In addition, Overviews of three groups—the smaller industrial countries, economies in transition, and developing countries—are presented, accompanied by reports of selected countries within these groups. These countries were selected because of their importance in the world or regional economy, with some smaller countries included on a rotating basis. For each country, the Annual Report includes a brief description of salient macroeconomic and structural developments in the period leading up to the consultation and a table of data available to the Board at the time of the consultation.

Industrial Countries

United States

Directors concluded the 1994 Article IV consultation with the United States in August 1994, as the U.S. economy entered an advanced stage of the expansion. The economy had grown steadily since the second quartet of 1991 (Table 3), and there seemed to be little slack remaining in U.S. labor and product markets by mid- 1994. Growth in real personal consumption expenditures, which was strong in 1992 and 1993, and again in the first quarter of 1994, slowed in the second quarter. The personal saving rate continued to decline, from over 5 percent in 1992 to less than 4 percent in the first half of 1994.

Table 3UNITED STATES: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Real final domestic demand–1.22.53.74.3
Real GDP–0.72.63.03.9
Employment–0.90.61.5
Unemployment rate2
(in percent of labor force)6.77.46.86.3
Consumer price index4.23.03.02.6
External economy3
Current account balance–0.1–1.1–1.6–2.3
Trade balance–1.3–1.6–2.1–2.5
Invisibles balance1.20.50.40.3
Financial variables
General government balance3–3.4–4.5–3.5–2.6
Federal3–3.6–4.6–3.6
Personal saving rate45.05.54.1
Gross private investment312.913.214.0
Growth rate of M252.91.91.4
Three-month treasury bill
interest rate25.43.43.04.4
Ten year government bond
interest rate27.97.05.96.9
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Yearly average.

On a national accounts basis and in percent of GDP.

As a percentage of disposable personal income.

Four-quarter change, in percent.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Yearly average.

On a national accounts basis and in percent of GDP.

As a percentage of disposable personal income.

Four-quarter change, in percent.

Employment growth accelerated from the sluggish pace set early in the expansion, rising markedly in 1993 and in the first half of 1994 despite continued shedding of jobs through corporate downsizing. Employment gains also became more widespread; early in the recovery, job creation had been concentrated in the service sector, but in the second half of 1993 increased construction activity and rising automobile demand also spurred employment in manufacturing. The unemployment rate was 6.1 percent in July 1994, within the range of estimates of the natural rate of unemployment. Strong demand and the appearance of domestic capacity constraints, together with higher oil prices in the first half of 1994, helped to halt the general decline in inflation rates that began in 1991. Consumer prices advanced by 2.6 percent in the year to June 1995, a rate of increase little changed from a year earlier.

The external current account deficit rose from 1.6 percent of GDP in 1993 to a seasonally adjusted annual rate of 1.9 percent in the first quarter of 1994. The higher deficit was largely the result of a growing imbalance on merchandise trade associated with the strong cyclical position of the United States relative to its trading partners. However, net investment income receipts also declined steadily owing to the growing net external indebtedness of the United States.

In their discussion. Directors observed with satisfaction that, since the last consultation, the U.S. economy had continued to expand at a strong pace, while the rate of inflation had remained subdued. They observed that the favorable performance of the economy had been supported by the authorities’ efforts to address the fiscal problem and the skillful management of monetary policy.

Directors generally agreed that monetary policy needed to focus on slowing demand growth to a pace consistent with sustainable non inflationary growth. Directors, therefore, welcomed the Federal Reserve’s actions to tighten monetary conditions ahead of clear-cut evidence of a rise in inflation. They stressed the need for the authorities to react quickly to any signs of emerging inflationary pressures in order to preserve and strengthen the progress that had been made toward price stability. Several Directors commented that a further increase in short-term interest rates could be justified for domestic reasons, and some considered that such action would also support the dollar.

Directors noted that the implementation of the medium-term fiscal program adopted in August 1993 would contribute significantly to fiscal adjustment in fiscal years 1994 and 1995. After fiscal year 1995, however, the deficit was expected to begin to grow again, and the federal debt-to-GDP ratio would resume its rise from already high levels. At the same time, the U.S. national saving rate would remain below historical and international norms. Against this background, there was a broad consensus among Directors that further fiscal consolidation was needed to reverse the upward trend in the debt-to-GDP ratio, restore national saving to adequate levels, and support investment.

The priority for fiscal policy. Directors believed, was to ensure that the pace of fiscal consolidation was maintained after fiscal year 1995. Therefore, they encouraged the authorities to adopt measures sufficient to achieve a further substantial reduction in the deficit, beginning in the budget for fiscal year 1996. A number of Directors observed that the goal of fiscal consolidation should include more effective control over the growth of spending on entitlement programs. Noting the constraints already placed on discretionary outlays and the difficulty of achieving reductions in mandatory spending. Directors emphasized the need to consider revenue measures, especially those that minimized adverse effects on economic efficiency and private saving.

Directors noted that, despite the recent weakness of the dollar against the yen and the deutsche mark, the effective value of the dollar was little changed from its average of the past several years. Renewed pressures on exchange markets could not be ruled out, given the large U.S. external current account deficit and the prospects that it would remain large well into the medium term. Directors welcomed the recent assurance by the Secretary of the Treasury that the dollar was not a tool of trade policy and that its weakness was a matter of concern to the U.S. Government. Several Directors emphasized that, in their view, the deterioration in the U.S. external balance on current and long-term capital accounts was at the root of the recent weakness of the dollar. Against this background. Directors stressed the importance of strengthening the fundamentals—particularly through additional fiscal adjustment, which would help to ensure that the process of correcting the external imbalance does not place an excessive burden on domestic investment.

Directors welcomed the authorities’ commitment to achieve a timely ratification of the Uruguay Round agreement. They encouraged the authorities to continue to support the free trade system and refrain from restrictive trade practices. Directors noted the important role played by the United States in assisting developing countries, but they expressed concern about the decline in the share of GDP devoted to official development assistance.

Japan

Directors met at the end of July 1994 to discuss the fund’s Article IV consultation with Japan amid signs of a mild recovery from three years of economic downturn (Table 4).

Table 4JAPAN: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993Proj.

1994
Domestic economy
Domestic demand2.90.40.31.7
Real GDP4.31.10.10.9
Unemployment rate (level, in percent)2.12.22.53.0
Consumer price index3.31.71.30.7
External economy
Exports, f.o.b. (in billions of U.S. dollars)306.6330.9351.3372.8
Imports, c.i.f. (in billions of U.S. dollars)203.5198.5209.9230.5
Current account balance (in billions of U.S. dollars)172.9117.6131.434.92
Current account balance (in percent of GDP)2.23.23.12.9
Overall balance (in billions of U.S. dollars)–17.1–1.423.56.12
Real effective exchange rate (relative normalized unit labor cost; 1990=100)107.5111.8135.8149.03
Financial variables
General government balance (in percent of GDP)3.01.8–0.6–2.7
Gross national saving (in percent of GDP)34.634.433.432.2
Gross domestic investment (in percent of GDP)32.531.230.329.3
Broad money (M2 plus CDs, period average)3.60.61.11.7
Interest rates
Three-month CD rate (average)7.24.32.8
Official discount rate (end of period)4.53.31.8
Note: Data in the table reflect information available at the time of the Board discussion.

Sum of the seasonally adjusted trade balance and the seasonally unadjusted invisibles balance.

Actual, first quarter of 1994.

As of June 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Sum of the seasonally adjusted trade balance and the seasonally unadjusted invisibles balance.

Actual, first quarter of 1994.

As of June 1994.

Following a “bubble” period of rapid output growth in the Japanese economy during 1987–90, the economy entered a period of stagnant activity in late 1991. Output rose briefly in early 1993 but then faltered again, mainly owing to the appreciation of the yen that began in mid-1992 and to continued adjustments to excess capital stock accumulated during the bubble period. A further yen appreciation between mid-June and mid-July 1994 raised concerns that the recover) could be derailed. The rise was small, how ever: only 3 percent in nominal effective terms, compared with a 25 percent nominal effective appreciation from mid-1992 to mid-1993. The other chief factor prolonging the recession—depressed investment activity—showed only mixed signs of improvement by mid-1994, with full adjustment expected to take a number of years.

Flagging domestic demand had led the Government to provide compensatory, countercyclical support through four major fiscal packages between August 1992 and February 1994. The February plan cut taxes in fiscal year 1994 in anticipation of an envisaged permanent income tax cut combined with a lagged increase in consumption taxes. On the monetary side, the weakening in aggregate demand had been cushioned from mid-1991 by declines in nominal interest rates. In real terms, however, these effects were partially offset by declining inflation.

Japan’s current account surplus, having risen sharply in 1991–92, widened moderately to a high of $131 billion in 1993, although as a proportion of GDP it remained stable at 3 percent—well below the peak of 4.2 percent in 1986. The increase in dollar terms mainly reflected cyclical factors and the terms of trade improvement arising from exchange rate appreciation. As regards import penetration, despite a rapid rise in the volume of manufactured imports from the mid-1980s on, Japan’s ratio of manufactured imports to GDP remained the lowest among industrial countries.

In June 1994, the Government announced a five-year deregulation plan and a package of deregulation measures in four areas: housing and land use; information and communications; import promotion, market access, and distribution; and the financial sector. Many specifics of the initiatives, however, remained to be determined.

In their discussion. Directors noted the indications that the recession in Japan had bottomed out and that a recovery, although moderate and gradual, appeared to be under way. Directors also pointed out, however, that there were downside risks and that the recovery was fragile, owing in particular to the yen’s further appreciation, continued weakness in business investment, and remaining problems in the banking sector.

Directors welcomed the fiscal and monetary measures introduced during the cyclical downswing, including the most recent packages, as providing much-needed support to economic activity, although some considered that earlier and more forceful action would have been warranted. On macroeconomic policy, many Directors considered that a further reduction in interest rates would not be effective, although others felt that a further cut in the official discount rate would be desirable. On the fiscal side. Directors observed that, owing to earlier fiscal packages, substantial stimulus was in place for 1994. In this context. Directors welcomed the 1994 income tax cut and supported the tax reform currently under consideration.

Most Directors believed that the large increase in the budget deficit in the past few years, including its structural component, imposed a constraint on further measures, and that fiscal consolidation should be resumed once the recovery was under way, particularly in view of such long-term considerations as the rapid aging of the population. Directors agreed that a renewed consolidation effort, including an increase in the consumption tax and a reform of the pension system, would be required in the period ahead to avoid rapid growth of the public debt in the long run.

As regards structural measures, all Directors urged the authorities to strengthen their efforts to remove structural rigidities, promote deregulation, and open up markets. Directors stressed the need for the recently launched broad initiatives to be quickly translated into concrete measures, especially in the areas of distribution, transportation, telecommunications, construction, and land use. Many Directors emphasized that broadly based market opening would raise consumer welfare and standards of living both in Japan and abroad, and that this would be the best antidote to protectionist pressures.

Several Directors observed that the banking system remained burdened by a large amount of turn-performing and restructured loans. They welcomed the recent initiatives to strengthen rehabilitation, but a number of Directors suggested the need to supplement those initiatives with improved disclosure requirements and the expeditious development of a secondary market for nonperforming loans. Directors also welcomed the continuation of financial sector reform and the completion of interest rate liberalization.

Directors noted that the current account surplus had widened markedly since 1990, owing in part to cyclical developments. They felt that the surplus would decline somewhat in the medium term, since a sustained recovery of domestic demand would eliminate the cyclical component. Never the less, the surplus, given its important structural component, was likely to remain significant in the medium term. Most Directors did not see this as a problem in itself, since the surplus would make a much-needed contribution to the pool of global saving, as long as it was not the result of structural rigidities in the economy. Some Directors felt that a further reduction in Japan’s surplus over the medium term would be desirable, in light of what they viewed as the country’s excess saving engendered in part by structural rigidities and distortions. A view was expressed that the low level of import penetration in Japan might be contributing to distortions in the saving-investment balance, which, in turn, hindered long-term growth prospects. Most Directors, while noting that Structural rigidities and distortions should be eliminated on their own right, felt that the impact of structural reforms on the current account balance remained uncertain.

Many Directors encouraged the authorities to address trade issues within a multilateral framework, and some expressed concern that the focus on bilateral discussions of sectoral and trade issues threatened to lead to market sharing and managed trade arrangements.

Directors welcomed Japan’s leading position as a provider of foreign assistance, including its important contribution to the enlarged and enhanced ESAF and to the Fund’s technical assistance. They expressed the hope that the recent decline in disbursements of official development assistance relative to GDP would be reversed, with a view to achieving the United Nations target at an early date.

Germany

The 1994 Article IV consultation with Germany was considered by Directors in September 1994, as the German economy continued to emerge from the severe recession that began in 1992. The downturn bottomed out in the course of 1993 (Table 5), and the economy then moved into an export-led recovery phase in which output fluctuated about an apparent gentle uptrend. Weak domestic demand persisted in west Germany as consumption remained flat in the first quarter of 1994 after stagnating in 1993. Disposable incomes were under pressure from tax increases, pay restraint, and a sharp decline in employment. But by early 1994 a modest recovery was taking shape in west Germany, while preliminary estimates indicated that strong growth in east Germany was continuing.

Table 5GERMANY: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy (west Germany)
Total domestic demand (percent change at 1991 prices)3.61.5–2.60.1
GDP (percent change at 1991 prices)4.51.6–1.91.2
Unemployment (in percent of labor force)5.55.87.38.4
Average hourly earnings in industry7.37.06.03.5
Unit labor costs in total economy4.14.83.5
Consumer price index3.54.04.13.0
Domestic economy (east Germany)
Real GDP–28.69.77.18.0
Real investment33.424.015.613.6
Unemployment (in percent of labor force)10.814.815.115.7
Consumer price index11.18.93.5
External economy
Current account balance (in billions of deutsche mark)–32.2–34.4–35.2–19.3
Nominal effective exchange rate (1990 = 100)98.9101.7104.6104.43
Financial variables
General government balance (in percent of GNP)–3.2–2.6–3.3–2.8
Money and quasi-money (M3; percent change in annual average)10.78.58.2
Three-month money market rate (period average, in percent)9.29.57.25.54
Yield on government bonds (period average, in percent)8.68.06.36.24
Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Projected.

June 1994.

Average January-June.

Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Projected.

June 1994.

Average January-June.

Despite the stabilization of output in west Germany and recovery in east Germany, total employment continued to fall in 1993 and early 1994. In west Germany, restructuring in the manufacturing sector aggravated labor shedding, and employment continued to decline through May 1994 despite the nascent recovery. Unemployment in west Germany rose from a low point of 5½ percent of the labor force in early 1992 to stand at 8¼ percent in June 1994. In east Germany, meanwhile, growth appeared to create little or no employment, and the jobless rate continued to rise in the early months of 1994.

The widening gaps in output and labor markets helped to make inflationary pressures recede. After running, at around 4 percent in 1992 and much of 1993, despite stable producer prices and declining import prices, west German consumer price inflation began to decline in 1994 in the face of weak demand and sluggish labor cost growth. At the same time, there was a marked fall in consumer price inflation in east Germany, which for several years had been well above the west German rate.

Fiscal policy in 1993 and 1994 continued to emphasize measures to reduce the deficits incurred to meet the cost of German unification. The 1994 budget plans of the territorial authorities implied a lowering of the general government deficit to 2¾ percent of GDP, despite the weakness of the economic recovery. After a pause around the turn of 1993–94 as money growth accelerated, the easing in monetary conditions resumed in April 1994. At around 5 percent at the end of June 1994, three-month money market rates were approximately half their peak levels in August 1992.

In their review of the German economy, Directors observed that, even with a recovery in economic activity, unemployment would remain among the most serious problems facing policymakers. This underscored the need for continued reform to increase the flexibility of the labor market, including the need to increase the flexibility of the collective wage-bargaining system itself. Although overall wage increases had moderated noticeably in recent months, high unemployment among less-skilled workers would persist unless steps were taken to increase wage differentiation, especially at the lower end of the scale.

Directors welcomed progress made in reducing the structural deficit of the general government. They strongly supported the intention of the authorities to reduce the deficit of the general government further, as well as the objective of rolling back the high burden of taxes and social security contributions. The emphasis placed by the authorities on curbing the growth in public spending was strongly supported by Directors. However, Directors emphasized that a further round of selective, well-targeted expenditure cuts would be required to create scope for a substantial decline in the revenue burden. They affirmed that wage restraint in the public sector, while helpful, was unlikely to be sufficient.

As Directors had mentioned previously, further steps to scale back subsidies to agriculture, coal mining, and the old industrial core in eastern Germany would need to be key elements in any fiscal retrenchment program. Measures would also be required to reduce over-staffing in the public sector, improve the targeting of social welfare benefits, and adapt arrangements for pensions and health care.

Directors generally agreed that, in light of the uncertainties about the medium-term inflation outlook generated by the continued substantial overshooting of the target path for broad money, the pause in official interest rate reductions since May 1994 was understandable, and it was generally agreed that the level of short-term interest rates was broadly appropriate. In that connection, a number of Directors observed that over the medium term, monetary targeting had contributed to keeping inflation in check in Germany and should be maintained as a framework for policy. However, it was felt that the forces at the root of the current overshooting should be carefully re-examined, and that more reflection was needed on the best instruments to guide monetary policy. Nevertheless, most Directors expected the rate of inflation—and money growth—to decelerate in the months ahead, thus allowing for a further decline in short-term interest rates, which in turn would support a more robust and broadly based upturn of domestic demand in Germany.

France

When the Board considered the 1994 Article IV consultation with France in September 1994, French economic growth had resumed (Table 6) after the sharpest recession since the Second World War. During the downturn, consumption was particularly sluggish, with its rate of growth falling for four successive years. Consumer confidence in 1993 declined to its lowest ebb since household surveys began, and the fall in investment was similar to those that occurred after the oil shocks of the mid-1970s and early 1980s. Although output growth turned positive in the second quarter of 1993, real GDP contracted by 1.5 percent in 1993, and the recovery gathered pace only in early 1994.

Table 6FRANCE: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Total domestic demand0.60.2–1.91.8
Real GDP0.81.2–1.01.7
Employment0.1–0.5–1.6–0.4
Unemployment (in percent of total labor force)9.410.111.712.4
Unit labor costs in manufacturing3.90.23.20.8
Consumer price index3.22.42.11.8
External economy
Export volume24.25.1–2.5
Import volume23.11.2–5.9
Trade balance (in billions of francs)–56.49.440.039.2
Effective exchange rate (MERM)3–2.63.70.5–0.44
Financial variables
General government balance (in percent of GDP)–2.2–3.9–5.8–5.6
Broad money (M3)2.55.2–1.5–4.35
Three-month interbank money rate9.710.48.46.04
Government bond yield9.08.66.86.64
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

National accounts basis.

Based on the Fund’s multilateral exchange rate model; a positive figure indicates an appreciation.

Average to July 29, 1994.

First quarter of 1994 over the first quarter of 1993.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

National accounts basis.

Based on the Fund’s multilateral exchange rate model; a positive figure indicates an appreciation.

Average to July 29, 1994.

First quarter of 1994 over the first quarter of 1993.

Unemployment increased continuously from 1990 until mid-1994, when it reached 12.5 percent, a postwar record, before beginning to fall later in the year. A sharp drop in employment in 1993 was concentrated in the private nonagricultural sector, and especially in manufacturing. A notable feature of the labor market in 1993 was the rise in part-time unemployment through a program of temporary layoffs, encouraged by an increase in the government subsidy to those temporarily laid off. The public (nonmarket) sector was the only area in which additional jobs were created in 1993, partly through the increase in employment programs.

Inflation remained low during 1993, with a small rise in the GDP deflator relative to 1992 (2.5 percent) and a continuing reduction in the rate of increase of consumer prices. Wholesale price increases were moderate as a result of the recession, and to some degree because of lower prices for intermediate imported inputs. In January 1994 the Bank of France became independent in the conduct and formulation of monetary policy, with a mission to pursue price stability “within the general framework of the government’s economic policy.” The Bank of France stated in its 1993 annual report that it planned to pursue price stability through maintaining the stability of the French franc within the exchange rate mechanism (ERM) of the European Monetary System (EMS) and through keeping the money supply within a range compatible with noninflationary economic growth.

The recession had an adverse impact on public finances, lifting the general government deficit, which was among the lowest of the industrial countries in the early 1990s, to levels well above the average. The economic downturn led to a decrease in tax revenues, an increase in social security payments, and a widening of the general government deficit from 1.6 percent of GDP in 1990 to 6.1 percent of GDP in 1993.

In their discussion. Directors acknowledged that France’s relatively high general government deficit was, to some extent, the result of the unfavorable cyclical position. They accepted that the economic recovery should in time reduce the actual deficit to its structural level of about 4 percent of GDP, but they observed that this was still too high. Directors commended the authorities for their Convergence Plan, which formulated a medium-term objective for the general government deficit of 2 percent of GDP. They expressed concern, however, over whether these targets would be met. One danger was the risk that high real long-term interest rates would depress output and add to debt-servicing costs. More fundamentally. Directors questioned whether the reforms of social security would be far-reaching enough to contain expenditure to planned levels.

In considering the causes of the high rate of unemployment in France, Directors pointed to the unfavorable effects of high social charges and the level of the minimum wage, both of which affected low-skilled workers most. Directors endorsed the authorities’ objective of substituting a more broadly based tax for social charges on labor income, but noted that employers’ contributions would still remain above those in most industrial countries. They urged the authorities to find a way to lower labor costs for low-skilled workers, to make training programs more efficient and transparent, and to explore channeling a portion of unemployment benefits to employers in the form of employment subsidies.

Several Directors believed that monetary policy could be more responsive to domestic indicators, but most other Directors supported the authorities’ cautious approach to monetary easing and their conviction that exchange rate stability was essential in maintaining the credibililty of monetary policy. In the discussion, the argument was also advanced that achieving the long-term objective of monetary union required exchange rate stability.

United Kingdom

Directors met in October 1994 to discuss the staff report for the Article IV consultation with the United Kingdom. Because no consultation had been held in the previous year (owing to a change in the country’s budget cycle that affected the timing of the discussion), Directors took up economic developments in the United Kingdom over the past two years. It is expected that the next Article IV consultation will be held on the standard 12-month cycle.

At the time of the discussion, the economic performance of the United Kingdom had improved steadily since the lowpoint of the recession in mid-1992. Annual growth of real GDP, which reached 2 percent in 1993, accelerated to near 4 percent in the second quarter of 1994, and unemployment had declined significantly (Table 7). The September 1992 departure from the ERM was credited with bolstering the recovery by allowing for an easing of overall monetary conditions. The resulting increase in private consumption fueled growth throughout 1993, while a pickup in exports was an important contributor to growth in the first half of 1994. Investment began its recovery later in 1993, however, and had not yet reached its pre-recession levels.

Table 7UNITED KINGDOM: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Real domestic demand–3.10.32.12.8
Real GDP–2.0–0.52.03.3
Employment–3.1–2.5–1.00.2
Average unemployment rate (in percent of labor force)8.19.810.39.4
Retail price inflation6.84.73.02.5
External economy (in billions of pounds)
Exports103.4107.3121.4131.0
Imports113.7120.4134.6141.5
Current account balance–8.2–9.8–10.3–3.7
Invisibles balance2.13.32.96.8
Nominal effective exchange rate (period average, 1990 = 100)100.7996.8988.8089.222
Financial variables
General government receipts3 (in billions of pounds)221.2219.6228.0249.8
General government expenditure3 (in billions of pounds)244.2268.4283.4295.2
M02.42.44.96.12
M45.63.15.15.52
Three-month interbank interest rate11.59.65.95.24
Ten-year government bond yield10.19.17.58.34
Note: Data in the table reflect information available at the time of the Board discussion.

Fund staff projections unless otherwise indicated.

Preliminary 1994 average based on available data.

Excluding privatization proceeds. Outturn figures from Central Statistical Office for fiscal years 1991/92, 1992/93, and 1993/94, and from proposed budget in Financial Statement and Budget Report for fiscal year 1994/95.

Second quarter of 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Fund staff projections unless otherwise indicated.

Preliminary 1994 average based on available data.

Excluding privatization proceeds. Outturn figures from Central Statistical Office for fiscal years 1991/92, 1992/93, and 1993/94, and from proposed budget in Financial Statement and Budget Report for fiscal year 1994/95.

Second quarter of 1994.

Despite rising demand during the period, inflation in the United Kingdom remained exceptionally low, largely because the 1990–92 recession left considerable room for noninflationary growth. Underlying inflation fell to 2.2 percent in July 1994, its lowest rate in decades. The improvement in the labor market was also favorable—unemployment fell from its high of 10.6 percent in December 1992 to 9.2 percent in August 1994. The growth of average earnings had stabilized at 3.8 percent.

