Trade

The trade part of most EAs foresees the establishment of a free trade area for industrial products between the EU and each associated CEEC within 10 years of the entry into force of each agreement. The provisions of the EAs are asymmetric in the sense that the period for the phase-out of import restrictions is much shorter for the EU than for the CEECs. The EAs obliged the EU to abolish within one year of their entry into force quantitative restrictions on all industrial imports from the associated CEECs except for textiles and coal, and tariffs on most of the EU’s industrial imports. For a number of “sensitive products,” including coal, iron, steel, some chemicals, leather goods, footwear, glass, clothing, and textiles, tariffs were to be abolished over a period of two to five years (six years in the case of the products included in the Multifiber Agreements).⁶ These sensitive products, however, account for about 50 percent of the associated CEECs’ exports to EU, and arguably include some products in which the CEECs would seem to have a comparative advantage over EU countries. Trade in agricultural products is in principle excluded from the proposed free trade area. Nevertheless, the EAs foresee reduced tariffs for a number of agricultural products, generally within a given quota, with either the tariff or the quota becoming less restrictive over a five-year period.⁷

At the European Council meeting of Copenhagen in June 1993, the EU decided to accelerate substantially the pace of liberalization for sensitive industrial products and to advance by six months a reduction in duties and an increase in quotas for agricultural products compared with what had been envisaged in the EAs. Also, the European Council of Essen in December 1994 agreed to align the liberalization timetable for custom duties and tariff quotas for Bulgaria and Romania with that for the Visegrad countries as from January 1, 1995.⁸ As a result, all statutory tariffs on industrial imports from the associated CEECs, except certain textiles, were eliminated by January 1996. Tariffs on products from the Visegrad countries, Bulgaria, and Romania that were covered by the Multifiber Agreements were abolished in January 1997, ahead of the dates set in the Uruguay Round agreements. Those on textile imports from Slovenia, Latvia, and Lithuania were eliminated in January 1998. Thus, since that date, all industrial imports from the 10 associated CEECs into the EU have been free of duties. However, this duty-free treatment of industrial imports from the associated CEECs cannot really be considered preferential, given that about 80 percent of the EU’s industrial imports from all countries are free of tariffs.

In terms of possible contingent protection, the EAs include standstill clauses that prohibit the introduction of any new duties or quantitative restrictions from the date of entry into force of the agreements, safeguard clauses, anti-dumping provisions, and rules of origin.⁹ The CEECs, however, are allowed to derogate under exceptional circumstances the standstill clause in order to protect infant industries and sectors under restructuring. The contingent protection embodied in the anti-dumping and general safeguard clauses, and the use the EU has made of them in several instances, have been criticized for being one of the most restrictive aspects of the EAs.¹⁰ The anti-dumping provision may seem unnecessarily restrictive, given that CEECs are obliged under the EAs to introduce the EU competition rules, which also prohibit dumping, within three years. As for the general safeguard clause, it has sometimes been noted that its drafting is laxer and more open to abuses than that of the comparable Article XIX of GATT.¹¹ It should also be indicated that the EU has negotiated in recent years Voluntary Export Restraints (VERs) for certain categories of steel exports from associated CEECs.

It has been argued that the pursuit by the EU of separate EAs with each CEEC, as opposed to a multilateral preferential trade zone with all of them, could divert foreign direct investment (FDI) from CEECs to the EU and reduce intra-CEEC trade.¹² For example, a company may decide to supply the associated CEEC markets from an EU location, despite the lower production and transportation costs of alternative CEEC locations, because of the existence of relatively high tariffs on intra-CEEC trade flows or simply because of uncertainty about the continuity of intra-CEEC trade agreements. The “hub-and-spoke” nature of the EAs therefore may tend to marginalize the “spoke” economies (the associated CEECs) to the benefit of the “hub” (the EU).

These undesirable “hub-and-spoke” effects of the EAs were until recently exacerbated by their relatively strict rules of origin. The original protocols on rules of origin attached to the EAs set relatively demanding requirements (in terms of changes in tariff headings or value added produced locally) for classifying goods as produced in the associated CEECs. This tended to deter investment in these countries.¹³ For example, a Western firm interested in setting up an assembly plant in a CEEC with relatively cheap unskilled labor to produce low value-added goods and export them to the EU markets did not qualify for EU trade preferences if it used too many inputs from countries outside the EU and the country in question. This led some Western firms to build their factories in EU countries despite their higher labor costs. So-called cumulation provisions can limit these negative effects to the extent that they allow the value added in other countries with similar preferential trade agreements to count as local content. Unfortunately, while the EAs permitted bilateral cumulation (between the CEEC concerned and the EU) of local content, as well as diagonal cumulation among Visegrad countries (e.g., between the Slovak Republic, Poland, and the EU), they did not provide for cumulation between the Visegrad countries, Bulgaria and Romania.

Recognizing the shortcomings of the rules of origin initially contained in the EAs, the European Council of Essen agreed to take the necessary steps to extend the diagonal cumulation provisions to Bulgaria, Romania and, eventually, to all new associated CEECs (in particular, the Baltic countries and Slovenia). It also proposed to introduce this diagonal cumulation of content between the countries of the European Free Trade Association (EFTA) and the associated CEECs.¹⁴ This so-called pan-European cumulation initiative materialized in the amendment of the protocols on rules of origin of all the EAs during the first half of 1997. Since July 1997, 31 countries, including the 15 member states of the EU, the 10 associated CEECs, the four EFTA countries, Andorra, and San Marino, benefit from this pan-European multilateral cumulation of content; Turkey is expected to join the system in January 1999.¹⁵

The EU has also encouraged the associated CEECs to liberalize trade among themselves partly on the grounds that it will limit the diversion effects of the EAs. Two major intra-regional CEECs trade arrangements have been concluded: the Central European Free Trade Association (CEFTA), currently comprising the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, and Slovenia; and the Baltic Free Trade Agreement, among Estonia, Latvia, and Lithuania. The associated CEECs have also concluded free trade agreements with the countries of the EFTA as a whole, shadowing the EAs.

Current account convertibility and capital flows

Regarding current account convertibility, the contracting parties must ensure the full convertibility of their currencies for all current transactions liberalized under the EAs. Since all the associated CEECs had already introduced a high degree of current account convertibility at the beginning of the transition, this obligation was not particularly constraining. All the associated CEECs except Bulgaria have subsequently accepted the obligations under Article VIII of the IMF’s Articles of Agreement, and Bulgaria is expected to take this decision reasonably soon. With effect from their entry into force, the EAs also obliged the contracting parties to liberalize FDI flows between themselves, as well as the repatriation of these investments and of any profits stemming from them.¹⁶

In addition, the parties commit themselves to taking measures during the first five years of application of the EAs to facilitate the application of EU rules on the free movement of capital. At the end of this five-year period, the Association Council, the highest bilateral consultative body created by the EAs, is to examine ways to apply those rules in full. Since the Maastricht Treaty has extended the obligation to fully liberalize capital movements to transactions vis-a-vis third countries, this part of the EAs amounts in practice to the acceptance by CEECs of the medium-term objective (but without committing themselves to a concrete timetable) of fully opening their capital accounts vis-a-vis all countries. The EAs also incorporate a standstill clause prohibiting—as from the date of entry into force of the EAs for the EU countries, and as from the end of the fifth year of applicability of the EA for the CEECs—the introduction of any new foreign exchange restriction on capital flows or current payments between residents of the two contracting parties.

Movement of workers

The EAs basically only oblige each contracting party to prevent discrimination, based on nationality, of legally employed workers from the other party and to ensure access to the labor market of the legally resident spouse or children of a legally employed worker from the other party. The EAs therefore do not ease in any significant way the relatively restrictive immigration rules of EU countries vis-a-vis the CEECs. There is only a vague commitment on the part of EU member states to try to preserve or improve, subject to the situation in their labor markets, these immigration rules: the Association Council will examine within five years of the entry into force of the EA ways in which the mobility of workers between the two parties could be enhanced.

Political dialogue

Finally, the EAs introduce an institutional framework to promote a bilateral political dialogue. An Association Council meeting once a year at the ministerial level, an Association Committee meeting twice a year at the senior official level, and a number of specialized subcommittees, have been created.¹⁷ The EAs also foresee regular contacts at the parliamentary level. At the meetings of the Association Council and Committee, all EU member states are represented along with the CEEC concerned and the European Commission.

Participation in ERM II

At its meeting of Amsterdam of June 1997, the European Council defined the main principles and elements of a new Exchange Rate Mechanism (ERM II) that will replace the current one in Stage III of EMU.⁴⁷ ERM II has been conceived only for EU currencies. No exchange rate arrangement is being envisaged for the time being between the euro and the currencies of neighboring non-EU countries. The AAs signed between the EU and CEECs or Mediterranean countries do not foresee any form of exchange rate cooperation. European Commission officials have nonetheless indicated that an exchange rate arrangement involving the euro for at least some of the associated CEECs is likely to be high on the EU’s political agenda in the coming years, although any such arrangement should not threaten the price stability objective of the European Central Bank (ECB).⁴⁸ The possibility of exchange rate arrangements with non-EU currencies is also contemplated in Declaration No. 5 annexed to the Maastricht Treaty, which states that “the Community shall be prepared to cooperate [on monetary and exchange rate matters] with other European countries and with those non-European countries with which the Community has close economic ties.”

