High Inflation Prompts Reform

In the face of incipient hyperinflation, the authorities fundamentally changed their financial policies at the start of 1995. With the assistance of the IMF, the authorities developed an ambitious economic reform program, supported by the IMF’s former systemic transformation facility (STF). The program’s main objective was to reduce inflation quickly and create an environment conducive to the resumption of economic growth. Monetary policy was geared toward curbing the growth of money and credit, with fiscal consolidation a prerequisite. Although the authorities took several measures to enhance budgetary revenues, revenues continued to decline in 1995. Expenditures were therefore sharply compressed through the elimination of bread price subsidies, tight control over increases in wages and social benefits, and large cuts in other spending. The government also reduced drastically central bank financing of the budget, aided by the availability of external financing. In 1995, the Azerbaijan budget was helped by $91 million in the form of an oil signature bonus received for concluding an oil contract with international oil companies.

Rapid Disinflation Follows

Azerbaijan’s new reform policies have yielded impressive gains, especially in the area of macroeconomic stabilization. The general government budget deficit narrowed to 5½ percent of GDP in 1995 from 10½ percent in 1994. Although the deficit was fully financed by the central bank in 1994, domestic bank financing amounted to less than ½ of 1 percent of GDP in 1995. With tight central bank credit policies, money growth fell to 6 percent in the last quarter of 1995 from 35 percent in the first quarter. The velocity of manat broad money rose sharply in the beginning of the year, but has been declining since then, reflecting gradually growing confidence in the manat. As a result of the tight financial policies, inflation eased significantly while the exchange rate has been broadly stable since the beginning of 1995. Monthly inflation fell to an average of about 3 percent in the last quarter of 1995—and then to 1½ percent in the first quarter of 1996—from more than 50 percent at the end of 1994.

In November 1995, the IMF’s STF support for the Azerbaijan reform program was replaced by a stand-by arrangement. The new reform program aims at a further reduction in monthly inflation rates to 1 percent by mid-1996—reflecting an expected appreciation of the undervalued nominal exchange rate—and a resumption of economic growth in the second half of 1996. This is to be achieved by continued tight monetary and fiscal policies, in particular by reducing the budget deficit further to 3½ percent of GDP in 1996 and avoiding the monetization of the deficit. The deficit will again be financed from external sources—that is, new oil signature bonuses received in mid-1995 and expected toward the end of 1996.

Structural Reforms Lag

The implementation of structural reforms did not keep pace with the success on the macroeconomic front. Initially, the authorities took important steps, notably liberalizing most producer prices and discontinuing the system of differentiated surrender requirements of foreign exchange at nonmarket rates. But progress in such key areas as privatization, agricultural reform, and enterprise restructuring has been slow. In early 1996, foreign and domestic trade were still hindered by administrative controls and red tape, despite the official abolition of the state order system and reduced licensing requirements.

The persistence of old economic structures—in particular, many obstacles to private entrepreneurship—has impeded recovery. In the absence of a significant supply response from the private sector, Azerbaijan’s output decline continued in 1995—albeit at a slower pace than before stabilization (real GDP in 1995 was -13 percent versus -21 percent in 1994). The state-owned industrial sector continued to be plagued by inefficiencies and marketing problems, and agriculture remained depressed for most of the year as the authorities only reluctantly raised domestic producer prices to world market levels. In 1995, recorded wages fell 25 percent in real terms, year-on-year, reflecting delays in enterprise restructuring and the continued deterioration of productivity throughout the economy. Economic conditions for the average citizen in 1995 deteriorated, although the situation may not be as bad as official data suggest, as activity increasingly shifted to the informal sector.

Azerbaijan: Fiscal Balance

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A008

Data: Azerbaijan authorities

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Azerbaijan: Fiscal Balance

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A008

Data: Azerbaijan authorities

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Azerbaijan: Fiscal Balance

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A008

Data: Azerbaijan authorities

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• Download figure as PowerPoint slide

1996 Could Mark Reversal

With monetary and fiscal policies largely on track, structural issues are moving into the forefront of reform. The Azerbaijan authorities recognize that the population will only reap the full benefits from macroeconomic stabilization if structural reforms take hold rapidly. In 1996, they plan to step up structural reform efforts with the technical and financial support of both the IMF and the World Bank. Privatization is now gaining momentum, with the first small enterprises changing ownership through cash auctions. The government has also devised a voucher privatization plan that entails holding auctions for medium-and large-sized enterprises before the end of 1996.

If these reform measures take hold, 1996 could mark the beginning of the economic recovery initiated with the stabilization of inflation and exchange rates in 1995. Although real GDP is still expected to decline, year-on-year economic growth is projected to reverse in the second half of 1996, driven by an increase in foreign direct investment and supported by an economic environment freed from administrative burdens. Real incomes are expected to catch up as inflation is reduced further and the private sector continues to expand. The IMF-supported adjustment program envisages real wages to increase by 15 percent during the year and monthly dollar wages to reach $26 by the end of 1996.