Since leaving the ERM, the United Kingdom’s external cost competitiveness had increased by 10 percent, with non-oil exports rising by over 9 percent in the year up through the second quarter of 1994. Over the same period, import growth was a moderate 5 percent. Reflecting these movements, the current account deficit narrowed to 0.7 percent of GDP in the second quarter of 1994. In addition, positive financial market sentiment benefited sterling during 1993, helping it to recover about a third of its post-ERM depreciation. Sterling remained stable in 1994, but the gilt market weakened when world markets stumbled, and long-term sterling interest rates rose to about 9 percent.

In 1993, the U.K. authorities took steps to tackle the country’s large fiscal imbalance by proposing a plan for medium-term fiscal consolidation. Revenue measures included several significant tax increases, the implementation of which was phased through April 1995 in order to protect the recovery. Expenditures were to be restrained, including a freeze on running costs. The plan aimed to eliminate public sector borrowing by the end of the decade.

In their review, Directors commended the U.K. authorities on the economy’s impressive performance since the February 1993 consultation. They noted that during 1994 the recovery gained strength and became better balanced, while inflation fell to a very low level. Directors observed that policies had been implemented in a well-judged manner and particularly welcomed the medium-term fiscal consolidation and supporting monetary policies. They noted, however, the declining trend in private saving and the limited recovery in investment.

Directors considered that the authorities were likely to face greater challenges in the future as the recovery became more mature and slack was absorbed. Moreover, Directors commented that the authorities’ policy credibility, while strengthening, was still not robust—as reflected in the rise in long-term interest rates. In this regard, it was important that the authorities met their announced policy intentions. They emphasized that redressing the budgetary imbalance would be essential to sustain the recovery. Although encouraged by the fact that public borrowing had been below its targeted path. Directors advised the authorities to continue to use unanticipated favorable developments to reduce the deficit faster.

Successful fiscal consolidation. Directors commented, would depend on holding down government expenditures. They emphasized firm adherence to the freeze on running costs and continued progress on fundamental expenditure reviews. Directors agreed that the recent tax measures were broadly appropriate and strongly advised against tax cuts until public borrowing was firmly under control.

Directors welcomed the firm commitment to low-inflation embodied in the monetary policy framework adopted after departure from the ERM. They expressed satisfaction with the performance of underlying inflation, which had already moved into the lower half of the 1–4 percent target range. In this regard. Directors endorsed the recent increase in interest rates as a prudent way of heading off inflation and building credibility.

Directors also commended recent steps to enhance transparency and accountability in monetary policy, which are particularly important given that the authorities’ conduct of monetary policy involves considerable judgment. Those steps should help to ensure that decisions are guided solely by considerations of monetary and financial stability. In addition. Directors recommended that the authorities solidify their commitment to a low and stable inflation rate and keep well within European Union convergence objectives.

In the area of structural policies, Directors wel comed the progress in privatizing public enterprises, further, although structural unemployment remained high, they recognized the United Kingdom’s leadership in improving labor utilization, increasing industrial productivity, and gearing policy toward improving the process of wage determination. Directors suggested that further measures, including training programs, may be needed to alleviate the remaining unemployment.

Finally, Directors encouraged the authorities in their commitment to liberal trade policies and commended them for their official development assistance. They urged that such assistance be increased toward the United Nations target of 0.7 percent of GDP.

Italy

Directors considered the 1994 Article IV consultation with Italy in March 1995, against a background of an economic recovery that had accelerated while financial market pressures on the lira and interest rate differentials persisted. In the first three quarters of 1994, GDP grew by 2.2 percent over the same period a year earlier. Exports continued to grow at strong rates, given the considerable competitiveness gains and the expansion of demand in partner countries, but imports also picked up as domestic demand revived (Table 8).

Table 8ITALY: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Total domestic demand1.90.8–5.02.3
Real GDP1.20.7–0.72.5
Employment20.8–0.9–2.9–2.7
Unemployment (in percent of total labor force)2,38.810.710.411.5
Unit labor costs in manufacturing7.53.11.4–1.6
Consumer price index6.35.34.43.9
External economy4
Export volume0.13.88.510.4
Import volume4.53.4–10.410.1
Trade balance (in percent of GDP)0.33.33.4
Effective exchange rate–2.4–2.4–18.7–4.7
Financial variables
General government balance (in percent of GDP)–10.2–9.5–9.5–9.2
Broad money (M2)58.36.07.92.8
Six-month treasury bill rate612.514.410.59.1
Ten-year treasury bonds (gross)613.313.311.210.6
Note: Data in the table reflect information available at the time of the Board discussion.

Estimates.

Series broken in 1992 by methodological survey revision; pre-1992 series reconstructed by Bank of Italy.

Excluding workers in Wage Supplementation Fund.

Volumes are customs basis; trade balance is balance of payments basis.

Growth rate used for target monitoring, that is, moving average of last three months.

Period average.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimates.

Series broken in 1992 by methodological survey revision; pre-1992 series reconstructed by Bank of Italy.

Excluding workers in Wage Supplementation Fund.

Volumes are customs basis; trade balance is balance of payments basis.

Growth rate used for target monitoring, that is, moving average of last three months.

Period average.

The economic upswing was still in its early stages at the time of the Executive Board discussion, and, as in past recoveries, its effects had yet to be reflected in general labor market conditions. Despite a continued fall in participation rates, unemployment rose further in 1994 to a year average of 11.5 percent. Employment continued to decline, with particularly intense labor shedding in the services sector, bringing the cumulative loss of jobs from the previous peak at the end of 1991 to 1.4 million, a much larger fall than in previous recessions.

The wage restraint stemming from slack labor market conditions and adherence to the guidelines of the new collective bargaining system served to moderate inflation. The 12-month increase in consumer prices reached a low of 3.6 percent in mid-1994 but edged up again to average 3.9 percent during the year. Although above the official target of 3.5 percent, this outcome was nonetheless the lowest annual rate recorded in 25 years.

Private saving is estimated to have recovered in 1994 from the historical low level reached in 1993, while the gap between public saving and investment is estimated to have improved marginally following the contraction in public works. The external current account surplus is estimated to have increased slightly, to about 1.5 percent of GDP, while official foreign reserves remained broadly stable as the current account surplus was offset by capital outflows.

In contrast to the generally positive developments in the real economy, the fiscal situation remained critical. In 1994, the planned “pause” in the process of fiscal adjustment resulted instead in a backtracking, with the primary surplus tailing to 1.1 percent of GDP (from 1.8 percent of GDP in 1993). In addition, overoptimistic interest rate assumptions underlying the 1995 budget required further corrective measures in March 1995. These measures, and stronger-than-expected growth in 1995, were viewed—at the interest rates prevailing at the time of the Board meeting—as sufficient to achieve the 1995 target for the overall balance (a deficit of some 8 percent of GDP) and to stabilize the debt-to-GDP ratio in 1995, a year earlier than envisaged in the Government’s three-year plan.

In their review. Directors noted that, over the past year, positive macroeconomic developments had been overshadowed by the looming threat of a confidence crisis, evidenced by financial market anxieties. They stressed that the economic recovery presented the opportunity to restore confidence by making rapid and durable progress in fiscal consolidation. Several Directors emphasized that Italy needed a binding and ambitious medium-term fiscal strategy. Otherwise, persistent market tensions threatened a vicious circle in which inflationary pressures would increase and the recovery could be smothered.

Directors welcomed the important step that had been taken toward fiscal consolidation with the Government’s corrective budget package. They noted that the package was aimed not only at safeguarding the 1995 fiscal targets, which were judged to be an indispensable minimum, but also at going further, making it possible to stabilize the public debt as a share of GDP beginning in 1995, as the Board had recommended at the time of the 1994 discussion. Directors welcomed the inclusion in the package of permanent measures aimed at reducing the debt-to-GDP ratio. This was a welcome shift from the heavy reliance in the 1995 budget on one-off measures of uncertain yield.

Directors stressed the need to avoid slippages from the current targets and to take further action to tackle long-standing expenditure rigidities. They strongly supported the Government’s priority to implement a major structural reform of Italy’s public pension system. This reform was needed to ensure the system’s solvency and to relieve a growing burden on the public finances. They also welcomed the Government’s intention to advance the timetable for the preparation of the 1996 budget, along with that of the new three-year plan. Directors believed that the current medium-term fiscal plan was not ambitious enough. They advocated the acceleration of fiscal consolidation, with targets consistent with those required for participation in European integration.

Directors considered that the 1995 inflation target was beyond reach and expressed concern about the risk of a resurgence in inflation arising mainly from the persistent weakness of the lira. This, in turn, reflected the market’s lingering skepticism about the prospects for sustained fiscal adjustment, and Directors thus viewed rapid and visible progress on the fiscal front as essential to forestall an upsurge of inflation. Directors stressed the critical role monetary policy needed to play in achieving and preserving price stability. There was general agreement in the Board that, with the lira outside the ERM, the monetary authorities needed to help anchor expectations by building credibility for their commitment to price stability. Directors noted that a strengthening of the lira would support disinflation without placing undue pressure on the external accounts. They viewed the depreciated level of the lira as related mainly to fiscal and political concerns and agreed that the authorities should not try to engineer an appreciation through monetary policy. In such circumstances, ERM re-entry was not seen to be a viable option.

Directors pointed out the importance of key structural reforms that would enhance the flexibility and efficiency of the economy and increase the employment content of growth. They noted that unemployment had remained high even as the economy was recovering, with the situation in the south being of particular concern. Directors welcomed steps already taken to improve labor market flexibility, but they called for a bolder and more comprehensive approach to reducing the costs of hiring and firing, reforming the unemployment benefits system further, and promoting greater mobility and wage differentiation in the public sector. Directors also welcomed the acceleration of plans for privatization, but they cautioned that this schedule needed to be consistent with the program’s long-term efficiency goals.

Canada

Directors met in May 1995 to discuss the staff report for the 1995 Article IV consultation with Canada. The discussion took place against a background of stronger and more broadly based Canadian economic growth during 1994. Surging exports outpaced imports (Table 9), and strong growth in profits fueled growth in nonresidential fixed investment. Also, a pickup in employment growth and an associated rise in consumer confidence led to a strengthening of private consumption, despite a run-up in interest rates and sluggish growth in personal income. Rising interest rates dampened growth in residential investment, and fiscal restraint at all levels of government acted as a brake on demand.

Table 9CANADA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19921993199419951
Domestic economy
Total domestic demand0.31.82.93.0
Real GDP0.62.24.54.3
Unemployment (in percent of labor force)11.311.210.49.2
Real fixed investment (private)–3.2–0.96.36.4
Unit labor costs in manufacturing–0.3–1.2–1.2–1.0
Consumer price index (annual average)1.51.80.22.0
External economy
Merchandise exports (f.o.b.)11.116.421.021.8
Merchandise imports (f.o.b.)9.115.217.719.4
Current account balance (in billions of Canadian dollars)–26.5–30.7–24.8–15.7
Nominal effective exchange rate–5.8–5.7–6.2
Financial variables
General government balance (in percent of GDP)–7.1–7.1–5.3–4.4
Three-month treasury bill rate (in percent)6.54.95.4
Ten-year government bond rate (in percent)8.17.28.4
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

The unemployment rate fell from 11.2 percent at the end of 1993 to 9.7 percent in March 1995 as employment growth accelerated sharply. Notably, the increase in employment in 1994 was largely among full-time workers, whereas in the previous two years part-time workers accounted for virtually the whole increase. Inflation remained low in 1994, despite the large depreciation of the Canadian dollar and the rise in industrial product prices, mainly because of the slack that still remained in the economy.

The external current account deficit fell sharply in the second half of 1994 to 2.7 percent of GDP, from 3.9 percent of GDP in the first half of 1994 and 4.3 percent of GDP in 1993. The large depreciation of the Canadian dollar since 1991, the decline in unit labor costs, and the cyclical recovery in the United States contributed to strong growth in export volume during 1993 and 1994. Import volume growth also accelerated, owing to the large import content of exports (especially automobiles) and investment goods.

The 1995/96 budget presented to parliament in February 1995 introduced measures to achieve the interim deficit target for 1996/97 that was announced in the previous year’s budget. In particular, the measures were expected to achieve a reduction in the deficit to Can $32.7 billion (4.2 percent of GDP) in 1995/96, and to Can$24.3 billion (3 percent of GDP) in 1996/97. the budget initiatives were concentrated in the area of spending cuts, focusing largely on business and agricultural subsidies.

In their review. Directors observed that, since the last Article IV consultation, Canada’s economic performance had been favorable in many areas: economic growth was robust, the unemployment rate had dropped markedly, inflation continued to be low, and there had been a significant improvement in the external current account. However, they emphasized that the fiscal situation continued to be difficult despite the authorities’ efforts. They also considered that over the period ahead it would be important to ensure that aggregate demand was kept within the limits of potential output, so that inflation remained subdued.

Directors noted that the measures announced in the February 1995 budget showed the authorities commitment to the goal of fiscal consolidation. However, they stressed the need for a faster and more front-loaded fiscal consolidation effort during the current cyclical upturn. In particular. Directors observed that the 1995 budget measures would still leave federal debt and interest payments at high levels, exposing the fiscal position either to adverse interest rate shocks or to an economic downturn. Moreover, there was the risk that the persistence of an appreciable fiscal imbalance could erode confidence in the Government’s economic policies and lead to sharp increases in interest rates and renewed downward pressure on the Canadian dollar. Directors advocated the implementation of additional adjustment measures that would set the debt-to-GDP ratio on a clear downward path and lead more rapidly to the authorities’ ultimate goal of budget balance. Such action would strengthen market confidence, raise the credibility of the authorities’ commitment to price stability, and strengthen national saving.

Directors commended the authorities for their determined and effective efforts to reduce inflation to Very low levels. They noted, however, that economic slack was being absorbed quickly, while the depreciation of the Canadian dollar and higher commodity prices could put upward pressure on domestic prices. Consequently, they believed that the authorities’ credibility and conviction to maintain price stability would be tested in the period ahead. Directors thought that the authorities would need to be on their guard to prevent a re-emergence of inflationary pressures. Directors observed that the substantial depreciation of the Canadian dollar over the past few years, along with the benefits of structural reform and low inflation, had enhanced competitiveness and thus contributed to the improvement in the external current account. Some Directors, noting the possible emergence of price pressures as a result of the lower exchange rate, also recommended that the authorities consider a propitious tightening of monetary policy to avert further depreciation, particularly if further fiscal consolidation efforts were not made.

Directors complimented the authorities on their ratification of the Uruguay Round agreement and noted that its implementation offered the opportunity to phase out long-standing distortions in trade and agriculture. However, Directors were concerned that import quotas on agricultural commodities were being replaced by prohibitively high tariffs. Directors commended Canada’s record on development assistance, but they expressed concern about the planned reductions that were announced in the 1995/96 budget.

Smaller Industrial Countries

During the financial year, the fund concluded Article IV consultations with 13 of the 16 smaller industrial countries. In all except Greece, which was still experiencing stagflation at the time of the Board discussion, fairly robust recoveries were finally under way. Among the countries enjoying strong growth, New Zealand stood out as exemplifying the benefits that could be reaped through a fundamental reorientation of macroeconomic policies and restructuring.

In their consultations, Directors commended many countries for making considerable progress toward price stability under generally successful monetary policies. For the two countries that were well into their expansions, Australia and New Zealand, Directors welcomed tighter monetary conditions. For most of Europe, Directors noted that, with the strengthening of economic activity, monetary policy was entering a more difficult phase in which tightening of the monetary stance might be warranted to keep inflation low or on a downward path. Directors advised the Swedish authorities that their hard-won gains in reducing inflation should be safeguarded. This was a prerequisite for interest rates to fall from their high levels and thus to contribute to durable growth. Directors supported the Greek authorities’ focus on reducing inflation but warned that monetary policy alone, in the absence of credible fiscal actions, could not secure their inflation objectives for long without significant costs to the economy.

Although the fiscal situation and outlook were of particular concern in Greece and Sweden, Directors urged most other countries also to take advantage of their expansions to strengthen fiscal consolidation. Sharply higher debt-to-GDP ratios were frequently cited as adversely affecting interest rates and impeding investment and growth. While welcoming the authorities’ announcements of fiscal tightening, in most cases Directors recommended that greater efforts be undertaken to scale back public sector wage bills, income transfers, and subsidies to agriculture and industry.

Several other structural reforms were seen as key to underpinning growth prospects. Widespread and persistent unemployment problems, which for the first time in decades had emerged, even in Switzerland, led Directors to stress the need for labor market reforms in all consultations except those for New Zealand, where reforms had already been implemented, and Portugal, where labor market flexibility had resulted in much lower unemployment rates than elsewhere in Europe. Far-reaching social security system reforms were recommended for the Netherlands and Sweden, and privatization was encouraged in Australia, Greece, and Portugal.

On the external front, few common themes emerged, beyond encouragement for faster trade policy liberalization in areas where effective protection remained high.

As regards exchange rate policy, Directors’ advice for the most part was tailored to the circumstances of individual countries, although the link with strong fiscal policy was stressed in several discussions. For example, Directors advocated the urgent adoption of fundamental fiscal measures in Spain to alleviate exchange market tensions and sharp increases in long-term interest rates. Similarly, the weakness of the krona and high domestic interest rates were traced to Sweden’s large budget deficit, an explosive increase in the public debt, and the resulting high debt-to-GDP ratio, requiring a forceful, convincing, and sustained policy to achieve fiscal consolidation as early as possible. In the case of Belgium, Directors noted that reducing the high public debt level would make the economy less vulnerable to adverse shocks and enhance the credibility of the exchange rate link with the deutsche mark. For Finland, in particular, there was considerable discussion of the right exchange rate posture, given the unevenness of Finland’s recent recovery. Pressure on the drachma was seen as a warning signal that Greece’s fiscal and monetary policies were unsustainable.

Directors welcomed steps to enhance the independence of the central banks in Greece and Spain.

Netherlands

Early in May 1995 Directors reviewed the Dutch economy. Following a mild recession in 1993, the onset of recovery in continental Europe had led to a sharp increase in Dutch exports followed by a broadly based strengthening of economic activity in 1994 (Table 10). Inflation remained low. Wage moderation had helped to contain the decline in competitiveness in a period of strong appreciation of the guilder. Total employment, which had virtually stopped growing in 1993, began to recover in 1994, and unemployment declined somewhat in the course of the year.

Table 10NETHERLANDS: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199219931994119951
Domestic economy
Domestic demand1.2–0.52.02.8
Real GDP1.30.32.43.0
Unemployment rate (in percent)6.67.68.78.6
Consumer price index3.22.62.82.5
External economy
Exports of goods and nonfactor services2.51.75.65.5
Imports of goods and nonfactor services2.70.25.25.4
Current account balance
In billions of guilders20.017.520.921.5
In percent of GDP2.13.13.53.4
Real effective exchange rate22.11.70.6
Financial variables
General government balance (in percent of GDP)–3.9–3.2–3.6–3.5
Gross fixed investment1.0–2.32.55.8
Money and quasi-money (M3H)36.17.60.4
Interest rates (percent a year, period averages)
Money market rate9.37.15.1
Government bond yield8.16.57.2
Note: Data in the table reflect information available at the time of the Board discussion.

Estimates or projections.

IMF Information Notice System, consumer prices.

Harmonized M3 (based on standardized European Union concepts).

Note: Data in the table reflect information available at the time of the Board discussion.

Estimates or projections.

IMF Information Notice System, consumer prices.

Harmonized M3 (based on standardized European Union concepts).

Fiscal consolidation had reduced the general government deficit to a level well below that of the beginning of the 1990s. Monetary policy, devoted to maintaining a tight link with the deutsche mark, had succeeded in keeping the guilder/deutsche mark rate within narrow bands. Long-term interest rates, and the exchange rate in terms of the deutsche mark, had remained stable during a period of exchange rate turbulence in February–March 1995. The current account had also remained stable—in substantial surplus (about 3 percent of GDP)—in recent years, having shown little variation over the business cycle.

In their discussion, Directors welcomed the robust recent economic performance of the Netherlands and commended the authorities for the strong policy credibility they had established. Growth had picked up, the guilder had been unaffected by exchange market tensions, and the budget deficit had been lowered. Despite these successes, Directors expressed a number of concerns: the ratios of fiscal deficit and public debt to GDP needed to be reduced further; the burden arising from large public expenditure, especially for social security, was still heavy; unemployment remained high, and labor participation rates relatively low; and labor and product markets remained subject to many rigidities.

Directors supported the authorities’ monetary policy objective of price stability through the linking of the guilder to the deutsche mark. Financial markets had not questioned the guilder’s strength, even during times of turbulence, and interest rates in the Netherlands were among the lowest in Europe. Saving in the Netherlands was high. Directors remarked, and the economy continued to run sizable external account surpluses.

As regards fiscal policy, Directors commended the authorities for their program aimed at a decreasing trend in expenditures over the medium term, in particular in the area of social spending. On this basis, both a reduction in the fiscal deficit and some lowering of the burden of taxes and social security charges were expected. Directors stressed, however, that the authorities must stick firmly to the program of curtailing expenditures and resist pressures to dilute it. Pointing out that the 1995 fiscal policy objectives were not particularly ambitious during a phase of economic upswing, speakers generally urged the authorities to let automatic stabilizers work and to use the higher tax revenues resulting from the faster-than-assumed growth to reduce the deficit and the debt-to-GDP ratio further rather than to cut taxes.

Taking advantage of the opportunity to cut the deficit and lower debt while economic growth was strong would be important not only to ensure confidence but also to prepare for the longer-run fiscal pressures arising from the aging of the population. Although a lowering of the high burden of taxes and social security charges was desirable, such steps required a lasting further reduction in spending.

Directors observed that the generous welfare system and high tax and social security wedge inhibited the functioning of the labor market, especially among lower-paid workers. Although they welcomed the planned reduction in tax and social security contributions, they supported the view that stronger measures would be necessary to lower labor costs through additional cuts in social benefits. Directors also urged further reforms in collective bargaining arrangements to help improve the functioning of the labor markets. As for other structural policies. Directors welcomed the adoption of a medium-term program of deregulating product markets, observing that regulations bore especially heavily on the nontradable goods sector, keeping investment there low.

Directors commended the authorities for maintaining their high level of assistance to developing countries and to the former centrally planned economies.

New Zealand

Starting in the mid - 1980s, New Zealand embarked on a comprehensive reorientation of macroeconomic policies and economic restructuring. Wage and price controls were removed, the exchange rate was floated, financial markets deregulated, agricultural and export subsidies eliminated, a broad value-added tax (VAT) introduced, marginal income tax rates reduced and harmonized, commercial public sector activities privatized and the core public sector reorganized, government accounting practices improved, import protection significantly reduced, monetary policy restructured, and labor markets liberalized. When the Board met in July 1994 to discuss New Zealand’s Article IV consultation, the country appeared to be reaping the rewards of its decade-long efforts.

Strong growth had been evident for two years, with GDP increasing an estimated 5 percent in 1993/94 while inflation remained low (Table 11). The higher rate of growth had already brought several important benefits. The fiscal position had reached balance three years earlier than anticipated, and employment had grown rapidly, reducing the still relatively high rate of unemployment. Despite the strength of domestic demand. New Zealand had maintained an inflation rate among the lowest in the world. Moreover, the external current account deficit had remained below 2 percent of GDP, and the external debt ratio had begun to decline. While Directors welcomed these developments, they noted that a number of challenges remained: the external environment might not remain as favorable as it had been in the recent past, net public and total external debt remained high, and unemployment was likely to come down only gradually. Directors encouraged the authorities to persevere with the coherent and consistent implementation of the basic policy strategy that was already in place by maintaining price stability, proceeding with fiscal consolidation, safeguarding the enacted structural reforms, and making continued progress toward completing the reform process.

Table 11NEW ZEALAND: SELECTED ECONOMIC INDICATORS 1(Annual percent change unless otherwise noted)
1990/911991/921992/931993/942
Domestic economy
Domestic demand–1.6–6.43.86.1
Real GDP (expenditure)0.2–2.90.85.2
Real gross fixed investment–2.1–16.07.015.4
Unemployment rate (in percent)9.911.110.29.1
Consumer price index5.51.71.11.6
External economy
Exports (in percent of GDP)21.022.924.323.7
Imports (in percent of GDP)18.918.019.720.2
Current account balance
(in percent of GDP)–2.1–2.1–1.5–1.7
External debt (in percent
of GDP, end of period)83.584.586.478.4
Debt-service ratio12.213.713.211.7
Real effective exchange rate
(1980 = 100)3109.5104.394.3101.84
Financial variables
Adjusted government balance
(in percent of GDP)5–3.5–3.3–2.40.6
Broad money (in percent, year on year)12.811.38.45.24
Interest rates
Bank bills (90-day)11.97.37.25.4
Government bonds (five-year)11.48.67.26.0
Note: Data in the table reflect information available at the time of the Board discussion.

Fiscal years ending March except where noted otherwise.