Looking ahead, once the countries under analysis join the EU, they will be confronted with the decision on when to join ERM II. As in the case of the current ERM, membership of ERM II will be voluntary, but EU countries with a derogation “can be expected to join the mechanism.” ⁴⁹ Participation in the ERM under the normal fluctuation bands for at least two years remains a criterion for admission to the euro area, although the admission of Finland and Italy (both of which had been in the ERM for less than two years) suggests that the EU Council is not interpreting this criterion strictly.⁵⁰

ERM II, as currently envisaged, will be based on standard fluctuation bands of ±15 percent defined vis-a-vis the euro, which will be the anchor currency. This implies bilateral fluctuation bands twice as large among non-euro participant currencies. Both marginal and intra-marginal interventions supported by a slightly modified version of the current Very Short Term Financing Facility will be possible, provided they do not impinge on the ECB’s primary objective of price stability. The commitment of the ECB to intervene in the foreign exchange markets to support a particular non-euro currency is therefore limited. Timely realignments of central parities will be encouraged. Countries having reached a sufficient degree of convergence with the euro area may enter, if they so wish, into closer exchange rate links involving (publicly announced or secret) narrower fluctuation bands vis-a-vis the euro. These forms of closer exchange rate cooperation, however, must be approved by a procedure involving the European Commission, the Economic and Financial Committee (the body replacing the Monetary Committee at the start of Stage III of EMU), the ECB, and the ministers of finance of the euro-area countries, in addition to the country requesting it.

Its voluntary nature, the wide bands, calls for timely realignments, and the possibility of closer exchange rate links for certain countries make ERM II a flexible system, which would seem to accommodate the varying circumstances of the associated CEECs and other candidate countries for EU membership. Some of these countries may require a significant degree of exchange rate flexibility for a certain period after joining the EU for several reasons: their inflation differentials with the euro area may remain significant; they will be more exposed to asymmetric shocks; and their rapid pace of structural transformation is likely to affect their equilibrium real exchange rate. This is acknowledged by representatives of the European Commission. Referring to the CEECs entering the EU, Berrigan and Carre (1997, p. 125) note that the flexibility of ERM II “allows one to conceive of a broad spectrum of exchange rate arrangements within the new mechanism, ranging from very loose pegs to progressively tighter arrangements, including a currency board.”

Table 7 summarizes the current exchange rate regimes of the countries under analysis. A majority of these countries currently peg (de jure or de facto) their currencies to the deutsche mark, the ECU, or a basket dominated by one of these two currencies.⁵¹ In addition, Poland uses a basket where the deutsche mark and the French franc have a combined weight of 40 percent. Upon the launching of Stage III of EMU, these countries will have to either replace these currencies with the euro or change the nature of their exchange arrangements.⁵² As more CEECs gear their exchange rate policies toward the euro, the advantages for other CEECs (in terms of the stabilization of the nominal effective exchange rate) of pegging to the euro will tend to increase. This, in conjunction with the prospect of EU accession, may lead other countries to also adopt the euro as a reference currency, or to increase the weight of this currency in their currency baskets. Indeed, the three-stage plan to exit the CBA announced by Lithuania last year explicitly foresees the eventual pegging of the litas to the euro or a basket including the euro in the third stage (scheduled to take place not earlier than 1999).⁵³

Table 7.

Exchange Rate Regimes, May 1998

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and IMF staff reports.

Table 7.

Exchange Rate Regimes, May 1998

	Exchange Rate Regime	Basket/Target	Fluctuation Band	Remarks
CEECs:
Albania	Independent float
Bosnia-Herzegovina	Currency board	DM	0%	Currency board was formally introduced on June 20, 1997.
Bulgaria	Currency board	DM	0%	Currency board introduced on July 1,1997. Its Law foresees the substitution of the DM by the euro as currency of peg upon launching of EMU.
Croatia	Managed float	De facto narrow target band vis-a-vis DM		The kuna has remained within narrow band against the DM since devaluation of October 1993
Czech Republic	Managed float			On May 27, 1997, the central bank was forced to abandon ±7.5% fluctuation band against a basket including the DM (65%) and the US$ (35%)
Estonia	Currency board	DM	±3%	Currency board was introduced in June 1992.
Hungary	Crawling peg	Basket: DM (70%), US$ (30%)	±2.25%	Mid-point of the band is devalued monthly by 0.9% against the basket
Latvia	Fixed peg	SDR		The exchange rate has been pegged to the SDR since February 1994.
Lithuania	Currency board	US$	0%	Currency board was introduced in April 1994.
FYR Macedonia	Managed float	De facto peg to DM		Denar devalued by 14.2% on July 9,1997, after having been stable against DM since early 1994
Poland	Crawling peg	Basket: US$ (45%), DM (35%), £ (10%), F (5%) SWF (5%)	±7%	Mid-point of the band is devalued monthly by 1% against the basket
Romania	Independent float
Slovak Republic	Fixed peg	Basket: DM (60%), US$ (40%)	±7%	Crown has remained stable against reference baskets since 10% devaluation in July 1995
Slovenia	Managed float	De facto shadowing of DM, combined with real exchange rate rule
FR Yugoslavia	Fixed peg	DM		The dinar was devalued by 70% in November 1 1995 and by 45% in March 1998
Mediterranean countries:
Cyprus	Fixed peg	ECU	±2.25%
Malta	Fixed peg	Basket: ECU (67%), US$ (21%), £(12%)	±0.25%
Turkey	Managed float	Real exchange rate rule

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and IMF staff reports.

View Table

Table 7.

Exchange Rate Regimes, May 1998

	Exchange Rate Regime	Basket/Target	Fluctuation Band	Remarks
CEECs:
Albania	Independent float
Bosnia-Herzegovina	Currency board	DM	0%	Currency board was formally introduced on June 20, 1997.
Bulgaria	Currency board	DM	0%	Currency board introduced on July 1,1997. Its Law foresees the substitution of the DM by the euro as currency of peg upon launching of EMU.
Croatia	Managed float	De facto narrow target band vis-a-vis DM		The kuna has remained within narrow band against the DM since devaluation of October 1993
Czech Republic	Managed float			On May 27, 1997, the central bank was forced to abandon ±7.5% fluctuation band against a basket including the DM (65%) and the US$ (35%)
Estonia	Currency board	DM	±3%	Currency board was introduced in June 1992.
Hungary	Crawling peg	Basket: DM (70%), US$ (30%)	±2.25%	Mid-point of the band is devalued monthly by 0.9% against the basket
Latvia	Fixed peg	SDR		The exchange rate has been pegged to the SDR since February 1994.
Lithuania	Currency board	US$	0%	Currency board was introduced in April 1994.
FYR Macedonia	Managed float	De facto peg to DM		Denar devalued by 14.2% on July 9,1997, after having been stable against DM since early 1994
Poland	Crawling peg	Basket: US$ (45%), DM (35%), £ (10%), F (5%) SWF (5%)	±7%	Mid-point of the band is devalued monthly by 1% against the basket
Romania	Independent float
Slovak Republic	Fixed peg	Basket: DM (60%), US$ (40%)	±7%	Crown has remained stable against reference baskets since 10% devaluation in July 1995
Slovenia	Managed float	De facto shadowing of DM, combined with real exchange rate rule
FR Yugoslavia	Fixed peg	DM		The dinar was devalued by 70% in November 1 1995 and by 45% in March 1998
Mediterranean countries:
Cyprus	Fixed peg	ECU	±2.25%
Malta	Fixed peg	Basket: ECU (67%), US$ (21%), £(12%)	±0.25%
Turkey	Managed float	Real exchange rate rule

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and IMF staff reports.

As some of the countries under analysis join the EU, they may need to further adjust their exchange rate arrangements if they wish to participate in ERM II. Countries with CBAs or other (formal or de facto) fixed pegs could continue with similar arrangements within ERM II, with the associated advantages in terms of intervention and financing facilities. Countries with pre-announced crawling pegs (such as Hungary or Poland) or floating exchange rates (such as Albania, Romania, and Turkey), however, would have to substantially modify their exchange rate regimes to join ERM II. All countries, including those that will decide to stay out of ERM II after joining EU, will be subject to the obligation to treat their exchange rate policy as a matter of common interest (Art. 109m of the Treaty).⁵⁴

Central bank independence

All EU member states should ensure, at the latest at the time of establishment of the European System of Central Banks (ESCB), that their national legislation (including the central bank statutes) is compatible with the Treaty and the Statutes of the ESCB (Art. 108 and 14 of Protocol No. 3).⁵⁵ This implies in particular: i) that their central bank governors should be elected for terms of no less than five years and should only be dismissed under circumstances of serious misconduct or inability to perform their duties (Art. 14 of Protocol No. 3); ii) that their central banks should not take any instructions from the government (Articles 107 and 7 of Protocol No. 3); and iii) that they should have as primary objective the maintenance of price stability (Articles 105 and 2 of Protocol No. 3).⁵⁶ Since the ESCB is to be established in June 1998, new countries joining the EU will have to fulfill these requirements as of their dates of accession to the EU. In addition, iv) national legislation should prohibit any form ofdirect credit from the central bank to the government as of the beginning of Stage II of EMU.

These four provisions in the Maastricht Treaty are all aimed at ensuring the independence of the central banks from the public authorities. They deal with each of the four legal characteristics used by Cukierman to construct a measure of statutory central bank independence.⁵⁷ These characteristics refer to: i) the rules on the appointment, dismissal, and term of office of the chief executive of the central bank (usually the governor); ii) the capacity of the central bank to formulate monetary and exchange rate policy without government interference; iii) the stated ultimate objectives of the central bank; and iv) the limitations on the central bank’s ability to lend to the public sector. Table 8 describes the current status of the countries under analysis regarding the first three of these legal characteristics. The situation concerning the fourth characteristic is discussed in the next section.

Table 8.

