The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.


The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Rapid Stabilization, Strong Growth Mark Indochina’s Economic Transition

Few economies in transition to market-oriented systems have achieved relative macroeconomic stability more quickly than those in Indochina or have matched the strong growth rates these countries recorded during stabilization. In the late 1980s and early 1990s, Vietnam, the Lao People’s Democratic Republic (PDR), and Cambodia embarked on rapid disinflation that took them from the edge of hyperinflation to annual average inflation rates of 20 percent or less in 1995. Virtually in step with this disinflation, these countries averaged annual GDP growth rates of 6 to 8 percent and strengthened their external positions.

What policies and conditions shaped this remarkable performance, and why has Indochina’s path to stabilization differed so markedly from that of other transition economies? The IMF’s Central Asia Department has been examining the macroeconomic lessons to be drawn from Indochina’s stabilization. Its analysis provided the basis for a May 29 IMF Economic Forum chaired by David Goldsbrough and featuring John Dodsworth, both of the IMF’s Central Asia Department. Specific attention was focused on Vietnam by the remaining panelists, who included Professor James Riedel of Johns Hopkins University’s School of Advanced International Studies; Hiroshi Haruta of the Overseas Economic Cooperation Fund (OECF) of Japan; and David Dollar of the World Bank’s Policy Research Department.


Comparative Growth and Inflation1

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A013

1Period t is the starting year for comprehensive stablization programs. This year is 1989 for Vietnam and Lao PDR, whereas it is 1992 for Cambodia.2The unweighted average, as calculated in Fischer, Sahay, and Végh, Stablitzation and Growth in Transition Economies: The Early Experience. IMF Working Paper 96/31, April 1996.Data: IMF

While these countries vary widely in population—ranging from 4 million in the Lao PDR and 8 million in Cambodia to 70 million in Vietnam—they share some striking similarities. Each had an economy dominated by family-based agriculture and marked by extreme poverty, and each had only recently emerged from isolation or war. These factors, plus the dearth of external assistance, underdeveloped institutional capacities, and relatively brief experiences with central planning, helped shape the strategies they would pursue in fighting inflation.

Common Path Toward Stabilization

When the leadership in Vietnam and the Lao PDR in the late 1980s—and Cambodia in the early 1990s—sought to stabilize their economies, they devised a broadly common recipe. According to Dodsworth, in the initial stages this entailed flexible exchange rates, extensive fiscal adjustment (predominantly through expenditure cuts), high positive real interest rates, and strict limits on public enterprise credit.

The two unusual features of this policy mix were the flexible exchange rate and the size of the fiscal adjustment. The departure of these countries from the use of an exchange rate anchor as a first step in promoting stabilization and reversing currency substitution was a pragmatic acknowledgment, Dodsworth said, of the prevalence of parallel foreign exchange markets in their economies. Fixing an exchange rate in this environment would have been difficult, and attempting to defend it without foreign currency reserves would have been all but impossible.

Both Vietnam and the Lao PDR used rules to formally link the official and parallel rates within certain margins. Over time, these margins were reduced, until the two rates were unified. The authorities acted early to liberalize trade and foreign exchange controls, thus facilitating transactions and reducing the distortive effects of risk premia. Early liberalization of exchange restrictions also smoothed exchange rate movements during the disinflation period.

In addition, a deliberate commitment to positive high real interest rates (on the order of 3-4 percent a month) initially helped deter further currency substitution, which might have undermined the exchange rate policy. High interest rates posed a risk for enterprise profitability and heightened the potential for default on bank loans, but Vietnam and the Lao PDR steadily reduced nominal interest rates as inflation rates declined.

In the absence of an exchange rate anchor, Dodsworth noted, the real impetus for disinflation had to come from fiscal adjustment—notably, a drastic reduction in expenditures. The Indochinese countries accomplished this by lowering real labor costs, cutting back or eliminating subsidies to consumers and state enterprises, and reducing capital outlays.

Of the three countries, Vietnam had the most success in reducing its real wage bill. After 1990, Vietnam kept increases in nominal wages below inflation and reduced public sector employment by nearly one million workers. The Lao PDR capped its wage bill and reduced employment in the central government by nearly one fourth.

The Indochinese authorities also sharply cut back on subsidies. Vietnam abolished virtually all consumer subsidies in 1989 within the context of price and exchange rate liberalization. The Lao PDR ended all current budget subsidies in 1988. Initial efforts to abolish subsidies, however, were often undercut by enterprise access to bank credit. Vietnam ultimately instructed banks to cut off lending to loss-making enterprises. The Lao PDR and Cambodia, which pursued more extensive privatization policies, reduced credit to state enterprises to a minimum.

The severity of the cutbacks in public sector spending did adversely affect public investment and social services. The Lao PDR, which had some access to external assistance, was able to moderate the severity of these cuts. For Vietnam, however, a sharp deterioration in the quantity and quality of its education and health services caused unwelcome slippages from the progress it had made in the previous three decades.

With inflation largely under control and the exchange rate unified, the Indochinese authorities in 1993 moved on to a second phase of their stabilization efforts. This phase emphasized achievement of exchange rate stability with the support of appropriately tight financial policies. Fiscal policies have focused more on revenue enhancement, so that social services could be rebuilt and capital outlays increased. The degree of fiscal consolidation varies among the countries, but all have made some progress toward modernizing tax systems.

In this second phase, noted Dodsworth, monetary policies have also generally remained tight, and this has helped promote the use of domestic currencies. In Cambodia and the Lao PDR, however, the use of U.S. dollars in the economy remains prevalent and complicates the formulation of monetary policies. Vietnam has moved farthest toward creating formal exchange markets and a modern banking system, but even here parallel exchange markets and informal credit systems still hamper the development of the banking system. Currency substitution, observed Dodsworth, is a notoriously stubborn phenomenon, and Indochina has made only partial inroads in “dedollarizing” their economies.

Sustaining Development

As impressive as Indochina’s recent growth has been, cautioned Riedel, several years of high growth should not be mistaken for economic transformation. The true measure of the success of a country like Vietnam, he argued, will be its capacity to sustain growth over the next two to four decades.