Estimated.

Calendar-year average.

March-to-February percentage change.

Excluding lending minus repayment plus, since 1991, the proceeds from the sale of Crown forestry assets and unrealized foreign exchange gains.

Note: Data in the table reflect information available at the time of the Board discussion.

Fiscal years ending March except where noted otherwise.

Estimated.

Calendar-year average.

March-to-February percentage change.

Excluding lending minus repayment plus, since 1991, the proceeds from the sale of Crown forestry assets and unrealized foreign exchange gains.

The Board noted the rapid improvement in the fiscal position and endorsed a plan of the Government to run fiscal surpluses in order to reduce outstanding public debt. Improving the debt position would strengthen both the country’s external credit standing and its fiscal position, which was particularly important given the demographic trends likely after the first decade of the next century. Some Directors believed that it might be necessary to keep firm control over expenditure to achieve the fiscal objective, in the near term, and to delay any tax reduction if the fiscal position failed to improve as expected. At the same time, they noted that there would be room to reduce taxes eventually, and the prospect of lowering tax rates to further enhance economic efficiency was raised. Directors welcomed the aims of the recently enacted Fiscal Responsibility Act. On the expenditure side, they also welcomed the changes in the welfare system and the increased efficiency of government departments.

The Board believed that the monetary policy framework, based on the Reserve Bank Act of 1989 and a system of policy target agreements, had been effective in delivering low inflation, although questions remained about the effectiveness of inflation targeting in different cyclical circumstances. With the economy growing strongly and the Reserve Bank forecasting Inflationary pressures. Directors viewed the upward movement in interest rates as broadly appropriate.

New Zealand’s bold program of structural reforms, it was noted, had increased the productive potential of the economy. Directors emphasized in particular the far-reaching labor market reforms, which were seen as contributing to potentially more rapid productivity and employment growth, and to a lower level of unemployment, in the future.

On the external side, while major steps had been taken to liberalize the trade regime, high rates of effective protection continued in a few sensitive sectors. The Board urged the authorities to use the opportunity of the 1994 tariff review to announce plans for completing the trade liberalization process. There was, also, some questioning of the role of the agricultural marketing boards, with Directors believing that eliminating the remaining Statutory export monopolies would lead to greater product innovation and a higher level of investment in the agricultural sector.

Directors welcomed the chance to review New Zealand’s progress in transforming its economic and government institutions. They recognized that many challenges remained but expressed confidence that the authorities were on the right long-term path. New Zealand’s experience was being watched closely by other member governments for lessons on what elements of the reforms seemed appropriate for their economies.

Norway

Directors met in February 1995 to discuss Norway’s Article IV consultation. At that time, a robust recovery in the mainland economy (that is, activities other than petroleum extraction and ocean shipping) had been firmly under way for over a year. With oil and gas production continuing, to rise, the overall economy was also growing briskly.

Following a sharp boom and bust associated with financial deregulation and oil-related shocks in the 1980s, Norway’s economic performance recovered in 1993, driven by increases in private consumption and traditional, non-oil exports as well as by continued increases in petroleum production (Table 12). In response, private sector employment growth resumed after a lengthy period of stagnation, and unemployment was somewhat reduced from its historic highs of recent years. Inflation, which for some years had been below the average among Norway’s trading partners, was reduced still further to below 2 percent, and the current account remained in comfortable surplus.

Table 12NORWAY: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Domestic demand–1.50.93.23.2
Real GDP1.63.42.35.5
Mainland GDP2–0.62.12.03.5
Unemployment (in percent of labor force)5.55.96.05.5
Consumer prices3.42.32.31.4
External economy
Exports of goods and services (volume change in percent)6.16.21.88.9
Oil and gas17.010.85.817.3
Imports of goods and services (volume change in percent)1.72.83.36.2
Current account balance
(in percent of GDP)4.82.62.33.0
External debt (in percent of GDP)10.79.37.9
Real effective exchange rate3–2.40.5–2.30.3
Financial variables
General government balance (in percent of GDP)–0.2–2.3–2.6–0.9
Gross fixed investment (volume change in percent)1.74.515.21.0
Broad money410.77.30.67.6
Interest rates (in percent)
Money market rate10.613.77.66.05
Government bond yield9.99.86.58.66
Note: Data in the table reflect information available at the time of the Board discussion.

Official estimates and projections as of December 1994.

Excludes items related to petroleum exploitation and ocean shipping.

Based on relative normalized unit labor costs; 1994 figure is an average for January–November 1994 compared with 1993 average.

Twelve-month percent change, end of period, except 1994, which is end-September.

October 1994.

November 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Official estimates and projections as of December 1994.

Excludes items related to petroleum exploitation and ocean shipping.

Based on relative normalized unit labor costs; 1994 figure is an average for January–November 1994 compared with 1993 average.

Twelve-month percent change, end of period, except 1994, which is end-September.

October 1994.

November 1994.

Underlying the favorable macroeconomic picture, however, were a number of structural issues, particularly related to the rapid growth of the oil and gas sector—by 1993 Norway had risen to be the world’s fourth-largest oil exporter. Although this growth had brought significant benefits, the use of oil revenues to finance substantial increases in public employment had helped to crowd out mainland business activity, and the dependence of the economy and the budget on oil-related revenues carried with it continuing Vulnerability to large oil shocks.

In their review. Directors commended the Norwegian authorities on their economy’s recent favorable performance and welcomed the economic policies that had contributed positively to those developments. Supported by a shift toward fiscal tightening, monetary policies geared toward exchange rate stability had fostered wage moderation, declining inflation rates, and improving cost competitiveness. With continued recovery in the international economy, the short-term prospect was for continued output expansion.

Directors viewed Norway’s policy challenges as being to ensure that domestic demand expanded at a sustainable pace and to foster noninflationary, employment-generating growth over the long term. Policy should, therefore, continue to focus on restraining domestic cost pressures, creating conditions conducive to investment in the mainland business sector, and enhancing the economy’s capacity to withstand oil-related shocks. Directors commented on the increased uncertainty of Norway’s longer-term prospects following the November 1994 decision not to accede to the European Union. Many speakers also referred to the serious structural problems in the economy associated with the high levels of protection, subsidies and transfer payments, a very large public sector, and the gradual depletion of oil and gas resources.

While welcoming the shift in the fiscal stance in 1994 that followed several years of expansionary policies, many Directors noted the need for further fiscal adjustment in the next few years to ensure a sustainable wealth position. They stressed the importance of such adjustment because oil and gas reserves would begin to decline just when large pension commitments, associated with an aging population, would start to fall due in the next century. Although welcoming the Norwegian authorities’ emphasis on expenditure restraint, these Directors recommended scaling back—well beyond current plans—the extensive subsidies to agriculture and industry, as well as restraining public sector employment and transfers to households and local authorities. The high level of taxation added further emphasis to the importance of expenditure restraint, even though some Directors saw room for a restructuring of the tax burden to secure a more efficient system.

Directors noted that the authorities’ new guidelines on monetary and exchange rate policies—with the stated aim of exchange rate stability against European currencies, but without a commitment to defend specified parities—essentially continued the approach followed after delinking from the European currency unit (ECU) in late 1992. This approach had been successful to date and was well under stood by market participants and social partners. Most speakers did not support the view that the announcement of an inflation target would add clarity to monetary policy implementation.

As regards structural issues, Directors emphasized improving the functioning of the labor market through measures to reduce non-wage costs and encourage work-seeking behavior. They noted that the bank rescue operations mounted in 1991 had been successful and that the banks had been brought back to profitability. Directors urged the authorities to reprivatize the commercial banks more rapidly and completely than envisaged, while strengthening supervision over financial institutions. In light of Norway’s high level of protection for domestic agriculture. Directors urged the authorities to view as a minimum their commitments in the agricultural area under the Uruguay Round agreement.

Directors commended Norway continued commitment to official development assistance, which amounted to 1.1 percent of GDP in 1994, among the highest ratios in the industrial countries.

Portugal

Directors met in August 1994 to discuss Portugal’s Article IV consultation, which took place amid sign of a turnaround in business and consumer confidence, fueled in part by indications of a strong pickup in export orders in early 1994 as Europe moved into recovery.

Portugal had entered the recession later than its European partners. Nevertheless by mid-1994, projections were envisaging recovery in output beginning in the second half of the year (Table 13). During 1993 a growing slack in the labor market had markedly affected wages, with reported settlements in the private sector down to about 7 percent from 15 percent in 1991. Consumer price inflation had also continued a declining trend from double-digit levels in 1989–91, dropping to below 6 percent by-mid-1994.

Table 13PORTUGAL: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Domestic demand3.93.9–1.10.0-1.0
Real GDP2.21.5–1.00.5-1.5
Unemployment rate4.124.15.56.73
Consumer price index11.48.96.55.5–6.0
External economy
Export volume1.17.4–1.83.5–5.5
Import volume7.118.4–5.40.5–2.0
Current account balance In billions of U.S. dollars–0.7–0.4
In percent of GDP–0.9–0.5
Overall balance (in billions of
U.S. dollars)5.8–0.2–2.7
Real effective exchange rate (CPI-based, 1990= 100)106.8116.5111.6104.64
Financial variables
General government balance (in percent of GDP)–6.5–3.5–7.3–6.94
Gross domestic saving (in percent of GDP)24.325.022.9
Gross investment (in percent of GDP)27.327.926.2
Broad money (M2, in billions of escudos)7,8049,0579,747
Liquidity of residents (in billions of escudos)58,1899,2319,843
Interest rates
Overnight rate18.614.211.211.86
Treasury bill rate (6-month)718.215.610.612.36
Note: Data in the table reflect information available at the time of the Board discussion.

Revised central bank projections, unless otherwise noted.

The figure for 1991 is not comparable to later years due to a change in the survey method.

June 1994.

1994 Budget.

Liquidity of assets held by nonfinancial residents is the sum of M2, contingent liabilities, treasury bills, and CLIPS (a type of government bond).

July 1994.

Gross of a withholding tax of 20 percent, introduced on May 4, 1989.

Note: Data in the table reflect information available at the time of the Board discussion.

Revised central bank projections, unless otherwise noted.

The figure for 1991 is not comparable to later years due to a change in the survey method.

June 1994.

1994 Budget.

Liquidity of assets held by nonfinancial residents is the sum of M2, contingent liabilities, treasury bills, and CLIPS (a type of government bond).

July 1994.

Gross of a withholding tax of 20 percent, introduced on May 4, 1989.

In the external sector, the general upward trend in Portugal’s export shares had weakened slightly during 1993, but imports had also fallen, and the current account continued to be fairly close to balance. However, the overall balance of payments registered a sizable deficit in 1993 as short-term private capital outflows ($3.1 billion) outweighed continued strong net inflows of foreign direct investment ($1.2 billion) and an increase in government net borrowing from abroad, fiscal performance had sharply deteriorated in 1993. Most of this deterioration reflected noncyclical problems, including increased capital expenditures, worsening social security finances, and weaknesses in tax administration. As a result, the 1994 budget approved in December 1993 envisaged constrained spending and firm control over the public sector wage bill. (Data available subsequent to the Article IV discussion indicated that the outturn for 1994 was better than had been anticipated.)

After a turbulent first year of ERM membership, the escudo remained fairly stable in the year from August 1993, following the general widening of the ERM margins. Rather than use the wider margins to respond to bouts of exchange rate pressure, however, the monetary authorities raised interest rates and intervened in the market. At times, this policy led to sharp increases in interest rates—to over 14 percent in spring 1994 as markets tested the authorities’ resolve. Tensions had abated considerably by July 1994; the escudo strengthened by about 1½ percent from mid June, while overnight interest rates fell to below 11 percent by early August.

In their discussion, Directors welcomed Portugal’s aim of returning to a medium-term path aimed at real and nominal convergence with European partners that had been pursued since the early 1990s. This strategy had been partially derailed by the severe recession in 1993 and turmoil within the ERM. As a result, although there had been a welcome reduction in inflation, including in the most recent data, the fiscal position was notably weaker than originally envisaged, and there had been recurrent exchange market tensions. Directors pointed out that the recovery elsewhere in Europe, signs of which were beginning in Portugal, offered an opportunity to press ahead with the planned fiscal consolidation and make further progress on inflation. This, in turn, should help to bring down interest rates and speed economic recovery.

Directors generally emphasized that the authorities should ease the burden on monetary policy through faster fiscal consolidation than currently envisaged, together with greater wage moderation and pursuit of structural reforms. They observed that exchange rate stability was a crucial plank in the anti-inflationary policy, and most agreed that this should continue to be the focus of monetary policy. It would be important that competitiveness not be compromised, and the continued strength of external accounts was encouraging in that regard.

Directors stressed that inflation and labor cost increases should be brought down rapidly to the levels in other ERM countries; in addition to continued wage moderation in the public sector, it would be important that any broader agreement on incomes incorporate a further slowdown in wage increases in 1995. Directors commended the labor market flexibility that, at the height of the recession, had resulted in much lower unemployment rates in Portugal than elsewhere in Europe. As regards other structural policies, they supported further progress in privatization and continued financial liberalization.

For 1995 and beyond, Directors were of the view that fiscal adjustment should be more front-loaded, with significant progress toward the medium-term goal for the fiscal deficit. On expenditures, Directors advised restraint on current spending to make room for expected higher capital expenditures. On the revenue side, Directors urged the authorities to improve underlying weaknesses in the areas of tax administration and social security.

Developing Countries

Nearly one hundred Article IV consultations with developing countries were held by the Executive Board during the year. Directors commended many countries—ranging from newly industrialized to low-income—for the significant advances they had made in macroeconomic and structural reforms, often with the financial support of the Fund, Directors were encouraged by the achievement of, or progress toward, sustained economic growth and external viability in many countries. Most countries, however, required some further macroeconomic and structural adjustment, and a strong aggregate performance masked considerable diversity. (For a description of policy issues in the CFA franc countries see Box 9.)

Foremost among the policy requirements for sustained growth was the creation, and maintenance, of a stable macroeconomic environment, although Directors noted in this regard that the implementation of monetary and fiscal policy was frequently uneven, which fueled uncertainty and discouraged saving and investment.

In their discussion of stabilization efforts, Directors frequently stressed the importance of prudent fiscal policies, which they considered vital for the preservation of macroeconomic stability. In many countries, a substantial improvement in public sector saving was needed to put growth on a firmer basis, and Directors also stressed the importance of moving toward fiscal balance. Together with measures in other areas, fiscal consolidation, especially when front-loaded, was seen as key to the success of efforts to foster economic growth by lowering inflation and bringing about a durable reduction in domestic and external imbalances. Furthermore, over the medium term, a strengthening of the fiscal position allowed room for growth of the private sector. On occasion, for certain countries, Directors cautioned about a buildup of the public debt, which, if not curbed, could weaken confidence, with adverse effects on international reserves and the economy in general.

Box 9COMMON POLICY ISSUES IN THE CFA FRANC COUNTRIES

In November 1994, Directors discussed the common policy issues faced by the CFA franc countries in connection with designing adjustment programs, and considered the implications of regional policy coordination and common currency arrangements. The CFA franc is the currency of 13 of the 14 countries in the CFA franc zone: Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo, which are members of the West African Economic and Monetary Union (WAEMU); and Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon, members of the Central African Economic and Monetary Community (CAEMC). The Comoros, which uses the Comorian franc, is not a member of a monetary union.

Directors observed that comprehensive adjustment programs and the devaluation, in January 1994, of the CFA franc had provided CFA franc countries with an unprecedented opportunity to achieve sustainable economic growth, fiscal and external viability, and greater regional economic integration. Encouraging signs in some countries included a drop in inflation, which had soared following devaluation; the resurgence of economic growth and export activities; and the return of flight capital. There had also been a strong improvement in the net foreign asset positions of the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC), the zone’s two central banks.

Directors underlined the need for countries to implement adjustment programs vigorously, emphasizing financial stabilization and structural reforms, so as to derive the most benefit from regional economic recovery and integration. They noted that countries’ different situations would have to be taken into account in designing individual programs.

Fiscal Adjustment

The reduction of fiscal deficits and of imbalances in the public enterprise sector would be critical in fostering private sector growth, reforming the financial sector, and achieving internal and external financial viability. Rigorous and transparent systems for controlling public expenditures and stricter wage restraints were needed, and priority should be given to spending for urgent social and investment needs. Directors urged countries to press forward with civil service reforms.

The CFA countries would need to simplify, rationalize, and lower taxes on foreign trade, while reducing exemptions, fighting fraud, increasing collections, and shifting progressively from trade taxes to broadly based domestic taxes. Directors considered that steps to improve tax administration and preserve the revenue base would be necessary to facilitate such a shift. The Fund would provide technical assistance to help the CFA franc countries broaden their tax base.

To achieve objectives in the financial sector, such as market determination of interest rates, the development of instruments for indirect monetary control, and the ability to respond to surge: in bank liquidity, Directors observed that countries would have to act decisively in addressing the problems of financially distressed banks. They would also need to develop regional money and interbank markets and a broadly based market for government securities.

Structural Reforms

Directors stressed the necessity of far-reaching structural reforms to ensure durable recovery and economic diversification and emphasized the role of the World Bank in assisting in the design and implementation of such reforms. Countries needed to move swiftly to restructure or privatize public enterprises and eliminate monopolies, but they should not allow problems in this area to hamper fiscal adjustment and private sector expansion, or put the banking system at risk. The strengthened procedures for bank supervision would have to be followed while countries took care to avoid subsidized lending and state intervention in the banking system. Greater flexibility with respect to wages and hiring practices would facilitate adjustment to external shocks, but it was recognized that staffing cuts in public enterprises and the civil service had social costs and would necessitate severance payments and training programs.

Other Issues

Directors commended efforts to accelerate economic and monetary integration in the CFA franc countries. Intrazone trade was expected to increase with further economic liberalization in individual countries and efforts by the two monetary unions to establish a common external tariff, remove intrazone trade barriers, and harmonize members’ domestic tax systems.

Directors welcomed steps toward multilateral surveillance of each country’s fiscal and external position. However, the central banks needed to improve the macroeconomic data base to facilitate surveillance and regional policy coordination and ensure a timely response to economic changes.

Noting with satisfaction the absence of foreign exchange restrictions on pay incuts and transfers for current international transactions in the CFA franc countries, Directors urged them to accept the obligations of Article VIII of the Fund’s Articles of Agreement (see Box 7). The central banks were encouraged to end the suspension of the repurchase of CFA franc bank notes.

Directors suggested that Fund staff review, on a regular basis, developments in the CFA franc countries, particularly in the context of Fund-supported programs. When more evidence was available, a brief assessment would be made of the experience of the CFA franc countries in 1994. This would provide lessons for program design, which would need to evolve in response to a changing, increasingly complex environment, and to reflect regional considerations that included African countries outside the CFA franc countries.

On the revenue side. Directors urged country authorities to monitor developments closely and to be ready to implement contingency measures, if necessary. In many cases, they recommended broadening the tax base, improving tax administration, and reducing tax exemptions. They also considered that strict control of government expenditure and the avoidance of unbudgeted outlays were essential, and they supported a cautious stance of wage policy in the public sector. Directors also stressed that the quality of the spending must be ensured and underscored that, in curtailing expenditure, the authorities should make efforts to redirect expenditure from unproductive uses to priority economic and social services. In some cases, the Board welcomed a reduction in military expenditure.

Directors further considered that fiscal action should be supported by appropriate monetary policies, often with additional steps to liberalize the financial system. Where they recommended a change of stance of monetary policy in order to realize macroeconomic objectives—in particular, that of controlling the rate of inflation—it was usually in the direction of tightening. For some countries, however, restrictive fiscal and monetary policies should be supported by supply-side policies to strengthen growth and employment.

Board members noted that strong private capital inflows had complicated the management of monetary and exchange rate policies in many countries and had led to a marked appreciation of the real effective exchange rate. They pointed out that sterilization of large capital inflows could put upward pressure on domestic interest rates.

For several countries, Directors called for moves toward a more market-oriented monetary policy, including market determination of interest rates. In some cases, this would need to be implemented over the medium term. They emphasized the importance of positive real interest rates for mobilizing the saving and investment critical for development. Directors also spoke of the need to liberalize credit and to encourage competition among banks. For a number of countries, they welcomed the progress made by the authorities to move to indirect monetary controls and, for others, recommended this as a course Of action.

Directors observed that monetary policy should play a key role in reducing inflationary risks, and they commended the authorities in many countries for their success in bringing down the rate of inflation through a prudent monetary and credit stance. Elsewhere, they emphasized the importance of a renewed and sustained effort to reduce inflation to low levels, noting that this was the only way to achieve a durable decline in interest rates, maintain competitiveness internationally, and lay the basis for higher rates of economic growth. When a low-inflation environment was in place, the authorities should take advantage of this to reduce the coverage of price controls, where these existed.

As additional components of a credible anti inflationary policy, Directors stressed the need for a more flexible labor market, as well as perseverance with structural reforms aimed at further diversification of the economy.

The Board welcomed the considerable progress in structural reform in many developing countries, high lighting in these cases such policies as the adoption of measures to foster the role of the price mechanism and improve the allocative efficiency of the economy, privatization, improved financial management and accountability in public enterprises, and capital market liberalization. In general, structural reforms helped to improve confidence, spur private investment, and strengthen economic competitiveness. These pointed to the need for elimination of labor market rigidities, incentives, generalized subsidies, and price supports. Directors also emphasized the need to promote the diversification of production and of exports, improve the competitiveness of the economy, and strengthen the role of the private sector.

Social safety nets were increasingly becoming an important component of countries’ efforts to shield the most vulnerable segments of their populations from the short-term effects of corrective policies. In a number of cases, the Board welcomed the implementation of appropriately targeted safety net measures to mitigate the impact of adjustment on the poor, while at the same time urging authorities generally to focus on more efficient and lasting measures to alleviate the burden of adjustment.

On the external front, Directors emphasized that the reform strategy should encompass the liberalization of the external trade and payments system. In general, authorities should resist protectionist pressures. A large number of countries were commended for initiatives to reduce exchange and trade restrictions, to promote greater competition, and to encourage fuller integration into the world economy. In a few cases, Directors suggested that the authorities should take steps to liberalize the external capital account.

Directors had occasion to welcome the decision by a number of countries to accept the obligations of Article VIII, Sections 2, 3, and 4 of the fund’s Articles of Agreement, or their intention to do this, as well as the decision by several others to seek accession to the General Agreement on Tariffs and Trade (GATT) and its successor organization, the World Trade Organization (WTO). The completion of the Uruguay Round provided important new opportunities in the trade area for many members.

Directors welcomed improvements in many countries in external competitiveness—although in other cases they noted with concern a deterioration—and in this context urged the authorities, among other things, to keep wage and exchange rate policy under close review in order to safeguard the external position. The Fund’s advice in the area of exchange rate policy depended on the circumstances of each country. A few countries were urged to unify exchange rates at a realistic, market-determined level. The objective of achieving exchange rate stability had been and would continue to be elusive without a concomitant—and significant—tightening of fiscal and monetary policies.

Many countries had made progress toward balance of payments viability, but in many cases further adjustment efforts would be needed over the medium term. In some countries, Directors were concerned about a deterioration of the external position that had often resulted from a relaxation of policies, and that was evidenced by a loss of international reserves. Although the adjustment needed to ensure external viability would be challenging, a strengthening of the external position would enhance the prospects for growth.

Board members recognized that, for some countries, balance of payments viability could not be attained without the support of substantial debt and debt-service reduction and concessional terms for new financing.

Directors noted that only a comprehensive adjustment strategy could mobilize creditor and donor support. They stressed that adequate external assistance that complemented domestic saving would be essential for many countries and occasionally noted with concern substantial shortfalls in external assistance. In this context. Directors occasionally urged the authorities to improve the quality and transparency of governance. It was emphasized that the sustainability of growth also depended on the attraction of foreign direct investment.

Directors frequently pointed to the importance of remaining current on debt and other external obligations, and they praised the good record of many countries in this regard. They also stressed the necessity for other countries of quickly eliminating domestic and external payments arrears, in pan to normalize relations with external creditors and donors.

Finally, in order better to guide policymakers in reformed economic environments, Hoard members asked a number of countries to improve the quality, coverage, timeliness, and transparency of their economic and financial data, in some cases with technical assistance from the Fund.

Argentina

Directors met in July 1994 to discuss the Article IV consultation with Argentina and to review the country’s extended arrangement with the Fund (see section on Fund Support for Member Countries). The strong economic upswing in Argentina–made possible by comprehensive stabilization efforts, structural reform, financial liberalization, debt and debt -service reduction, and privatization in recent years–had continued throughout 1993, albeit at a more moderate pace.