Oil a Dominant Feature

Azerbaijan’s wealth lies mainly in its oil reserves, estimated at 900 million tons. Medium-term prospects for the petroleum sector are good since the government signed a production-sharing contract with an international oil consortium in 1994, providing access to technology needed to exploit the reserves under the Caspian Sea. The contract stipulates a total investment of $7.5 billion over ten years; crude-oil production from new sources, beginning in 1997, is expected to reach about 33 million tons annually by 2006.

The dominance of the petroleum sector also entails risks: large capital inflows may lead to strong real exchange rate appreciation, income disparities between oil and non-oil sectors, and crowding out of such other competitive activities as agriculture. A strategy for balanced growth is needed, and the authorities have begun to develop a medium-term economic program, which may be supported by an enhanced structural adjustment facility (ESAF) arrangement with the IMF. The foundations for such a strategy are already being laid by the encouragement of production in such non-oil sectors as cotton through privatization and trade liberalization. In the prospective ESAF program, the question of capital inflows and development strategies connected with the petroleum sector will receive particular attention.

Although a lot needs to be done, Azerbaijan’s economic prospects are good. Much depends on the authorities’ persevering with adjustment, keeping macroeconomic policies on track, and deepening structural reforms.

Christoph Rosenberg and Ron van Rooden

IMF European II Department

Institutional Characteristics

International organizations have not reinvented themselves to the extent that private corporations, or even national governments, have, says Clark. The IMF, however, has been one of the most adaptive of the international organizations. In contrasting IMF ad-ministrative practices with those of the Canadian national government, Clark finds many attributes of the IMF that would be in step with the new public management philosophy. He commends the clarity and focus of the IMF’s mandate, the strength and tenure of its management, the sustained and high quality of its recruitment, the organization’s substantial internal review capacity, and the close integration of staff and line functions.

There are arguments against greater adaptivity in the IMF, says Clark, and the most persuasive of them derive from the basic nature of the organization. The IMF, much like central banks, is quintessentially associated with the virtues of stability, predictability, and caution. The IMF’s founders were mindful of this when they chose to emphasize the rule of law rather than discretion in the IMF’s work. And subsequent generations of IMF Governors have remained wary of excessive or inappropriate responsiveness—the concern that moral hazard may encourage perverse behavior.

Those in favor of more caution also note that the IMF has repeatedly demonstrated its ability to adapt when crises demanded it. Clark cites the IMF’s rapid response to the first oil shock in 1973 and its decisive assumption of the role of crisis manager during the debt crisis, the transition of the former centrally planned economies of eastern Europe and the former Soviet Union, and the recent Mexican financial crisis. The IMF has also addressed vital issues on a noncrisis basis—most recently, with initiatives to deal with countries emerging from conflict, support for stabilization funds, and continuing deliberations on the future of the enhanced structural adjustment facility and on finding a solution for the debt problems of the poorest developing countries.

Certain features of international organizations, however, may inhibit or facilitate their adaptiveness. Clark identifies a number of characteristics of the IMF that tend to inhibit adaptiveness. These include:

• Dependence on rules and uniform treatment. While both facilitate cooperation, they can inhibit adaptiveness. Ironically, this same institutional rigidity may also hasten the implementation of change, which can occur rapidly in a crisis once a consensus has developed that change is necessary.

• Universal membership. Some issues are better coordinated among small groups than the full membership of a multilateral institution. This is perhaps best exemplified by exchange rate coordination—an issue in which, Clark argues, the organization’s insistence on the participation of the full membership is a structural disadvantage. Few additional benefits accrue from including more countries in the decision making, but the potential costs—in terms of delays and difficulties—increase dramatically as the number of participants rises. Some have urged the IMF to explore the use of limited membership panels to take up specific issues, such as reserve currency coordination. If this noninclusive, nonuniform treatment, which is so sharply at odds with IMF tradition, is unacceptable, Clark suggests the organization at least consider procedural changes to lower the costs of universal decision making.

• Consensus tradition. The IMF’s elaborate process of consultation and discussion traditionally produces “decisions that stick and minimal rancor,” but at a substantial cost in terms of time and energy. In the absence of a crisis, institutional adjustment is slow, but the stock of “trust and good will” built up during the regular process appears to serve the institution well in crises, when rapid decision making is needed.

• Divergent country interests. With the large size of its membership and the magnitude of its cultural differences, consensus on institutional changes in the IMF will always prove difficult.

Change is never easy for organizations. On the other hand, other institutional characteristics, some unique to the IMF, may tend to facilitate adaptivity, according to Clark. These include:

• Taking initiative. Management and staff have a crucial role in IMF decision making. The impetus for major reforms normally comes from management, whose formulations tend to reflect the overt general preferences of the major shareholders and the sometimes latent preferences of the majority of developing countries.

• Members’ commitment. Member countries value the services provided by the IMF, but not all services are of equal value to all members. Clark notes, for example, that the major industrial countries may value the IMF’s crisis management highly, since this addresses systemic problems that they might otherwise have to take on themselves. Smaller countries, without a ready supply of economic expertise, may find the IMF’s policy and technical advice more useful. Many countries, Clark notes, value the role of IMF missions and surveillance, since these often serve as a “political catalyst” for policy decision making and promote coordination and collaboration within national governments. On balance, the benefits of IMF membership appear fairly evenly distributed among members, although the benefits are associated with different roles of the IMF. Proposed changes in these roles are likely to be viewed “differently by different members,” suggests Clark.