Indicators of Statutory Central Bank Independence

(Situation as of end-January 1998)

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Minister of Finance

^1/The Central Bank of Bosnia-Herzegovina was established on June 20,1997 under a currency board arrangement.

Table 8.

Indicators of Statutory Central Bank Independence

(Situation as of end-January 1998)

	Composition, appointment and dismissal of Boards	Objective(s) of the central bank	Policy formulation
Albania	Board of 9 members, all appointed by Parliament on government proposal. The President of the Republic appoints Governor, and the Board appoints 2 Deputy Governors. All members have 7-year terms renewed on a rotating basis. They can be reappointed. Dismissal only possible for well-specified reasons not related to policy.	Main goal: price stability. Other objectives (development of financial and foreign exchange markets, ensuring orderly monetary conditions conducive to balanced economic growth) are subordinated to primary goal in case of conflict.	Independence from government is explicitly stated in the CB law. MoF has right to attend Board meetings but is not entitled to vote. Exchange rate and monetary policies are formulated by CB alone.
Bosnia-Herzegovina	During first 6 years of existence of CB, the Board will consist of a Governor, appointed by IMF after consultation with the Presidency of Bosnia-Herzegovina, and 3 other members appointed by that Presidency. 1/ After these 6 years, Board will be composed of 5 members appointed by Presidency. Board will appoint Governor from among its members. All members will have 6-year renewable terms. They may only be dismissed under well-specified reasons not related to policy.	Only objective: price stability	Independence from other public authorities explicitly stated in CB law. CB alone formulates monetary policy. Exchange rate constrained by legal obligation, under the currency board, to peg the domestic currency to the deutsche mark.
Bulgaria	Board of 7 members: a Governor appointed by Parliament, 3 Deputy Go-Governors proposed by the Governor and appointed by Parliament, and 3 other members appointed by President of Republic. All members have 6-year terms renewed on a rotating basis. CB law lists reasons for dismissal of members but does not exclude dismissal on other grounds.	Main objectives: stability of national currency and development of an efficient payments mechanism.	Independence from government bodies explicitly stated in CB law. Exchange rate policy is constrained by currency board arrangement.
Croatia	Board composed of Governor, Deputy Governor, 2 or more Vice-Governors and up to 8 other members, all appointed by Parliament for 6-year terms. Deputy and Vice Governors appointed upon recommendation of Governor. Regarding the dismissal of Board members, the CB law only notes that this is to be decided by the Parliament.	Primary goals: stability of national currency, and maintainance of liquidity in domestic and international payments. Other objectives: support economic policies of government provided this does not endanger primary goals.	CB law states that the CB will formulate independently monetary and exchange rate policies.
Czech Republic	Board of 7 members: the Governor, 2 Vice-Governors, and 4 other members, all appointed by the President of Republic for 6-year terms. They can only be dismissed in limited number of cases defined by CB law.	Primary goal: price stability.	CB formulates exchange and monetary policy independently from government. Government may attend Board meetings in advisory capacity.
Estonia	Board consists of Chairman and 8 other members (including Governor). All appointed by Parliament for 5 years, the Chairman upon nomination of President of Republic, the other members upon nomination of Chairman. Law does not limit reasons for dismissal of Board members.	Main goal: ensure stability of the currency. CB will also support economic policies of government provided this does not conflict with primary objective.	Law states that the CB shall be independent from government, and will pursue monetary and banking policy independently. Exchange rate policy is constrained by currency board arrangement. MoF attends Board meetings without voting rights.
Hungary	Board consists of President, up to 5 Vice-Presidents, and other members in a number equal to the number of Vice-Presidents plus 1. All members appointed by President of Republic (Vice-Presidents upon CB President nomination, and President and other members upon Prime Minister nomination). President and Vice-President have 6-year terms. Other members have 3-year terms. Law lists reasons for dismissal but does not exclude dismissal on other grounds.	Main goal: to safeguard the domestic and external purchasing power of the national currency. The CB law, however, also indicates that the CB will support the economic policy program of the government.	The CB law states that the CB will formulate and implement monetary policy independently, without being subject to instructions from the government. Exchange rate policy, however, is approved by the government in agreement with the CB. The government is represented at CB Board by a Minister.
Latvia	Board consists of Governor, Deputy Governor, and 6 other members, all appointed for 6-year terms. Governor nominated and appointed by Parl-liament. Other members appointed by Parliament upon recommendation of Governor. Law lists reasons for dismissal but does not exclude dismissal on other grounds.	Main goal: maintainance of price stability. Other objectives: facilitate free and efficient allocation of financial resources, and ensure the stability of the financial system.	The CB law states that the CB shall not be subject to instructions from the government. It shall formulate monetary and exchange rate policy, and banking supervision independently. MoF may attend board meetings without voting rights.
Lithuania	Board consists of Chairman, 3 Deputy Chairmen, and 10 other members. Chairman appointed for 5-year term by Parliament upon recommendation of President of Republic. Other members appointed for 9 years by President of Republic upon recommendation of Board Chairman. Board members may only be removed for health, criminal, or incompatibility reasons.	Main goal: price stability. Other objectives: ensure proper operation of foreign exchange market and payments system, and support government’s economic policy provided this does not conflict with main goal.	The CB law states that the CB shall be independent from government. Exchange rate policy is contrained by currency board arrangement.
FYR of Macedonia	Board consists of Governor and 8 other members appointed by Parlia-Parliament for 7 years. The Governor is nominated and recalled by President of Republic and can be reappointed. A Deputy Governor (for 7-year term) and one or more Vice-Governors (for 4-year terms) are appointed among Board members, at Governor’s proposal, with the possibility of one reappointment. CB law does not limit reasons for dismissal.	Primary objectives: stability of the currency and the liquidity of domestic and international payments.	CB law states that the CB will act independently.
Poland	Board of 10 members: the President, appointed by lower house of Parliament upon recommendation from President of Republic, and 9 other members appointed in equal numbers by Lower House, Senate, and President of Republic. All members serve 6-year terms and may only be removed for health or criminal reasons.	Primary goal: price stability. In addition, CB will support government policies provided this does not conflict with primary objective.	The Constitution and the CB law enshrine the principle of full independence of the CB from the gov-vemment. CB formulates monetary policy, and implements the exchange rate policy defined by government in agreement with the CB Council.
Romania	Board consists of Governor, Vice-Governor, 2 Assistant Governors, and 5 other members, all appointed by Parliament at Prime Minister proposal for 5-year renewable terms. CB law lists limited number of reasons for dismissal and forbids removal on other grounds.	Primary goal: currency and price stability. Other objectives: development of financial markets and normal operation of banking system.	Law does not recognize independence from government but assigns to CB full responsibility for exchange rate and monetary policy. Board meetings may be attended by MoF without voting rights.
Slovak Republic	Board consists of Governor, 2 Vice-Governors, 2 Executive Directors and three other members. Governor and Vice-Governor appointed by President of Republic upon government recommendation, with consent of Parliament. Other members appointed by government upon recommendation of Governor. Terms: 6 years for Governor, Vice-Governors and Executive Directors; 4 years for other members. Law lists 3 reasons for dismissal of Board members but does not exclude dismissal on other grounds.	Primary goal: stability of the currency. Within the limits defined by the CB law, the CB will also support the economic policy of the government.	The CB law states that the CB shall fulfill its tasks independently of instructions given by the government. Deliberations of the CB Board may be attended by a member of the government in an advisory role. Exchange rate and monetary policies are formulated by the CB alone.
Slovenia	Board consists of Governor, Deputy Governor, 3 Vice-Governors and 6 independent experts. Governor and experts appointed by Parliament upon proposal of President of Republic. Other members appointed by Parliament upon proposal of Governor. AH members serve 6-year terms. CB law does not restrict possible reasons for dismissal of Board members.	Primary goals: the stability of the currency and the liquidity of domestic and international payments.	CB law states that CB shall act independently in carrying out its assignments.
Cyprus	Board consists of Governor and Deputy Governor, appointed jointly by President and Vice-President of Republic for at most 5 years, and 5 Directors appointed by government for 5-year terms. All members can be reappointed. Terms are renewed on a rotating basis. CB law lists a number of reasons for dismissal but does not exclude dismissals on other grounds.	Main goal: to foster monetary stability and credit and balance of payments conditions conducive to the orderly development of the economy. In so doing, the CB must have due regard to the economic conditions prevailing in the country.	Independence from government is not stated in CB law. A representative of MoF can attend CB Board meetings, propose subjects to include in agenda, express views without voting rights, convene meetings under certain conditions, and temporarily suspend a Board decision if deemed incompatible with CB law or contrary to public interest.
Malta	Board consists of Governor and Deputy Governor, appointed by the President on advice of the Prime Minister for 5-year renewable terms, and three other members, appointed by Prime Minister for 3-year renewable terms. CB law lists some reasons for dismissal but does not exclude others.	Goals: safeguard international value of the currency, promote orderly and balanced economic development, rising level of employment and income consistent with price and currency stability, and foster development of capital markets.	Independence is not recognized by CB law. The MoF may, if thought necessary in the national interest, and after consultation with the Governor, give written instructions to the CB and the CB must comply with them.
Turkey	Board consists of Governor and 6 other members. Governor is appointed by government for 5 years upon Board proposal. Other members are appointed for 3 years by the CB’s General Assembly of Shareholders (Treasury is majority shareholder). All members can be reappointed. Governor can only be dismissed for the reasons listed in the CB law.	Main goals: to conduct money and credit policy in conformity with Government Development and Annual Programs; and to take, jointly with government, measures to guarantee internal and external stability of the currency	Independence is not recognized by CB law. Monetary policy is formulated jointly with government, in consideration of the tatter’s economic policies. Exchange rate policy is formulated within the guidelines defined by the government.