Throughout the first three quarters of 1993, the growth of domestic demand gradually subsided, but in the last quarter of 1993 and the early months of 1994 domestic expenditure rebounded because of increased investment, which rose by a third in real terms during January–March 1994. Although consumer demand was strong, consumer price inflation remained very-low, at 3.4 percent for the year ended May 1994 (Table 14). Imports, led by capital goods, rose by 23 percent in the last quarter of 1993 and by 46 percent in the first four months of 1994 relative to the corresponding periods of 1993. Exports in January–April 1994 were only 4 percent higher than in the same months of 1993; agricultural exports declined, but exports of industrial manufactures rose by over 30 percent. Consequently, the trade deficit widened to $2.4 billion in the first four months of 1994, compared with $0.5 billion during the same period in 1993. Capital inflows in 1993 were strong enough to offset the current account deficit, which had widened to $8.8 billion in 1993 (as a result, gross international reserves rose by over $4 billion in 1993, to S15 billion at the end of the year), but they weakened somewhat in March–April 1994, following the increase in international interest rates, before subsequently regaining strength.

Table 14ARGENTINA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
1994
1991199219931Proj.Rev.2
Domestic economy
Real GDP8.98.76.06.07.4
Unemployment rate (in percent)35.36.79.69.512.2
Consumer prices (end of period)84.017.57.42.73.9
External economy
Exports, f.o.b. (in billions of U.S. dollars)12.012.213.114.715.7
Imports, c.i.f. (in billions of U.S. dollars)8.314.916.819.721.5
Current account balance (in billions of U.S. dollars)–2.8–8.4–8.8–10.6–10.1
Overall balance (in billions of U.S. dollars)0.84–3.110.22.30.3
External debt (in percent of GDP)535.928.423.622.322.6
Debt service (in percent of exports
of goods and nonfactor services)57.049.247.840.937.9
Real effective exchange rate636.513.69.5–4.7
Financial variables
Combined public sector balance (in percent of GDP)7–1.20.62.281.20.1
Gross national saving (in percent of GDP)15.2214.3215.7216.716.8
Gross domestic investment (in percent of GDP)14.616.718.2220.519.9
Broad money949.833.526.916.9
Interest rate (compounded annual interfirm rate)70.018.28.18.5
Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Data revised subsequent to the Board discussion.

Percent of labor force seeking work in greater Buenos Aires as of October each year.

Excludes placement of $4.9 billion of compulsory bonds.

Includes Fund credit.

Average; measured in terms of foreign exchange per unit of local currency; -, depreciation.

Cash basis, except for interest payments, which are on an accrual basis. For 1991, average of quarterly ratios to nominal GDP; for 1994, includes employee social security contributions that were estimated to accrue to the newly created private pension system, equivalent to 1.6 percent of GDP.

Includes payments to reduce arrears from previous years to pensioners and provincial governments.

Twelve-month rate of change in the average stock of monetary base in the quarter or month (for 1994, April).

Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Data revised subsequent to the Board discussion.

Percent of labor force seeking work in greater Buenos Aires as of October each year.

Excludes placement of $4.9 billion of compulsory bonds.

Includes Fund credit.

Average; measured in terms of foreign exchange per unit of local currency; -, depreciation.

Cash basis, except for interest payments, which are on an accrual basis. For 1991, average of quarterly ratios to nominal GDP; for 1994, includes employee social security contributions that were estimated to accrue to the newly created private pension system, equivalent to 1.6 percent of GDP.

Includes payments to reduce arrears from previous years to pensioners and provincial governments.

Twelve-month rate of change in the average stock of monetary base in the quarter or month (for 1994, April).

Real GDP was projected to grow by around 6 per cent in 1994, led by investment, which was expected to reach 20½ percent of GDP. National saving was projected to rise by about 1½ percentage points of GDP in 1994, but the external current account deficit was expected to widen in 1994, to 3.8 percent of GDP (compared with 3.5 percent of GDP in 1993). Inflation was expected to remain at low single-digit levels during the year. The growth rate of monetary aggregates slowed in the first four months of 1994; broad money rose at an annual rate of about 18 percent during the period, compared with an annual rate of 56 percent during the same period in 1993. fiscal tar gets for expenditure and the overall balance of the public sector were missed by small margins in the first quarter of 1994; a better-than-expected tax outturn was offset by higher discretionary spending, owing to a change in budgetary commitment procedures.

In their discussion, Directors commended Argentina’s progress over the past three years in strengthening public finances, curbing central bank credit, implementing comprehensive structural reforms, and re-establishing relations with internal and external creditors. These policies had resulted in lower inflation, strong capital inflows, and a sharp recovery of domestic demand and economic activity. The medium-term prospects for continued economic growth, they concluded, remained positive.

Directors focused considerable attention on the overall macro economic setting and the appropriateness of Argentina’s macroeconomic policies. While noting the success in bringing inflation down to single-digit levels approaching those in major industrial countries, Directors stressed the need to maintain monetary discipline and continue progress toward price stability. They agreed that domestic saving and investment should be strengthened in order to improve growth prospects further and strengthen the sustainability of the external position.

Most Directors shared the authorities’ view that the widening of the external current account deficit reflected a positive response of foreign capital to the opportunities arising from stabilization and adjustment, and to the restructuring of the private sector economy. Thus, the rapid growth of imports was in response to high demand for capital goods. Argentina’s competitive position would have to be monitored, however, and these Directors agreed with the authorities that overall fiscal balance would be the appropriate course of action. Other Directors, however, expressed concern that the economy remained vulnerable and advised the authorities to be prepared to strengthen the fiscal position so that the economy could sustain both domestic and external adjustment.

Directors emphasized the importance of structural measures to increase flexibility in the economy, reduce domestic production costs, and improve competitiveness. Such measures included reform of labor legislation in order to facilitate labor mobility and promote more flexible employment conditions, reform of bankruptcy laws, and reform of the health insurance system. Directors encouraged the authorities to persevere in their efforts to induce the provinces to carry out deregulation, privatization, and tax and administrative reform, while continuing to restrain their domestic and foreign borrowing. While recognizing the internal political and social factors that made carrying out structural measures difficult. Directors stressed that addressing structural issues was necessary to ensure continued progress toward sustainable growth. In that context. Directors also emphasized the benefits to Argentina of further liberalizing international trade.

In the area of sectoral policies. Directors noted the authorities’ decision not to lower bank reserve requirements at this time. They urged the authorities to continue with the steps being taken to protect the solvency of the financial system, including risk-adjusted capital adequacy requirements and strengthening of prudential regulations and bank supervision.

Burkina Faso

Directors met in October 1994 to discuss the Article IV consultation with Burkina Faso and the midterm review of its second annual arrangement under the enhanced structural adjustment facility (ESAF). The discussion took place against the background of the broadened medium-term adjustment strategy—including a 50 percent devaluation of the CFA franc in January—that the authorities had adopted in 1994. The basic macro-economic objectives for 1994–96 were to achieve an average annual real GDP growth rate of more than 5 percent; lower the rate of inflation to about 5 percent by 1996, following the acceleration initially induced by the devaluation; and reduce the external current account deficit (excluding official transfers) to less than 15 percent of GDP by 1996. The program’s objectives for 1994, as set at the beginning of the year, were to attain a real GDP growth rate of at least 3 percent, contain inflation to about 30 percent, and limit the external current account deficit to 21.5 percent of GDP.

Burkina Faso’s economic performance in 1993 under the program that was supported by the first annual ESAF arrangement was disappointing. Owing mainly to a sharp drop in cotton output and a slowdown in manufacturing activity, real GDP declined by 1 percent, while the external current account deficit widened to 16 percent of GDP (Table 15). The fiscal situation also deteriorated, as a poor revenue performance—reflecting, in part, temporary problems associated with the introduction of the VAT—was not offset by corresponding reductions in outlays, which, in fact, exceeded the programmed level. On the monetary side, broad money increased by about 8 percent, largely because of a rise in currency in circulation corresponding to larger cash holdings by the private sector, which was attempting to obtain foreign currency in anticipation of the devaluation. However, net domestic assets fell as bank credit to the economy declined. The increase in broad money thus contributed to a larger-than-expected rise in net foreign assets. Moreover, with respect to structural reforms, although progress was made in liberalizing foreign trade and restructuring public enterprises, a number of measures—in particular, to enhance revenue—were delayed. As a result, the midterm review under the arrangement could not be concluded.

Table 15BURKINA FASO: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Real domestic demand5.83.80.1–2.9
Real GDP9.92.5–1.03.3
Consumer price index2.5–2.00.631.2
External economy
Exports, f.o.b. (in billions of CFA francs)79.378.576.5176.8
Imports, f.o.b. (in billions of CFA francs)169.8178.7182.2330.4
Current account balance (in percent of GDP)3–13.6–14.4–16.0–20.0
Overall balance (in percent of GDP)0.41.80.94.4
External debt (in percent of GDP)1.72.12.63.7
Debt-service ratio (in percent of exports of goods and services)14.617.822.119.1
Real effective exchange rate2.91.91.4–35.5
Financial variables
Central government balance (in percent of GDP)4–8.2–8.8–10.1–14.7
Gross national saving (in percent of GDP)17.617.617.825.4
Gross national investment (in percent of GDP)20.921.321.928.9
Broad money5.06.38.120.8
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Excluding transfers.

Excluding grants.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Excluding transfers.

Excluding grants.

In their discussion of economic developments in 1994, Directors welcomed the positive response of the economy to the devaluation of the CFA france and the accompanying adjustment effort. They observed that the rate of inflation had decelerated rapidly following the initial surge and that—bolstered by the improved competitiveness of the economy the—prospects for strong growth in the tradable goods sector and real GDP were encouraging. Most program criteria and benchmarks for the period January–June 1994 were observed.

In view of the larger-than-programmed fiscal deficit in the first half of 1994, Directors welcomed the authorities’ commitment to improve revenue performance, through a strengthening of customs and tax administration, firm implementation of measures to reduce tax exemptions and combat tax evasion, and the collection of exceptional revenue, as programmed, from selected public enterprises. With respect to expenditures, Directors commended the authorities’ success in keeping wage and salary payments on target; they also stressed the need to improve budget management, particularly by strengthening the monitoring of expenditures and introducing a revised budget nomenclature system.

In the monetary area, broad money rose by 15 percent in the first half of 1994. The Government’s net position vis-à-vis the banking system exceeded the performance criterion for end-June 1994 by about 4 percent of the initial stock of broad money. Nevertheless, net domestic assets of the banking system continued to decline, contributing to a larger-than-expected increase in net foreign assets.

In discussing the medium-term outlook. Directors emphasized the need to build on the devaluation by accelerating the pace of structural reform, with a view-to laying the groundwork for private sector development and sustainable growth. They noted with satisfaction the program to restructure and privatize public enterprises and urged the authorities to rely more on private sector initiative to increase investment and output. To that end, Directors also called for an acceleration of the restructuring of the banking sector and the privatization of public enterprises. In addition, they observed that serious consideration should be given to eliminating the protection tax, so that possible distortions and inefficient resource allocation could be avoided.

Directors also urged the committee that was recently created to monitor external obligations falling due to take appropriate action to avoid a further accumulation of external arrears.

Chile

Directors met in July 1994 to discuss Chile’s Article IV consultation. Following the rapid economic growth, lower inflation, improved foreign reserve position, increased employment and real wages, and reduced poverty achieved in the early 1990s, concern shifted to overheating. The Chilean authorities’ economic program for 1993 aimed to slow the growth of domestic demand to a rate consistent with estimated real GDP growth of 6½ percent, down from 10½ percent in 1992, and to achieve a moderate reduction in inflation, from 12.7 percent in 1992 to 11–12 percent, mainly through tight monetary policy.

In the event, real GDP growth slowed to 6 percent in 1993, domestic demand grew by 9 percent in real terms, and the terms of trade deteriorated more sharply than expected, owing to declines in world prices for copper and Chile’s other primary commodity exports (Table 16). Consequently, the external current account deficit widened by 3 percentage points, from 1.8 percent of GDP in 1992 to 4.8 percent of GDP in 1993. Despite tight monetary policy throughout 1993, the 12 -month inflation rate declined only slightly, to 12.2 percent in December 1993.

Table 16CHILE: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Domestic demand (at current prices)27.129.822.8
Real GDP6.110.36.04.0
Unemployment rate (in percent of labor force, fourth quarter)5.34.44.5
Consumer price index (12 months ended December)18.712.712.210.0
External economy
Exports, f.o.b. (in millions of U.S. dollars)8,9299,9869,2019,805
Imports, c.i.f. (in millions of U.S. dollars)7,3549,23710,18010,503
Current account balance (in millions of U.S. dollars)15–743–2,092–2,003
Overall balance (in millions of U.S. dollars)1,2472,499578948
External debt (in percent of GDP)348.144.243.945.0
Debt service (in percent of exports of goods and nonfactor services)23.720.322.520.0
Real effective exchange rate (12 months ended December)5.510.8–2.2
Financial variables
Combined public sector balance (in percent of GDP; -, deficit)1.41.91.0–0.44
Gross national saving (in percent of GDP)22.222.321.421.4
Gross national investment (in percent of GDP)22.224.126.225.8
Broad money (in percent of GDP)30.632.735.236.2
Real interest rate55.85.56.5
Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Projected.

End of period; excludes use of Fund credit and trade credits.

The actual outcome for 1994 was in surplus.

Actual average yield on 90-day central bank indexed promissory notes.

Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Projected.

End of period; excludes use of Fund credit and trade credits.

The actual outcome for 1994 was in surplus.

Actual average yield on 90-day central bank indexed promissory notes.

In their discussion, Directors commended Chile’s wide ranging structural reforms and the authorities’ continued pursuit of sound macroeconomic and structural policies that have enabled the country to make significant progress toward sustained economic growth and external viability. They also welcomed the authorities’ prudent response to the sharp drop in copper prices and other adverse external developments in 1993. They stressed, however, the importance of maintaining strong performance in the medium term while lowering inflation to industrial country levels.

Directors observed that progress in reducing inflation had lagged in 1993 and cautioned that slippages must be avoided during a gradual approach to inflation reduction. They welcomed the authorities’ readiness to adhere to tight monetary policy should domestic demand growth and inflation tail to subside, and their commitment to save any fiscal revenue above the 1994 budget projections should circumstances call for curtailment of public outlays. Directors noted that the greater flexibility in managing the exchange rate could contribute to the process of disinflation, but some Directors wondered whether there was scope for using the exchange rate as a nominal anchor. Directors emphasized that reducing the scope of indexation—including with respect to financial instruments—would facilitate inflation reduction.

The Board commended the steps taken toward liberalizing foreign exchange transactions and recommended that Chile take advantage of its present strong external position to proceed with further liberalization. Directors welcomed recently adopted legislation on capital markets, which should facilitate integration with international capital markets. Directors also noted Chile’s success in achieving social objectives, including poverty reduction, and encouraged the Government to continue with privatization of public enterprises and to improve further the regulatory framework for private sector activities.

China

The Board’s discussion on China took place in March 1995. Since the reform process began 15 years ago, the size of China’s economy had quadrupled, with real output increasing by 9 percent annually. Many of the distortions of central planning had been eliminated or reduced, and economic agents had been allowed to make decisions based on market signals.

Reform had stimulated a vibrant nonstate sector, which accounted for more than one half of industrial output and two thirds of GNP. The economy had also become more open and integrated with the rest of the world through trade and investment.

These achievements notwithstanding, several problems remained: the lack of an effective infrastructure for indirect macroeconomic management; weak performance of the state-owned enterprise sector, which accounted for most of the unemployment and had hindered development of the financial system; a weak legal and regulatory framework, which had impeded development of competitive markets; widening disparities between coastal and inland areas and urban and rural areas; and unemployment.

These problems became evident in 1992 and 1993 when economic growth reached about 13 percent in each of these years (Table 17). The accompanying surge in demand was accommodated by expansionary monetary policies, which caused inflationary pressures to intensity and disorderly conditions to emerge in the financial am. exchange markets. By mid-1993, the authorities had responded decisively with the introduction of a 16-point program for economic adjustment aimed at restoring macroeconomic stability and, in particular, achieving a “soft landing.” In 1994, however, the growth of aggregate demand, while moderating, remained high, and inflation accelerated to over 20 percent. Although certain structural factors, including increases in food prices, accounted for much of the acceleration, rapid growth in monetary aggregates also contributed to rising overall inflation.

Table 17CHINA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993Proj.

1994
Domestic economy
Real GNP8.013.013.411.8
Unemployment rate Retail prices (period average)2.75.413.021.7
External economy
Exports, f.o.b. (in billions of U.S. dollars)58.969.675.798.9
Imports, c.i.f. (in billions of U.S. dollars)–50.2–64.4–86.3–94.7
Current account balance (in billions of U.S. dollars)13.36.4–11.92.2
Overall fiscal balance (in percent of GNP)–2.2–2.3–1.9–2.1
External debt (in billions of U.S. dollars)60.669.483.695.0
Debt-service ratio110.312.512.312.6
Real effective exchange rate (year-end; 1990 = 100)285.174.574.274.73
Financial variables
Gross national saving (in percent of GNP)36.035.839.244.0
Gross domestic investment (in percent of GNP)32.734.441.243.6
Broad money26.431.324.036.84
Interest rate (one-year time deposits, year-end)7.567.5610.9810.984
Note: Data in the table reflect information available at the time of the Board discussion.

Debt service as a percentage of exports of goods and nonfactor services.

In terms of the basket of currencies used in the IMF Information Notice System. A decline in the indices indicates a depreciation. For 1990–93, effective exchange rates are calculated on the basis of the weighted average of exchange rates in the official and swap markets. From 1994, they are calculated on the basis of the interbank market rate.

November 1994.

End of September 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Debt service as a percentage of exports of goods and nonfactor services.

In terms of the basket of currencies used in the IMF Information Notice System. A decline in the indices indicates a depreciation. For 1990–93, effective exchange rates are calculated on the basis of the weighted average of exchange rates in the official and swap markets. From 1994, they are calculated on the basis of the interbank market rate.

November 1994.

End of September 1994.

In their discussion, Directors praised the impressive performance of the Chinese economy and the comprehensive reform program under way to advance its transformation to a market economy. Particularly noteworthy, they felt, were the recent reforms of the exchange and trade system, the ongoing reforms of the central bank and fiscal system, and the emerging initiatives in the enterprise and financial sectors.

Directors were of the view that a return to a more stable macroeconomic environment in 1995 would require tighter monetary and fiscal policies than currently planned, as well as faster progress with reforms in key areas, such as the state-owned enterprises, the financial sector, institution building, and further internal and external liberalization.

Considerable concern was expressed over demand pressures remaining excessive, with inflation accelerating to high levels in 1994. Directors viewed reducing inflation on a lasting basis as the key macroeconomic policy challenge facing the authorities. Success in this area would depend on implementing tighter financial policies in the near term and addressing areas that impeded macroeconomic policy reform, particularly weaknesses in the state-owned enterprises and in the infrastructure for macroeconomic policymaking and implementation.

Directors welcomed the authorities’ intention to focus on the state-owned enterprise sector in 1995. They agreed that reform of this sector was one of the most challenging and important steps in the current stage of the reform process. They urged that immediate steps be taken to harden the budget constraints on these enterprises, particularly wages and access to bank credit, and urged the authorities to continue to encourage diverse ownership forms, including privatization. Reform of the state-owned enterprise sector would need to be supported by parallel reforms of the financial sector and the establishment of a transparent legal and regulatory framework. Many Directors noted that reform of social security benefits, including social safety net provisions, would be critical to the reallocation of labor that would accompany the restructuring process.

With regard to monetary policy, Directors noted the difficulty that had been experienced with monetary control in the context of large external surpluses and inadequate monetary instruments. They were of the view that actions were needed to strengthen monetary control. Directors encouraged the People’s Bank of China to reduce lending and reorient itself toward short-term credits and to proceed with establishing open market operations and enhancing competition in the banking sector. Directors stressed that achieving and maintaining positive interest rates in real terms was a crucial element of the program for monetary restraint. They welcomed the enactment of the central bank law and hoped that it would help in formulating and implementing monetary policy that was more closely oriented to restoring and maintaining price stability.

Directors welcomed the comprehensive fiscal restructuring implemented in 1994 and noted that it would contribute to more effective demand management and to reducing regional disparities over the medium term. They strongly supported the authorities’ plans to improve tax administration.

Directors also welcomed the successful implementation of the reform of the foreign exchange market and the unification of exchange rates in early 1994. Given the strong balance of payments position. Directors saw few obstacles to removing the remaining restrictions on current account transactions and strongly encouraged China to accept the obligations of the Fund’s Article VIII at an early date.

Directors underlined the need to consolidate the progress made by fully liberalizing trading rights of domestic and foreign enterprises, dismantling nontariff barriers, and accelerating tariff reduction and simplification. They also urged the authorities to improve the quality of data and to increase public dissemination of data.

Directors considered that perseverance with the implementation of the reform program was essential for realizing the full potential of the Chinese economy and for continued improvements in living standards.

Ecuador

Directors met in May 1994 to discuss the Article IV consultation with Ecuador and approved its request for a stand-by arrangement (see section on Fund Support for Member Countries).

In the ten years following the onset of the debt crisis in 1982, Ecuador was faced with high inflation and declining per capita output and had difficulty in servicing its external debt. A new Government took office in 1992 and adopted a series of reform measures to turn the economy around. Tighter fiscal policies in 1993, combined with a policy that kept the nominal exchange rate approximately constant to anchor inflationary expectations, helped to cut the inflation rate sharply (from 60 percent in 1992 to 31 percent) and encouraged private capital inflows that substantially increased international reserves (Table 18). The combined public sector deficit was also reduced, from 3.9 percent of GDP in 1992 to 0.4 percent of GDP in 1993. Although the external current account deficit widened (from $110 million to about $470 million) because of a drop in world oil and banana prices, this weakening was more than offset by the higher-than expected increases in capital inflows and net international reserves (the latter increased by about S600 million in 1993). Despite worsening of Ecuador’s terms of trade, real GDP growth remained positive in 1993, at 2.0 percent compared with 3.6 percent in 1992.

Table 18ECUADOR: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Non-oil real GDP4.43.30.92.2
Urban unemployment (in percent)8.58.9
Consumer prices (end of period)49.060.231.020.0
External economy
Exports, f.o.b. (in millions of U.S. dollars)2,8513,0082,9013,0763
Oil exports (in millions of U.S. dollars)1,1521,3371,2531,2963
Imports, f.o.b. (in millions of U.S. dollars)2,2072,0482,3262,4723
Current account balance (in millions of U.S. dollars)–570–111–469–693 3
Overall balance (in millions of U.S. dollars)–973–1,009–478–698 3
External debt (in percent of GDP, end of year)3,4,5108.4104.595.785.7
Debt-service due (in percent of exports of goods and nonfactor services)3,4,570.865.659.664.8
Real effective exchange rate (end of period)6.619.9
Financial variables
Combined public sector balance (in percent of GDP)6–4.3–3.9–0.4–0.5
Gross national saving (in percent of GDP)3,417.020.618.920.3
Gross domestic investment (in percent of GDP)21.921.622.224.5
Money and quasi-money (M2)55.056.546.727.5
Interest rate749.542.328.4
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected (under Fund-supported program).

Before debt-reduction operations.

Includes late interest on arrears to commercial banks.

Includes obligations to the Fund.

Includes interest payments on an accrual basis and the change in the floating debt of the Treasury; excludes late interest on arrears to commercial banks. Through 1993, includes statistical discrepancy (difference between deficit measured “above” and “below the line”).

On 90-day certificates of deposit, end of period.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected (under Fund-supported program).

Before debt-reduction operations.

Includes late interest on arrears to commercial banks.

Includes obligations to the Fund.

Includes interest payments on an accrual basis and the change in the floating debt of the Treasury; excludes late interest on arrears to commercial banks. Through 1993, includes statistical discrepancy (difference between deficit measured “above” and “below the line”).

On 90-day certificates of deposit, end of period.

In late 1993 the authorities initiated efforts to deepen structural reforms and strengthen fiscal adjustment. legislation to downsize the public sector and improve its efficiency was approved in November 1993, and legislation to deregulate the petroleum industry and open the sector to increased activity by private companies was passed in December. When the decline in world oil prices in late 1993 threatened to erode the fiscal gains achieved earlier in the year, the Administration submitted a tax reform bill that featured a sharp increase in the VAT rate. Congress rejected the VAT increase, and in January 1994 the authorities moved to strengthen public finances by increasing the domestic price of gasoline. At the same time, an austerity decree gave the Ministry of Finance increased power to limit government spending.

In their discussion. Directors commended the Government for the progress achieved in reducing inflation, increasing international reserves, and implementing structural reforms. They urged the authorities to persevere in the adjustment and reform effort, in order to improve Ecuador’s economic prospects on a durable basis and to ensure continued foreign direct investment. In this regard. Directors welcomed the agreement reached with the commercial bank steering committee on a term sheet that contemplated debt-and debt-service-reduction operations as an important step toward achieving external viability.