The focal point of Vietnam’s development strategy is the export-oriented industrialization strategy that its Southeast Asian neighbors have successfully pursued. Riedel expressed confidence that Vietnam possesses most of the tools needed to support this strategy—principally human resources, impressive macroeconomic stability, relatively high rates of saving and investment, and an open trading regime. Still lacking, however, is a thriving private corporate sector in industry, most notably in manufacturing. Vietnam’s household sector is burgeoning, but production in the private medium- and small-sized sectors—which provided the backbone for Malaysia’s and Thailand’s export-oriented industrialization—is almost nonexistent.

More broadly, Riedel added, the environment Vietnam creates for its private sector will be more important over the long run than the process of privatization. Riedel cited Taiwan Province of China, which did not succeed initially in selling or closing its public enterprises in the manufacturing sector but whose dynamic private sector ultimately eclipsed its public enterprises and set the stage for eventual privatization.

Commenting from the perspective of his OECF operational work in the region, Haruta also singled out Vietnam, commending its achievements on the microeconomic and macroeconomic levels and noting that progress in both areas was crucial for low-income transition economies.

Haruta emphasized that rapid implementation of infrastructure projects is a key element in laying the basis for private sector investment. He also noted the critical contribution that a modern banking system can make in the reform of state enterprises. In the postwar reconstruction of Japan, he said, the banking system had played a key role in monitoring management as well as providing needed financing.


Comparative Fiscal Balances1

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A013

1 Period t is the starting year for comprehensive stabilization programs. This year is 1989 for Vietnam and Lao PDR, whereas it is 1992 for Cambodia.2The unweighied average, as calculated in Fischer, Sahay, and végh, Stablization and Growth in Transition Economies: The Early Experience. IMF Working Paper 96/31, April 1996.Data: IMF

Regarding Vietnam’s ability to sustain high growth rates, Haruta offered two cautionary observations. The country’s agricultural sector was approaching capacity. Without improvements in rural infrastructure, rural credit, and extension services, Haruta foresaw little scope for further growth in the sector. Likewise, both the authorities and the multilateral institutions needed to remain vigilant regarding Vietnam’s debt management.

Overall, however, Haruta was optimistic about Vietnam’s potential. The country was well positioned to benefit from the strong growth in neighboring economies, which offered Vietnam an excellent market for its goods and a substantial source of future investment financing.

How Distinctive Is the Indochina Experience?

Transition economies reap substantial rewards for persevering with stabilization, observed Dollar, but typically stabilization exacts a sizable initial cost. Severe output declines and recession have accompanied the first year or two of most stabilization efforts, testing the will of authorities to “stay the course” and eroding popular support for the reform process. How were the countries in Indochina able to grow while stabilizing their economies?

Stand-By, EFF, SAF, and ESAF Arrangements as of May 31

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Note: EFF = extended Fund facility.SAF = structural adjustment facilityESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department

Dollar believed the key to stabilization with growth in Vietnam, for example, lay in its peasant agricultural economy, which in 1988 was in the throes of 400 percent inflation and reaped little benefit from the public enterprise sector, which attracted the bulk of public resources. When the authorities drastically cut public sector expenditures, raised interest rates on credit to state enterprises, and reduced public-sector employment, the typical village household saw only benefits in the form of a halt to spiraling prices, a marked decrease in inflation, and a lifting of price controls that offered new incentives to grow. Vietnam’s large household sector responded vigorously, far outweighing the recession in the public sector and quickly absorbing excess labor from the public sector.

Critical to this dynamic, Dollar explained, was openness. With the aid of a realistically valued currency and a liberalized trade regime, Vietnam was in a position to channel dramatically higher rice yields to external markets. It became a major rice exporter overnight. Over the past seven years, total exports have grown by 25 percent a year in real terms; indeed, said Dollar, exports are “really the key to why the Vietnamese economy was able to grow during transition.”

Riedel added that Vietnam also had access to a resource that has fed China’s rapid growth: a large, idle rural labor force waiting for work. “If you find a way to mobilize this resource,” he said, “you can afford to maintain an inefficient public sector, because the center of your economy is in this resource. Eastern Europe doesn’t have this luxury. For them to build up an efficient economy, they have had to tear down an inefficient economy and then rebuild it.”

Much of what the Indochinese transition economies achieved through their stabilization efforts appears to be linked to their stern fiscal adjustment measures and to their starting conditions (principally, the dominance of family-based agriculture, which permitted a quick supply response). Goldsbrough noted that the magnitude of Vietnam’s budget hardening was unprecedented and reflected in large part tough constraints on public enterprise finances. Net contributions from the public enterprise sector to the budget shifted, between 1989 and 1994-95, by the equivalent of a positive 10-12 percent of GDP. Nearly a third of this turnaround reflects the emergence of a profitable oil sector, but the remainder constitutes an enormous fiscal shift—one that could be difficult to replicate, Goldsbrough said, in other political economic contexts.

Next Steps

As Indochina continues to adjust and grow and become more integrated into the world economy, it will have to adapt its strategies to new environments and new obstacles, Dodsworth and Goldsbrough concluded. Overheating, a risk that accompanies strong growth, is likely to present one set of challenges. Substantially increased private capital inflows and greater external assistance will afford opportunities but also raise the prospect of greater volatility in the economy. Finally, the growing role of the private sector and the expansion of the banking system will require the authorities to continue to adapt their macroeconomic policies to the changing situation and develop a new set of policy tools.

Photo Credits: Denio Zara and Padraic Hughes for the IMF, page 214; IMF file photo, page 224.

Latin America and the Challenge of Globalization Policy Response Key to Capital Market Access

Following are edited excerpts of a speech given by IMF Managing Director Michel Camdessus at the Academy of Economic Science in Buenos Aires, Argentina, on May 27.

Since the late 1980s, there has been a drastic shift in the orientation of economic policy in Argentina. The Convertibility Law established fiscal and monetary discipline as the centerpiece, and this—along with structural reform, including a more open trade policy, privatization, exchange and financial liberalization, deregulation, normalization of international financial relations, and restoration of access to international markets—made a decisive difference in Argentina’s economic performance.

Argentina’s experience was part of a larger transformation that had been taking place throughout Latin America and the Caribbean over the last decade, as countries jettisoned economic strategies based on import substitution and a heavy government role in the economy and adopted comprehensive adjustment and reform programs. This process opened up opportunities that were firmly grounded in the region’s resource base and the positive externalities of globalization. As part of this shift in policy, major changes were introduced in tax policy and administration, the quasi-fiscal losses of central banks were reduced, public enterprises were restructured and privatized, and public expenditure was reduced and redirected toward the development of human capital and infrastructure.