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Minister of Finance

^1/The Central Bank of Bosnia-Herzegovina was established on June 20,1997 under a currency board arrangement.

View Table

Table 8.

Indicators of Statutory Central Bank Independence

(Situation as of end-January 1998)

	Composition, appointment and dismissal of Boards	Objective(s) of the central bank	Policy formulation
Albania	Board of 9 members, all appointed by Parliament on government proposal. The President of the Republic appoints Governor, and the Board appoints 2 Deputy Governors. All members have 7-year terms renewed on a rotating basis. They can be reappointed. Dismissal only possible for well-specified reasons not related to policy.	Main goal: price stability. Other objectives (development of financial and foreign exchange markets, ensuring orderly monetary conditions conducive to balanced economic growth) are subordinated to primary goal in case of conflict.	Independence from government is explicitly stated in the CB law. MoF has right to attend Board meetings but is not entitled to vote. Exchange rate and monetary policies are formulated by CB alone.
Bosnia-Herzegovina	During first 6 years of existence of CB, the Board will consist of a Governor, appointed by IMF after consultation with the Presidency of Bosnia-Herzegovina, and 3 other members appointed by that Presidency. 1/ After these 6 years, Board will be composed of 5 members appointed by Presidency. Board will appoint Governor from among its members. All members will have 6-year renewable terms. They may only be dismissed under well-specified reasons not related to policy.	Only objective: price stability	Independence from other public authorities explicitly stated in CB law. CB alone formulates monetary policy. Exchange rate constrained by legal obligation, under the currency board, to peg the domestic currency to the deutsche mark.
Bulgaria	Board of 7 members: a Governor appointed by Parliament, 3 Deputy Go-Governors proposed by the Governor and appointed by Parliament, and 3 other members appointed by President of Republic. All members have 6-year terms renewed on a rotating basis. CB law lists reasons for dismissal of members but does not exclude dismissal on other grounds.	Main objectives: stability of national currency and development of an efficient payments mechanism.	Independence from government bodies explicitly stated in CB law. Exchange rate policy is constrained by currency board arrangement.
Croatia	Board composed of Governor, Deputy Governor, 2 or more Vice-Governors and up to 8 other members, all appointed by Parliament for 6-year terms. Deputy and Vice Governors appointed upon recommendation of Governor. Regarding the dismissal of Board members, the CB law only notes that this is to be decided by the Parliament.	Primary goals: stability of national currency, and maintainance of liquidity in domestic and international payments. Other objectives: support economic policies of government provided this does not endanger primary goals.	CB law states that the CB will formulate independently monetary and exchange rate policies.
Czech Republic	Board of 7 members: the Governor, 2 Vice-Governors, and 4 other members, all appointed by the President of Republic for 6-year terms. They can only be dismissed in limited number of cases defined by CB law.	Primary goal: price stability.	CB formulates exchange and monetary policy independently from government. Government may attend Board meetings in advisory capacity.
Estonia	Board consists of Chairman and 8 other members (including Governor). All appointed by Parliament for 5 years, the Chairman upon nomination of President of Republic, the other members upon nomination of Chairman. Law does not limit reasons for dismissal of Board members.	Main goal: ensure stability of the currency. CB will also support economic policies of government provided this does not conflict with primary objective.	Law states that the CB shall be independent from government, and will pursue monetary and banking policy independently. Exchange rate policy is constrained by currency board arrangement. MoF attends Board meetings without voting rights.
Hungary	Board consists of President, up to 5 Vice-Presidents, and other members in a number equal to the number of Vice-Presidents plus 1. All members appointed by President of Republic (Vice-Presidents upon CB President nomination, and President and other members upon Prime Minister nomination). President and Vice-President have 6-year terms. Other members have 3-year terms. Law lists reasons for dismissal but does not exclude dismissal on other grounds.	Main goal: to safeguard the domestic and external purchasing power of the national currency. The CB law, however, also indicates that the CB will support the economic policy program of the government.	The CB law states that the CB will formulate and implement monetary policy independently, without being subject to instructions from the government. Exchange rate policy, however, is approved by the government in agreement with the CB. The government is represented at CB Board by a Minister.
Latvia	Board consists of Governor, Deputy Governor, and 6 other members, all appointed for 6-year terms. Governor nominated and appointed by Parl-liament. Other members appointed by Parliament upon recommendation of Governor. Law lists reasons for dismissal but does not exclude dismissal on other grounds.	Main goal: maintainance of price stability. Other objectives: facilitate free and efficient allocation of financial resources, and ensure the stability of the financial system.	The CB law states that the CB shall not be subject to instructions from the government. It shall formulate monetary and exchange rate policy, and banking supervision independently. MoF may attend board meetings without voting rights.
Lithuania	Board consists of Chairman, 3 Deputy Chairmen, and 10 other members. Chairman appointed for 5-year term by Parliament upon recommendation of President of Republic. Other members appointed for 9 years by President of Republic upon recommendation of Board Chairman. Board members may only be removed for health, criminal, or incompatibility reasons.	Main goal: price stability. Other objectives: ensure proper operation of foreign exchange market and payments system, and support government’s economic policy provided this does not conflict with main goal.	The CB law states that the CB shall be independent from government. Exchange rate policy is contrained by currency board arrangement.
FYR of Macedonia	Board consists of Governor and 8 other members appointed by Parlia-Parliament for 7 years. The Governor is nominated and recalled by President of Republic and can be reappointed. A Deputy Governor (for 7-year term) and one or more Vice-Governors (for 4-year terms) are appointed among Board members, at Governor’s proposal, with the possibility of one reappointment. CB law does not limit reasons for dismissal.	Primary objectives: stability of the currency and the liquidity of domestic and international payments.	CB law states that the CB will act independently.
Poland	Board of 10 members: the President, appointed by lower house of Parliament upon recommendation from President of Republic, and 9 other members appointed in equal numbers by Lower House, Senate, and President of Republic. All members serve 6-year terms and may only be removed for health or criminal reasons.	Primary goal: price stability. In addition, CB will support government policies provided this does not conflict with primary objective.	The Constitution and the CB law enshrine the principle of full independence of the CB from the gov-vemment. CB formulates monetary policy, and implements the exchange rate policy defined by government in agreement with the CB Council.
Romania	Board consists of Governor, Vice-Governor, 2 Assistant Governors, and 5 other members, all appointed by Parliament at Prime Minister proposal for 5-year renewable terms. CB law lists limited number of reasons for dismissal and forbids removal on other grounds.	Primary goal: currency and price stability. Other objectives: development of financial markets and normal operation of banking system.	Law does not recognize independence from government but assigns to CB full responsibility for exchange rate and monetary policy. Board meetings may be attended by MoF without voting rights.
Slovak Republic	Board consists of Governor, 2 Vice-Governors, 2 Executive Directors and three other members. Governor and Vice-Governor appointed by President of Republic upon government recommendation, with consent of Parliament. Other members appointed by government upon recommendation of Governor. Terms: 6 years for Governor, Vice-Governors and Executive Directors; 4 years for other members. Law lists 3 reasons for dismissal of Board members but does not exclude dismissal on other grounds.	Primary goal: stability of the currency. Within the limits defined by the CB law, the CB will also support the economic policy of the government.	The CB law states that the CB shall fulfill its tasks independently of instructions given by the government. Deliberations of the CB Board may be attended by a member of the government in an advisory role. Exchange rate and monetary policies are formulated by the CB alone.
Slovenia	Board consists of Governor, Deputy Governor, 3 Vice-Governors and 6 independent experts. Governor and experts appointed by Parliament upon proposal of President of Republic. Other members appointed by Parliament upon proposal of Governor. AH members serve 6-year terms. CB law does not restrict possible reasons for dismissal of Board members.	Primary goals: the stability of the currency and the liquidity of domestic and international payments.	CB law states that CB shall act independently in carrying out its assignments.
Cyprus	Board consists of Governor and Deputy Governor, appointed jointly by President and Vice-President of Republic for at most 5 years, and 5 Directors appointed by government for 5-year terms. All members can be reappointed. Terms are renewed on a rotating basis. CB law lists a number of reasons for dismissal but does not exclude dismissals on other grounds.	Main goal: to foster monetary stability and credit and balance of payments conditions conducive to the orderly development of the economy. In so doing, the CB must have due regard to the economic conditions prevailing in the country.	Independence from government is not stated in CB law. A representative of MoF can attend CB Board meetings, propose subjects to include in agenda, express views without voting rights, convene meetings under certain conditions, and temporarily suspend a Board decision if deemed incompatible with CB law or contrary to public interest.
Malta	Board consists of Governor and Deputy Governor, appointed by the President on advice of the Prime Minister for 5-year renewable terms, and three other members, appointed by Prime Minister for 3-year renewable terms. CB law lists some reasons for dismissal but does not exclude others.	Goals: safeguard international value of the currency, promote orderly and balanced economic development, rising level of employment and income consistent with price and currency stability, and foster development of capital markets.	Independence is not recognized by CB law. The MoF may, if thought necessary in the national interest, and after consultation with the Governor, give written instructions to the CB and the CB must comply with them.
Turkey	Board consists of Governor and 6 other members. Governor is appointed by government for 5 years upon Board proposal. Other members are appointed for 3 years by the CB’s General Assembly of Shareholders (Treasury is majority shareholder). All members can be reappointed. Governor can only be dismissed for the reasons listed in the CB law.	Main goals: to conduct money and credit policy in conformity with Government Development and Annual Programs; and to take, jointly with government, measures to guarantee internal and external stability of the currency	Independence is not recognized by CB law. Monetary policy is formulated jointly with government, in consideration of the tatter’s economic policies. Exchange rate policy is formulated within the guidelines defined by the government.