Fiscal consolidation and structural reform were seen by the Board as key to a successful effort to foster economic growth by lowering inflation and durably reducing domestic and external imbalances. Adjustment of public sector tariffs and establishment of a system to stabilize oil revenue in the face of fluctuating world oil prices were seen as important elements of the fiscal program. In the near term, increased tax collections would depend on strict adherence to the Government’s plan to strengthen tax administration; beyond that, additional revenue sources would need to be identified and tax reform eventually undertaken. Such reform should aim to enhance tax equity, reduce the public sector’s reliance on oil revenue, and increase outlays on infrastructure and social programs, especially those directed toward the poorest segments of the population. The authorities were also urged to formulate quickly a program to strengthen finances of the social security system.

Directors welcomed approval of legislation to improve public sector efficiency and increase private sector activity, including through the sale of public assets. They emphasized, however, that prudent fiscal and wage policies must be accompanied by suitably restrained credit policies; plans to lower reserve requirements and reduce the stock of open marker bills should be tailored to progress in fiscal consolidation and inflation reduction. Directors also welcomed approval of legislation to reform the financial system and the authorities’ plans to enhance central bank autonomy and strengthen bank supervision.

Directors noted Ecuador’s application for accession to the GATT (and its successor organization, the WTO) and encouraged Ecuador and its partners in the Andean Pact to agree on a low and simple common tariff. The authorities were advised to resist protectionist pressures in implementing reference prices and agricultural price bands, and to overhaul those systems. Directors welcomed Ecuador’s maintenance of a free interbank market for private foreign exchange transactions. They urged the authorities to develop more direct expenditure control mechanisms and to eliminate multiple currency practices for public sector transactions. Directors commended the authorities for their intention to tighten the fiscal stance further, in order to safeguard competitiveness, should capital inflows exert continued upward pressure on the currency.

Ghana

The Executive Board discussed the Article IV consultation with Ghana in June 1994. Because of slippages in the Government’s economic recovery program during recent years and consequent macroeconomic deterioration, the authorities adopted policies in 1993 to restore financial discipline and improve Ghana’s external position. Most program benchmarks were not met, however, although real GDP growth exceeded targets—rising by 5 percent in 1993 (Table 19). (Growth was largely attributable to good harvests and strong growth in mining output.)

Table 19GHANA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Real GDP5.33.95.05.0
Consumer price index18.010.125.021.3
External economy
Exports, f.o.b.11.2–1.16.613.3
Imports, f.o.b.9.410.518.6–6.7
Current account balance (in percent of GDP)–3.6–5.5–9.4–6.3
External debt outstanding (in percent of GDP)54.460.776.294.9
Debt service (in percent of GDP)4.54.17.27.2
Real effective exchange rate3.6–10.6–12.7
Financial variables
Government revenue and grants46.1–6.297.753.2
Total government expenditure33.245.260.929.8
Broad money19.952.927.45.0
Interest rate (in percent)320.025.432.0
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Program target.

Discount rate on 91-day treasury bills.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Program target.

Discount rate on 91-day treasury bills.

The program’s slippage was due to higher-than-expected expenditures, a shortfall in revenue from petroleum excise duties, and exchange rate changes that affected retail prices. In addition, budgetary receipts from petroleum taxes, sales taxes, and cocoa exports fell short of targeted levels, As a result, the overall deficit in 1993 was 2.5 percent of GDP.

Nonetheless, intensified collection and administrative improvements contributed to a healthy increase in both personal and company income tax receipts. Moreover, the Government was able to contain its wage bill despite mounting pressure from public sector unions. Development spending was also kept within the budgeted limits, and structural reform continued to progress.

Liquidity in the banking system expanded sharply because of lending by the Bank of Ghana, a reduction in the public’s holdings of currency relative to deposits, and a rundown of banks’ reserves. Despite these actions, broad money grew by 27 percent, driven by a strong increase in private sector credit. Consumer prices rose by 28 percent in 1993, more than double the 1992 rate.

Comparatively loose financial policies and heavy sales of foreign exchange by the Bank of Ghana contributed to disappointing external sector performance. The current account deficit widened sharply to 9 percent of GDP, and the balance of payments registered an overall surplus of $ 41 million, with reserves declining to 2.7 months of imports.

Directors noted that, notwith-standing progress made in stabilizing the economy and strong economic growth, the performance under the 1993 program fell short of expectations. In particular, improvement in the overall fiscal balance was only about one half of what had been envisaged. In addition, although the civil service wagebill was contained, there were substantial spending overruns in other areas of the budget. As a consequence, monetary targets were missed, inflationary pressures mounted, and the balance of payments position was weaker than expected.

The authorities’ commitment to a comprehensive-stabilization and structural adjustment program for 1994 was welcomed by the Board. The restoration of strict financial discipline and a reduction in inflation would be essential to external viability and sustainable growth. Directors Observed that the progress made on expenditure control at the payments stage needed to be complemented by better monitoring at the commitment level. Directors noted with satisfaction both the 1994 program goal of a fiscal surplus and the broadly based strategy for achieving it. However, they encouraged the authorities to pass through unanticipated increases in oil import costs and to resist pressures for large public sector wage awards. Directors remarked that if necessary the Bank of Ghana should allow interest rates to rise in order to meet the program’s objectives.

Directors supported Ghana’s structural reform efforts. In particular, they welcomed the good progress being made on the divestiture program, which provided a clear signal of the Government’s commitment to enhancing the private sector’s role in economic development. Directors also expressed satisfaction that the operating costs of the Cocoa Board had been contained, that strong price incentives had been provided to cocoa farmers, and that the domestic marketing of cocoa had been liberalized.

Directors noted that the flexible exchange rate policy acted as a safety valve against weaknesses in policy implementation and in order to avoid undue losses of foreign exchange. But they also observed that the currency depreciation over the years may well have led to inflationary expectations and that greater exchange rate stability could contribute to greater price stability. They were agreed, however, that the first priority was to strengthen macroeconomic—particularly fiscal—policy.

External assistance to Ghana was expected to remain relatively high through the medium term. Directors therefore emphasized the importance of structural reforms and domestic resource mobilization as key elements in diversifying economic activity and achieving external viability. They welcomed Ghana’s acceptance of the obligations of Article VIII.

Jamaica

Directors met in February 1995 to discuss Jamaica’s Article IV consultation and the fourth review under the country’s extended arrangement with the Fund.

Jamaica’s real GDP grew by 2 percent in 1993/94 (the fiscal year begins on April 1), about the same rate as in 1992/93 (Table 20). Twelve-month inflation rose from 14,9 percent in June 1993 to 37 percent by March 1994 before declining to 26,7 percent in December 1994, with monthly inflation coming down to 0,7 percent in the latter month. Through a package of tax measures applied by the authorities in mid-1993-94, accompanied by stronger expenditure control, the impact of the early 1993 public sector wage increases was effectively contained, leading to the public sector balance for the fiscal year reaching a surplus of 1.6 percent of GDP. The public sector balance increased further to 3½ percent of GDP during the first half of 1994/95. Net domestic assets of the central bank contracted sharply in 1993/94, and, with tighter credit policy, market interest rates on treasury bills rose from around 20 percent at the end of 1992/93 to a peak of 52 percent in February 1994.

Table 20JAMAICA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
1991/921992/931993/941994/951
Domestic economy
GDP at constant prices0.81.82.02.0
Unemployment rate (in percent)215.415.716.2
Consumer prices (period average)68.657.524.532.0
External economy
Exports, f.o.b. (in millions of U.S. dollars)1,082.11,051.11,071.31,192.6
Imports, c.i.f. (in millions of U.S. dollars)1,741.51,831.82,202.62,240.2
Current account balance (in percent of GDP; -, deficit)3–6.8–1.5–5.4–1.4
Overall balance (in millions of U.S. dollars)42.4170.1136.5343.9
External debt (in percent of GDP, end of period)4116.9108.097.989.8
Debt-service ratio (in percent of exports of nonfactor goods and services)528.526.623.921.2
Real effective exchange rate (end of period; -, depreciation)–31.635.3–8.7
Financial variables
Central government balance (in percent of GDP)4.14.23.51.9
Gross national saving (in percent of GDP)16.219.318.321.6
Gross domestic investment (in percent of GDP)21.119.422.622.6
Broad money (M)60.949.249.323.0
Interest rate644.320.550.327.67
Note: Data in the table reflect information available at the time of the Board discussion.

Projected under the extended arrangement with the Fund.

Calendar years.

Excluding official grants.

Includes use of Fund credit and projected purchases under the extended arrangement with the Fund.

After rescheduling; includes projected purchases under the extended arrangement with the Fund.

Average treasury bill yield, end of year.

As of December 31, 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected under the extended arrangement with the Fund.

Calendar years.

Excluding official grants.

Includes use of Fund credit and projected purchases under the extended arrangement with the Fund.

After rescheduling; includes projected purchases under the extended arrangement with the Fund.

Average treasury bill yield, end of year.

As of December 31, 1994.

The Bank of Jamaica’s net domestic assets continued the 1993/94 declining trend during the first half of 1994/95 as the central bank sterilized the monetary effect of the gain in net international reserves. Net international reserves reached $272 million at end-September 1994, substantially ahead of the program target. This performance reflected, first, strong improvement of the external current account balance, arising mainly from higher private transfers, and, second, high private capital inflows that could be partly explained by high domestic interest rates. As a result of these developments, Jamaica’s overall balance of payments showed a surplus of $137 million in 1993/94, with the surplus rising to $215 million in the first half of 1994/95. The central bank’s gross reserves increased to about $630 million by the end of September 1994.

In their discussion. Directors commended the authorities for the significant economic progress made under the extended arrangement. The tightening of fiscal and monetary policies that began in 1993/94 had been sustained, and structural reforms had continued—with the result that private sector confidence in the economy had improved. The sizable gain in international reserves over the past year had given Jamaica a much-needed reserve cushion. Directors cautioned, however, that public sector wage increases should be contained at a level commensurate with anti-inflationary efforts and the sustainability of the policy mix. They stressed the importance of forward-looking wage negotiations and of tying wage increases more closely to productivity gains in order to durably reduce inflation.

The recent uncertainty in international capital markets appeared to have had no adverse impact on Jamaica. Directors noted the possibility of some nominal appreciation of the currency occurring if private capital inflows remained high. They believed, however, that given trends in wages and prices, it would be important to limit any real appreciation of the currency. They thought the authorities should stand prepared to consider responses other than sterilization, if strong capital inflows persisted.

Directors noted that important structural reforms had been implemented in recent years, particularly the liberalization of the exchange and trade system and the privatization of public enterprises. Privatization was central to improving economic efficiency over the medium term, and Directors welcomed the authorities’ intention to continue the process. They also welcomed the planned elimination of Hank of Jamaica losses in early 1995/96 and commended the authorities for reforms to improve the efficiency and comprehensiveness of the financial sector.

Under the extended arrangement with the fund, Jamaica’s medium-term balance of payments prospects had improved considerably, The external debt-service burden had declined appreciably in recent years. Directors cautioned, however, that the country remained vulnerable to exogenous developments, Jamaica would need to maintain its current strong fiscal position, combined with a restrained monetary policy, to ensure continuation of external viability with low inflation in the medium term.

Jordan

Directors completed the Article IV consultation with Jordan in May 1994. At that time, they also approved its request for a three-year extended arrangement (see section on fund Support for Member Countries).

The Board discussion was conducted in the context of the progress Jordan had made on the macroeconomic and balance of payments fronts under a two-year stand-by arrangement with the fund ending in February 1994. After several years of stagnation, real GDP growth had averaged over 10 percent in 1992–93 while inflation had dropped below program targets to 4–5 percent (Table 21). The strong economic growth, combined with the impact of fiscal measures and lower interest payments, had reduced the fiscal deficit much faster than had been anticipated. Meanwhile, the external current account and overall balance of payments deficits had narrowed beyond expectations, reflecting increased private sector investment, improved trade incentives, and prudent exchange rate management. Also, through a prudent debt-management policy, the burden of external debt in relation to GDP was reduced to 128 percent by the end of 1993, compared with the peak of 193 percent in 1990.

Table 21JORDAN: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Domestic demand0.832.09.14.9
Real GDP1.816.15.85.7
Consumer price index8.24.04.83.5
External economy
Exports, f.o.b. (in millions of U.S. dollars)1,1321,2201,2481,442
Imports, c.i.f. (in millions of U.S. dollars)2,5713,3393,5413,556
Current account balance (in percent of GDP)2–17.0–14.4–11.6–8.8
Overall balance (in millions of U.S. dollars)–267–488–571–503
External debt (in percent of GDP)163.8128.1128.2109.0
Debt-service ratio (in percent of exports of goods and services)41.936.135.025.3
Exchange rate (Jordan dinar/ U.S. dollar)1.46891.47121.44341.4312
Financial variables
Overall fiscal balance (in percent of GDP)3–17.4–3.44–5.6–5.1
Gross national saving (in percent of GDP)5.013.414.213.3
Gross national investment (in percent of GDP)23.730.031.828.6
Broad money24.57.96.98.0
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Including grants.

Excluding foreign grants.

Including the effect of an estimated 3.5 percent of GDP in nonrecurrent revenues.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Including grants.

Excluding foreign grants.

Including the effect of an estimated 3.5 percent of GDP in nonrecurrent revenues.

In their discussion, Directors commended the Government’s achievements under the program supported by the extended arrangement, as well as its adoption of a medium-term adjustment and structural reform program aimed at generating an average real growth rate of 6 percent while holding inflation at or below 5 percent. They characterized the program’s two-pronged medium-term economic strategy—further progress in macroeconomic stabilization and continued structural reform in priority areas—as comprehensive and well focused. Directors noted that, to achieve the first goal, further sustained improvements in public and private sector saving were needed. In the area of structural reform, the Board encouraged the Government to elaborate the details of the envisaged reforms and to accelerate the pace of their implementation. Reform of the direct and indirect tax systems and improvements in the quality of public expenditure and the regulatory framework for private sector investments were singled out as priority areas; in that connection. Directors welcomed the planned introduction of the General Sales Tax law, which was effectively introduced on June 1, 1994, one month ahead of the planned date of introduction.

Directors also noted the authorities’ intention to support the stabilization efforts by maintaining a prudent monetary and credit stance. They commended the progress made in attaining the objective of implementing indirect monetary controls by mid-1994 through the issuance of certificates of deposit denominated in Jordan dinars. They also supported the authorities’ intention to streamline certain credit facilities and promote the development of the domestic interbank market.

Directors endorsed the authorities’ exchange rate policy, which, bolstered by appropriate macroeconomic policies, had stabilized the nominal exchange rate in recent years. The Board also emphasized that, despite the favorable external sector developments of the past two years, the goal of achieving balance of payments viability by 1997 remained ambitious, especially in light of the country’s heavy debt burden and vulnerability to adverse exogenous shocks, including regional developments and shifts in private investors’ sentiments. To help expand the domestic export—base and to reduce the external current account deficit to targeted levels—the Government would have to continue to implement its medium-term strategy of domestic demand restraint, price stability, and deepened structural reforms. Despite the progress made in reducing external debt and the debt-service ratio and in normalizing relations with external creditors, Jordan’s need for exceptional financing would persist for several years to come. Nevertheless, Directors considered that continued implementation of strong adjustment and debt-management policies, and the envisaged acceleration in the pace of aid disbursements, would enhance Jordan’s prospects for regaining balance of payments viability in the medium term.

The Board noted the further liberalization of the exchange system and welcomed the Government’s intention to accept obligations under Article VIII. Jordan accepted these obligations with effect from February 20, 1995.

Korea

The Board’s 1994 Article IV consultation with Korea took place in September 1994 against a background of sustained output growth. Following an economic slowdown in 1992 caused mainly by the implementation of measures to restrain domestic demand, output picked up in 1993, supported by the continued buoyancy of exports and the gradual recovery of domestic demand (Table 22). Economic activity gained further momentum in the first half of 1994 as investment in equipment and consumer spending increased. Mean while, alter tailing to 4½ percent by the end of December 1992, consumer price inflation rose to the percent in 1993 because of a surge in food prices and continued at that pace into 1994.

Table 22KOREA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319942
Domestic economy
Real final domestic demand10.53.94.77.9
Real GNP9.15.05.67.9
Unemployment rate2.32.42.82.6
Consumer price index9.36.24.85.6
External economy
Exports, f.o.b. (in billions of U.S. dollars)69.675.281.087.7
Imports, c.i.f. (in billions of U.S. dollars)76.677.378.988.2
Current account balance (in percent of GNP)–3.0–1.50.1–0.8
Overall balance (in billions of U.S. dollars)–3.74.96.5–2.5
External debt (in percent of GNP)14.514.013.3
Debt-service ratio (in percent of exports of goods and services)6.06.09.1
Real effective exchange rate–0.4–0.9–1.32.42
Financial variables
Consolidated central government balance (in percent of GNP)–1.9–0.7–0.3–0.6
Gross national saving (in percent of GNP)36.335.034.935.9
Gross domestic investment (in percent of GNP)39.336.534.836.7
Broad money (annual average)18.618.418.615.93
Interest rate (yield on corporate- bonds, period average)18.916.212.612.43
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Average for March.

Through June.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Average for March.

Through June.

Driven by the strong export performance and the slow recovery of imports, the current account registered a small surplus in 1993 after three years of deficits; large inflows of long-term capital in the same year contributed to a substantial balance of payments surplus. After a 6 percent depreciation from December 1992 through August 1993, the won appreciated by 2 percent in nominal effective terms in the last three months of 1993.

Broad money growth accelerated temporarily in the wake of the introduction of the “real name system’(which banned the use of false or borrowed names) in August 1993 but subsided to just above the top of the target band by the end of the year. Monetary expansion decelerated further in the first half of 1994. On the fiscal side, cutbacks in expenditure in the first half of 1993 in response to an anticipated revenue shortfall produced an unexpected surplus for the year as a whole, since revenues turned out close to the original budget targets. Available 1994 data suggested that revenues were running slightly ahead of budget projections, generating a better than-expected position for the consolidated central government.

In their discussion, Directors noted Korea’s remarkable economic performance since 1960—a period in which it has transformed itself from one of the world’s poorest countries (with per capita income below $150) to the twelfth-largest economy, accounting for 2¼ percent of World trade. They commended the authorities for that record, attributing the sustained success to a high investment rate supported by a high private saving rate, a conservative fiscal policy, a strong emphasis on education and human capital accumulation, and an increasingly outward orientation of the economy.

Directors agreed that, with the economy approaching full employment, the main macroeconomic policy challenge was to sustain the economic expansion while avoiding a renewed bout of inflation. Because growth had shown continued strength and the unemployment rate had dropped further to just over 2 percent, Directors saw a clear case for an early tightening of financial policies and emphasized that such an action would obviate the need for more difficult measures at a later stage.

The Board commented that the task of containing demand pressures might be complicated by the prospect of continuing large capital inflows. In light of the authorities’ concern that such inflows could contribute to inflationary growth of the money supply or an appreciation of the won—thereby undermining export competitiveness—Directors agreed that a set of policies emphasizing fiscal restraint and structural measures to liberalize imports and capital outflows could be helpful. At the same time, a number of Directors emphasized that a somewhat stronger currency would have beneficial effects on inflation and should not detract significantly from the economy’s strong competitive position.

In view of the cyclical situation, and given the need for fiscal policy to play a greater role in restraining aggregate demand, Directors emphasized the need for a significant withdrawal of stimulus in 1995. They welcomed the recent decision to aim for a surplus in the 1995 budget while noting the difficulty of achieving such a stance, especially in light of the Government’s commitment to strengthen infrastructure and improve the provision of public goods.

On monetary policy, Directors observed that the central bank’s flexible approach to monetary targeting in recent years had been successful. However, with financial sector reform moving ahead and the patterns of financial intermediation changing, the assessment of the monetary stance would increasingly need to rely on a broader range of indicators. Directors endorsed the central bank’s latest efforts to push up short-term interest rates to achieve monetary growth at the lower end of the target band in 1994.

The Board welcomed the authorities’ commitment to steady implementation of structural reforms and agreed that financial sector reform and capital account liberalization should have top priority. On trade policy. Directors supported the continuing efforts to phase out barriers to agricultural imports and urged the Government to go further in that direction.

Malaysia

In September 1994, Directors met to discuss the Article IV consultation with Malaysia. The discussion took place against the background of Malaysia’s impressive economic performance over the past two decades. Following a slowdown in 1992 and early 1993, brought on in part by tighter financial policies, activity picked up momentum (Table 23). Inflation remained moderate in 1993. Real output growth rose by 8½ percent in 1993 and the first quarter of 1994. This new growth was driven by domestic factors, particularly private consumption and investment, and a rise in exports, reflecting the improved performance of Malaysia’s main trading partners.

Table 23MALAYSIA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
1991199219931
Domestic economy
Domestic demand18.02.510.7
Real GDP8.77.88.5
Unemployment rate (in percent)4.33.73.0
Consumer price index (period average)4.44.73.6
External economy
Exports, f.o.b. (in billions of U.S. dollars)33.539.645.9
Imports, f.o.b. (in billions of U.S. dollars)33.036.242.5
Current account balance (in billions of U.S. dollars)–4.2–1.6–2.5
Overall balance (in billions of U.S. dollars)1.26.910.2
Real effective exchange rate (annual average, percent change)–2.96.3–1.0
Financial variables
General government balance (in percent of GNP)–2.7–1.00.2
Gross national saving (in percent of GNP)29.532.633.1
Gross domestic investment (in percent of GNP)38.835.637.1
Broad money (end of year, percent change)13.718.022.8
Interest rate (interbank, in percent)7.68.17.2
Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

Directors commented on the appropriate policy mix under such circumstances. In this context, they noted that while fiscal policy could make a contribution to containing demand pressures, the burden of attaining the needed degree of restraint would ultimately tall on monetary and exchange rate policies.

Directors commended the authorities for the strength of the fiscal position that had been attained in recent years. Some Directors suggested that the authorities adopt a more ambitious target than that of maintaining an overall budget balance over the medium term. The authorities’ intention to replace direct taxes with indirect taxes in order to enhance the incentives to work, save, and invest was supported by Directors. In that vein, they also supported plans to consolidate the present sales and services taxes into a broadly based consumption tax.

Directors observed that in the recent past surging capital inflows had complicated the conduct of monetary policy. Although steps had been taken by the authorities to tighten monetary policy, Directors viewed monetary policy during the past year as broadly accommodative. In particular, they saw a risk that credit demand would rise as the economic expansion continued, Directors felt that, in these circumstances, there was merit in the adoption of further monetary policy measures that could contribute more actively to restraining demand pressures. Recognizing that the increased integration of Malaysia’s financial market with those of other countries had limited the scope of maintaining interest rates significantly above world levels, and the desirability of maintaining an open capital account. Directors felt that an upward movement in the ringgit exchange rate could be accommodated to maintain monetary restraint without affecting external competitiveness in view of the strong external position.

Rapid growth in Malaysia had been accompanied by rising wage costs, and consequently the competitiveness of more labor-intensive industries had been reduced. This led Directors to observe that maintaining the rapid growth would require that production continue to shift toward higher value-added industries. They noted that such a shift should be facilitated by the authorities’ commitment to providing increased budgetary resources for education and training. Con sidering the role of fiscal incentives in Malaysia’s economic development. Directors cautioned against their pervasive use, lest they introduce distortions in the allocation of resources.

Mali

Directors met in October 1994 to discuss Mali’s Article IV consultation report; the discussion also included a midterm review of the country’s second annual ESAF arrangement (see section on Fund Support for Member Countries). After two years of mixed economic performance, the Malian authorities resolved in early 1994 to take additional steps to restore sustainable growth and financial viability over the medium term. Their strengthened and broadened adjustment strategy, conceived in the context of increased regional cooperation and integration, involved three main elements: (1) the zonewide 50 percent devaluation of the CPA franc, effective January 12, 1994; (2) strong supporting financial policies to limit inflation and ensure that the devaluation restores long-term competitiveness; and (3) structural reforms to accelerate private sector development.

Developments under the adjustment program during the first half of 1994 were encouraging (Table 24). Inflation was more moderate than projected. The devaluation helped boost export activities, especially of the agricultural sector, while imports dropped appreciably. There were also sizable reflows of capital and a larger-than-anticipated improvement in the net foreign assets of the banking system. Structural measures included the implementation of flexible pricing policies, the strengthening of reforms in the agricultural sector, and the acceleration of public enterprise reforms. At the same time, customs duties and certain domestic taxes were reduced to moderate cost and price increases, as well as to lower external protection.