The results of these reforms were dramatic. The region’s overall fiscal deficit narrowed from an average of 4¼ percent of GDP in 1988-89 to about ½ percent of GDP in 1990–94. And, excluding Brazil, where economic adjustment has been more recent, the region’s average rate of growth rose from 1½ percent a year in 1985–89 to about 4 percent a year in 1990–94. Meanwhile, inflation declined from 150 percent in 1989 to 15 percent in 1994. On the external side, however, the region’s current account deficit widened to about 3 percent of GDP a year in 1992–94, after averaging about 1 percent of GDP a year during several previous years.

In my view, this sea change in policies and performance is associated with two phenomena of profound and universal significance:

  • The changing role of the state. It is now nearly universally accepted that the most effective economic strategies are private sector led and outward oriented. Conversely, there is ample evidence that when the state dominates the economy, resources are often misallocated, and private investment and growth suffer.

  • Globalization of international capital markets. Net private capital inflows to developing countries soared from an average level of $10 billion a year in the mid-1970s to over $100 billion a year in the first half of the 1990s. By 1994, private capital inflows to Latin America registered about $50 billion, or approximately one third of total private capital inflows to developing countries.

The availability of such vast amounts of capital has opened up many new opportunities to increase investment, modernize technology, raise production, accelerate growth, and create employment in the developing countries. But overreliance on external capital flows also entails risks. As the 1994 crisis in Mexico amply demonstrated, a perceived lack of macroeconomic discipline can lead to a rapid and destabilizing reversal of capital flows. Moreover, given the high degree of financial market integration today, crises can quickly spill over into other markets, producing serious adverse effects on other countries as well.

Lessons from the Mexican Crisis

What conclusions should be drawn from the experience in Mexico?

  • The quality of a country’s economic policies makes a difference. Mexico also confirmed an important corollary: irrespective of past efforts or achievements, the loss of economic discipline in the face of other adverse developments can have a severe impact on market confidence, with devastating effects on output, employment, and future market access.

  • The consistent implementation of policies over time has an important effect on confidence. For example, the fact that Chile was largely unaffected by the spillover effects of Mexico’s crisis clearly demonstrates the advantages of making an early start on reform and pursuing it steadfastly until success is achieved. And although the reform process came later in Argentina, the authorities’ prompt and comprehensive action to strengthen the country’s policy stance in the face of the Mexican crisis was decisive in preserving the economic progress already achieved and in restoring credibility.

  • Once credibility is lost, it takes time to regain it, and the costs in terms of activity and employment can be extremely high.

  • The Mexican crisis exposed the vulnerability of the region’s domestic financial systems. Inadequate supervision—at a time of high real interest rates and large private capital inflows—has led to serious problems in the banking systems of many countries.

How Countries Can Meet the Challenge

It has now been about a year and a half since the onset of the crisis in Mexico. What can countries do to enhance their prospects for economic stability and growth in today’s global economy?

Market perceptions are decisive in determining where capital will flow. Hence, countries that hope to attract private capital inflows must pursue policies that the market believes will result in economic stability and growth. It follows that emerging market economies face two related challenges: to establish a climate of domestic economic confidence conducive to savings, investment, and production; and to convince economic agents—both domestic and foreign—that this climate will be an enduring one. How can countries achieve these two deceptively simple objectives? In my view, the strategy must be based on three key elements:

  • Consistent and stable macroeconomic policies. Increasingly, the maintenance of low inflation rates has become a key criterion for evaluating the success of macroeconomic policy. It is vital to have a disciplined fiscal policy that encourages increases in domestic saving and provides room for a well-targeted social safety net. In addition, it must ensure a satisfactory level of public investment in basic infrastructure and human capital, and it must not crowd out the private sector but rather enhance its effectiveness. There is also a need for a firm, anti-inflationary monetary policy and the maintenance of international cost competitiveness.

  • Comprehensive structural reform. This is a particularly important area for emerging market economies. Structural reforms, such as privatization and measures to increase domestic competition, promote greater efficiency and thus allow countries to make more effective use of their resources. Appropriate structural reforms are essential to foster a strong supply response to emerging economic opportunities by helping to ensure that markets are flexible and competitive and the economy is outward oriented. Moreover, structural reforms in such areas as trade liberalization, privatization, and labor markets increase the chances that private capital inflows will take the form of productive, long-term investment; not only is such investment good for emerging market economies, it also helps reduce the recipient countries’ vulnerability to sudden reversal of capital flows. Finally, if countries are to retain the confidence of markets, governments must be prepared to adjust policies when needed. This, in turn, points to the importance of strengthening domestic institutions in the budgetary and banking areas, so that the required measures can be adopted when the need arises.

  • Good governance. To establish an institutional and legal framework that gives confidence to savers and investors, governments must demonstrate that they have no tolerance for corruption. In addition, they must fulfill the functions for which they are uniquely qualified, including providing reliable public services, establishing a simple and transparent regulatory framework that is equitably enforced, and guaranteeing the professionalism and independence of the judiciary. Good governance also involves establishing appropriate social policies to combat poverty and marginalization, including well-targeted social safety nets, and policies that promote greater equality of opportunity and income distribution. Further, good governance involves national dialogue, so that the public understands and broadly supports the policy framework in place. Indeed, the credibility of economic policy hinges on a sufficient consensus in favor of reform—so that the market will have reasonable confidence that the essential policy conditions for economic stability and growth will endure.

How the IMF Is Meeting the Challenge

If the Mexican crisis has provoked a re-evaluation of country policies in many countries, what changes has it prompted at the IMF? The IMF’s objectives have not changed. We are still taking action “to give confidence to members” and to provide them the “opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” This is in essence what we did with the Argentine government in the aftermath of the Mexican crisis at end-1994.

Nevertheless, prevention is better than cure. Accordingly, the IMF has taken a number of steps to strengthen its surveillance over member countries’ policies, so that emerging problems can be detected and addressed before they become full-blown crises. In this connection, we have sought to develop a more continuous and probing dialogue with member countries. We are also paying greater attention to the soundness of banking systems, to the sustainability of financial flows, to countries potentially at risk, and to countries where financial market tensions could have systemic spillover effects.

The credibility of economic policy hinges on a sufficient consensus in favor of reform.