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Minister of Finance

^1/The Central Bank of Bosnia-Herzegovina was established on June 20,1997 under a currency board arrangement.

When two-tier banking systems were established at the beginning of the transition process, many CEECs endowed their newly created central banks with a relatively high degree of independence (Estonia in the context of a CBA). The new central bank laws often mirrored existing Western central bank laws, in particular the Bundesbank law. Subsequently, many countries enacted new legislation increasing central bank independence (including the introduction by Lithuania of a CBA in 1994). This process has gathered momentum recently with the amendment of the law on the National Bank of Hungary of December 1996, the adoption of CBAs in Bulgaria and Bosnia-Herzegovina in July and June 1997, respectively, the adoption of a new Constitution and central bank law in Poland in mid-1997 that enshrine the principle of an independent central bank, and the passing of new central bank laws in Albania and Romania in January 1998.⁵⁸ Some of these recent changes in central bank laws (in particular, those in Hungary and Poland), as well as some of the amendments being planned in other countries, explicitly aim at better aligning these laws to the EU standards and, in that respect, EMU is already having an institutional impact on these countries.

Following this recent wave of changes in legislation, many CEECs satisfy or are close to satisfying the first three central bank statutory requirements laid down by the Maastricht Treaty. Albania, Bosnia-Herzegovina, the Czech Republic, Lithuania, and Poland already fully comply with such requirements. All the CEECs appoint their governors for tenures of at least five years, as stipulated in the Maastricht Treaty (see Table 8). In fact, in all these countries except Estonia, Romania, and Lithuania, the Governor is elected for six or seven years, implying a term considerably longer than their electoral cycles. In a few of them (Hungary, FYR of Macedonia, and the Slovak Republic), however, some of the other members of the Board have terms of less than five years, which, as noted, would not be consistent with the stricter interpretation of the EU rules made by the EMI. In addition, some countries do not restrict by law the possible reasons for removal of Board members (Bulgaria, Croatia, Estonia, Hungary, Latvia, the Slovak Republic, and Slovenia).⁵⁹

With respect to the statutory objectives, practically all the CEECs have price or currency stability (or both) as their sole or primary goals, to which they subordinate any other stated objectives. To the extent that “currency stability” is associated with price stability, stating the main objective in this way would seem consistent with the Maastricht treaty. As emphasized by some authors, however, currency stability (or the stability of the external purchasing power of the currency, as stated in the National Bank of Hungary’s law) may in some cases be in conflict with price stability.⁶⁰ Regarding policy formulation, the central bank laws of all CEECs except Romania explicitly enshrine the principle of independence from the government, which extends to both monetary and exchange rate policy in all of them except Hungary (where exchange rate policy is approved by the government, although in agreement with the central bank). Finally, in line with the EMI’s interpretation of the Maastricht Treaty requirements, the central bank acts of many CEECs contain incompatibility clauses for high central bank officials, aimed at preventing potential conflicts of interest.

The relatively high degree of statutory central bank independence in the CEECs contrasts with the situation prevailing in the three Mediterranean countries examined here (see Table 8). While Cyprus, Malta, and Turkey all meet the Maastricht requirement that governors be appointed for terms of at least five years, the length of the term (five years in the three countries)is lower than that seen in most CEECs, and, except for Turkey, none of these three countries restricts the reasons for the dismissal of Board members. Central bank goals include, without clear subordination to a price stability objective, the orderly development of the economy (Cyprus and Malta), promoting a rising level of income and employment (Malta), and supporting the government’s economic policy (Turkey). The independence of the central bank from the government is not recognized in any of these three countries. In Malta and Cyprus, a government representative has some important prerogatives in the Board of the central bank, and in Turkey the government plays a key role in the formulation of exchange rate and (jointly with the central bank) monetary policy. These three countries will therefore need to undertake substantial changes in their central bank laws to adapt them to the Maastricht requirements.

While the extent to which countries satisfy the Maastricht rules under discussion provides a good measure of their degree of statutory central bank independence, legal independence is only one of the factors that determine the actual degree of independence. The latter depends also on elements such as tradition, the personality of central bank managers, and how actively the government uses its possible channels of influence. One approach to measuring actual (as opposed to statutory) independence, popularized by Cukierman, is to look at the rate of “turnover” of central bank governors.⁶¹ Table 9 provides data on the average rate of turnover of governors for seven of the countries under analysis, which can also be interpreted as a measure of the average term of office of governors in each country. Table 9 also shows average turnover data for industrial and developing countries.

Table 9.

Turnover Rate of Central Bank Governors in Selected Countries

Sources: Radzyner and Riesinger (1997) for the CEECs; and Cukierman et al. (1992) for the Mediterranean countries and industrial and developing countries averages.

^1/Calculated as the number of governors divided by the length (in years or fractions of years) of the period of observation. A higher turnover rate, therefore, indicates a lower average term of office of the governor and, therefore, a lower degree of actual central bank independence. Because in all countries the electoral cycle is of at least four years, central bank independence is normally expected to decline seriously for turnover rates above 0.25.

Table 9.

Turnover Rate of Central Bank Governors in Selected Countries

	Period of observation	Turnover rate 1/
CEECs:
Czech Republic	1992-97	0.23
Hungary	1991-97	0.38
Poland	1989-97	0.49
Slovak Republic	1992-97	0.23
Slovenia	1991-97	0.17
Mediterranean countries:
Malta	1972-79 1980-89	0.38 0.20
Turkey	1972-79 1980-89	0.38 0.40
Memorandum items:
Average of 21 industrial countries	1980-89	0.13
Average of 51 developing countries	1980-89	0.29

Sources: Radzyner and Riesinger (1997) for the CEECs; and Cukierman et al. (1992) for the Mediterranean countries and industrial and developing countries averages.

^1/Calculated as the number of governors divided by the length (in years or fractions of years) of the period of observation. A higher turnover rate, therefore, indicates a lower average term of office of the governor and, therefore, a lower degree of actual central bank independence. Because in all countries the electoral cycle is of at least four years, central bank independence is normally expected to decline seriously for turnover rates above 0.25.

View Table

Table 9.

Turnover Rate of Central Bank Governors in Selected Countries

	Period of observation	Turnover rate 1/
CEECs:
Czech Republic	1992-97	0.23
Hungary	1991-97	0.38
Poland	1989-97	0.49
Slovak Republic	1992-97	0.23
Slovenia	1991-97	0.17
Mediterranean countries:
Malta	1972-79 1980-89	0.38 0.20
Turkey	1972-79 1980-89	0.38 0.40
Memorandum items:
Average of 21 industrial countries	1980-89	0.13
Average of 51 developing countries	1980-89	0.29

Sources: Radzyner and Riesinger (1997) for the CEECs; and Cukierman et al. (1992) for the Mediterranean countries and industrial and developing countries averages.

^1/Calculated as the number of governors divided by the length (in years or fractions of years) of the period of observation. A higher turnover rate, therefore, indicates a lower average term of office of the governor and, therefore, a lower degree of actual central bank independence. Because in all countries the electoral cycle is of at least four years, central bank independence is normally expected to decline seriously for turnover rates above 0.25.

The main conclusion that emerges is that all the countries for which turnover data were available experienced high turnover rates, implying a relatively low degree of de facto independence. Turnover rates were particularly high for Poland, Hungary, and Turkey, but they significantly exceeded in all seven countries the average turnover rate seen in industrial countries in 1980-89.⁶² While the recent amendments of central bank legislation in Hungary and Poland are not reflected in these ratios, the data suggest that the legal status of central banks in CEECs overstates their actual independence.

Looking at turnover ratios seems relevant in the case of the countries under review insofar as there seems to be a negative correlation between the frequency of the change of governor and inflation, at least in developing countries.⁶³ Empirical evidence also suggests that there is a negative correlation between statutory independence and inflation, but this correlation does not seem to hold for developing countries.⁶⁴ With the central banks of CEECs having been established at most nine years ago and their laws having been amended frequently, there is not a sufficiently long track record to produce robust econometric relations between central bank independence and inflation, and few studies have attempted this. There is, however, some evidence that transition countries with more (statutorily) independent central banks had lower inflation than their counterparts, even after controlling for different initial conditions, fiscal performance, and the quality of structural reforms.⁶⁵

Monetary and other privileged financing of the government

As noted above, the Maastricht Treaty requires all countries to renounce any form of direct central bank financing of government deficits from the beginning of Stage II of EMU (Art. 104). This applies to overdraft facilities, advances, and the purchase directly from public institutions by the central bank of government securities (including purchases in the primary market). Only indirect credit through the purchase of government securities from a third party (as in the case of open market operations or the refinancing of banks against government paper as collateral) is allowed. A Council Regulation of December 13, 1993 (Regulation EC/3603/93) has clarified the exact application of the prohibitions of Article 104. Regarding the possibility of overdrafts or short-term advances, it allows intraday credits on the grounds that they may be necessary to guarantee a smooth operation of the payments systems.⁶⁶

Privileged access by public authorities to financial institutions (such as through the placement among banks of public debt at below-market rates) has also been prohibited since the beginning of Stage II of EMU (Art. 104a). However, this limitation excludes privileged financing based on prudential considerations, which seems to cover the possibility of reserve requirements remunerated at below-market rates. In addition, the Maastricht Treaty introduced a “no bail-out” provision (Art. 104b), which prohibits the assumption of liabilities of an EU member country by another EU country or the EU budget, a provision that became effective with the Treaty.⁶⁷ All the obligations contained in Articles 104, 104a, and 104b will therefore apply to countries joining the EU as of their dates of membership.