• Culture of discipline and excellence. The IMF sees itself as the “most agile and effective of the major international institutions,” and chief among the qualities it treasures are organizational discipline and crisis management. Its hierarchical culture encourages questioning and debate in the early stages but requires “cabinet-like solidarity” once decisions are made, says Clark. Hierarchical structures can nonetheless adapt rapidly under determined management. Also, the IMF’s commitment to excellence and its success in dealing with crises have endowed it with relatively high morale.

• Strong relationships between staff and member countries and between management and the Executive Board. Critics have questioned whether the strength of the relationship between the IMF and its members sometimes blunts the “hard edges of the Fund’s advice.” Clark notes, however, that this same closeness makes the institution “more sensitive to the changing needs of the membership.” The IMF also benefits, he believes, from “creative tension” between the IMF’s management and Executive Board.

• Voting mechanisms. Many scholars link the IMF’s effectiveness to its weighted system of voting, which reflects the relative economic clout of its members. A major change in the IMF also requires special voting majorities; this requirement, Clark argues, allows countries to debate change “without fearing that they could lose control over the final outcome.”

• Resource availability. The IMF’s relatively comfortable liquidity position since the early 1980s has permitted it to adapt and to support initiatives.

A Need to Be More Adaptive?

Ultimately, Clark believes the IMF will have to become more adaptive to keep pace with the intensifying breadth and pace of global economic change. He emphasizes the need for the IMF to work “with the grain”—that is, with the organization’s strengths, while remaining keenly aware of the attributes that inhibit change.

He suggests several general directions for change that could reinforce the IMF’s traditional strengths. For example, while the organization’s broad purposes remain valid, Clark argues that it might be useful to refine and make explicit several of the IMF’s more specific objectives, including:

• promoting market-based principles to better integrate countries into the world economy;

• emphasizing the need for fiscal discipline; and

• helping members gain and retain the confidence of capital markets.

The IMF would do well, Clark adds, to recognize that the universal nature of its membership works against an effective role for the organization in the management of exchange rate issues. Either the organization should allow deliberations on the basis of restricted membership (in this instance, among holders of the major currencies) or it should play down expectations of significant progress in this area in the foreseeable future.

Clark also encourages the IMF to be more conscious of the trade-off between regulations and innovation. IMF rules and its commitment to uniform treatment help create consensus and facilitate compromise in crises, but they also reinforce the status quo and slow decision making on less urgent matters. It would be useful to leaven the IMF’s inherent conservatism with more activism, innovation, and initiative, suggests Clark. And if members agree that the IMF should pursue a more adaptive stance, they should encourage its Managing Director—who has been the most “consistent and vigorous initiator of change and adaptation”—to take an even more activist role in proposing change.

Finally, if the IMF is to be more adaptive, Clark believes it cannot be excessively concerned about overlapping responsibilities with development banks. The costs of such overlaps are easily exaggerated, and the respective managements are committed to minimizing them. The IMF must look forward, not backward, Clark concludes. And in seeking a model for future adaptation, the IMF must look to its evolution rather than to its purely monetary past.

IMF Issues

François P. Gianviti, General Counsel of the IMF, discusses how the IMF’s Articles of Agreement are interpreted to address questions regarding the rights and obligations of member countries. The analogy between the practice of an international organization and the case law of national courts is particularly relevant, he notes. Unlike most national public agencies, some international organizations, such as the IMF, are vested with quasi-judicial powers to interpret their charters. The IMF—through its Executive Board and Board of Governors—is the final interpreter of its own charter. It has in practice shown great restraint in exercising its power in interpreting its Articles. Only ten official interpretations have been adopted, says Gianviti. The mere existence of this power makes its exercise less necessary. The IMF’s power to interpret its Articles, while complete, is also limited in certain respects. For example, while the IMF decides when the conditions specified in the Articles governing the use of its general resources are met, in accordance with the entitlement of Article V, Section 3(b) of the Articles of Agreement, it cannot “impose other conditions.”

In a companion article, Gianviti discusses various sanctions available for use by the IMF against members who fail to fulfill their obligations under the IMF’s Articles. The nature of each sanction, he explains, is determined by whether such failures concern obligations pertaining to special drawing rights (SDRs) or other obligations. In the latter case, sanctions include suspension of the member’s entitlement to use IMF general resources, expulsion from the IMF, and—as a protection of IMF resources rather than a sanction—the suspension of disbursements to members in arrears. Gianviti then discusses how the search for an “intermediate sanction” led to the adoption of the Third Amendment to the IMF’s Articles, which provides for suspending a member’s voting rights—a step short of expulsion.