At the same time, we have clarified the procedures under which the IMF can respond rapidly to fulfill our mandate of giving confidence to members and the international monetary system. As our Executive Board has made clear, the use of such procedures must be limited to truly exceptional circumstances; our support must be decisive, when justified, while remaining conditional and catalytic in nature.

The Mexican crisis also led us to the conclusion that in a globalized world with large capital flows between countries, there is a premium on transparency. International capital markets function more smoothly when they have reliable, regular, and up-to-date information available on countries’ economic performance. For this reason, the IMF has developed standards to guide members in the dissemination of economic and financial data, so that markets will be better informed—and less prone to surprises.

Finally, Mexico also demonstrated that the IMF must have adequate financial resources so that it can continue to fulfill its mandate in this globalized, and at times unpredictable, world.

The last 18 months since the onset of the Mexican crisis have been trying times. Yet, looking ahead, the prospects for a full recovery are favorable—both in Argentina and the region. This is because of the macroeconomic stabilization, structural reforms, and improvements in governance that Argentina and others undertook in the early 1990s and, indeed, because of the policies they are continuing to pursue today. In this world of such violent upheavals, we all must share a common duty: to persevere and maintain confidence in the future.

World Bank Report Focuses on Transition Economies

The transition economies have made great strides over a short time toward becoming market-oriented economies. With sustained effort, these countries have the potential to achieve strong growth, financial stability, and rising living standards. But transition is far from complete and the process continues to exert a profound social, political, and strategic impact, says the World Bank’s 1996 World Development Report in its review of 28 countries in Central and Eastern Europe, the newly independent states of the former Soviet Union, and China, Mongolia, and Vietnam.

The chances of a return to planned economic systems may be small, but long-term stagnation and rising poverty—likely outcomes of inconsistent and unstable policies—cannot be ruled out for some countries. Transition country reforms will not bear fruit until they are supported by a broad political and social consensus. Developing this consensus is perhaps the highest priority facing them.

Among the World Development Report’s major conclusions are the following:

  • Even where the institutional underpinnings of a market system are weak, consistent policies—including liberalization of markets, trade, and the entry of new businesses, and reasonable price stability—can achieve a great deal.

  • Arguments about the suitability of “big bang” versus “gradualism” miss the point: what matters is the breadth of the policy reforms attempted and the consistency with which they are maintained.

  • Clearly defined property rights are necessary to generate an efficient response to market processes—and this will eventually require widespread private ownership.

  • Major changes in social policies to address poverty alleviation and the impact of reforms on the young and elderly are necessary complements to the move to a market-oriented system.

  • Reforming legal and financial institutions, as well as government itself, is critical.

The Challenge of Transition

Countries cannot ignore their history and geography, and this legacy, together with political developments, profoundly influences both the relative importance of different market reforms and how policymakers approach them, according to the World Development Report. Liberalization and stabilization are interrelated. The freeing of markets is the basic enabling reform from which all the potential benefits of transition flow. But market signals cannot function in an environment of severe macroeconomic imbalances and high inflation. Stabilization is a vital complement to liberalization in fostering productivity and growth during transition and beyond.

Establishing property rights and incentives is a second challenge, says the World Development Report. Here, too, initial conditions matter. Some transition economies will have a more urgent need to privatize than others. A third challenge—vital for social and political as well as economic reasons—is to relieve poverty and address the other ill effects of transition on vulnerable groups. Many have gained from the transition, but depending again on the starting point and context for reforms, the transition process can be accompanied by declining poverty. Thus, the losses suffered need to be addressed through effective social policies. But restoring economic growth is the most essential element in poverty reduction.

Consolidating Reform

Although liberalization, stabilization, and privatization are intrinsic to transition, they alone cannot create vibrant market economies, says the World Development Report. Building on these elements and the early gains of transition will require major consolidating reforms to help these countries develop strong market-supporting institutions and a skilled and adaptable work force.

The many institutions that support market relations and shape ownership in advanced market economies—both concrete organizations and abstract rules of the game—did not exist under central planning. Even in this weak institutional setting, however, favorable policy reforms have been able to spur economic growth, according to the report. Nevertheless, a growing body of evidence on market economies suggests that, for the longer term, if transition economies are to join the ranks of the advanced market economies, they will need not just good economic policies but strong and accountable institutions to support and implement them.

A Future Agenda

Donors have an important role to play in the transition process. In addition to supporting stabilization programs and helping absorb some of the costs of transition, which are reflected in government budgets, donors can provide long-term technical assistance to support institution building. Entire professions need to be rebuilt through training programs financed by loans and grants. Many countries will also benefit from donor efforts to assist them in the development of strong civil societies, a necessary complement to the new economic system.

The agenda for reformers in transition economies depends on the stage of transition. With macroeconomic stabilization and liberalization largely achieved, advanced reformers in Central and Eastern Europe now see the realignment of the state as a major priority, together with other institutional reforms to facilitate their integration into the European Union. For these countries, technical assistance may be more important than official external financing, concludes the World Development Report.

World Development Report 1996 is available for $22.95 at the World Bank Bookstore. Telephone: (202) 473-1113; Internet:

IMF Co-Sponsors Workshop On Banking Supervision

During May 20-30, the IMF helped sponsor a regional workshop on banking supervision in Harare, Zimbabwe. Participants in the workshop, which was organized by the IMF’s Monetary and Exchange Affairs Department (MAE) and the World Bank’s Financial Sector Development Department, included 29 supervisory officials from the Eastern and Southern African Bank Supervisors Group and other English-speaking African countries.

The main objective of the workshop, which was supported by the Basle Committee on Banking Supervision and hosted by the Reserve Bank of Zimbabwe, was to provide operational guidance on bank licensing; off-site supervision of banks; loan portfolio analysis, classification, and provisioning; and supervisory responses and intervention for problem banks. The workshop was also designed to encourage further intraregional cooperation among African countries, with a view to identifying and making recommendations in those areas where there could be convergence of supervisory practices in the region. More broadly, these workshops combine technical assistance and training by bringing together groups of officials in a region to discuss common structural and implementation issues and also to review country experiences and principles to facilitate problem solving.

MAE’s involvement in banking supervision derives from its macroeconomic and technical linkages to the IMF’s work in the monetary and exchange areas. Through training in this area, it seeks to strengthen member countries’ economic and financial policies—including those undertaken in the context of IMF-supported economic stabilization programs.