Current regulations on central bank financing of the government in the countries under review are shown in Table 10. Only Bulgaria, Bosnia-Herzegovina, Estonia, and Lithuania comply in full with the Maastricht requirements in this area. The CBAs of these four countries prohibit any type of credit from the central bank to the government, including (except in the case of Lithuania) indirect credit via open market operations. Bulgaria and Bosnia-Herzegovina also prohibit central bank credits to banks collateralized with government securities, although the Bulgarian central bank may extend credits to banks against government collateral in the case of a liquidity crisis. These tight rules are part of the usual and more general prohibition under CBAs of any domestic credit from the central bank to either the public or the private sector.⁶⁸ Poland will also satisfy the Maastricht limits on central bank financing of the government as of October 17, 1998, when the full prohibition of any direct credit enshrined in the Constitution of 1997 will come into effect. In the meantime, the National Bank of Poland will still be allowed to purchase, within certain limits, treasury bills in the primary market. The National Bank of Hungary (NBH) is also almost in full compliance with the Maastricht rules, following the amendments to its law introduced in January 1997.⁶⁹ The Hungarian government’s capacity to run overdrafts in its current account at the NBH for up to 15 days, however, is still incompatible with EU rules which, as noted, only permit intraday credits.

Table 10.

Rules on Central Bank Financing of the Government

(Situation as of end-January 1998)

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Ministry of Finance. OMO = Open Market Operations.

^1/Overdrafts (on the current account of the government at the central bank) refer to any line of credit granted by the latter to the former without specified maturity. Short-term advances refer to any nonsecuritized credit with fixed (normally short-term) maturity.

^2/For 1998, these limits have been set at a higher level (10 percent and 15 percent of ordinary revenues, respectively).

^3/A 1994 amendment to the Central Bank of Malta Act provides for the eventual removal of this facility; the amendment has not entered into force but the government has voluntarily refrained from seeking access to this facility since the end of 1996.

^4/The Central Bank of Malta disengaged from the primary market after March 1996.

Table 10.

Rules on Central Bank Financing of the Government

(Situation as of end-January 1998)

	Overdrafts and advances 1/	Securitized lending
Albania	Not allowed.	The CB may grant to the government loans of up to 6-month maturities provided they are collateralized by government securities, bear market interest rates, and do not exceed 5% of ordinary government revenues of the previous year. Under exceptional circumstances, this limit may be temporarily increased to 8% of ordinary revenues. 2/ The CB may engage in OMO with government securities but the securities obtained in this way are subject to the above-mentioned limits unless the OMO are justified on monetary policy grounds. It may also rediscount government securities held by banks and maturing within 3 years from the date of discount.
Bosnia-Herzegovina	Not allowed. The currency board law forbids the extension of any credit to the government.	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may not extend to banks credit collateralized with government securities.
Bulgaria	Not allowed. The currency board law forbids the extension of any credit to the government (with the exception of credits related to the purchase of SDRs from the IMF).	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may grant to banks loans of up to 3 months collateralized with government securities in the case of liquidity risk threatening the stability of the banking system.
Croatia	Short-term loans to bridge liquidity gaps are allowed but should not exceed 5 percent of the current year’s budget and must be repaid by the end of the current year.	CB may grant credits to banks against government securities and may engage in OMO. The CB law does not explicitly foresee CB purchases of government securities (T-bills) in the primary market, and these have never taken place.
Czech Republic	Not allowed.	The CB may grant direct short-term credit to the government through the purchase of T-bills maturing within 3 months from the day of purchase, provided the total amount does not exceed 6% of current year’s budgeted expenditures. It can also buy and sell from banks government securities and hold them for up to one year, and can grant to banks credits for up to 3 months guaranteed with government securities.
Estonia	Not allowed.	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may however extend to banks credit collateralized with government securities.
Hungary	An overdraft facility, limited to 2% of planned revenues for the current year, is available to the government. Overdrafts may not exist continuously for more than 15 days and must be eliminated by year-end.	All direct financing from the government other than the overdraft facility is explicitly prohibited. In particular, the CB may not purchase government securities in the primary market. OMO in government securities are allowed but only for monetary policy purposes.
Latvia	CB may grant short-term credits to the government up to 1/12 of budgeted current revenues.	The CB may grant short-term loans to banks collateralized with government securities. It may also perform lombard operations against government securities.
Lithuania	Not allowed.	The CB may conduct OMO with government securities. It may also grant, withing certain limits, credits to banks collateralized with government securities.
FYR of Macedonia	CB may grant loans up to 5% of the current year’s budget provided that they do not conflict with the CB’s monetary policy objectives.	CB may grant to banks loans of up to 3 months guaranteed with government securities.
Poland	Not allowed. The Constitution of 1997 explicitly prohibits any form of direct credit to the government from October 17, 1998.	Until October 17, 1998, the CB may purchase in the primary market T-bills up to 2% of current year’s planned budgetary expenditures. From that date on, purchases of government securities in the primary market will be forbidden. CB may conduct OMO with government securities.
Romania	The CB may grant short-term advances but they must be repaid withing 180 days, bear market interest rates, and may not exceed 7% of the previous year’s budget revenues, nor the double of the CB’s capital and reserves.	CB may grant to banks loans of up to 90 days against government securities maturing within one month from the date of acquisition.
Slovak Republic	Not allowed.	The CB may grant direct short-term credit to the government through the purchase of T-bills maturing within 3 months from the day of purchase, provided the total amount does not exceed 5% of the budgetary revenues of the previous year. It can also buy and sell from banks government securities and hold them for up to one year, and can grant to banks credits for up to 3 months guaranteed with government securities.
Slovenia	CB may grant short-term advances to the government to bridge over temporary liquidity gaps but they may not exceed 5% of the current year’s budget, nor 0.5% of the anticipated budget deficit, and must by fully repaid by the end of the fiscal year.	The CB may engage in OMO in government securities.
Cyprus	The CB may make direct advances to the government up to 10 % of the ordinary revenue estimated for the current fiscal year. These advances must be repaid not later than 3 months after the end of the current fiscal year. The CB will receive no interest unless otherwise agreed.	CB may purchase T-bills maturing within 12 months from the date of aquisition, and provide advances to banks against this same type of government securities provided that the total amount of T-bills obtained in this way does not exceed 10% of estimated government revenue for the current fiscal year. The CB may also conduct, under certain limits, OMO with other government securities.
Malta	The CB may grant advances to the government to cover temporary liquidity gaps up to 15 % of ordinary revenue estimated for the current fiscal year. These advances must be repaid as soon as possible and, in any case, by the end of the current fiscal year. The rate of interest applied is to be agreed between CB and MoF. 3/	CB may purchase in primary market T-bills maturing within 93 days. 4/ It can also grant to banks loans of up to 3 months guaranteed with government securities maturing vvithin 20 years, and conduct OMO in government securities with maturities of up to 20 years, provided that the securities obtained in these two ways do not exceed 20% of the sight deposits at the CB. In addition, the CB may purchase bonds or shares issued by public companies for the purpose of financing government development plans under certain limits specified by the CB law.
Turkey	CB may extend short-term advances to the government up to 15% of current year’s general budget. The rate of interest applied is to be agreed between CB and MoF. A protocol signed between CB and Treasury in 1997, however, foresees the end of the Treasury’s recourse to short-term advances from the CB.	CB may discount or grant advances against bills, or Treasury-guaranteed bills, with maturities of up to 9 months, issued by state enterprises and administrations to cover seasonal liquidity needs connected with purchases of raw materials or crops. OMO in bonds issued by the state or public agencies are allowed but only for monetary policy purposes and with bonds with maturities up to 12 months. The total amount of OMO (with both public and private securities) may not exceed five times the total of the CB’s capital and reserve funds.

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Ministry of Finance. OMO = Open Market Operations.

^1/Overdrafts (on the current account of the government at the central bank) refer to any line of credit granted by the latter to the former without specified maturity. Short-term advances refer to any nonsecuritized credit with fixed (normally short-term) maturity.

^2/For 1998, these limits have been set at a higher level (10 percent and 15 percent of ordinary revenues, respectively).

^3/A 1994 amendment to the Central Bank of Malta Act provides for the eventual removal of this facility; the amendment has not entered into force but the government has voluntarily refrained from seeking access to this facility since the end of 1996.

^4/The Central Bank of Malta disengaged from the primary market after March 1996.

View Table

Table 10.