William E. Holder of the IMF’s Legal Department examines the statutory requirements guiding IMF technical assistance, including principles governing its use. While the IMF willingly provides such services, it is not obligated to do so, he states. In the original Articles of Agreement, Holder notes, technical assistance was not mentioned; nor was it a focus of attention in the drafting of the Articles at the Bretton Woods Conference. Since the first request for technical assistance in 1946, the IMF has nonetheless become increasingly active in this area. According to Holder, fully one third of the resources of the Legal Department are now devoted to technical assistance.

The IMF considers a number of factors in determining whether to provide technical assistance, including need, the alternative availability of assistance, and IMF staffing and budget constraints. Such assistance is not confined to members, Holder adds. In 1991, for example, the IMF agreed to provide extensive technical assistance to the former Soviet Union under a Special Association Agreement. To economize on the use of technical assistance resources, the IMF has taken steps to improve the delivery of technical assistance—including through more effective coordination with other entities, such as the United Nations Development Program. Another approach, says Holder, is to leverage such programs through the use of external and parallel financing.

Reinhard H. Munzberg, also of the IMF’s Legal Department, discusses the IMF’s approach to members with overdue obligations. The most important approach is through the IMF’s “cooperative strategy,” whereby countries in arrears may accumulate “rights” under a new adjustment program that, upon completion, allows them to draw on IMF resources under a successor arrangement, he explains. Achieving this status is not automatic, Munzberg points out. Because a member cannot have access to resources while in arrears, a rights accumulation program does not entail any commitment of resources. The IMF’s aim is to provide such members with appropriate incentives while they accumulate these rights, says Munzberg. Once the program is completed, the IMF would then agree to provide a member with appropriate support under a successor arrangement in an amount not exceeding the member’s accumulated rights, but only if all other conditions for the new program have been met.

While the IMF provides technical assistance, it is not obliged to do so.

—Holder

Law and the EMU

René Smits of the Netherlands Central Bank maintains that final approval of the Maastricht Treaty has opened the door to far-reaching financial liberalization in Europe. In this regard, Smits highlights the Treaty’s requirement of freedom of all financial transactions. The European Union, he says, is the only jurisdiction in the world whose constitution requires that financial freedom be the rule not only among the 12 member states but also with third countries.

Jean-Victor Louis of the National Bank of Belgium examines the objectives and tasks of the institutions of European economic and monetary union (EMU), including the newly established European Monetary Institute (EMI). The EMI will disappear upon the creation of the European System of Central Banks, which will consist of the European Central Bank (ECB) and the national central banks. In the meantime, the EMI will be responsible for monetary policy once the EMU enters its third and final stage. Louis concludes that the ECB will be independent, “perhaps to a greater degree than the German Bundesbank.”

Central Bank Independence

The editor of the volume, Robert C. Effros, suggests that support for central bank independence derives largely from the belief that insulation from short-term political pressures is necessary if these institutions are to carry out their monetary policy mandates effectively. This point is also made by J. Virgil Mattingly, Jr., of the U.S. Federal Reserve in his historical review of the Federal Reserve System. Independence does not preclude central bank political accountability, however. Mattingly notes that the Federal Reserve is required to submit biannual reports to the U.S. Congress concerning recent economic trends. Mindful of the history of central banking in the United States, the Federal Reserve Board is careful to maintain close working relations with the executive and congressional branches of the U.S. government. And the government regularly audits the Federal Reserve’s budget.

The Federal Reserve must also balance important regional and economic interests, says Mattingly. One third of the board of directors of each Federal Reserve Bank is accordingly chosen by the representative of the member banks in that Federal Reserve Bank’s district. Two thirds of the directors must represent the public; may not be affiliated with any bank; and should represent the interests of agriculture, commerce, industry, services, labor, and consumers. The location and structure of the Federal Reserve Banks not only ensure that local concerns are heard and met but also prevent any one interest or region from dictating Federal Reserve policy.

As the world’s oldest central bank, the Swedish central bank has, since its inception in 1668, been able to carry out a relatively independent financial policy. This independence, says Robert Sparve of the Swedish central bank, gives it a relatively free hand in economic policymaking. While the government is responsible for overall economic policy—following consultation with a cabinet member—only the central bank has the authority to make the final decision about any monetary or exchange rate policies.

Bertold Wahlig of the German Bundesbank examines the relationship of this institution to the German federal government. The Bundesbank, he notes, is widely considered to be the model upon which the drafters of the Maastricht Treaty drew for the in-dependence of the ECB and the national banks of the European System of Central Banks. The Bundesbank enjoys a high degree of independence from the government as well as the right and duty to express its views in federal cabinet meetings. It does not exist in a political vacuum, however, says Wahlig. Cooperation between the government and the central bank is necessary and subject to statutory guidance. The Bundesbank has the responsibility to advise the government on its own initiative, he says, just as the government, in turn, must invite the bank’s president to participate in discussions of monetary policy issues.

Hungary: Stand-By

The IMF approved a stand-by credit for Hungary authorizing drawings up to the equivalent of SDR 264.2 million (about $387 million) over the next 23 months to support the government’s economic program through end-1997. The Hungarian authorities do not intend to make any drawings and plan to treat the stand-by as precautionary.