From the Executive Board

Niger: ESAF

The IMF approved a new three-year loan for Niger under the enhanced structural adjustment facility (ESAF) equivalent to SDR 58 million (about $83 million) in support of the government’s 1996-98 macroeconomic and structural adjustment program. The first annual loan in an amount equivalent to SDR 19.3 million (about $28 million) will be disbursed in two equal semiannual installments, the first of which will be available shortly.

Since the end of the uranium boom in the early 1980s, Niger has been faced with growing macroeconomic imbalances resulting from a deterioration of its terms of trade and a loss of competitiveness as a result of currency overvaluation, recurrent droughts, and inefficient economic management. In early 1994, the government, working in concert with other CFA franc zone members, realigned the exchange rate. However, because of growing social and political unrest, which resulted in the breakup of the coalition government and new elections, the opportunity presented by the exchange rate action to reverse the economic downturn was not seized.

The government that took office in February 1995 moved quickly to address the country’s deep-seated problems. On the basis of encouraging progress, particularly in the fiscal area, a program to be supported by an ESAF loan was negotiated in late 1995 but was put on hold when Niger’s key donors withdrew their financial support following a military coup in January 1996. A new civilian government was appointed and proceeded with a plan for a return to democracy in the second half of 1996. Several steps were taken in this direction, including a referendum on a new constitution, the legalization of political parties, the lifting of the state of emergency, and the scheduling of presidential and parliamentary elections. Based on these initiatives, Niger’s major donors have recently reconsidered their decision to freeze budgetary assistance and have indicated that they would be prepared to resume financial support in conjunction with an ESAF-supported program.

The 1996–97 Program

The basic macroeconomic objectives for the 1996–97 program are to achieve annual real GDP growth of over 4 percent; to reduce the annual inflation rate to 3 percent in 1997; and to contain the external current account deficit, excluding official transfers, at the equivalent of 11.4 percent of GDP in both 1996 and 1997. Fiscal policy will be the critical instrument in achieving macro-economic stabilization. To this end, the public finances aim at eliminating the primary deficit and reducing the overall budget deficit (excluding grants) to 8 percent of GDP in 1996, while raising budgetary revenue by 1 percentage point to 8.2 percent of GDP. Fiscal policy in 1997 will aim at containing the overall deficit to less than 9 percent of GDP, while raising budgetary revenue to over 10 percent of GDP.

On the revenue side, a number of important policy measures were introduced in early 1996. These included the merging of the general income tax with the tax on wages and income, the introduction of a single general business license tax to bring the informal sector into the tax system, and the introduction of a property tax on owner-occupied housing. On the expenditure side, the program continues to focus on ensuring that the wage bill does not crowd out other essential outlays, including maintenance and social services.

Structural Reforms

Structural policies under the program aim at broadening the scope for the growth of the private sector. Accordingly, they focus on privatization and parastatal reform, the deregulation of the energy sector, the liberalization of the labor market, the strengthening of the judicial system, and civil service reform.

To encourage the development of the private sector, the government will reform the legal framework governing business activities and the labor market. A key objective will be to eliminate the job placement monopoly of the Government Employment Office, as well as its influence on the decisions of public and private enterprises with respect to hiring and firing for economic and technical reasons. A civil service census has already been carried out, to be followed by reform. The government’s equity participation in three public enterprises is to be reduced to below 50 percent in 1996, and the monopoly status of the petroleum company will be terminated; over the medium term a total of 11 public enterprises are to be privatized, 4 liquidated, and 7 others restructured.

Social Issues

The authorities recognize that human capital development is a key to realizing the country’s growth potential. Thus, the primary school enrollment rate, which in 1994 averaged 29 percent, is targeted to increase to 35 percent by 1999. To this end, some 2,600 teachers are to be recruited over the next five years, and the budgetary allocation for primary education will rise in real terms. The budget will also increase real expenditure in preventive health care and sanitation by over 5 percent and will include provisions for social safety net outlays and poverty alleviation.

Niger: Selected Economic Indicators

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Data: Nigerien authorities and IMF staff estimates

The Challenge Ahead

Although the January events jolted the economy and delayed consideration of the ESAF-supported program, the new government has moved quickly to declare its commitment to structural reform and to accelerate the timetable for the return to democracy. However, given the evolving political situation and until the return to democratic rule is completed, there is an urgent need to reinforce consensus in support of Niger’s adjustment effort to ensure continuity in policy implementation.

Niger joined the IMF on April 24, 1963. Its quota is SDR 48.3 million (about $70 million), and its outstanding use of IMF credit currently totals SDR 32 million (about $46 million).

Press Release No. 96/30, June 12

Côte d’Ivoire: ESAF

The IMF approved the third annual loan under the enhanced structural adjustment facility (ESAF) for Côte d’Ivoire in an amount equivalent to SDR 95.3 million (about $137 million) to support the government’s economic reforms in 1996. The loan is available in two equal installments.

The 1994 devaluation of the CFA franc and the supporting adjustment program put an end to the economic slump that had marred the Ivoirien economy for the previous eight years. In 1995, the recovery was further bolstered by the improvement in world economic activity and a substantial increase in non-oil primary commodity prices. In 1995, real GDP growth, which was broad based, is estimated to have reached 7 percent.

Although the main macroeconomic objectives of the 1995 program were achieved, the strong economic growth resulted in a somewhat higher rate of inflation and a larger external current account deficit than had been initially projected. On the other hand, improvement in the fiscal balance was substantially larger than targeted, thanks to the economic recovery and gains in the terms of trade. On the structural front, the privatization program made great strides in 1995, and there was considerable liberalization of the regulatory framework governing economic activity.

The 1996 Program

In 1996, the international environment is likely to be less favorable to the Ivoirien economy because of slower growth in the industrial countries and a downward trend in primary commodity prices. Given these prospects, the 1996 program seeks to achieve real GDP growth of 6.5 percent, to slow consumer price inflation to 5 percent by the end of the year, and to contain the external current account deficit at 5.6 percent of GDP.