Rules on Central Bank Financing of the Government

(Situation as of end-January 1998)

	Overdrafts and advances 1/	Securitized lending
Albania	Not allowed.	The CB may grant to the government loans of up to 6-month maturities provided they are collateralized by government securities, bear market interest rates, and do not exceed 5% of ordinary government revenues of the previous year. Under exceptional circumstances, this limit may be temporarily increased to 8% of ordinary revenues. 2/ The CB may engage in OMO with government securities but the securities obtained in this way are subject to the above-mentioned limits unless the OMO are justified on monetary policy grounds. It may also rediscount government securities held by banks and maturing within 3 years from the date of discount.
Bosnia-Herzegovina	Not allowed. The currency board law forbids the extension of any credit to the government.	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may not extend to banks credit collateralized with government securities.
Bulgaria	Not allowed. The currency board law forbids the extension of any credit to the government (with the exception of credits related to the purchase of SDRs from the IMF).	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may grant to banks loans of up to 3 months collateralized with government securities in the case of liquidity risk threatening the stability of the banking system.
Croatia	Short-term loans to bridge liquidity gaps are allowed but should not exceed 5 percent of the current year’s budget and must be repaid by the end of the current year.	CB may grant credits to banks against government securities and may engage in OMO. The CB law does not explicitly foresee CB purchases of government securities (T-bills) in the primary market, and these have never taken place.
Czech Republic	Not allowed.	The CB may grant direct short-term credit to the government through the purchase of T-bills maturing within 3 months from the day of purchase, provided the total amount does not exceed 6% of current year’s budgeted expenditures. It can also buy and sell from banks government securities and hold them for up to one year, and can grant to banks credits for up to 3 months guaranteed with government securities.
Estonia	Not allowed.	The CB may not purchase government securities in the primary market, nor engage in any OMO. It may however extend to banks credit collateralized with government securities.
Hungary	An overdraft facility, limited to 2% of planned revenues for the current year, is available to the government. Overdrafts may not exist continuously for more than 15 days and must be eliminated by year-end.	All direct financing from the government other than the overdraft facility is explicitly prohibited. In particular, the CB may not purchase government securities in the primary market. OMO in government securities are allowed but only for monetary policy purposes.
Latvia	CB may grant short-term credits to the government up to 1/12 of budgeted current revenues.	The CB may grant short-term loans to banks collateralized with government securities. It may also perform lombard operations against government securities.
Lithuania	Not allowed.	The CB may conduct OMO with government securities. It may also grant, withing certain limits, credits to banks collateralized with government securities.
FYR of Macedonia	CB may grant loans up to 5% of the current year’s budget provided that they do not conflict with the CB’s monetary policy objectives.	CB may grant to banks loans of up to 3 months guaranteed with government securities.
Poland	Not allowed. The Constitution of 1997 explicitly prohibits any form of direct credit to the government from October 17, 1998.	Until October 17, 1998, the CB may purchase in the primary market T-bills up to 2% of current year’s planned budgetary expenditures. From that date on, purchases of government securities in the primary market will be forbidden. CB may conduct OMO with government securities.
Romania	The CB may grant short-term advances but they must be repaid withing 180 days, bear market interest rates, and may not exceed 7% of the previous year’s budget revenues, nor the double of the CB’s capital and reserves.	CB may grant to banks loans of up to 90 days against government securities maturing within one month from the date of acquisition.
Slovak Republic	Not allowed.	The CB may grant direct short-term credit to the government through the purchase of T-bills maturing within 3 months from the day of purchase, provided the total amount does not exceed 5% of the budgetary revenues of the previous year. It can also buy and sell from banks government securities and hold them for up to one year, and can grant to banks credits for up to 3 months guaranteed with government securities.
Slovenia	CB may grant short-term advances to the government to bridge over temporary liquidity gaps but they may not exceed 5% of the current year’s budget, nor 0.5% of the anticipated budget deficit, and must by fully repaid by the end of the fiscal year.	The CB may engage in OMO in government securities.
Cyprus	The CB may make direct advances to the government up to 10 % of the ordinary revenue estimated for the current fiscal year. These advances must be repaid not later than 3 months after the end of the current fiscal year. The CB will receive no interest unless otherwise agreed.	CB may purchase T-bills maturing within 12 months from the date of aquisition, and provide advances to banks against this same type of government securities provided that the total amount of T-bills obtained in this way does not exceed 10% of estimated government revenue for the current fiscal year. The CB may also conduct, under certain limits, OMO with other government securities.
Malta	The CB may grant advances to the government to cover temporary liquidity gaps up to 15 % of ordinary revenue estimated for the current fiscal year. These advances must be repaid as soon as possible and, in any case, by the end of the current fiscal year. The rate of interest applied is to be agreed between CB and MoF. 3/	CB may purchase in primary market T-bills maturing within 93 days. 4/ It can also grant to banks loans of up to 3 months guaranteed with government securities maturing vvithin 20 years, and conduct OMO in government securities with maturities of up to 20 years, provided that the securities obtained in these two ways do not exceed 20% of the sight deposits at the CB. In addition, the CB may purchase bonds or shares issued by public companies for the purpose of financing government development plans under certain limits specified by the CB law.
Turkey	CB may extend short-term advances to the government up to 15% of current year’s general budget. The rate of interest applied is to be agreed between CB and MoF. A protocol signed between CB and Treasury in 1997, however, foresees the end of the Treasury’s recourse to short-term advances from the CB.	CB may discount or grant advances against bills, or Treasury-guaranteed bills, with maturities of up to 9 months, issued by state enterprises and administrations to cover seasonal liquidity needs connected with purchases of raw materials or crops. OMO in bonds issued by the state or public agencies are allowed but only for monetary policy purposes and with bonds with maturities up to 12 months. The total amount of OMO (with both public and private securities) may not exceed five times the total of the CB’s capital and reserve funds.

Sources: Central Bank laws and amendments, and other national legislation. Note: CB = Central Bank. MoF = Ministry of Finance. OMO = Open Market Operations.

^1/Overdrafts (on the current account of the government at the central bank) refer to any line of credit granted by the latter to the former without specified maturity. Short-term advances refer to any nonsecuritized credit with fixed (normally short-term) maturity.

^2/For 1998, these limits have been set at a higher level (10 percent and 15 percent of ordinary revenues, respectively).

^3/A 1994 amendment to the Central Bank of Malta Act provides for the eventual removal of this facility; the amendment has not entered into force but the government has voluntarily refrained from seeking access to this facility since the end of 1996.

^4/The Central Bank of Malta disengaged from the primary market after March 1996.

At the other extreme, Cyprus, Malta, and Turkey have the laxest rules on central bank financing of the government among the countries under review. They all allow advances of 10-15 percent of government revenues (or budget appropriations), without imposing short deadlines for their repayments and leaving freedom to the central bank and government to agree on the interest rate applied. In addition, they permit direct purchases of government securities either in the primary market (Cyprus and Malta) or from the public administration and certain state enterprises (Turkey). Although Malta and Turkey have recently taken a number of steps to reduce the de facto access of their treasuries to central bank financing (see Table 10), these three countries still need to reform substantially their rules on the matter to comply with EU standards.

The rest of the countries (all of them CEECs) have relatively restrictive rules (though not as restrictive as required by the Maastricht Treaty) and can be classified into two groups. The first group consists of the Czech Republic, the Slovak Republic, and Albania (under the new central bank law passed in early 1998), all of which prohibit overdrafts or unsecuritized advances from the central bank to the government, but permit direct securitized credits under relatively strict limits (via the acquisition of treasury bills in the case of the Czech and the Slovak Republics, and in the form of loans to the government collateralized with government securities in the case of Albania). The second group includes the rest of the countries shown in Table 10, and is characterized by permitting overdrafts or unsecuritized advances under relatively strict conditions but not allowing (or at least not explicitly foreseeing in the law) the purchase by the central bank of securities directly from the government.

Participation in the European System of Central Banks

Even if the countries under analysis stay out of the euro area for a number of years after joining the EU, their central banks will be part of the ESCB on a restricted basis (Art. 1 of the Protocol). In particular, their central bank governors will be members of the General Council of the ECB, which comprises the President and Vice-President of the ECB and the governors of all EU central banks (Art. 45 of the Protocol).⁷⁰ The General Council will be informed of the decisions of the ECB’s Governing Council, thus giving countries with a derogation the opportunity to follow closely and, to a limited extent, influence monetary developments in the euro area. The General Council will also be in charge of monetary cooperation between euro-area countries and other EU countries within ERM II, including the operational aspects of this exchange rate arrangement, and of the necessary preparations for participation of members with a derogation in the euro area (Art. 47 of Protocol No.3). Countries with a derogation will, however, be excluded from the appointment of the members of the ECB’s Executive Board and will have no representation in the ECB’s Governing Council other than via the President of EU Council and a member of the Commission, who can attend (without voting rights) the meetings of the Governing Council (Art. 109b and 43 of Protocol No.3).

EU member states with a derogation will of course be allowed to continue to conduct an autonomous monetary policy and will keep official foreign exchange reserves under national control (they will not participate in the pooling of reserves at the ECB). They will also be excluded from the provisions regulating the transfer of ECB’s net profits and the allocation of the seignorage income accruing from the common monetary policy (Art. 33 and 32 of Protocol No. 3). They will, however, be obliged to consult the ECB onany draft legislative proposal in its field of competence (Art. 105, 4), and their financial institutions could be subject to prudential supervision by the ECB, should the latter be assigned this task in the future (Art. 105, 6).

Liberalization of capital flows

Free capital movements are an essential component of monetary union. The obligation of EU countries to liberalize capital movements among themselves stems, however, not from the Maastricht Treaty or subsequent secondary legislation but from the Treaty of Rome (Title III, Chapter 4) and a number of Council Directives (in particular, the Directive 88/361/EEC of June 24, 1988 requiring the full liberalization of intra-EU capital flows). Countries joining the EU will have to comply with this part of the acquis communautaire upon accession, although some of them may obtain transitory periods for certain types of flows (in particular short-term flows), just as the Directive of 1988 granted transition periods to Spain, Greece, Portugal and Ireland. As noted in Section II.B, the EAs also contain certain obligations (largely limited to FDI) with regards to the mutual opening of the capital accounts. What the Maastricht Treaty added (Art. 73 b) is the obligation to liberalize capital flows also vis-a-vis third countries (something most EU countries had already done when the Treaty was signed). This obligation became effective for all EU countries on January 1, 1994.