Table 24MALI: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Real GDP–2.57.8–0.82.4
Primary sector (in percent of GDP)46.347.244.9
GDP deflator2.11.92.635.1
External economy
Exports, f.o.b.9.1–11.48.7100.9
Imports, c.i.f.7.21.5–1.699.1
Current account balance (in percent of GDP)2–14.0–15.0–12.9–19.0
Overall balance of payments (in millions of SDRs)101.2–5.63.772.5
External payments arrears (net change in millions of SDRs)2.99.912.6–24.0
Debt-service ratio317.219.819.122.4
Real effective exchange rate–3.5–7.4–2.0–42.8
Financial variables
Overall fiscal deficit4 (in percent of GDP)–12.3–11.2–9.6–14.2
Gross domestic savings (in percent of GDP)6.54.66.65.3
Gross domestic investment (in percent of GDP)23.121.921.926.9
Money and quasi-money12.53.48.436.2
Interest rate510.610.17.3
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Excluding official transfers.

Excluding debt service to China and the former U.S.S.R.

On commitment basis and excluding grants.

End-of-period rate on overnight deposits in the money market of the Union Monetary Ouest Africaine (UMOA); for 1993, end-of-period rate in the money market of the UMOA.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Excluding official transfers.

Excluding debt service to China and the former U.S.S.R.

On commitment basis and excluding grants.

End-of-period rate on overnight deposits in the money market of the Union Monetary Ouest Africaine (UMOA); for 1993, end-of-period rate in the money market of the UMOA.

To contain the fiscal deficit at the equivalent of some 15 percent of GDP in 1994, special emphasis was placed on broadening the tax base, strengthening the collection process, reducing rax fraud, and abolishing ad hoc exemptions. On the spending front, the authorities have been very prudent; total government expenditure for the first half of the year was lower than projected. A pivotal element of the fiscal program was implementation of a restrained wage policy.

Credit conditions in Mali were generally tight in 1994. At the same time, commercial banks became increasingly liquid for several reasons: a return of flight capital, the improved financial position of exporters, the weak demand for private sector credit, and the very cautious lending stance adopted by commercial banks.

Directors commended the Malian authorities for the strengthening and broadening of their medium-term adjustment strategy, including the devaluation of the CFA franc, which was a key condition for the achievement of sustainable economic growth and financial viability. Directors noted that the comprehensive adjustment program had been implemented in difficult circumstances and that all performance criteria and benchmarks for end-March and end-June 1994 had been observed.

Directors commented that the authorities had succeeded in keeping inflationary pressures in check after the initial price shock following the devaluation while avoiding price controls and subsidies. In addition, they welcomed the package of fiscal measures. Directors noted that the significant depreciation of the real effective exchange rate had elicited a positive supply response in several sectors, notably through an increase in intraregional trade, including a rise in livestock and agricultural exports, and considerable improvement in the cotton sector.

Directors remarked, however, that despite the encouraging results, Mali’s per capita income remained very low with a still fragile economy. Directors noted that fiscal imbalances were still important and that it would require continued efforts to reform the tax system, improve revenues, and contain expenditures. In that connection, further technical assistance would play an important role. They underscored the need for the authorities to continue to provide adequate allocations for health and education services, as well as for the programmed social safety net measures.

The pursuit of a prudent monetary policy was considered essential. Directors encouraged the authorities to strengthen their efforts to coordinate fiscal and monetary policies within the framework of the West African Economic and Monetary Union (WAEMU). They noted the authorities’ intention to reduce domestic payments arrears with technical assistance from the World Bank. Directors indicated that the Government’s securitization scheme of the consolidated government debt (assumed by the Government during the restructuring of the banking system in the late 1980s), aimed partly at absorbing the increased liquidity of the banking system, could be better structured, with the interest rate set by the market. Moreover, it was essential that commercial banks support economic activity through their lending operations without deviating from sound banking practices.

Directors remarked that the CFA franc devaluation gave the authorities an opportunity to strengthen the momentum of structural adjustment. Increasing efficiency and production in the agricultural sector was indispensable for Mali’s economy to reap the full benefits of the devaluation. For example, in the cotton sector the implementation of the new performance contract and the maintenance of flexible producer prices—based on the evolution of world market prices—were seen as crucial. In the industrial and mining sectors, the vigorous pursuit of the reform and privatization program was also considered crucially important for diversifying production and increasing the profitability of a number of activities.

Directors also encouraged the authorities to accept the obligations of Article VIII at an early date.

Morocco

The Board discussion on Morocco took place in July 1994. Morocco has made significant progress in macroeconomic adjustment and structural reforms over the past decade. Although economic activity suffered in 1992–93 as a result of a severe drought, the average annual rate of inflation, as measured by the consumer price index, dropped to 5.2 percent in 1993 (Table 25). During 1993, a watershed year for the Moroccan economy, the authorities managed to restore financial equilibria, substantially reduce the natural and policy-induced weaknesses in the economy, and “graduate” Morocco from the prolonged use of Fund resources and from debt rescheduling.

Table 25MOROCCO: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992Prel.

1993
Prel.

1994
Domestic economy
Real GDP6.2–4.10.29.0
Consumer prices (annual average)8.05.75.25.0
External economy
Exports, f.o.b. (on the basis of SDR value)0.4–9.7–6.99.0
Imports, f.o.b. (on the basis of SDR value)–1.34.0–8.77.5
Current account balance (in percent of GDP)1–2.3–2.2–2.5–2.3
Overall balance (in millions of SDRs)2–126–36284271
External debt (in percent of GDP)3,469.972.174.167.1
Debt-service ratio (before debt relief)440.537.338.134.7
Real effective exchange rate0.10.61.03.0
Financial variables
General government balance (in percent of GDP)5–3.1–2.1–3.5–1.9
Gross national saving (in percent of GDP)21.721.821.520.2
Gross national investment (in percent of GDP)22.823.023.122.2
Broad money (M2)16.89.38.28.5
Interest rate (five-week treasury bills)9.810.58.0
Note: Data in the table reflect information available at the time of the Board discussion.

Before official grants.

Before debt relief.

Includes use of Fund credit.

In percent of exports of goods, nonfactor services, and private transfers.

On cash basis; excluding grants.

Note: Data in the table reflect information available at the time of the Board discussion.

Before official grants.

Before debt relief.

Includes use of Fund credit.

In percent of exports of goods, nonfactor services, and private transfers.

On cash basis; excluding grants.

In 1993, even with the economy buffeted by a second year of drought, sluggish economic activity in Morocco’s main trading partners, and a further deterioration in the terms of trade, the authorities managed to implement reforms. These were aimed at further opening the economy and improving resource allocation; strengthening the financial system and improving financial intermediation, by adopting a new banking law and revising the statutes of the central bank; and widening the scope of private sector activity by selling the first batch of 10 of 112 enterprises targeted for privatization.

Despite a sharp drop of 8.7 percent in the terms of trade, the trade balance narrowed in 1993, owing to a larger drop in import payments than in export receipts. Export proceeds suffered from a weak export market for phosphates, the depressed economic activity in importing markets, and the effects of the drought on agricultural exports. Nonetheless, the balance of payments for 1993 recorded a surplus amounting to SDR 284 million.

In their discussion, Directors commended the authorities for the substantial progress made since the early 1980s in strengthening the macroeconomic situation, liberalizing the economy, and achieving a sustainable external position. They noted that, despite exogenous adversities in 1993, Morocco had continued to pursue prudent macroeconomic policies and structural reforms, which allowed improved growth prospects and a stronger external position.

Morocco’s acceptance of the obligations of Article VIII, Sections 2, 3, and 4 was welcomed by Directors, as was the virtual abolition of quantitative trade restrictions, the further reduction in import tariffs, the privatization of a first group of public enterprises, and measures to reform the financial sector.

To reduce the high levels of unemployment and raise living standards, Directors were of the view that the main challenge in the coming years would be to move the economy to a higher sustainable growth path. They noted that higher growth would require increased private investment, a reduced budget deficit, promotion of private sector saving, and higher inflows of foreign direct investment. Increases in productivity were also seen as essential.

Directors felt that 1994 would provide a base to move ahead with further structural reforms, in light of the rebound in agricultural production and the recovery in key export markets. Concern was expressed about the signs of excessive liquidity in the economy and the danger that inflation could be reignited unless tighter monetary policy was maintained, along with continued deficit reduction. Directors agreed that there was a need to take concrete measures to reinforce the fiscal position, including possible contingency measures.

In their discussion. Directors stressed the critical need to press ahead with further reforms of the financial system, including the elimination of the remaining interest rate controls and the requirement that hanks hold government paper at below -market interest rates. The new securities law was seen as contributing to the deepening of financial markets and strengthening saving. Directors felt that the financial sector reforms would also facilitate the move toward the conduct of monetary policy through market-based indirect policy instruments.

Directors welcomed the acceleration in the privatization of public enterprises and the authorities’ intention of extending privatization beyond the enterprises that were currently scheduled to be privatized.

Several Directors noted that the move to current account convertibility should be followed by the establishment of a broadly based foreign exchange market, together with a range of additional financial sector reforms. It was pointed out that other countries had an important role to play in removing trade measures that artificially limited Morocco’s export potential.

South Africa

The Article IV consultation with South Africa took place in January 1995 following a year of fundamental political change. It was clear by late 1993 that the most immediate problems facing South Africa were confidence related. Consequently, the African National Congress, even before it was elected to government in April 1994, voiced its commitment to eschewing policies perceived to imperil confidence—interventionist regulation, excessive fiscal and monetary spending, and confiscatory tax increases—and to strengthening market forces.

The first budget of the new Government, presented in June 1994, targeted a ½ percentage point reduction in the deficit, to 6.6 percent of GDP. Moreover, it eliminated the 5 percent surcharge on imports of capital and intermediate goods and cut the corporate profits tax. The budget helped to allay fears that the Government’s Reconstruction and Development Program, which promised reform in critical areas such as housing, education, health, and landownership, would lead to financial instability.

Monetary conditions were eased appreciably in 1994, and inflation picked up slightly in midyear (Table 26). During this time, the Reserve Bank’s pronouncements were aimed at safeguarding its anti-inllationary credibility. The most fundamental change in South Africa’s economic circumstances has been its renewed access to foreign markets for trade and capital, and the most telling signal of the new Government’s economic ideology has been its broad advocacy of free trade. Tariff protection has been simplified and is being lowered, and special export subsidies are being phased out.

Table 26SOUTH AFRICA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Domestic demand–0.7–1.31.43.7
Real GDP–1.0–2.21.12.0
Nonagricultural employment2 (1990= 100)97.995.893.491.63
Remuneration per nonagricultural worker16.115.410.6
Consumer price index15.313.99.7
External economy
Merchandise exports, non-gold (in billions of U.S. dollars)16.217.217.317.8
Gold exports (in billions of U.S. dollars)7.16.46.87.0
Merchandise imports (in billions of U.S. dollars)17.218.218.320.5
Current account balance (in percent of GDP)2.01.21.5–0.2
Real effective exchange rate (period average)3.83.8–2.7–4.34
Financial variables
Central government balance (in percent of GDP)–4.4–8.3–6.9–6.6
Gross national saving (in percent of GDP)19.517.217.6
Gross fixed investment–7.4–5.3–3.45.7
Broad money12.38.07.014.0
Prime rate (period average)20.318.916.215.55
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Total public and private (includes general government, business enterprises, mining, and manufacturing).

End of first quarter 1994, seasonally adjusted.

Through October.

Through November.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

Total public and private (includes general government, business enterprises, mining, and manufacturing).

End of first quarter 1994, seasonally adjusted.

Through October.

Through November.

Despite generally reassuring macroeconomic policies in 1994, South Africa’s real GDP was unlikely to rise by much more than 2 percent for the year. In addition, the unemployment outlook was dire, with an estimated 45 percent of the labor force unable to find employment in the formal economy during 1994.

Directors congratulated South Africa on its momentous transition to democratic rule and characterized the announced macroeconomic policies of the new Government as prudent. The Government’s endorsement of a more liberal trade regime and its move toward fiscal retrenchment were especially welcomed. Directors observed that improved business and external confidence were contributing to social and political stability.

Directors noted that real GDP growth had remained slow for two years into the economic recovery, and they expressed concern that the modest growth projected for the medium term would be insufficient to arrest the upward trend in unemployment. Moreover, the recent increase in inflation and the disappearance of the external current account surplus suggested that the unemployment problem was structural, particularly related to the rise in labor costs. Directors, therefore, urged that the authorities give the highest priority to easing rigidities in the labor market.

Resolving the labor cost problem would require some combination of real wage containment and worker training to boost productivity. In ideal conditions, Directors believed that real wage correction would be brought about by breaking the inflation inertia in nominal wage settlements.

Many Directors believed that the exchange rate could also play a useful role—at the right time—in correcting the competitiveness problem. They stressed, however, that any depreciation of the rand must be considered in the context of real wage correction and labor market reform and be supported by macroeconomic policies; otherwise, it might spark a wage-price spiral.

Directors expressed support for the Government’s medium-term fiscal stance. By announcing appropriate targets and adhering to them, the Government would establish a track record of responsible fiscal management. Directors also welcomed the authorities’ commitment to undertaking the Reconstruction and Development Program within a stringent medium-term fiscal framework.

It was observed that monetary policy had been conducted in an unusually difficult environment in 1994. Nevertheless, the upturn in inflation and the sharp deterioration in the external current account suggested that the monetary stance had been insufficiently restrictive. Directors hoped that policy changes and the continued vigilance of the Reserve Bank would correct the problem in 1995.

Directors were optimistic that the ending of financial sanctions against South Africa had eased the external constraint that had existed for the past decade. They stressed the importance of foreign direct investment and observed that significant inflows would be contingent on an improvement of South African competitiveness.

Thailand

In July 1994, the Board met to discuss the Article IV consultation with Thailand. The discussion took place in the immediate context of a pickup in the Thai economy and a rise in inflationary pressures, as well as in the broader context of the infrastructure strains caused by the rapid growth of the past three decades.

Since 1965, real GDP in Thailand has grown at an average annual rate of 7¾ percent, resulting in a five-fold increase in per capita incomes. In the process, the economy has been transformed: agriculture’s share of output dropped from 35 percent in 1965 to 11 percent in 1993, while the shares of services and manufacturing correspondingly increased. Economic activity, which was hampered in the first half of 1993 by the effects of a drought on the agricultural sector and by a slowdown in exports, began to regain momentum in the second half of the year, owing to a strengthening of domestic demand and a resurgence of growth in most of Thailand’s main trading partners (Table 27). In view of the low rate of unemployment and the high degree of capacity utilization, there was a risk as the upturn continued into 1994 that unchecked demand could lead to higher inflation.

Table 27THAILAND: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Real domestic demand8.75.37.39.5
Real GDP8.17.67.88.2
Unemployment rate3.13.03.22.6
Consumer price index5.74.13.35.0
External economy
Exports, f.o.b. (in billions of U.S. dollars)28.332.236.642.2
Imports, c.i.f. (in billions of U.S. dollars)37.840.145.152.7
Current account balance (in percent of GDP)–7.5–5.6–5.3–6.0
Overall balance (in billions of U.S. dollars)4.23.03.92.7
External debt (in percent of GDP)38.439.241.140.6
Debt-service ratio (in percent of exports of goods and services)10.211.010.710.9
Real effective exchange rate0.2–1.6–0.2
Financial variables3
General government balance (in percent of GDP)4.01.3–0.2–0.7
Gross national saving (in percent of GDP)33.733.833.834.3
Gross capital investment (in percent of GDP)42.039.539.340.3
Broad money19.815.618.721.0
Government bond repurchase rate (end-period)6.885.103.776.924
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Fiscal years ending September 30.

At end-March 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Fiscal years ending September 30.

At end-March 1994.

As regards external developments, the sizable imports of capital goods required by the rapid industrialization of the economy have generated large trade deficits in recent years. The current account deficit was estimated to be about 5¼ percent of GDI’ in 1993, slightly smaller than in the previous year, while the capital account surplus was estimated at about 9½ percent of GDP. Overall, the balance of payments surplus was estimated to have risen to about 3¼ percent of GDP in 1993, from about 2¾ percent in 1992.

Interest rates fluctuated markedly in 1993 and early 1994, Short-term rates rose to over 8 percent in the first half of 1993 before falling to 4 percent by the end of the year, reflecting a drop and subsequent resurgence in liquidity. Short-term rates rose to 7 percent in March 1994 as the Bank of Thailand moved to tighten monetary conditions. On the fiscal front, the 1993/94 central government budget, which followed recent budgets in restraining current spending while increasing capital expenditure, called for a surplus of 1 percent of GDP—against the 2 percent surplus recorded in the previous year, which had been much larger than budgeted.

In its discussion, the Board commended the remarkable performance of the Thai economy, which it attributed to the authorities’ commitment to macroeconomic stability, a prudent fiscal policy, an increasingly open trading system, and a flexible labor market.

Directors agreed that demand pressures were likely to intensify in 1994, and they supported the authorities’ decision to tighten financial policies. In that connection, the Board welcomed the intended moderate strengthening of the budgetary position for the 1994/95 fiscal year. Although it recognised the importance of reducing the gap between private and public sector wages, the Board expressed concern about the size of the planned increase in public sector wages.

Directors noted that, in any event, the room for a contribution by fiscal policy to restraining demand was limited. On the revenue side, recent tax reforms constrained the authorities’ ability to change tax rates; on the expenditure side, the increased demand for spending in the priority sectors of infrastructure, rural development, and education would limit further reductions.

In view of those constraints, the Board agreed with the Government that the burden of combating excess demand would fall mainly on monetary policy. However, the policy of maintaining the external value of the baht in a narrow range against a basket of currencies, and the increasing integration of Thai financial markets with those of other countries, could make it difficult for domestic interest rates to differ from international norms. Several Directors suggested that a broadening of the range would allow the authorities to pursue a somewhat more independent interest rate policy.

Directors supported the authorities’ structural reform program. They encouraged the Government to continue its efforts to stimulate competition and improve prudential oversight in the financial sector, as well as to restructure tariffs and accelerate the privatization program. The Government’s increasing focus on rural development was also welcomed, since the provision of infrastructure in the peripheral areas of the country would not only reduce the current imbalances in the distribution of income but also would lower the social and environmental costs arising from Bangkok’s rapid development.

The Board considered that the continuation of Thailand’s strong growth would depend on its moving up the industrial scale toward higher value-added production, supported by increased budgetary allocations for education and training. Some Directors suggested that fiscal incentives to influence the location of new investments could be useful; other Directors cautioned that the use of fiscal incentives to promote the adoption of new technologies could introduce distortions.

Tunisia

The Article IV consultation with Tunisia was discussed by the Board in January 1995. Preliminary estimates for 1994 indicate that the adverse impact of the drought on economic activity is likely to be limited. Manufacturing industries, as well as services, continued to grow rapidly, driven by strong exports and tourism. Real GDP growth is estimated at 4.4 percent (Table 28). The overall fiscal deficit, excluding grants, is estimated to have declined to the equivalent of 2.6 percent of GDP. Total expenditure is expected to remain within the budgetary appropriations and to decline as a share of GDP.

Table 28TUNISIA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Real GDP3.98.02.14.4
Consumer price index8.25.84.04.5
External economy
Exports, f.o.b. (in SDRs)4.65.1–4.410.7
Imports, f.o.b. (in SDRs)–6.520.6–2.611.9
Current account deficit (in percent of GDP)–4.4–6.9–8.1–7.1
External debt (in percent of GDP)55.251.555.255.7
Debt service (in percent of current receipts)23.820.220.519.0
Real effective exchange rate1.12.1–1.5
Financial variables
Central government consolidated deficit (in percent of GDP)2–5.7–3.0–3.2–2.6
Gross national savings (in percent of GDP)21.523.421.422.4
Gross investment (in percent of GDP)26.230.029.329.4
Money and quasi-money (M2)5.57.26.67.3
Money market interest rate311.811.38.88.8
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Payment-order basis, excluding grants.

Percent a year; end of period.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Payment-order basis, excluding grants.

Percent a year; end of period.

Reflecting a somewhat more rapid-than-expected expansion of credit to the private sector, domestic credit is estimated to increase by 7.2 percent, and broad money is estimated to grow by 7.3 percent, below the growth rate of nominal GDP. This is expected to maintain the inflation rate at 4.5 percent, slightly higher than the 1993 level.

In the external sector, a narrowing of the current account deficit is anticipated for 1994. The growth of nonenergy exports remained strong, implying further gains in market share, and agricultural exports experienced sharp growth. Strong improvement in the services balance reflected booming tourism receipts and a pickup in worker remittances.

The capital account strengthened significantly, owing to large net inflows of medium- and long-term public sector borrowing. As a result, the net foreign assets of the banking system are estimated to improve substantially in 1994, with official reserves possibly rising to the equivalent of two months of imports.

Throughout 1993 and 1994, the Tunisian authorities pursued structural reforms aimed at further liberalizing the economy. With respect to foreign trade, some quantitative import restrictions were eliminated, and the import surcharge was lifted. Tunisia also has been negotiating with the European Union on a new trade and cooperation agreement and has continued to work toward external liberalization within both the Uruguay Round and the Arab Maghreb Union. On the domestic front, both producer and retail prices have been further liberalized, and the prices of subsidized food products have been raised regularly, while maintaining protections for the poorest families. A unified investment code was introduced in late 1993 to simplify the incentive structure across sectors. In March 1994 an interbank foreign exchange market was introduced to replace the system of administratively set exchange rates.

In the financial sector, audits of all commercial banks were completed, and restructuring plans were carried out for 11 banks. The regulatory and supervisory powers of the central bank were also strengthened, and interest rates were further liberalized in the context of the bank’s increased reliance on the use of indirect instruments for conducting monetary policy.

Directors commended the authorities’ prudent macroeconomic policies and structural reforms, which helped to safeguard economic performance despite adverse external development and the drought. Fiscal consolidation had continued, credit expansion had been restrained, and inflation had remained relatively low. Directors particularly welcomed the structural measures taken to attract private investment, liberalize the trade system, and deepen financial sector reforms. Tunisia’s population policy was also commended.

With the recovery in Tunisia’s main export markets and the expected rebound in agricultural output, prospects for 1995 appeared favorable, in the Board’s view. This would provide an opportunity to reduce further the fiscal and current account deficits and to accelerate structural reforms. Directors considered the budget target for 1995 to be appropriate but stressed that considerable efforts are required to contain expenditure growth and achieve the ambitious revenue targets. Directors encouraged the authorities to enhance revenue performance through strengthening the tax and customs administrations.

Directors believed that the main challenge in the years ahead was to move the economy to a higher and sustainable growth path. To achieve this objective, it would be necessary to intensify structural reforms designed to increase domestic saving and productivity. Directors welcomed the Government’s intention to further liberalize the economy, introduce greater competition and flexibility in various markets, and improve the incentive structure. Directors also welcomed the authorities’ intention to accelerate the privatization program in 1995. They underlined the importance of eliminating the remaining preferential interest rates and the mandatory financing of priority sectors in 1995.

The central bank’s policy of keeping the real effective exchange rate stable as a means of maintaining competitiveness was supported, but Directors noted that greater scope could be given to market forces in the determination of the exchange rate. The view was also expressed that exchange rate policy could be used to keep inflation low.

Directors considered that Tunisia should build on the momentum of the reforms implemented thus far by moving toward full convertibility of its currency. This would help to accelerate Tunisia’s integration into the world economy and reinforce the authorities’ high-growth strategy’ over the medium term. Directors also noted that Tunisia’s prospective free trade agreement with the European Union and its member ship in the WTO would have a positive impact on the economy.

Viet Nam

The 1994 Article IV consultation with Viet Nam was completed by the Board in June 1994, in conjunction with its review and modification of the stand-by arrangement with the country and approval of its request for a second purchase under the systemic transformation facility (STF) (see section on Fund Support for Member Countries). The Board discussion took place against the background of the progress Viet Nam has been making since 1989 in the transition to a market-based economy and toward macro-economic stability.

In 1989–92, GDP rose on average by nearly 7 percent annually; meanwhile, inflation, which had reached triple-digit levels in the late 1980s and had resurged in 1991, was reduced to 17 percent by the end of 1992 (Table 29). During the first half of 1993, however, there was a marked relaxation in the implementation of macroeconomic policies. A sharp jump in spending fueled a widening of the fiscal deficit, while policies to promote commercial bank lending led to an annual increase of 73 percent in domestic credit to the nongovernment sectors. Fiscal and credit policies began to be tightened under the Fund-supported economic program adopted in the second half of the year: as a result, the overall budget deficit, at 6 percent of GDP, was only about ½ percent of GDP above the program target; and net State Bank credit to banks fell sharply in December 1993. Never-theless, the performance criterion for the year on net domestic assets was exceeded by a large margin.