Côte d’Ivoire: Selected Economic Indicators

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Data: Ivoirien authorities and IMF staff estimates

To these ends, the program seeks to reduce the overall fiscal deficit in 1996 to 2.6 percent of GDP from 3.6 percent in 1995, eliminating all domestic arrears, and mobilizing exceptional domestic resources—equivalent to 1.2 percent of GDP—through privatization and contributions from public enterprises to external debt-service payments. The strengthening of domestic tax administration and additional tax measures, together with royalties from the recent resumption of oil exploitation, should compensate for the envisaged reduction in the taxation of cocoa and coffee exports and allow for a stabilization of the ratio of revenue to GDP at 21.3 percent. On the expenditure side, primary spending is to be reduced by 0.4 percent of GDP to 18.5 percent while increasing outlays on human resource development.

Recent Use of IMF Credit

(million SDRs)

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Note: EFF = extended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals shown owing to roundingData: IMF Treasurers Department

The regional Central Bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), will maintain a prudent policy stance, consistent with the fixed peg regime and the objective of a further improvement in its net foreign asset position, to which Côte d’Ivoire is expected to continue making some contribution. The array of instruments available to the monetary authorities of the West African Economic and Monetary Union (WAEMU) for indirectly regulating banking sector lending and liquidity is expected to expand in 1996. To this end, the authorities plan to replace government securities operations by the end of the year with a system for auctioning BCEAO bills.

Structural Reforms

The program calls for a major deepening and acceleration of structural reforms, whose objectives are to provide a more adequate institutional and regulatory environment for the development of the private sector. In the context of a far-reaching reform of coffee and cocoa marketing, a computer-based system for auctioning export rights has recently started operating, and the authorities intend to take a number of additional steps. The program seeks to step up the privatization process and to improve the monitoring and management of the enterprises remaining in the public domain. The authorities have slated 31 enterprises for privatization in 1996–97. They also plan to work toward an agreement on a common external tariff with other WAEMU member countries and on further reductions in intraregional tariffs; harmonization of indirect taxation; adoption of harmonized business laws; implementation of regional surveillance procedures; further liberalization of prices and nontariff barriers; and completion of the regional financial market so as to promote long-term savings and financing.

Addressing Social Issues

A major objective of Côte d’Ivoire’s medium-term economic policy is to significantly reduce poverty. To this end, the government will implement a comprehensive, multisectoral social strategy in the fields of health, education, family policy, agriculture, and housing, together with targeted social actions in favor of vulnerable groups. To ensure the success of its antipoverty program, the government will establish a system of routinely monitoring poverty indicators.

The Challenge Ahead

In view of the prospective weakening of Côte d’Ivoire’s terms of trade and a decline in foreign financial assistance, the 1996 program appropriately centers on further fiscal consolidation and on the implementation of a critical mass of structural measures designed to create an environment conducive to the development of private investment. It is essential that the authorities closely monitor fiscal developments and be prepared, if necessary, to implement additional tax measures and expenditure cuts.

Côte d’Ivoire joined the IMF on March 11, 1963, and its quota is SDR 238.2 million (about $343 million). Its outstanding use of IMF credit currently totals SDR 276.13 million (about $397 million).

Press Release No. 96/31, June 14

Burkina Faso: ESAF

The IMF approved a new three-year loan under the enhanced structural adjustment facility (ESAF) for Burkina Faso totaling the equivalent of SDR 39.8 million (about $57 million) to support the government’s economic and financial reform program for 1996-98. The first annual loan for 1996-97, equivalent to SDR 13.3 million (about $19 million), will be disbursed in two equal installments, the first of which is available immediately.

Burkina Faso: Selected Economic Indicators

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Data: Burkinabè authorities and IMF staff estimates

Burkina Faso successfully implemented an economic reform program supported by ESAF loans during the period 1993–95. Considerable progress was made in reducing financial imbalances, restoring external competitiveness, and removing structural rigidities and impediments to growth. Real GDP growth was over 4 percent in 1995, the first significant increase since 1991, and the annual rate of inflation was reduced to below 4 percent at end-1995 from 29 percent at end-1994. The fiscal deficit was reduced to 0.2 percent of GDP in 1995 from 2.3 percent in 1994. Considerable progress has been made in reducing the size of the government and its role in the economy, including removal of extensive government regulations on prices, trade, and domestic marketing, in consolidating public finances, and in restoring the financial health of the banking system. Building upon the country’s rapidly improving economic performance in 1995, the authorities decided to consolidate and deepen the reform effort under a new ESAF-supported economic program that will encourage domestic saving and investment to underpin economic growth and effectively address poverty reduction.

Medium-Term Strategy And 1996 Program

The medium-term strategy for 1996-98 aims at an annual real GDP growth of over 5 percent, an annual rate of inflation of about 3 percent, and a reduction in the external current account deficit (excluding grants) to about 10 percent of GDP by 1998 from about 13 percent in 1995. Within this medium-term framework, the 1996 program seeks to achieve a real GDP growth rate of 5.3 percent, to limit the yearly inflation to 3.5 percent by the end of the year, and to maintain the external current account deficit (excluding grants) at less than 13 percent of GDP, reflecting the impact of a weak harvest on cotton exports in late 1995. To achieve the program objectives, a central focus of the medium-term strategy will be to strengthen government finances. The overall fiscal balance (excluding grants) is projected to improve by about 3 percentage points of GDP over the period 1996–98, based mainly on strong revenue collection and contained expenditures which should fall to 5.5 percent of GDP in 1996 from 9.2 percent in 1995. Revenue measures adopted in the 1996 budget include introducing an excise tax on nonalcoholic beverages, broadening the base for applying the VAT on imports, increasing excise taxes on domestic and imported tobacco products, and expanding the tax base on wages and salaries to include all benefits. The continuation of tight credit policies to preserve competitiveness and encourage financial savings is also a key element of the program.

Structural Reform Policies

Structural reforms envisaged under the program are critical for providing incentives to assure increased private sector investment. These reforms include additional privatization of public enterprises; prompt completion of the financial sector restructuring that began in 1991; civil service reform, reforms of the judiciary system, labor code; and regulatory environment; and elimination of remaining trade restrictions.

Addressing Social and Environmental Aspects

The projected GDP growth over the medium term is expected to increase employment opportunities. In the short term, the budget includes allocations to provide for wider access to basic social services, in particular increased access to primary education in the rural areas and to basic health care. Other measures being implemented under the program include increased supply of clean water, particularly to every school and medical unit. The government’s environmental action plan is targeted toward improved land and natural resource management, including forests and water.