In the early 1990s, Hungary’s economy faced a number of external shocks to which it was unable to react quickly. Constrained by high levels of taxation and social expenditure and by the size and inefficiency of the public sector, the external current account deficit deteriorated markedly to 9-10 percent of GDP in 1993-94, against a background of relatively subdued economic activity and already high external debt and debt-service ratios. Structural reform slowed to a halt.

In 1995, the government began corrective action through a policy package that sought to reverse the negative trends of the previous years, while addressing the economy’s structural problems. The package—which included the devaluation of the forint and the introduction of a crawling exchange rate peg, the tightening of public sector wage policy, and budgetary measures—has had positive results on the balance of payments, the decline in high levels (in relation to GDP) of both public expenditures and revenues, and privatization, while output growth remained positive in 1995. The government intends to continue the adjustment effort with IMF support and to tackle the remaining imbalances in the economy—notably fiscal and structural—to help stabilize it and to achieve secure and sustainable growth.

Hungary: Selected Economic Indicators

¹Estimated.

²Program.

Data: Hungarian authorities and IMF staff estimates

Hungary: Selected Economic Indicators

		1992	1993	1991	19951	19962	19972
		(percent change)
Real GDP		−3.0	−0.8	2.9	1.7	2.0	3.2
Consumer prices
	(end of period)	24.7	21.1	21.2	28.3	16.6	12.7
		(percent of GDP)
Primary fiscal balance
	(excluding privatization)	−1.7	−3.3	−0.8	2.0	4.5	4.4
Consolidated government budget balance (excluding privatization)		−7.3	−7.8	−7.5	−6.8	−3.9	−3.0
External current account balance		0.9	−9.0	−9.5	−5.6	−4.0	−3.0
Gross investment		15.2	19.4	21.5	21.8	23.6	24.6
Gross national saving		14.4	10.0	13.4	17.7	21.0	22.8
Net external debt		35.1	38.8	45.8	38.7	37.9	35.6

¹Estimated.

²Program.

Data: Hungarian authorities and IMF staff estimates

View Table

Hungary: Selected Economic Indicators

		1992	1993	1991	19951	19962	19972
		(percent change)
Real GDP		−3.0	−0.8	2.9	1.7	2.0	3.2
Consumer prices
	(end of period)	24.7	21.1	21.2	28.3	16.6	12.7
		(percent of GDP)
Primary fiscal balance
	(excluding privatization)	−1.7	−3.3	−0.8	2.0	4.5	4.4
Consolidated government budget balance (excluding privatization)		−7.3	−7.8	−7.5	−6.8	−3.9	−3.0
External current account balance		0.9	−9.0	−9.5	−5.6	−4.0	−3.0
Gross investment		15.2	19.4	21.5	21.8	23.6	24.6
Gross national saving		14.4	10.0	13.4	17.7	21.0	22.8
Net external debt		35.1	38.8	45.8	38.7	37.9	35.6

¹Estimated.

²Program.

Data: Hungarian authorities and IMF staff estimates

Yemen: Stand-By

The IMF approved a 15-month stand-by credit for the Republic of Yemen totaling SDR 132.4 million (about $193 million) in support of the government’s economic and financial reform program for 1996-97.

Yemen’s economy has faced severe difficulties in recent years. Both the real rate of growth and incomes declined, unemployment rose, inflation accelerated, and the balance of payments deficit widened. In response to these conditions, the authorities in 1995 initiated a reform program to improve the economy’s performance. The adjustments to fiscal, monetary, pricing, and exchange rate policies and the start of structural reforms yielded positive results, with output recovering and inflation moderating sharply over the second half of the year.

Addressing Social Concerns

The program s social safety net components include a Social Safety Net Fund for which some resources have been provided in the 1996 budget and external resources are being solicited; a civil works program to create income-generating employment for unskilled labor while upgrading infrastructure and social service facilities; and concessional first tranche pricing for electricity and water following large price increases for these public utilities. The budget also maintains the expenditure-to-GDP ratios for primary health care as well as primary and secondary education. The government is also studying a targeting mechanism to assist vulnerable groups that will replace the present generalized food subsidy with income support from the Social Safety Net Fund.

Yemen: Selected Economic Indicators

¹Estimate.

²Program.

³Projections.

⁴Excludes the effects of administered price adjustments.

⁵Excludes transactions of foreign oil companies.

Data: Yemeni authorities and IMF staff estimates

Yemen: Selected Economic Indicators

	1993	1994	19951	19962	19973	19983
	(percent change)
Real GDP growth	5.9	0.0	3.6	2.5	5.1	4.3
Core inflation4	—	66.0	55.0	20.0	10.0	5.0
	(percent of GDP)
External current account balance5	−12.2	3.5	−1.5	−10.0	−11.6	−10.1
Central government primary cash balance	−15.4	−14.9	−6.3	−1.9	0.8	1.0

¹Estimate.

²Program.

³Projections.

⁴Excludes the effects of administered price adjustments.

⁵Excludes transactions of foreign oil companies.

