© 1993 International Monetary Fund


© 1993 International Monetary Fund

Cataloging-in-Publication Data

Financial sector reforms and exchange arrangements in Eastern Eu-rope / [two papers by Guillermo A. Calvo … et al.].

  • p. cm. — (Occasional Paper / International Monetary Fund,

  • ISSN 0251-6365 ; no. 102)

  • Includes bibliographical references.

  • Contents: Pt. 1. Financial markets and intermediation / Guillermo A. Calvo and Manmohan S. Kumar — Pt. 2. Exchange arrangements of previously centrally planned economies / Eduardo Borensztein and Paul R. Masson.

  • ISBN 1-55775-279-6 : $15.00

  • 1. Financial institutions — Europe, Eastern. 2. Foreign exchange— Europe, Eastern. 3. Capital market — Europe, Eastern. 4. Banks and banking—Europe, Eastern. 5. Monetary policy — Europe, Eastern. 6. Privatization — Europe, Eastern. I. Calvo, Guillermo. II. Series : Occasional paper (International Monetary Fund) ; no. 102.

HG186. E82F57 1993 92-45213

332.1 ’0947—dc20 CIP

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  • Preface

  • Part I Financial Markets and Intermediation

  • Guillermo A. Calvo and Manmohan S. Kumar

  • I. Introduction

  • II. Recent Developments and the Role of the Financial Sector

    • Recent Economic Developments

    • Role of the Financial Sector

  • III. Development of the Financial Sector

    • Prereform Financial System

    • Reforms and the Two-Tier Banking System

  • IV. Performance of the Banking Sector

    • Quality of Loan Portfolios

    • Enterprise Restructuring and Credit Allocation

    • Competition in the Banking Sector

  • V. Privatization and Capital Markets

    • Equity Markets

    • Banks and the Privatization Process

  • VI. Financial Sector Reforms and Stabilization Policies

    • Monetary Policy

    • Fiscal Policy

    • Exchange Rate Policy and Convertibility

  • VII. Credibility and Prudential Supervision

    • Confidence Building

    • Deposit Protection Schemes

  • VIII. Summary and Conclusions

  • Appendix. Corporate Financing Patterns: Some Illustrative Evidence

  • References

  • Tables

  • 1. Eastern Europe: Recent Economic Developments

  • 2. Eastern Europe: Financial Sector Reforms

  • 3. Eastern Europe: Domestic Credit

  • 4. Eastern Europe: Monetary Policy

  • Appendix Tables

  • 1. Large Industrial Countries: Financing of Nonfinancial Enterprises, 1970–85

  • 2. Selected Developing Countries: Financing of Nonfinancial Enterprises, 1980–88

  • 3. Selected Developing Countries: Equity Market Concentration

  • Charts

  • 1. Domestic Credit in Eastern European Countries, 1986–91

  • 2. Money Velocity in Eastern European Countries, 1986–91

  • Part II Exchange Arrangements of Previously Centrally Planned Economies

  • Eduardo Borensztein and Paul R. Masson

  • I. Introduction

  • II. Currency Convertibility

    • Current Account Convertibility

    • Capital Account Convertibility

    • Speed of the Move to Convertibility and Preconditions for Its Success

  • III. The Desirable Degree of Exchange Rate Flexibility

    • Advantages of Exchange Rate Stability

    • A Currency Board

    • Implementing Exchange Rate Stability

    • Implementing a Floating Rate

    • Dual Exchange Rates

    • Conclusions

  • IV. The Experience of Eastern European Countries

    • Convertibility

    • Exchange Arrangements and Domestic Stabilization

    • Exchange Arrangements and International Competitiveness

    • CMEA Trade and Payments

    • Lessons from the Eastern European Experience

  • V. Summary and Conclusions

  • References

  • Tables

  • 1. Eastern Europe: Trade with CMEA and Non-CMEA Areas

  • 2. Eastern Europe and the U.S.S.R.: Shares of Exports to Former CMEA Countries in Total Exports, 1989

  • 3. Eastern Europe: Annual Changes in the Volume of Exports, 1991

  • Charts

  • Eastern Europe: Exchange Rates

  • Eastern Europe: CPI Inflation Rates

The following symbols have been used throughout this paper:

  • … to indicate that data are not available;

  • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • – between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.


The papers in this volume were originally prepared in early 1992 for discussion in the Fund’s Executive Board. They deal with two of the key issues facing the economies in transition in Eastern Europe: how to develop their financial sectors along market lines and what type of exchange arrangements to adopt. The first paper discusses developments in the financial sector and constraints on the performance of recently constituted commercial banks, as well as issues related to privatization, stabilization policies, and prudential supervision. The second paper discusses the extent to which exchange arrangements in these countries have contributed to the reform process and the restructuring under way. Events may have already overtaken some of the information in this paper, reflecting the rapid changes occurring in these economies as well as the usual time lags between preparation and publication.

The authors of Part I of this Occasional Paper are indebted to Ajai Chopra, Eric Clifton, David Coe, Omotunde Johnson, Mark Stone, Nissanke Weerasinghe, and, especially, to Peter Wickham for very useful comments and suggestions on earlier drafts of the paper. They would also like to express appreciation to Marco Lari for excellent research assistance.

Part II, prepared by Eduardo Borensztein and Paul R. Masson, benefited from comments by Charles Adams, David Burton, and Bankim Chadha. The authors would like to thank Youkyong Kwon for research assistance.

The authors of both papers are grateful to David Folkerts-Landau, Timothy Lane, Donald Mathieson, and, especially, Peter Isard for their valuable comments. They would like to thank other colleagues in European I and the Policy Development and Review Department for comments and for furnishing data. Margaret Casey and Elisa Diehl of the External Relations Department edited the papers and coordinated production, and Alicia Etchebarne-Bourdin, also of the External Relations Department, provided typesetting assistance. The views expressed here, as well as any errors, are the sole responsibility of the authors and do not reflect the opinions of the IMF Executive Board or IMF staff.