Camdessus Pays Tribute to Edward M. Bernstein

IMF Managing Director Michel Camdessus made the following statement on June 12, marking the death of Edward M. Bernstein, a key architect of the Bretton Woods agreement.

Edward Bernstein, who died June 8 at the age of 91, was a central figure in the history of the IMF. As deputy to Harry Dexter White at the U.S. Treasury in the early 1940s, he was instrumental in developing both the U.S. plan and the final compromise for the IMF’s Articles of Agreement. At the Bretton Woods conference in 1944, he was both the chief technical advisor and the principal spokesman for the U.S. delegation. When the IMF opened its doors in 1946, he became the first Director of Research, a position that he held until he left the IMF in 1958. He was, in effect, the chief economist of the IMF, and he had an enormous beneficial impact on this institution for which we are all extremely grateful.

Throughout his long and productive life, Eddie Bernstein was keenly involved in and supportive of the work and role of the IMF. Just two months ago, he attended our Seminar on the Future of the SDR, at which he was recognized for his pioneering work on the role of international reserve assets that helped make possible the creation of the SDR in 1969. But the idea of a composite reserve asset was just one of his many contributions to the IMF: the concepts of stand-by arrangements, conditionality, and surveillance all were honed on the anvil of his intellect. Perhaps, though, his most lasting contribution was that he attracted many of the brightest economists of his time to work at the IMF—Sydney Alexander, Marcus Fleming, Robert Mundell, Jacques Polak, Robert Triffin, and numerous others—and thus demonstrated that the IMF can and must have an international staff of the highest quality.

From the beginning, Eddie believed that inflation would be as great a threat as deflation to economic stability after World War II. A hallmark of his writing on this issue, as in everything that he wrote, was that he saw the need for balance: the IMF had to have enough resources to help its member countries avoid deflation, but it also had to have the means to impose the conditionality that would help them avoid inflation.

One of Eddie Bernstein’s guiding lights throughout his career was the value of a system of stable exchange rates to promote the growth of international trade and world income. Having witnessed the debacle of the deflation of the 1930s, he worked tirelessly in the years before Bretton Woods to devise an international monetary system that would not only prevent a relapse into competitive devaluations and autarky but also would provide positive incentives for trade and growth.

Although he took early retirement from the IMF, Eddie never retired from studying and writing about the IMF and the international monetary system. In fact, he worked for almost forty more years after leaving the IMF, first as the head of his own consulting firm and later as a guest scholar at the Brookings Institution. In July 1984, exactly forty years after Bretton Woods, he reflected on the changes in the world economy during an anniversary luncheon with Executive Directors here at the IMF. On that occasion, he lamented the massive appreciation of the U.S. dollar that was still under way, and he noted that it was having disastrous effects on many developing countries as well as on the major industrial countries. But he also recognized that the solution to the problem was not to try to return to a system of par values for exchange rates—not a “new Bretton Woods.” Rather, the solution was to have better and more stable macroeconomic policies. And to get better policies, it was important for the IMF to exercise firm surveillance. He believed that the IMF had the means to promote stability and that our role was even more important in today’s more volatile world than it had been in the 1950s and 1960s.

The Challenge Ahead

Burkina Faso’s external debt-service obligations are expected to be sustainable following the debt-stock-reduction operation requested under the program. However, the authorities must remain steadfast in implementing a cautious debt management strategy, ensuring that it be based on grants and very concessional loans to finance development projects and programs, and caking into account the likelihood that foreign financing of the public investment program will be somewhat more subdued than in previous years.

Burkina Faso joined the IMF on May 2, 1963; its quota is SDR 44.2 million (about $64 million); and its outstanding use of IMF credit currently totals SDR 50.5 million (about $73 million).

Press Release No. 96/32, June 14

Mozambique: ESAF

The IMF approved a new three-year loan for Mozambique under the enhanced structural adjustment facility (ESAF) equivalent to SDR 75.6 million (about $110 million) to support the government’s economic reform program for 1996-98. The first annual loan, equivalent to SDR 25.2 million (about $37 million), will be disbursed in two equal semiannual installments, the first of which will be available on June 28, 1996.

Since 1987, Mozambique has made good progress toward reversing economic decline, reducing macroeconomic imbalances, and liberalizing its economy. Despite civil war, a decline in the terms of trade, and natural disasters, the economy grew at an annual average rate of 6.7 percent in the period 1987–95. Liberalization of the exchange rate, prices, interest rates, and trade policies is now almost complete; progress toward enterprise and financial sector reforms has also been significant, although more still remains to be done in these areas. However, the remaining macroeconomic imbalances are substantial, and the objective of economic stabilization in this decade has not yet been fully achieved. Moreover, Mozambique’s external position remains fragile, inasmuch as the high levels of foreign aid inflows of recent years may not be forthcoming in the future, and foreign direct investment has been modest thus far. Although there has been a significant alleviation of the debt burden since 1987, Mozambique’s external debt level remains unsustainable.

Medium-Term Strategy for 1996–98 And 1996 Program

The government’s medium-term economic strategy is designed to raise gross domestic savings and improve the allocation of resources in order to create the conditions for sustained economic growth and poverty reduction. The basic macroeconomic objectives for the 1996-98 program to be supported by the ESAF loans are to achieve an average annual growth of nonenergy GDP of 5 percent; reduce the rate of annual inflation to 10 percent by 1998; and increase international reserves to the equivalent of four months of imports of goods and non-factor services by 1998.

Mozambique: Selected Economic Indicators

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Program projections.

Data: Mozambican authorities and IMF staff estimates

Within this medium-term strategy, the program for 1996 supported by the first annual ESAF loan aims at achieving a real GDP growth rate of 4 percent, reducing the end-of-period inflation rate to 22 percent, and increasing gross official reserves to 3.5 months of imports by end-1996. To achieve these objectives, the authorities plan to reduce the overall fiscal deficit (before grants) to 16.5 percent of GDP in 1996 from 20.3 percent in 1995 through revenue and expenditure measures. The program seeks to increase revenue by 1.9 percentage points of GDP in 1996, primarily as a result of an acceleration of customs reform and an increase in petroleum product taxes, and provides for a reduction in overall expenditure, as well as a continuing consolidation of the public investment program. Monetary policy will be geared to achieving the inflation and balance of payments objectives.

