Mr. Martin Petri, Mr. Günther Taube, and Mr. Aleh Tsyvinski
arrears), the central bank and/or the budget may be forced to extend large credits to the energyenterprises, which could fuel inflation. In addition, such bailout practices, even if they take place only once (“one-off arrears clearance”), condone the nonpayment culture and create moral hazard. Alternatively, arrears could be cleared through offsets which tends to trigger further arrears, barter, and offsetting arrangements. 6 This could ultimately result in the government being unable to pay wages or interest because most of the revenue is noncash.
Following on the steps taken in the fourth quarter of 1997 to restore macroeconomic stability, the authorities have designed a package of corrective policies for 1998. Inflation is expected to decline to 9 percent at end-1998 and the external current account (excluding official transfers) to 22 percent of GDP. Building on an acceleration of structural reform, real GDP growth is expected to recover to over 5 percent in 1998. Consistent with continued financial restraint, the Armenian Parliament approved the 1998 budget which calls for a state
still heavily dependent on cocoa, which accounts for more than 90 percent of merchandise exports, although production in recent years has only been at a third of the levels recorded in the early 1970s ( Figure 1 ). Secondary sector activities depend largely on foreign-financed construction projects. The rudimentary industrial base consists mostly of a few public manufacturing and energyenterprises, which account for about 5 percent of GDP. Commerce and transportation (which include a few newly established private companies), the financial system (composed of three
Mr. Aleh Tsyvinski, Mr. Martin Petri, and Mr. Günther Taube
A decade into the transition, many of the successor states of the former Soviet Union (FSU) continue to use energy sector quasi-fiscal activities (QFAs), especially low energy prices and the toleration of payment arrears, to provide large implicit and untargeted subsidies. These activities disguise the overall size of the government, cause overconsumption and waste, and contribute to macroeconomic imbalances. This paper analyses such activities in FSU countries, with particular emphasis on two case studies (Azerbaijan and Ukraine). The paper's policy conclusions point to the need to increase energy prices, combined with a strengthening of safety nets to protect the poor, better enforcement of payment discipline, and more efforts to achieve fiscal transparency.