Data: Yemeni authorities and IMF staff estimates

View Table

Yemen: Selected Economic Indicators

	1993	1994	19951	19962	19973	19983
	(percent change)
Real GDP growth	5.9	0.0	3.6	2.5	5.1	4.3
Core inflation4	—	66.0	55.0	20.0	10.0	5.0
	(percent of GDP)
External current account balance5	−12.2	3.5	−1.5	−10.0	−11.6	−10.1
Central government primary cash balance	−15.4	−14.9	−6.3	−1.9	0.8	1.0

¹Estimate.

²Program.

³Projections.

⁴Excludes the effects of administered price adjustments.

⁵Excludes transactions of foreign oil companies.

Data: Yemeni authorities and IMF staff estimates

Bolivia: Second Annual ESAF

The IMF approved the second annual loan for Bolivia in an amount equivalent to SDR 33.7 million (about $49 million) under the enhanced structural adjustment facility (ESAF) to support the government’s economic and reform program for 1996. The loan will be disbursed in two equal semiannual installments; the first, in an amount equivalent to SDR 16.8 million (about $25 million), will be available on April 15, 1996; the second will become available in September 1996 after review of the program’s implementation by the IMF’s Executive Board.

Within the framework of the present ESAF arrangement, Bolivia has been implementing a comprehensive program to stabilize and restructure the economy. Under the program, Bolivia has maintained real GDP growth of about 4 percent; initiated major structural reforms, including the transfer of ownership and management of large public enterprises to the private sector; and achieved significant progress toward external viability, while maintaining moderate inflation. Notwithstanding these achievements, poverty remains widespread, and the growth rates achieved so far have resulted in only gradual improvements in living standards.

Structural Reforms

Under the program, the government intends to further consolidate the structural reform effort by extending the capitalization process to the hydrocarbon sector in order to promote its development and expand natural gas exports. For this purpose, the monopoly position of the national oil company will be eliminated. In the education sector, the program seeks to improve the quality and provision of basic education, including the supply of educational materials, increased access to basic education in rural areas, and construction of schools. In the area of social security, the government will establish a minimum pension for all Bolivians based on shares of the capitalized public enterprises, and employees will have personal contributory accounts.

Bolivia: Selected Economic Indicators

¹Projections.

Data: Bolivian authorities and IMF staff estimates

Bolivia: Selected Economic Indicators

		1994	1995	19961	19971	19981
		(percent change)
Real economic growth		4.2	3.8	5.0	5.8	5.8
Consumer prices (end of period)		8.5	12.6	8.0	6.0	5.0
		(percent of GDP)
External current account balance
	(excluding official transfers)	−6.7	−9.4	−11.4	−11.8	−10.7
Public sector balance		−3.2	−2.0	−2.6	−2.6	−2.4

¹Projections.

Data: Bolivian authorities and IMF staff estimates

View Table

Bolivia: Selected Economic Indicators

		1994	1995	19961	19971	19981
		(percent change)
Real economic growth		4.2	3.8	5.0	5.8	5.8
Consumer prices (end of period)		8.5	12.6	8.0	6.0	5.0
		(percent of GDP)
External current account balance
	(excluding official transfers)	−6.7	−9.4	−11.4	−11.8	−10.7
Public sector balance		−3.2	−2.0	−2.6	−2.6	−2.4

¹Projections.

Data: Bolivian authorities and IMF staff estimates

Mali: ESAF

The IMF approved a new three-year loan for Mali under the enhanced structural adjustment facility (ESAF), equivalent to SDR 62.0 million (about $91 million) to support the government’s 1996-98 economic reform program. The first annual loan in an amount equivalent to SDR 20.7 million (about $30 million) will be disbursed in two equal semiannual installments, the first of which will be available on April 30, 1996.

Mali successfully implemented its economic reform programs supported by a three-year ESAF loan that expired at the end of March 1996. Especially after the devaluation of the CFA franc in January 1994, important strides were made in reducing financial imbalances, containing inflation, improving the competitiveness of the economy, and lessening distortions, thus revitalizing the private sector and boosting economic growth prospects. Under the 1995 program, economic developments were particularly encouraging: real GDP growth is estimated to have been about 6 percent, and average consumer price inflation was reduced from 24.8 percent in 1994 to 12.4 percent. Notwithstanding the important headway that has been made, Mali’s economic and financial situation remains fragile and vulnerable to exogenous shocks, while poverty remains widespread.

Mali: Selected Economic Indicators

¹Estimate.

²Program.

Data: Malian authorities and IMF staff estimates

Mali: Selected Economic Indicators

		1993	1994	19951	19962	19972	19982
		(percent change)
Real GDP		−2.4	2.3	6.0	4.0	4.9	4.5
Consumer prices
	(annual average)	−0.6	24.8	12.4	4.5	3.0	2.5
		(percent of GDP)
Overall fiscal balance
	(excluding grants)	−9.6	−13.7	−10.5	−10.1	−9.1	−8.1
External current account balance (excluding official transfers)		−12.9	−18.2	−15.2	−13.1	−11.6	−10.6

¹Estimate.

²Program.