Most CEECs lifted restrictions on FDI inflows (except in a few sensitive or defense-related sectors) at the beginning of the transition. They also guaranteed in most cases the free repatriation of both profits (current account convertibility) and FDI capital. FDI inflows were welcomed as a non-easily-reversible source of foreign exchange and because of the usual externalities associated with FDI (introduction of new technologies and managerial skills, access to export networks, etc.). In addition, FDI was to play a key role in these countries’ privatization and enterprise restructuring processes, and as a source of government revenues. Most CEECs initially required authorization for FDI outflows, but the authorization was normally granted liberally when the investment was thought to help exports. Since early in the reform process, most CEECs have also applied a quite liberal treatment to trade credits (in the case of outward trade credits because of their positive effect on exports), and allowed individuals to hold and operate foreign exchange accounts at local banks, a privilege that most OECD countries accorded only at the latest stage of liberalization of their capital accounts.

With the exception of FDI-related transactions, however, most other capital movements remained very restricted in CEECs, as these countries feared the potentially destabilizing effects of an open capital account at a time when they were still trying to put their macroeconomic houses in order. In particular, financial credits, portfolio flows, and real estate operations remained severely restricted for years in practically all countries. A general pattern, and one that has endured until today, was the existence (legally and de facto) of much tighter controls on outflows than on inflows and more serious restrictions on short-term than on long-term transactions. Only the Baltic countries (and in particular Estonia), which opted for a very high degree of capital account openness from the start of the transition process, have escaped this general trend.⁷¹

Since 1995, a number of CEECs have been gradually easing restrictions on capital movements. This process has been led by the Czech Republic, Hungary, and Poland. These three countries have undertaken substantial liberalization commitments as part of their accession to the Organization for Economic Cooperation and Development (OECD) in December 1995, May 1996 and November 1996, respectively.⁷² In this context, the Czech Republic, Hungary and Poland have liberalized FDI outflows (vis-a-vis OECD countries and countries having signed bilateral investment protection agreements in the case of Hungary and Poland), outward trade credits, and personal capital movements. They have also liberalized other outflows (particularly long-term outflows) to varying degrees.⁷³ Furthermore, within the OECD, the Czech Republic and Hungary have committed themselves to abolishing all remaining capital controls within three to four years of their dates of OECD membership, if the macroeconomic situation permits, while Poland has committed itself to removing all remaining restrictions by end-1999.

Regarding the selected Mediterranean countries, Turkey undertook a substantial liberalization of its capital account during the 1980s and first half of the 1990s, partly reflecting its obligations as a member of the OECD. In Cyprus and Malta, progress in liberalizing capital movements has been slower, although the former country has recently taken a number of steps in this field, and plans to take further measures in the coming years, in preparation for its integration into the EU.⁷⁴

Table 11 provides indices of liberalization for selected categories of capital flows in the countries under analysis. It focuses on FDI, real estate, and portfolio and credit flows not involving the domestic banking system, thus leaving aside the specific provisions affecting banks and other financial institutions, the investment restrictions affecting institutional investors, and the regulations determining the capacity of residents and nonresidents to hold and operate foreign- and domestic-currency-denominated accounts. An overall index of liberalization of the capital account, based on the selected flows, was also calculated as a proxy for the overall degree of capital account openness (see Table 11).⁷⁵ It can take values between 0 and 100, with 100 representing the maximum degree of liberalization.

Table 11.

Indices of Capital Account Liberalization

(Position as of December 31, 1997, unless otherwise indicated)

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and OECD.

^1/With the exception of investments in sectors normally considered sensitive or of strategic national interest.

^2/The index can take values between 0 and 100, with 100 representing the maximum degree of liberalization of the capital flows under consideration. The index for a given country is constructed by adding up the values obtained in each category of capital flows and dividing the total by the maximum possible score. Flows not subject to controls are assigned a value of 2; flows classified as being subject to partial controls are assigned a value of 1; flows subject to serious controls are given a value of zero. When information on a given capital transaction was not available, a value of zero was assigned in both the numerator and the denominator.

^3/Borrowed or extended by residents other than banks.

Table 11.

Indices of Capital Account Liberalization

(Position as of December 31, 1997, unless otherwise indicated)

		Albania	Bosnia-Herzegovina	Bulgaria	Croatia	Czech Republic	Estonia	Hungary	Latvia	Lithuania
	Controls on direct investment 1/ 2/	66.7	33.3	66.7	83.3	100	100	100	100	83.3
	Controls on real estate investment 2/	75.0	0.0	50.0	0.0	50.0	75.0	75.0	75.0	50.0
	Controls on credit operations 2/ 3/	0.0	50.0	37.5	83.3	62.5	100	75.0	100	62.5
	Controls on portfolio flows 2/	0.0	0.0	25.0	35.0	70.0	100	33.3	100	100
Overall index of liberalization of the capital account 2/		16.7	17.6	35.3	44.4	73.7	97.6	59.5	97.6	85.7
Memorandum item:
Current account convertibility (date of acceptance)		Article XIV	Article XIV	Article XIV	Article VIII (May 29, 1995)	Article VIII (Oct. 1, 1995)	Article VIII (Aug. 15, 1994)	Article VIII (Jan. 1, 1996)	Article VIII (June 10, 1994)	Article VIII (May 3, 1994)

		FYRof Macedonia	Poland	Romania	Slovak Republic	Slovenia	Cyprus	Malta	Turkey
	Controls on direct investment 1/ 2/	66.7	100	83.3	83.3	83.3	66.7	50.0	83.3
	Controls on real estate investment 2/	0.0	50.0	0.0	50.0	50.0	0.0	0.0	50.0
	Controls on credit operations 2/ 3/	37.5	75.0	0.0	50.0	37.5	37.5	50.0	50.0
	Controls on portfolio flows 2/	0.0	35.0	0.0	0.0	25.0	20.8	36.4	38.9
Overall index of liberalization of the capital account 2/		23.3	55.3	12.5	23.7	40.5	28.6	37.5	53.3
Memorandum item:
Current account convertibility (date of acceptance)		Article XIV	Article VIII (June 1, 1995)	Article VIII (Mar. 25, 1998)	Article VIII (Oct. 1, 1995)	Article VIII (Sep. 1, 1995)	Article VIII (Jan. 9, 1991)	Article VIII (Nov. 30,1994)	Article VIII (Mar. 22, 1990)

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and OECD.

^1/With the exception of investments in sectors normally considered sensitive or of strategic national interest.

^2/The index can take values between 0 and 100, with 100 representing the maximum degree of liberalization of the capital flows under consideration. The index for a given country is constructed by adding up the values obtained in each category of capital flows and dividing the total by the maximum possible score. Flows not subject to controls are assigned a value of 2; flows classified as being subject to partial controls are assigned a value of 1; flows subject to serious controls are given a value of zero. When information on a given capital transaction was not available, a value of zero was assigned in both the numerator and the denominator.

^3/Borrowed or extended by residents other than banks.

View Table

Table 11.

Indices of Capital Account Liberalization

(Position as of December 31, 1997, unless otherwise indicated)

		Albania	Bosnia-Herzegovina	Bulgaria	Croatia	Czech Republic	Estonia	Hungary	Latvia	Lithuania
	Controls on direct investment 1/ 2/	66.7	33.3	66.7	83.3	100	100	100	100	83.3
	Controls on real estate investment 2/	75.0	0.0	50.0	0.0	50.0	75.0	75.0	75.0	50.0
	Controls on credit operations 2/ 3/	0.0	50.0	37.5	83.3	62.5	100	75.0	100	62.5
	Controls on portfolio flows 2/	0.0	0.0	25.0	35.0	70.0	100	33.3	100	100
Overall index of liberalization of the capital account 2/		16.7	17.6	35.3	44.4	73.7	97.6	59.5	97.6	85.7
Memorandum item:
Current account convertibility (date of acceptance)		Article XIV	Article XIV	Article XIV	Article VIII (May 29, 1995)	Article VIII (Oct. 1, 1995)	Article VIII (Aug. 15, 1994)	Article VIII (Jan. 1, 1996)	Article VIII (June 10, 1994)	Article VIII (May 3, 1994)

		FYRof Macedonia	Poland	Romania	Slovak Republic	Slovenia	Cyprus	Malta	Turkey
	Controls on direct investment 1/ 2/	66.7	100	83.3	83.3	83.3	66.7	50.0	83.3
	Controls on real estate investment 2/	0.0	50.0	0.0	50.0	50.0	0.0	0.0	50.0
	Controls on credit operations 2/ 3/	37.5	75.0	0.0	50.0	37.5	37.5	50.0	50.0
	Controls on portfolio flows 2/	0.0	35.0	0.0	0.0	25.0	20.8	36.4	38.9
Overall index of liberalization of the capital account 2/		23.3	55.3	12.5	23.7	40.5	28.6	37.5	53.3
Memorandum item:
Current account convertibility (date of acceptance)		Article XIV	Article VIII (June 1, 1995)	Article VIII (Mar. 25, 1998)	Article VIII (Oct. 1, 1995)	Article VIII (Sep. 1, 1995)	Article VIII (Jan. 9, 1991)	Article VIII (Nov. 30,1994)	Article VIII (Mar. 22, 1990)

Sources: Annual Report on Exchange Arrangements and Restrictions, 1997, IMF; and OECD.

^1/With the exception of investments in sectors normally considered sensitive or of strategic national interest.

^2/The index can take values between 0 and 100, with 100 representing the maximum degree of liberalization of the capital flows under consideration. The index for a given country is constructed by adding up the values obtained in each category of capital flows and dividing the total by the maximum possible score. Flows not subject to controls are assigned a value of 2; flows classified as being subject to partial controls are assigned a value of 1; flows subject to serious controls are given a value of zero. When information on a given capital transaction was not available, a value of zero was assigned in both the numerator and the denominator.

^3/Borrowed or extended by residents other than banks.