Table 29VIET NAM: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Real domestic demand4.67.016.5
Real GDP6.08.38.08.0
Consumer price index (period average)83.137.88.36.8
External economy
Exports, f.o.b. (in millions of U.S. dollars)2,0422,4752,8503,362
Imports, f.o.b. (in millions of U.S. dollars)2,1052,5353,5053,875
Current account balance (in percent of GDP)3–2.5–0.8–9.0–6.1
Overall balance (in millions of U.S. dollars)–50268–1,106–169
External debt (in millions of U.S. dollars)42,7393,7754,024
Debt-service ratio (in percent of exports of goods and services)20.222.426.812.7
Real effective exchange rate–18.428.6–1.7
Financial variables
Overall fiscal balance (in percent of GDP)5–2.0–2.7–6.0–4.5
Gross national saving (in percent of GDP)9.111.35.38.8
Gross capital formation (in percent of GDP)11.612.014.314.9
Broad money (end-period)78.733.719.021.3
Interest rate (three-months savings rate)49.126.218.2
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Excluding official transfers.

Convertible currency only.

On cash basis; excluding grants.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Excluding official transfers.

Convertible currency only.

On cash basis; excluding grants.

Economic growth, estimated at 8 percent for 1993, was slightly higher than expected under the program. The demand pressures were reflected in a weakening in the balance of payments rather than in domestic inflation, as the external current account deficit grew by 8 percentage points to 9 percent of GDP during the year, while the consumer price index rose by only 5 percent. Net international reserves declined by almost $500 million in 1993, bottoming out in the third quarter of the year.

Through the first quarter of 1994, economic activity continued to be buoyant, as industrial output increased at an annual rate of 12 percent. Inflation was slightly higher than expected, but the program projection for the year was still regarded as attainable. The deceleration in domestic credit growth and the modest rebuilding of international reserves that had begun in the last quarter of 1993 continued.

In its discussion, the Board noted the continued strong output growth in 1993 and the further reduction in inflation. Directors regretted the financial policy slippages, but they were encouraged by the authorities tightening of macroeconomic policies aimed at bringing the program back on track.

Directors commended the steps taken to control domestic credit expansion—in particular, the imposition of bank-by-bank credit ceilings and quantitative limits on State Bank refinancing, as well as the recent increases in refinancing rates and stricter enforcement of reserve requirements. Looking to the future, the Board encouraged the authorities to develop indirect instruments of monetary control and welcomed the plan to establish soon an auction for government securities.

On the fiscal side. Directors endorsed the revenue and expenditure measures included in the 1994 budget to reduce the fiscal deficit below the program target. However, they expressed concern that the financing of the deficit would involve commercial external borrowing contracted on inappropriately short terms. Directors therefore urged the Government to try to mobilize additional domestic nonbank finance and external concessional aid. The Board also considered that, if financing shortfalls persisted, the authorities should implement the contingency fiscal measures built into the program.

The Board welcomed the headway made in structural reform, including the consolidation and closing of state-owned enterprises, and urged that further progress be made in revising the legal framework. The authorities were also urged to continue developing the social safety net and to move quickly to liberalize the import permit and licensing system.

Directors supported the authorities’ intention to implement a market-determined exchange rate regime. They called on the Government to rebuild reserves in 1994 following the sharp reduction in 1993, including by making adjustments to demand-management policies if necessary. Directors commended the authorities on improving Viet Nam’s relations with the international financial community since the clearance of its arrears to the fund. They also commented that the authorities should press forward with the regularization of Viet Nam’s relations with all creditors.

The Board considered that a firm commitment to macroeconomic stabilization, coupled with a more vigorous implementation of structural reforms, could enable Viet Nam to attain medium-term balance of payments viability. It was hoped that a good track record under the Fund-supported program would pave the way toward agreement on an ESAF arrangement for further use of Fund resources.

Zimbabwe

In September 1994, the Board discussed the 1994 Article IV consultation with Zimbabwe. The discussion took place at a critical stage of Zimbabwe’s economic and adjustment program, when a swift tightening of public sector financial policies was needed to strengthen the growth prospects of the private sector and the sustainability of the trade, financial, and exchange reforms, as well as to ensure the continuation of Fund support under the ESAF and the extended Fund facility.

Despite a drought-induced recession and adverse terms of trade developments, Zimbabwe has made significant progress since 1991 in implementing its structural adjustment program. Measures to liberalize agricultural pricing and marketing were introduced in July 1993 and March 1994, including the deregulation of the domestic maize market. In the financial area, the authorities began a review of central banking legislation, designed to strengthen bank supervision and modernize monetary control instruments. Also, the reform of the exchange and trade system implemented in January 1, 1994 moved Zimbabwe closer to the goal of currency convertibility.

In the real sector, a strong recovery in agricultural production fueled an economic upturn in the second half of 1993, which gained momentum in the first half of 1994 as a resurgence in the manufacturing and mining sectors more than compensated for the drought-induced fall in agricultural sector growth (Table 30). Real GDP growth for the year was targeted at 4—5 percent. However, the rate of inflation, which had fallen to almost 18 percent by the end of 1993, rose to 25 percent in May 1994, owing in part to the depreciation of the official exchange rate and the large increase in administered health fees earlier in the year, as well as to the growth in broad money occasioned by the monetary financing of public sector deficits.

Table 30ZIMBABWE: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Domestic demand
Real GDP4.3–6.22.14.5
Unemployment rate
Consumer price index23.642.725.423.2
External economy
Exports, f.o.b. (in millions
of U.S. dollars)1,7861,5311,5841,711
Imports, f.o.b. (in millions
of U.S. dollars)1,7001,7821,4621,515
Current account balance (in
percent of GDP)3–7.1–10.7–2.1–1.2
Overall balance (in millions
of U.S. dollars)–125–12717424
External debt (in percent
of GDP)53.869.576.875.2
Debt-service ratio (in percent
of exports of goods and services)22.028.329.628.4
Real effective exchange rate–35.436.2–1.4
Financial variables4
General government balance (in
percent of GDP)5–9.6–7.6–11.1–7.7
Gross national saving (in percent
of GDP)16.64.916.618.1
Gross national investment (in
percent of GDP)25.219.821.922.7
Broad money16.721.438.0
Interest rate (three-month CDs)25.537.029.0
Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Including transfers.

Fiscal years ending June.

Excluding grants.

Note: Data in the table reflect information available at the time of the Board discussion.

Estimated.

Projected.

Including transfers.

Fiscal years ending June.

Excluding grants.

In their discussion. Directors cautioned that the structural adjustment measures had not been accompanied by the strengthening of macroeconomic policies envisaged in the medium-term economic and adjustment program. In consequence, there had not been a restoration of macroeconomic stability in line with the liberalization of the trade and exchange system. Large budget deficits and the associated large demand for domestic financing had put strong pressure on financial markets, which in turn had kept interest rates high, crowded out the demand for private sector credit, thwarted the envisaged reduction in the inflation rate, and delayed the supply response to the structural reforms. Directors underscored the need to bring public sector financial policies under control in order to enhance the credibility and the long-term sustainability of the reform program. In that context. Directors stressed that the 1994/95 budget policies appeared inadequate to achieve the objectives of limiting the fiscal deficit to about 5 percent of GDP and significantly reducing the domestic financing requirement of public sector deficits. They therefore urged the authorities to act quickly to tighten substantially fiscal policy and accelerate the pace of public sector reform.

Box 10FUND POLICY EXPERIENCES AND ISSUES IN THE BALTIC COUNTRIES, RUSSIA, AND OTHER COUNTRIES OF THE FORMER SOVIET UNION

In March 1995, the Board reviewed policy experiences and issues in the Baltic countries, Russia, and other countries of the former Soviet Union.

Appropriate Policy Approach

Directors noted an encouraging degree of consensus on the appropriate policy approach between the Fund and the Baltic countries, Russia, and the other countries of the former Soviet Union. In this regard, there was a strong consensus on the need to accelerate structural reform, as well as for rapid stabilization to improve the output performance in these economics. Although progress in stabilization and reform overall had been mixed, significant progress had been made in a number of countries. The Board generally agreed that the successful cases were largely the result of bold, comprehensive, and coherent reform strategies. Directors thus indicated a clear consensus that credible commitment to stabilization and reform policies was essential for the success of these policies. They agreed that gradualism had not proved a viable alternative.

Output Decline and Stabilization

The decline in output in this group of countries since the dissolution of the Soviet Union had raised concerns about the design of policies. In this regard, however, Directors observed a positive correlation between lower inflation and smaller output decline. They emphasized that the experience in the Baltic countries clearly demonstrated the beneficial effects of sustained stabilization combined with structural reform: inflation had fallen to relatively low levels, and growth had resumed. Directors found little evidence that the output declines in these countries were exacerbated by unduly contractionary monetary and fiscal policies. At the same time, the need to contain the fiscal deficit to avoid crowding out the emerging private sector under tight monetary conditions was underscored by a number of Directors. All Directors recognized that the rate of money growth remained the single most important determinant of the inflation rate over the medium term.

Directors agreed that the revenue decline was to an important extent an inevitable consequence of the transition to a market economy. This decline, however, complicated the task of stabilization and needed to be reversed. They further noted that pegging the exchange rate had been a successful stabilization tool in Estonia and in some central European countries.

The Board called for a special effort to improve tax administration and broaden the tax base to compensate for the prospective revenue losses from the tax reductions and exemptions introduced in the first half of 1994. Directors emphasized, however, that fiscal adjustment should be focused primarily on limiting government expenditures, especially on the wage bill, subsidies, and transfers. In particular, Directors con sidered that the recent large wage increases added a new urgency to the need to implement a targeted reform of the civil service.

The Board emphasized that the expeditious reform of public enterprises was also integral to the successful implementation of fiscal policy. Directors regretted that the Government would increase net lending to parastatals in 1994/95 without resolving the issues necessitating that assistance, including the financial problems of the Grain Marketing Board. To that end, they called for a more realistic and flexible pricing policy and a review of the Grain Marketing Board’s role as buyer of last resort for maize. In addition. Directors welcomed the establishment of a cabinet committee on privatization and its decision to sell shares in publicly listed companies; they urged the committee to act quickly to allow for timely decisions on privatization and divestiture.

Directors noted that in those circumstances the burden on monetary policy had increased; despite the authorities’ efforts, reserve money growth had exceeded the program target. Directors observed that a tightening of fiscal policy and public sector operations should expand the room for private sector financing. They also called for greater reliance on indirect instruments of monetary control and cautioned against monetary expansion arising from the quasi-fiscal operations of the central bank.

The Board commended the important steps taken to reform the exchange and trade system in 1994, including unifying the exchange rate, abolishing all foreign exchange surrender requirements, liberalizing current external payments, and limiting access to official foreign exchange. Zimbabwe formally accepted Article VIII obligations, with effect from February 3, 1995.

Economies in Transition

The Fund’s surveillance of transition economies covers three relatively distinct groups of countries: central and eastern Europe and the Baltic countries, Russia, and the other countries of the former Soviet Union (see Box 10). Although each group displays unique characteristics, broader commonalities tie them together in terms of the effort to transform their formerly centrally planned economics into market-oriented ones.

Among the central and eastern European countries and the Baltic countries, the Board concluded Article IV consultations during the year with Croatia, the Czech Republic, Estonia, Hungary, Latvia, the Slovak Republic, and Slovenia. As in 1993, discussions were held against a general backdrop of improving economic performance, particularly with respect to the control of inflation, budgetary consolidation, privatization, and liberalization of the trade and payments systems. With a few exceptions. Directors underlined their satisfaction with the progress in fiscal consolidation throughout the region.

Virtually all these countries had embarked on serious stabilization and reform efforts. It was noted in the Board that those that had adopted more advanced programs, such as Albania, the Czech Republic, Poland, and Slovenia, had witnessed a rapid decline in inflation and had resumed growth. These countries were expanding at a pace approaching or exceeding average growth in the European Union. Despite a head start, performance has been mixed in Hungary. Although overall fiscal performance indicators had improved considerably in the more advanced central and eastern European economies, fiscal imbalances remained relatively large (see Box 11).

In the macroeconomic area, although inflation in all these countries had been brought down substan tially from rates that once bordered on hyperinflation, it would continue to pose a challenge in a number of them; and throughout the region, excepting the Czech Republic, severe fiscal pressures remained. There were also wide variations in what had been achieved in structural reforms. Regarding privatization, in almost all of these countries more than half of GDP originated in the private sector. The Czech Republic had registered particularly impressive gains on this front, with the private sector producing roughly two thirds of output. Directors nevertheless indicated that additional efforts needed to be made in transforming the structure of these economics through support of privatization and entrepreneurship. A reinvigorated reform process and a further reduction of government involvement in the economy would clearly be essential for achieving further market liberalization.

Directors expressed support for the outward-oriented strategies adopted by these countries. They had all taken major strides toward integrating themselves into the global market economy. As stabilization had taken hold, capital inflows had substantially increased in some of these countries. In the Czech Republic and the Slovak Republic, for example, large net inflows had reduced or eliminated the need for exceptional balance of payments financing. Directors expressed support of further trade liberalization steps, as seen in reduced import duties or future commitments to reduce them.

Box 11ECONOMIES IN TRANSITION: FISCAL DEVELOPMENTS

The May 1994 Board discussion on fiscal developments in economies in tran sition reflected a wide consensus on the critical role played by fiscal policy in these programs in supporting the needed front-loaded stabilization effort while leading the way toward market-oriented reforms. Most Directors further agreed that pragmatism was required in the design of stabilization and structural reform measures. They further stressed, however, that simulta neous action was required on several major fronts, since reforms in one area could easily be undermined by setbacks in other areas. In that context. Directors welcomed the pragmatism of the Fund’s approach to such issues as tax reform while generally agreeing that there was further scope for reducing the relative size of the public sector in these countries.

Fiscal Federalism

Several speakers observed that, with the collapse of central planning, pressure for a more decentralized approach to public finance was inevitable. While welcoming the potential gains in efficiency that could come from such an approach, they cautioned that moves in the direction of fiscal federalism would need to be accompanied by a clear and balanced assignment of responsibility for both expenditure and revenue. The point was also made that issues related to local government finance, and the direction of fiscal policy more generally, in the transition economies would be difficult to resolve in the absence of a firm decision by the countries themselves on the appropriate role of the government in the economy. Directors noted that in many of the countries under review, the fiscal balance had tended to deteriorate after the first year of the program as the pace of reform accelerated. Clearly, a large and increasing government borrowing requirement would impose a heavy burden during the transition, raising complex issues of financing and sustainability.

Pragmatism in Policy Design

In view of the different conditions and experiences of transition economies, most Directors felt that pragmatism was required in the design of stabilization and structural reform measures. The point was also made that fiscal policy in the economies in transition had only recently been pried loose from its sub-ordinate role in the system of central planning, and that in many respects the administrative capacity and institutional structures of a market economy had yet to be developed. Directors thus encouraged the staff to focus future technical assistance work on administrative capacity and institution building, particularly in the areas of tax administration and public expenditure management.

Directors expressed a range of views on the effectiveness of tax-based incomes policies. A few speakers noted that such policies had proved useful in some cases; several others expressed skepticism, however, noting that tax-based income policies had not contributed significantly to containing inflation, while they had acted as an obstacle to greater wage differentiation and a more decentralized system of wage determination.

In September 1994 the Board concluded an Article IV consultation with Russia. Among other countries of the former Soviet Union, the Board concluded Article IV consultations during 1994/95 with Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine. Directors expressed concern about the continuing external and domestic instabilities plaguing a number of these countries. The Board likewise credited several of them, however, with putting forward plausible economic stabilization programs. While Directors expressed disappointment with the pace and content of various stabilization and reform programs, they placed equal stress on maintaining the fund’s dialogue with the various national authorities.

Particular concerns were voiced about the lax stance of fiscal policy throughout the region. For a number of countries, Directors called for more resolute efforts to curb subsidies and devise more effective revenue-enhancing measures. Although a few countries had made a promising beginning in advancing structural reform. Directors indicated that additional steps would have to be taken to ensure an effective transition from a state-run to a market-oriented economy. They considered that sustainable progress in macroeconomic stabilization would be in jeopardy unless the momentum of structural reforms was accelerated and stricter financial discipline was imposed on the enterprise sector. Such steps should include restructuring or closure of loss-making enterprises, acceleration of the privatization program, elimination of tax and tariff exemptions, and the introduction of effective bankruptcy and antimonopoly legislation.

Noting the introduction of new national currencies, Directors stressed that the effectiveness of new monetary arrangements would be determined by the overall success of stabilization measures designed to strengthen monetary discipline within a framework of prudent fiscal and incomes policies. The Board welcomed progress that had been made toward trade liberalization throughout the region and urged the authorities to continue to reduce export quotas and taxes.

Directors saw a pressing need for firm monetary and fiscal policies as crucial to achieving price stabilization. With respect to monetary policy, the Board welcomed efforts to increase interest rates to positive levels in real terms and to unify the exchange rate. Other measures recommended included tighter control over the government deficit, a restrictive monetary policy, and the imposition of hard-budget constraints on state enterprises. More generally. Directors warned against gradual approaches to reform and stabilization. Although the existing security and political situation in many of these countries made adoption of bold measures difficult, the Board urged the authorities to carry forward such programs where conditions allowed.

Croatia

The Executive Board met in October 1994 to discuss Croatia’s Article IV consultation and approved its requests for an 18-month stand-by arrangement and a first purchase under the STF, for amounts totaling SDR 130.8 million. This discussion took place one year after the introduction of a stabilization initiative designed to reduce inflation sharply, improve financial discipline, and restore monetary control. The proposed stand-by arrangement envisaged a consolidation of the success on the inflation front while encouraging a resumption of economic growth. In addition, the authorities planned to intensify reconstruction, put into place an adequate social safety net, and strengthen Croatia’s external position and normalize relations with external creditors.

The first step in the stabilization initiative was the adoption by the National Bank of Croatia of a monetary policy based on tight and publicly announced targets for base money. After allowing an initial depreciation of some 20 percent, the central bank announced that it would prevent the dinar/deutsche mark exchange rate from depreciating beyond announced intervention limits through end-1993. A new interbank foreign exchange market was then introduced, and individuals were given the right to buy unlimited foreign exchange for current account transactions from the banking system in order to increase confidence in the dinar. As confidence in the program grew, substantial remonetization took place. The authorities responded by allowing their targets for the growth of base money to be exceeded, and from mid-November 1993 onward the exchange rate was used as the nominal anchor. A new currency, the kuna, was introduced on May 30, 1994.

The stabilization program has been successful, with inflation dropping abruptly and with only limited negative effect on economic activity (Table 31). Consumer prices fell by 2.7 percent between end-October 1993 and July 1994.

Table 31CROATIA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
199119921993119942
Domestic economy
Real GDP–14.4–9.0–3.21.8
Real consumption–1.22.0
Real gross fixed investment0.67.0
Unemployment rate (end of period; in percent)15.517.817.416.5
Consumer price index (Dec–Dec.)249.5937.31,149.7–2.5
External economy
(in millions of U.S. dollars) Exports, f.o.b.3,2924,5973,9044,065
Imports, c.i.f.–3,828–4,461–4,666–4,874
Current account balance–59082327876
External debt (end of period)2,9782,7362,6382,897
Official reserves (end of period)1676131,149
Financial variables
Central government budget revenues (in percent)15.020.420.326.8
Central government budget expenditures (in percent)19.621.121.127.1
Cash deficit–4.6–0.6–0.8–0.3
Broad money5691,09345
Deposit money bank interest rates Average deposit rate (end of period)434.527.43.8
Average credit rate (end of period)2,332.959.016.5
Note: Data in the table reflect information available at the time of the Board discussion. Interest rates are average annual rates in December (1992–93) and May (1994).

Estimated.

Projected.

Note: Data in the table reflect information available at the time of the Board discussion. Interest rates are average annual rates in December (1992–93) and May (1994).

Estimated.

Projected.

Fiscal receipts as a proportion of GDP increased sharply, as a result of lower inflation, the elimination of most tax exemptions, and strong measures to reduce tax evasion. However, expenditures also increased, with the result being an overall balanced fiscal position. The Government imposed a tight incomes policy, and wage bill limits for the Government and majority state-owned enterprises were generally observed.

Broad money rose by about 30 percent between October 1993 and June because the velocity of money tell sharply as inflationary expectations improved. Although exports and imports were below 1993 levels in the first quarter of 1994, they had increased by the time of the Board discussion. Official reserves increased from $613 million at end-1993 to $866 million at end-June 1994.

In their discussion, Directors congratulated the Croatian authorities for reducing inflation to very low levels, cutting the fiscal deficit sharply, building up international reserves, and moving toward the introduction of market mechanisms to the economy, all despite the difficult security situation. The aims of the authorities to encourage continued economic growth, maintain price stability, increase the reconstruction effort, implement a social safety net, and normalize relations with external creditors as soon as possible were all strongly endorsed by the Board. Directors were optimistic that the ambitious inflation target could be met.

However, Directors noted, there were significant risks to the program, with the most important being the political and security situation in the region. Steadfast commitment to the program’s objectives was essential to success. For example, an overextension of credit to, or excessive wage payments by, majority state-owned enterprises could cause inflation to rise. Therefore, Directors stressed, it was important to impose effective budget constraints on enterprises by breaking the links between banks and loss-making enterprises, and incomes policy had to be strictly implemented. While larger-than-expected foreign exchange inflows could be seen as a vote of confidence, they might also threaten the inflation targets. Sterilized intervention might be used to offset those inflows in the short term, but the authorities’ capacity in that area was limited, and they should advance their timetable for the introduction of marketable government securities.

Directors urged the authorities to accelerate the privatization program—most large enterprises were still publicly owned, although many small and medium-sized enterprises had been privatized—and to speed up the reform of the banking system and the structural reform program.

Kazakhstan

The Board discussion on Kazakhstan took place in November 1994 against the background of a decisively changed economic and financial situation from early 1993, when the country was part of the ruble area. On November 15, 1993, Kazakhstan had moved to monetary independence with the introduction of its own currency, the Tenge. Faced with high inflation and declining output, the Kazakh authorities in early 1994 launched a major stabilization program to improve the financial situation and reinforce structural reforms.

By mid-1994, the program, after being derailed, was back on track. The authorities drastically tightened the fiscal position, strictly limited credit expansion and raised interest rates to positive levels in real terms, and further improved the management of macroeconomic policy. Substantial progress had also been made toward full price liberalization; the trade regime was further liberalized; and the privatization program was enlarged.

By the third quarter of 1994, inflation had been sharply reduced, the exchange rate had stabilized, and external reserves had risen. The overall budget balance, including quasi-fiscal operations, had turned from a deficit of 16 percent of GDP in the first half of 1994 to a surplus of 4 percent (Table 32).

Table 32KAZAKHSTAN: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
1991199219931994
Domestic economy
Real GDP–13.0–14.0–12.0–25.0
Unemployment rate0.30.50.7
Consumer prices (annual average)91.01,3811,6621,880
External economy
Exports, f.o.b. (in billions of U.S. dollars)44.83.3
Imports, c.i.f. (in billions of U.S. dollars)9.05.24.1
Current account balance (in percent of GDP)–6.4–24.1–7.1–9.1
External debt (in billions of U.S. dollars)1.82.5
Real effective exchange rate1100.02141
Financial variables
General government balance3–7.9–7.4–1.2–6.9
Broad money (M2)210.7388.5691.9562.8
Interest rate4240230
Note: Data in the table reflect information available at the time of the Board discussion.

An increase indicates a real appreciation of the currency.

At the time of the introduction of the national currency (November 1993).

In relation to GDP.

The refinance note of the National Bank of Kazakhstan at the end of the year.

Note: Data in the table reflect information available at the time of the Board discussion.

An increase indicates a real appreciation of the currency.

At the time of the introduction of the national currency (November 1993).

In relation to GDP.

The refinance note of the National Bank of Kazakhstan at the end of the year.

In their discussion, Directors welcomed the progress that had been made since May 1994 toward financial stabilization. They commended the authorities for the significant tightening of monetary and fiscal policies, which had been successful in sharply reducing the monthly rate of inflation. Nonetheless, Directors observed that the rate of inflation was too high. Concerned at the sharp fall in the ratio of tax revenue to GDP, which had reached an unsustainable low of 14 percent, Directors urged the authorities to intensify further their collection efforts, to reduce widespread tax exemptions, and to proceed with tax reform.

Directors also expressed concern over the authorities’ resort to across-the-board sequestration of expenditures and delays in payments. They emphasized that such measures were unsustainable and undesirable and that prolonged cuts in investment and maintenance outlays could have major repercussions for growth. In this context, Directors noted that a broadening of the tax base and strict expenditure restraint, together with an improved structure for government outlays, would be important in achieving a durable fiscal position.

Directors were unanimous in their view that the authorities had not moved strongly enough to impose financial discipline on, or restructure, the state enterprise sector. They considered that unless the momentum of structural reforms was accelerated and stricter financial discipline imposed on the enterprise sector, sustainable progress in macroeconomic stabilization would be jeopardized. Directors stressed that vigorous action in enterprise reform was critical to further the progress toward financial stability and resumption of growth. In particular, the authorities were urged to avoid further delay in implementing the privatization program.