Data: Malian authorities and IMF staff estimates

View Table

Mali: Selected Economic Indicators

		1993	1994	19951	19962	19972	19982
		(percent change)
Real GDP		−2.4	2.3	6.0	4.0	4.9	4.5
Consumer prices
	(annual average)	−0.6	24.8	12.4	4.5	3.0	2.5
		(percent of GDP)
Overall fiscal balance
	(excluding grants)	−9.6	−13.7	−10.5	−10.1	−9.1	−8.1
External current account balance (excluding official transfers)		−12.9	−18.2	−15.2	−13.1	−11.6	−10.6

¹Estimate.

²Program.

Data: Malian authorities and IMF staff estimates

Staying in the “European Mainstream”

Daniel Gros, Senior Research Fellow at the Brussels-based Centre for Economic Policy Studies, stressed that the completion of EMU was unthinkable without the participation of France as well as Germany. Referring to France’s decision in 1983 to stay in the European Monetary System (EMS) during an economically difficult period, Gros said: “The option of leaving the European mainstream was not taken then, and I do not believe it will be taken today.” This will likely be the choice of most European countries, despite the adjustment costs associated with EMU. In fact, said Gros, the magnitude and incidence of these costs have often been exaggerated or misinterpreted.

Is EMU Still a Good Idea? It has long been accepted by economists that EMU will yield significant gains in terms of lower transaction costs and greater transparency of markets, said Gros. But the unprecedented turmoil in foreign exchange markets and the resulting pressures on the exchange rate mechanism of the EMS in 1992 and 1993 have prompted a re-examination of the question whether the costs entailed by the loss of the exchange rate as a policy instrument do not outweigh these benefits.

According to Gros, the large and extended exchange rate fluctuations in Europe over the past few years were due probably more to differences in policy stances and unanticipated speculative attacks than to external shocks. From the point of view of economists, the main attraction of keeping the exchange rate as an instrument is that it allows an economy to react quickly to an external shock. If, for example, exports fall as the result of a shock to external demand, it is better, according to conventional wisdom, to adjust the exchange rate rather than wait for the slower adjustment of wages, which is always painful in terms of transitional unemployment. However, in researching the influence of external shocks on unemployment, Gros found no statistically significant effect. Thus, the usefulness of the exchange rate as an adjustment instrument may be overrated.

“Self-fulfilling” speculative attacks have been responsible for many large exchange rate swings in the recent past, said Gros. Two countries—for example, Belgium and Italy—may have equally high ratios of debt to GDP but may be perceived differently by the market. If the market considers Italy to be a “bad bet,” interest rates in Italy will increase, the country’s budget deficit will increase, and fiscal consolidation becomes harder to achieve, while pressure on the exchange rate mounts. If, on the other hand, the market sees Belgium as a “good bet,” interest rates in Belgium will remain low. Two countries with similar economic fundamentals could thus end up with “radically different interest rates and a radically different debt-service burden.” Under EMU, said Gros, with a single currency there would, of course, no longer be a risk of speculative attacks on the exchange rate that might distort competition in the euro area.

How High Are Transition Costs? The cost of transition is defined as the temporary loss of output and the possible increase in unemployment that result from the required adjustment to the price stability and fiscal criteria laid out in the Maastricht Treaty. Although acknowledging these costs, Gros suggested that many countries would incur most of them even without EMU. In fact, according to Gros, 11 of the 15 member countries of the EU have already achieved the required price stability; and the remaining 4 (Greece, Italy, Spain, and the United Kingdom) are not “actually that far off.”

The requirement that the fiscal deficit be limited to 3 percent of GDP could entail painful adjustment costs, especially since the EU economies are presently encountering a period of slow growth. But this cost is not exclusively related to EMU, Gros noted. For many countries—such as France, which has a tradition of conservative fiscal policy—a fiscal deficit higher than 3 percent of GDP is considered excessive; for these countries, adjustment would be necessary with or without EMU.

Some observers have suggested that the transition costs would be lower if countries were given more time to meet the Maastricht criteria. But, according to Gros, the cost might actually be higher if the adjustment were slower. A quick adjustment that is perceived to be motivated by the Maastricht deadline might appear more credible to the markets. This “credibility bonus” might make the adjustment less costly in terms of forgone output and unemployment. Therefore, if the costs of transition have to be borne anyway, Gros concluded, quick adjustment is probably the most efficient course.

Resolving Political Issues. A major unresolved issue is the relationship between the “ins” and the “outs”—that is, the countries that participate initially in EMU and the ones that do not. The outs consist of countries temporarily unable to qualify and those, such as the United Kingdom and Denmark, that may not wish to participate. The concerns of this latter group are not central to the process of EMU, said Gros, but the others face a danger of speculative attacks and higher interest rates that would make convergence even more difficult for them. Leaving these willing but temporarily ineligible members out in the cold goes against the “spirit of the Union.”

For those countries that are close to meeting the criteria, Gros proposed a “unilateral” or “associated membership.” Although they do not satisfy the convergence criteria and cannot participate as full members of EMU, these countries could be invited to link their currencies, irrevocably and without margins or fluctuations, to the euro. Their national central banks would be instructed to behave as if they were members of EMU—that is, they would execute the common monetary policy decided by the ECB. They would be linked to the European payments system; and all issues of public debt would be denominated in euros. The only difference between these associate members and full EMU members would be that the governor of the national central bank would not have a vote in the council of the ECB. This unilateral linkage to the euro and the associated common monetary policy should, said Gros, expedite interest rate and fiscal convergence.

It is often argued that EMU is not possible without a full-fledged political union. Even the long-lived monetary unions of the nineteenth century were eventually dissolved. According to Gros, however, these unions differed considerably from EMU. In particular, they lacked a common monetary institution, which gave rise to moral hazard problems: the participating central banks had an incentive to print as much currency as possible, because they knew that the inflationary consequences would be borne by the entire group. In addition, political developments, such as wars, rather than asymmetric shocks, were the main reason for the dissolution of the nineteenth-century monetary unions. Such political developments, said Gros, were no longer a risk in Europe.

Although Gros expressed confidence that EMU would be able to weather both external and internal shocks, he acknowledged that one issue remains open. Economic crises will inevitably apply pressure on the fiscal side. Can one really be sure, he asked, that the prohibition against excessive deficits will be maintained once EMU has begun? Staying below 3 percent of GDP is a condition for entry, but what will be the response when a country goes beyond this limit—perhaps even far beyond—and threatens the financial stability of the entire Union? This question has yet to be answered satisfactorily.

Implementing Stage 3

The Maastricht Treaty does not say how the changeover to a common currency should be accomplished, said Julius Rosenblatt, Advisor and Assistant Director in the IMF’s Paris Office, only that it should be done quickly. The scenario adopted by the European Council in December 1995 calls for a decision to be made in early 1998 on the countries that will participate in EMU; on January 1, 1999, fixed conversion rates will be adopted for the currencies of the participating countries and a common monetary policy will be executed. Following a transition period of three years at the most, the substitution of euro notes and coins will start—at the latest on January 1, 2002. Six months later, the changeover is expected to be complete.

Over the past several months, central bankers and EU officials have been working out the mechanics—the “nuts and bolts”—of implementing this final stage of EMU. According to Rosenblatt, a major consideration was the speed at which the transition should take place. The position of many bankers was that the three-year transition period—during which monetary policy would be pursued in a single currency, but national currencies would still be in circulation—would pose major accounting problems.

Even more important than the cost angle, according to Rosenblatt, was the concern about credibility and the need to reach “critical mass” as soon as possible. Those who favored rapid transition argued that to avoid derailment of EMU, the new currency needed to be introduced swiftly in a sufficient number of areas, so that people would find it difficult to go back on the agreement. The Germans objected to this approach, however, saying that the three-year transition period was necessary to give economic agents time to prepare.

According to Rosenblatt, the scenario adopted last December takes both issues into account. The problem of the institutions that find the cost of keeping accounts in two currencies excessive has been resolved by the decision to set up conversion facilities. This procedure would entail adapting the software used by the commercial banks so that they could register payments and expenditures in two different currencies. Also, a consensus view is emerging that the shift to using the euro as a unit of account may turn out to be faster than originally expected. Many economic agents—large companies and banks—have concluded that it would be more efficient to achieve the transition immediately, rather than to wait and maintain complicated accounts in various currencies.

Setting Monetary Policy for EMU

In anticipation of the execution of a single monetary policy, the European Monetary Institute (EMI)—the precursor to the European Central Bank—has been working with the national central banks to prepare the ground for stage 3. Donogh McDonald, Advisor in the IMF’s European I Department, out-lined three areas of monetary policy that are under discussion:

• Payments system. A unitary monetary policy requires an efficient payments system that integrates financial markets, McDonald said. An EU-wide payments system will be set up for large-value payments that will integrate national real-time gross settlement systems. Consistent with the importance attached to market principles, this system will not have a monopoly on large-value payments.

• Operating procedures. Although the ECB will make the final decisions about its operating procedures and market instruments, the EMI is preparing the ground for these decisions by narrowing the options. There is broad agreement, McDonald said, that a key instrument in the implementation of monetary policy will be a system of regular open market operations on a predetermined schedule. These operations may be supplemented, as needed by market conditions, with unscheduled “quick tenders” that would respond to unexpected liquidity shocks. Discussion is continuing in other areas where national systems differ—for example, the role of reserve requirements and discount windows.

• Macroeconomic policy framework. The decision about which framework to adopt must be made in early 1998, but, according to McDonald, formal discussions in this area are not far advanced. Two broad options are whether to follow a monetary targeting approach, which underpins the monetary policy of the Bundesbank, or an inflation targeting approach, which has been adopted by the United Kingdom and a number of other countries in Europe and elsewhere.

No matter which approach is selected, said McDonald, implementation of monetary policy after the start of stage 3 will encounter difficulties: the monetary transmission mechanism—the relationships that central bankers need to understand to implement monetary policy—will be in a state of flux. The EMI and the central banks will therefore be carefully weighing the options before deciding in early 1998 on the framework that will be adopted.