The recent tightening of monetary policy and efforts toward financial sector reform in 1994 were noted by Directors. Several welcomed the planned introduction of new prudential regulations, the strengthening of banking supervision, and the restructuring of several specialized banks. Strong support was expressed for further reduction of credit and monetary growth rates in 1995 and for keeping interest rates positive in real terms. However, rising arrears to the banking system were viewed as a threat to the stability and credibility of the financial system.

Directors welcomed the substantial progress that had been made toward trade liberalization and urged the authorities to continue reducing export quotas and taxes. They noted that the balance of payments position remained under pressure. In view of low domestic saving, Directors encouraged the authorities to make strong efforts to attract foreign direct investment.

Directors agreed that a further reduction in inflation should be given high priority; to achieve this, domestic bank financing would need to be strictly limited in 1995, while wage restraint and exchange rate stabilization would also contribute. Some Directors stated that possible plans to move to a fixed exchange rate regime were premature. Directors urged the authorities to undertake a vigorous and more sustainable adjustment effort in 1995. It was noted that even’ effort should be made to ensure that social expenditures were not adversely affected by sequestration.

On the whole, Directors observed that, despite extremely difficult economic conditions and external developments, progress had been made in the overall direction and pace of economic reform policies since the last Article IV consultation in April 1993, although slippages had occurred in both macroeconomic policies and key structural reforms. They agreed that the direction and targets of the current stabilization and structural reform program deserved continuing Fund support.

Subsequent to the Board discussion and against the background of a less than fully satisfactory performance at the end of 1994, in early 1995 the Kazakh authorities launched a new economic program for 1995. This program aimed at reducing the monthly inflation rate to around 1 percent by July 1995, and at accelerating systemic reforms, with special focus on enterprise restructuring. To achieve these objectives, the authorities sought to limit the overall fiscal deficit to 3.5 percent of GDP, with less than 1 percent of GDP in domestic bank financing; further, there would be strict limits on the growth of monetary aggregates. In order to accelerate enterprise restructuring, the authorities were planning to establish, in close cooperation with the World Bank, a Rehabilitation Bank, which would oversee the finances as well as the restructuring of selected, highly indebted state enterprises. Macroeconomic policies were tightened considerably in the 1995 program, and as a result the monthly inflation rate was reduced to below 3 percent in May 1995; a number of important structural measures were also taken. (This program served as a basis for the approval by the Board of a new 12-month stand-by arrangement for Kazakhstan in early June 1995.)

Latvia

Since regaining its independence in 1991, Latvia has been engaged in a massive effort to transform its economy to a market-based system. At the time of the Board discussion in July 1994, an economic recovery was under way. Inflation was expected to moderate further in 1994, after having declined rapidly to a rate of 35 percent in 1993 from about 960 percent in 1992 (Table 33). Similarly, positive real GDP growth was projected for 1994; revised data indicated that the real GDP growth rate had fallen a further 15 percent in 1993 from the 35 percent drop in 1942. Despite economic indicators showing that economic activity had bottomed out during 1993, open unemployment continued to increase, reaching 6½ percent by the end of March 1994.

Table 33LATVIA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Real GDP–8–352–15222
Consumer prices (end-period, percentage change)2629603520
External economy
Exports, f.o.b. (in millions of U.S. dollars)6,42138319981,031
Imports, c.i.f. (in millions of U.S. dollars)5,25831,0461,15921,365
Current account balance (in millions of U.S. dollars)2,3563211502–83
Financial variables
General government financial balance (in millions of Lats)92–39
Gross national saving (in percent of nominal GDP)2619214
Gross domestic investment (in percent of nominal GDP)251217
Broad money (in millions of Lats)100251462650
Note: Data in the table reflect information available at the time of the Board discussion, unless otherwise indicated.

Projected.

Data revised subsequent to the Board discussion.

Figures for 1991 are distorted owing to exchange valuation effect.

Note: Data in the table reflect information available at the time of the Board discussion, unless otherwise indicated.

Projected.

Data revised subsequent to the Board discussion.

Figures for 1991 are distorted owing to exchange valuation effect.

Although structural reform lagged behind macro-economic stabilization, substantial progress was made in a number of areas, including the rehabilitation and privatization of the banking system and liberalization of prices and of the exchange and trade system.

The Government elected in mid-1993 continued the comprehensive economic program launched in mid-1992, which focused on macroeconomic stabilization, but with more emphasis on reinforcing reform over the medium term. At their discussion, Directors commended the authorities for their continued firm commitment to the overall aims of the economic program supported by a stand-by arrangement and by purchases under the STF. Directors expressed their confidence that the Government, despite a difficult political and economic environment, would persevere with stabilization and reform.

For sustainable growth, Directors agreed that price stability remained a prerequisite. Consequently, a firm monetary policy remained crucial to the economic recovery under way. At the same time. Directors recognized that the impact of capital inflows, together with the deficiencies of financial markets and monetary policy instruments, made it difficult to manage monetary aggregates. This underscored the need for continued efforts to develop financial markets and policy instruments. In this context, Directors welcomed the continued commitment to exchange rate flexibility in Latvia. A number of Directors encouraged the authorities to carefully consider the possibility of some further appreciation of the nominal exchange rate in the event that currency inflows into the Bank of Latvia resumed. Some Directors felt, however, that caution should be used in this respect and that the exchange rate could more explicitly serve as a nominal anchor in Latvia.

Directors emphasized that strong government support would be needed to meet the objectives of monetary policy. Most important, they felt, was that the deficit of the general government would need to be kept within the limit envisaged under the 1994 budget. They urged the authorities to stand ready to take further revenue-enhancing measures should the budgetary targets become endangered. Expenditures would also need to be monitored, Directors noted.

The recent developments in tariff legislation were viewed with concern by Directors, since they fell short of the comprehensive overhaul called for. Directors pointed out the benefits to Latvia of maintaining a relatively liberal trade system and encouraged the authorities to resist domestic pressures for protection. In that context, Directors noted that the tariffs on many agricultural goods remained high and urged the authorities to move ahead forcefully to further rationalize the tariff system.

Directors welcomed the progress that had been made in banking supervision and in the restructuring and privatization of the former commercial branches of the Bank of Latvia. Improvements in the banking system and the system of financial intermediation should lead to better prospects for saving and investment.

Directors, encouraged by the removal of most legal obstacles for the privatization of medium-sized and large-scale enterprises, urged the authorities to speed up reform in this key area, where progress had so far been disappointing. By late April 1994, 200 such projects had been approved, of which 85 had been completed; in contrast, two thirds of small-scale enterprises were now privatized.

The Board welcomed Latvia’s decision to accept the obligations of Article VIII of the Fund’s Articles of Agreement.

Russia

Russia’s economic performance during 1993 and the first half of 1994 was considered during the Board’s Article IV discussion in September 1994. Officially recorded real GDP declined by 12 percent in 1993 and by 17 percent in the first half of 1994 over the same period the previous year (Table 34). However, the actual fall in output, which was concentrated in the industrial sector, was probably less. This was because of the rapid growth of the private economy, which was only partially captured in the official statistics. Genuine structural change—as reflected in conversion from military to civilian output, development of the financial sector, and increased private retail trade—progressed, albeit slowly.

Table 34RUSSIA: SELECTED ECONOMIC INDICATORS(Percent change over the corresponding period in previous year, unless otherwise noted)
199119921993Jan.–June

19941
Domestic economy
Real GDP–13–19–12–17
Registered unemployed (end of period, in percent of labor force)0.10.81.11.6
Consumer prices (average)931,353896546
External economy2
Exports (in billions of U.S. dollars)53.241.646.319.3
Imports (in billions of U.S. dollars)44.537.234.316.6
Current account balance (in billions of U.S. dollars)3.2–5.72.3–3.1
Overall balance (in billions of U.S. dollars)–13.3–14.4–9.4
Scheduled debt service (in billions of U.S. dollars)37.714.419.710.2
Real exchange rate (July 1992 = 100; rate during last month of period)89.5274.3295.2
Financial variables
General government balance (cash basis, in percent of GDP)4–16.0–6.9–5.7–8.3
Gross national saving29.119.05
Gross national investment25.320.15
Ruble broad money54544252
Refinance rate of Central Bank (end of period, in percent)62080210155
Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

The data relate to Russia’s external relations with countries outside the former U.S.S.R.

In 1991, Russia’s 61 percent share of the debt service of the former U.S.S.R. is used.

Includes the federal and local governments and the extrabudgetary funds; excludes unbudgeted import subsidies associated with foreign disbursements.

Projections, for year as a whole.

Uncompounded annual rate.

Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary.

The data relate to Russia’s external relations with countries outside the former U.S.S.R.

In 1991, Russia’s 61 percent share of the debt service of the former U.S.S.R. is used.

Includes the federal and local governments and the extrabudgetary funds; excludes unbudgeted import subsidies associated with foreign disbursements.

Projections, for year as a whole.

Uncompounded annual rate.

Monthly inflation declined steadily after late summer 1993 to a low of 5 percent in July 1994, reflecting a tightening of financial conditions since late 1993. Average real wages remained broadly unchanged from 1992, at about half the late 1991 level. The rate of open unemployment increased only barely, and was 6 percent at end-July 1994.

Fiscal developments were uneven, with the fiscal policy stance fluctuating considerably throughout 1993. As revenue performance began to deteriorate in mid-1993, the authorities relied increasingly on sequestration as a means of limiting cash expenditures, which led to substantial budgetary arrears. The cash deficit of the general government dropped to 5.7 percent in 1993, but by mid-1994 it had increased over the 1992 level to 8.3 percent, as a result of continued weak revenue performance and despite a significant compression of outlays.

The growth of base money and ruble broad money trended downward throughout 1993 and the first quarter of 1994. Nominal interest rates were less than the rate of inflation during most of 1993 but increased sharply during the second half of the year, so that positive real interest rates were achieved by the end of the year.

In 1993, Russia recorded a trade surplus in its balance of payments with countries outside the former Soviet Union, mainly as a result of a significant fall in imports. However, this surplus declined sharply in the first half of 1994, as imports picked up and an increase in energy exports was more than offset by a sharp contraction in other exports, especially of machinery. In its trade with other countries of the former Soviet Union, Russia registered a surplus in 1993, with the volume of trade continuing to decline in 1994. Trade liberalization proceeded, although slower than planned under the program supported by a second purchase under the STF.

Russia’s official external debt at end-1993 was 26 percent of GDP, of which 90 percent was inherited by Russia from the Soviet era. Gross official reserves reached two months’ worth of total imports by end-1993. The ruble appreciated over 200 percent in real terms between end-1992 and end-1993 and another 7 percent during the first half of 1994

About two thirds of state-owned enterprises had been privatized by the middle of 1994. Increased importance was attached in mid-1994 to enterprise reform and restructuring, with the issuance of several relevant decrees. However, progress on land reform continued to be slow.

In their discussion. Directors welcomed the significant progress toward macroeconomic stabilization and structural reform. Tightened fiscal policies in late 1993 and early 1994 had helped to cut inflation earlier than envisaged, but monetary policy also played a critical role, and the fiscal progress needed to be consolidated by the achievement of positive real interest rates.

Directors indicated that an important immediate concern was the worsening fiscai outlook for the second half of 1994. There were major weaknesses in both government revenues and expenditure policies. Failure to adhere to the fiscal targets of the program supported by a second purchase under the STF would fuel inflationary expectations and damage the credibility of the Government’s economic strategy. Directors noted with regret that many of the new revenue measures provided for under the program had not been implemented. A top priority of the 1995 budget should be to arrest the revenue decline. Directors also encouraged the authorities to develop a medium-term fiscal strategy to take account of the major structural changes in the economy with the aim of reducing the fiscal deficit over time. As part of that strategy, a strengthened and better-targeted social safety net, including an increase in unemployment benefits, would be essential.

Directors commended the authorities on their continued commitment to a free and unified exchange rate system and cautioned that the schemes for monitoring export proceeds and import payments not interfere with current account convertibility, since confidence factors had a key role in reversing capital flight and encouraging foreign direct investment. While welcoming the steps taken recently to liberalize external trade. Directors regretted that the commitment to reduce export duties had been only partially implemented and encouraged the reduction of import duties and the abolition of energy export quotas. Directors also encouraged the authorities to establish a timetable for acceptance of the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement.

Directors noted the continued progress in privatizing state enterprises and encouraged the authorities to keep up the momentum in that area. However, they were concerned by the increase in enterprise arrears since late 1993, which partly reflected the absence of hard budget constraints.

Russia’s balance of payments and external debt situation remained difficult. Directors noted, and the significant loss of reserves resulting from exchange market intervention was cause for concern. Directors welcomed the progress in regularizing Russia’s relations with its creditors and, given Russia’s important role as a creditor itself, urged the authorities to clarify issues regarding outstanding debt and arrears to Russia by other countries of the Commonwealth of Independent States.

Directors noted with concern that the strong points in Russia’s performance had not obviously been reflected in increased confidence at home, or on the part of foreign investors. It was therefore important to stave off any perception of a loss of momentum in the reform effort. Directors emphasized the vital stake that the world economic community had in the success of Russia’s reforms and urged the authorities to set the stage for renewed economic growth and a sustained improvement in living standards by intensifying their stabilization efforts and accelerating structural change. They encouraged the authorities to undertake a bold adjustment effort in 1995 that could be supported by the international financial community.

Subsequent to the Board discussion, the financial policy stance deteriorated steadily during the second half of 1994. Beginning in July, the fiscal outcome worsened significantly compared with the objectives of the program (see above). The deficit of the general government reached 11¼ percent of GDP in the third quarter—double the program target—and net credit to the government shot up in tandem, ending the quarter well above the program ceiling. During the last quarter of 1994, the fiscal situation became increasingly precarious, leading to the events of “Black Tuesday” (October 11), when the ruble depreciated by more than 20 percent. Although the ruble rebounded the following day, the loss of confidence in the currency and the absence of any signs of fiscal correction resulted in a sharp rise in the velocity of money. The behavior of velocity (and inflation) was further exacerbated by the issuance of a substantial volume of special Treasury obligations at below -market interest rates to enterprises, which in essence functioned as a means of payment for government outlays. Reflecting the authorities’ desire to avoid a repeat of “Black Tuesday,” monetary policy become more restrictive toward end-1994, and there was a major tightening in January 1995. A stringent monetary stance has been maintained since then, with encouraging results in terms of lower inflation and increases in gross international reserves of the Central Bank of Russia. In April 1995, the Board approved Russia’s request for a stand-by arrangement (see section on Fund Support for Member Countries).

Slovenia

The Board met in August 1994 to discuss Slovenia’s Article IV consultation. The discussion took place as the Slovene economy showed signs of increasing vigor after returning to growth in 1993 following two years of contraction (Table 35). Downward pressures on output stemming from the disintegration of the former Socialist Federal Republic of Yugoslavia and from the move toward a marker economy were supplanted during 1993 by buoyant real aggregate demand. Real GDP, which had fallen by 15 percent during 1991–92, turned around in 1993 to rise by I percent; growth in 1994 was estimated at 4–5 percent.

Table 35SLOVENIA: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
19911992199319941
Domestic economy
Aggregate demand–20.06.0
Real GDP–9.3–6.01.04–5
Employment (in thousands)839.0783.4760.1749.0
Unemployment (in percent of labor force; end of period)10.113.415.514.62
Real net wages (average)–10.9–8.916.41.53
Retail prices (end of period)247932313
External economy
Merchandise exports4–6.08.1–8.91.2
Merchandise imports4–12.65.7–3.4
Trade balance (in percent of GDP)–2.16.4–1.11.2
Real effective exchange rate5–9.02.63.06
Financial variables
Overall government balance (in percent of GDP)2.70.20.5–0.5–0
Broad money (end of period)125.163.356.76
Real lending rate (in percent)18–2719–2117–187
Real deposit rate (in percent)4–77–88–97
Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

April 1994.

Based on actual developments during 1994:1 and assuming wage ceilings and inflation objective are observed.

Prior to 1992, excluding exports and imports for processing and trade with former Yugoslav republics. Imports expressed on c.i.f. basis for 1991, and on f.o.b. basis for 1992–94.

Depreciation = (–). Based on 1992 export trade weights of six major OECD trading partners.

May 1993 to May 1994.

June 1994.

Note: Data in the table reflect information available at the time of the Board discussion.

Projected.

April 1994.

Based on actual developments during 1994:1 and assuming wage ceilings and inflation objective are observed.

Prior to 1992, excluding exports and imports for processing and trade with former Yugoslav republics. Imports expressed on c.i.f. basis for 1991, and on f.o.b. basis for 1992–94.

Depreciation = (–). Based on 1992 export trade weights of six major OECD trading partners.

May 1993 to May 1994.

June 1994.

Real aggregate demand increased by 6 percent in 1993, led by a rise of 11 percent in private consumption that was fueled by real wage increases. Investment activity also recovered in 1993, but net capital formation remained negative for the third consecutive year. The rapid expansion in aggregate demand spilled over almost wholly into greater import demand, and domestic output growth was confined to the service sector. Real activity continued to contract, albeit at a slower pace, in the agricultural and manufacturing sectors, although signs of recover)’ were evident in industrial output during the second half of 1993.

Inflation declined dramatically in 1993, reflecting a slower expansion in reserve money and a substantial increase in real money demand. Despite significant administrative price adjustments, retail price inflation fell to 23 percent (December–December) by the end of 1993 from 93 percent at the end of 1992. Although overall output expanded, employment in the nongovernment sectors continued to fall, and the unemployment rate reached 15½ percent by the end of 1993.

A stronger-than-expected revenue performance, arising from the high rate of real wage growth, led to a small budget surplus of ½ of 1 percent of GDP in 1993 rather than to the deficit of 2 percent of GDP envisaged in the 1993 budget. As a result of a deterioration in the trade account, the current account surplus shrank markedly in 1993, declining to nearly 1½ percent of GDP from 7½ percent in 1992.

Structural reforms during 1993 included the initiation of bank rehabilitation, including partial recapitalization, which enabled affected banks to generate operating surpluses for the first time. Losses of socially owned enterprises relative to GDP were halved from the previous year, but progress on privatization was slow.

In their discussion, Directors complimented the Slovene authorities for the progress made in returning early to real GDP growth, reducing inflation, and increasing foreign exchange reserves. They said the authorities could be commended on the success of monetary policy, which had been supported by a strong fiscal stance and a hardening of the budget constraints on socially Owned enterprises.

But Directors remarked that additional steps were needed to consolidate these achievements. They advocated restraint in aggregate demand growth and recommended a more cautious budgetary stance, particularly given the role that continued fiscal surpluses could play in support of and-inflationary monetary management. Some Directors considered that undue attention to the maintenance of a given real exchange rate could make more difficult the task of lowering inflation, and they suggested the adoption of a nominal exchange rate anchor. Nevertheless, on balance the new incomes policy and the stronger external position offered an opportunity for a slower rate of crawl of the exchange rate without undue erosion of external competitiveness and growth prospects. Several Directors encouraged the authorities to reduce the degree of indexation in the economy, especially of financial assets and wages, and, in particular, backward-looking indexation.

Directors noted the need to secure the basis for long-term growth through continued structural reforms, and they supported the authorities’ outward-oriented growth strategy, particularly the open trade regime. However, the slow pace of ownership transformation was viewed as an impediment that resulted in low levels of investment, structural account surpluses, and an upward bias in wage settlements. Directors urged the authorities to accelerate the pace of privatization, and they supported continued budgetary expenditure on structural reforms.

Directors emphasized the importance of developing an efficient domestic financial market but recognized that access to foreign financial markets was hindered by external debt problems arising from the dissolution of the former Yugoslavia. Directors welcomed the progress made toward regularizing relations with official creditors. Directors encouraged the authorities to sustain the recently accelerated pace or discussion with commercial bank creditors.

Ukraine

The Board met in October 1994 to discuss the Article IV consultation with Ukraine and approved the authorities’ request for a first purchase under the STF (see section on Fund Support for Member Countries).

Economic activity in Ukraine declined in 1993 (Table 36) and was projected to continue to decline in 1994. Net material product in the first nine months of 1994 fell by 20 percent compared with the same period in 1993. Although open unemployment remained negligible, by mid-1994 some 15 percent of the labor force was estimated to be underemployed.

Table 36UKRAINE: SELECTED ECONOMIC INDICATORS(Annual percent change unless otherwise noted)
1994
19921993EstimatedRevised1
Domestic economy
Domestic demand–17–20
Real GDP–17–17–23–23
Unemployment rate (in percent)0.20.30.3
Consumer price index1,2104,735842891
External economy (in billions of U.S. dollars)
Exports, f.o.b.11.312.812.511.8
Imports, c.i.f.11.915.315.114.2
Trade balance–0.6–2.5–2.6–2.4
Overall balance–2.7–1.1–0.6–1.8
External debt (end of period)3.54.17.57.1
Debt-service ratio (in percent)0.11.312.4
Exchange rate (end of period; Krb/$) Official63812,610104,200
Auction rate74925,000104,200
Financial variables
General government balance (in percent of GDP)–29.3–9.7–9.1–8.6
Net investment (real percent change)–36–17
Broad money29212,103361465
Real broad money–51–792313
National Bank of Ukraine refinance rate (end of period)80240252
Note: Data in the table reflect information available at the time of the Board discussion unless otherwise indicated.

Data revised subsequent to the Board discussion.

Foreign currency deposits valued at parallel exchange rates.

Note: Data in the table reflect information available at the time of the Board discussion unless otherwise indicated.

Data revised subsequent to the Board discussion.

Foreign currency deposits valued at parallel exchange rates.

Fueled by sizable monetary expansion, the monthly rate of inflation accelerated from about 40 percent in the first quarter of 1993 to over 65 percent during the last quarter. Inflation then fell sharply to 4–5 percent a month in the second and third quarters of 1994. However, there had been no administered price adjustments since December 1993, and there were indications that cost pressures were mounting in the face of a renewed acceleration in the rate of monetary expansion and a rapid deterioration in the underlying budgetary situation. Real wages fell by some 60 percent during 1993 and were subsequently broadly unchanged.

Because of a shirt in traded goods prices toward world levels since 1992, Ukraine’s heavy dependence on imported energy resulted in a sharp deterioration in its terms of trade and a considerable widening of its current account deficit. At the same time, the economy had suffered substantial capital flight. In 1993 and 1994, the balance of payments gap was closed partly through a sizable compression of nonenergy imports, but primarily through resorting to payments arrears. The accumulation of arrears during the first nine months of 1994 brought Ukraine’s debt to some S7 billion at the end of September. Mirroring the acute shortage of foreign exchange, the rate of exchange in the cash market (the only free market since late 1993) had depreciated very sharply.

In October 1994, Ukraine announced a program of radical reform that included unification of the exchange rate, a reduction in the budget deficit, cuts in industrial subsidies, wide-ranging liberalization of the economy, and mass privatization.

In their discussion. Directors recognized the grave economic situation facing the Ukrainian authorities and welcomed the strong policy measures taken by the Government shortly before the Board meeting, which had signaled to the international community the Government’s resolve to implement the necessarily comprehensive and ambitious program. Such implementation was seen as requiring improvements in governance, administrative capacity, and internal coordination. Directors emphasized the program’s risks, including those of fiscal slippage, nonsupport by par liament, and shortfalls in international support. They urged the Ukrainian authorities to move as soon as possible to a stand-by arrangement and to extend both the scope and the time horizon of the stabilization and reform policies.

Directors welcomed the emphasis on liberalization and structural reform measures, which were essential and should be extended even further, for example, the Government had a leadership role to play in the areas of privatization and developing a propitious environment for entrepreneurship. At the same time. Directors welcomed the targeting of social support to protect the very poor from the impact of price and exchange market liberalization.

It was noted that the budget would have to play a critical role in achieving the program’s appropriately ambitious inflation targets. While Directors welcomed the aim to cut expenditure and limit bank financing of the deficit and the expenditure measures, they viewed this as representing first steps toward adjustment, given the projected size of the deficit. They underscored the need to reduce the role of government in the economy further. Directors also expressed concern about the large increases in money and credit, and they emphasized the need to raise interest rates further to positive levels.

The Board welcomed recent measures to liberalize the external sector. They saw the unified exchange rate as essential for the strengthening of exports, the restoration of confidence, and an early reversal of capital flight. They emphasized that significant progress toward economic stabilization and structural reform was necessary before a fixed exchange rate should be introduced.

Directors agreed that the expression of support for Ukraine by bilateral and multilateral creditors gave sufficient assurance that the external financing gap for the fourth quarter of 1994 would be closed. The large prospective external financing gap in 1995 reinforced the case for the Government to move quickly on a program that could be supported under a stand-by arrangement to begin in early 1995. Only then would it be possible to mobilize the substantial external support that was required. Directors stressed. Such an arrangement was approved by the Board on April 7. 1995 (see section on fund Support for Member Countries).

    Other Resources Citing This Publication