Structural Reforms

Structural reforms will be accelerated under the program. In particular, the government will focus on privatization and financial sector reforms, export promotion, strengthening the revenue base, public administration reforms—including decentralization and civil service reform—and promoting greater transparency and accountability in the public finances and in the economic regulatory system. The judicial system will also be strengthened.

Addressing Social Costs

Development of the agricultural sector through market incentives will be the cornerstone of government policies to reduce poverty. A review of the existing safety nets is being carried out by the authorities and should be completed in 1996, and a poverty assessment and action plan will be completed in 1997. The government will also focus on the expansion of primary and secondary education by rehabilitating facilities and hiring and training more teachers. To address health concerns, the government’s priorities will be on increased primary care, mother and child needs, and training of mid-level health professionals.

The Challenge Ahead

A key element in the period ahead is the acceleration of privatization of public enterprises, which is critical to increase investment efficiency and the stability of the banking system. Also, the external position remains vulnerable, which could indicate that Mozambique will require exceptional treatment in order to achieve a sustainable external debt position.

Mozambique joined the IMF on September 24, 1984. Its quota is SDR 84.0 million (about $122 million). Its outstanding use of IMF credit currently totals SDR 131 million (about $189 million).

Press Release No. 96/33, June 21

Dealing with Ukraine’s Gas Arrears Problem

Since the dissolution of the former Soviet Union in 1991, Ukraine has accumulated substantial domestic and external payments arrears, much of which are associated with the gas sector. A recent IMF study maintains that these gas arrears have further weakened Ukraine’s economic performance by:

  • constraining improvements in microeconomic efficiency owing to the postponement of enterprise restructuring and widespread resource misallocation; and

  • threatening macroeconomic viability, as a result of accumulating tax arrears and of pressures to expend scarce financial resources and borrow from foreign creditors to pay for imported gas.

The IMF study concludes that Ukraine’s gas arrears crisis results from policy distortions that can only be resolved through an acceleration of structural reforms. The most important steps in this direction are the removal of government from the gas business and the imposition of financial discipline on nonpayers. The Ukrainian government has already implemented a number of steps in this regard.

Ukraine’s Gas Situation

Ukraine relies heavily on gas as an energy source. Measured in tons of oil equivalent, gas accounted for approximately 50 percent of total energy usage in 1994, the most recent year for which data are available. Domestically produced sources of gas amounted to less than 20 percent of total gas consumption, with the remainder imported from Russia and Turkmenistan. Domestic gas supplies in Ukraine have decreased over the past two decades, with production falling to a current average of less than 20 billion cubic meters from a peak of nearly 70 billion cubic meters in 1975. The primary cause of this decline, says the IMF study, is the depletion of gas fields and the fall off of investment in new ones.

Gas Distribution. Ukrgasprom (UGP) dominates international gas operations in Ukraine. Until late 1995, the state-owned company imported gas from Russia and stored and transmitted Russian gas to Western European markets; since then, a number of wholesale gas distributors are allowed to import gas directly. UGP owns and operates 34,500 kilometers of high-pressure gas transmission pipelines. The company also owns 12 underground storage facilities with an active volume of 35.5 billion cubic meters.

Gas intended for the domestic market is transmitted by UGP’s high-pressure pipelines to gas distribution stations. From there, commodity ownership is transferred to one of nine regional transmission subsidiaries (Transgas company), all of which are owned by UGP. From these stations, gas is transferred through 60,000 kilometers of low-pressure pipelines. The entire network is owned by 50 local gas distribution companies that are organized under a trade organization known as Ukrgas, whose role is to coordinate and gather information.

Until early April 1995, each local distribution company entered into a contract with a regional Transgas company, whereby the local company physically delivered gas to end users, collected payments, and transferred the money to the Transgas company. In their billing and collection activities, local distribution companies were assisted by more than 400 local offices located throughout Ukraine. Since April 1995, however, the government has made Transgas companies directly responsible for billing and collection.

The Arrears Problem

While examining both external and domestic arrears, the IMF study stresses that the two dimensions of Ukraine’s gas arrears problem are closely interrelated. Domestic nonpayment resulted from gas importers being unable, or unwilling, to impose financial discipline on end users. This followed from the recognition that the government, as a guarantor of gas import payments, is ultimately responsible for the importers’ external liabilities. In the event, the Ukrainian government did assume substantial gas import payment commitments. The commitments’ sheer size, as well as the fact that domestic gas suppliers—themselves owed large sums for domestic gas deliveries—tended to result in substantial tax arrears and left the Ukrainian government unable to service its external gas payment obligations.

Selected IMF Rates

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The SDR interest rate, and the rate of remuneration, are equal to a weighted average of interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members” remunerated reserve tranche positions. The rate of charge, a proportion (currently 109.4 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

External Arrears. External arrears peaked at $1.5 billion at the end of 1994, resulting in rescheduling agreements with Russia and Turkmenistan. During the first half of 1995, however, the Ukrainian government ran a further $0.4 billion in arrears, which were also largely subject to a second round of restructuring. By the end of 1995, the stock of external arrears had been cleared and no new external government arrears have been accumulated since then.

A central cause of external arrears is related to the nature of commercial relations between Ukraine and its Russian and Turkmenistan suppliers. Until recently, these relations have suffered from an absence of specificity and transparency. The various parties, for example, appeared to rely heavily on oral discussions and past practices. Another difficulty cited by the study is the practice of “meshing” gas prices with transmission fees. While gas prices are well below what the Russian gas exporter charged Western European customers, Ukraine appears to have been paid considerably lower pipeline transmission fees than what its industrial country neighbors pay Russia. Which of the two discounts dominated depended on the volume of gas delivered to the Ukrainian market and the volume of Russian gas transmitted to the Western European market.

Until late 1995, official external arrears emerged in part as a consequence of the Ukrainian government’s practice of, de facto, guaranteeing gas import payments. The IMF study noted that this practice carried with it serious fiscal implications. As importers failed to pay their import bills, the government assumed a growing burden of liabilities, which eventually translated into massive external debt and large budgetary outlays.

The government of Ukraine has recently implemented a number of measures that constitute positive steps toward a solution to the external arrears problem. For example, gas import negotiations have become more transparent and reflect full specification of fees and prices for the delivery, transportation, and storage of gas. Moreover, the Ukrainian government announced in late 1995 that it will neither guarantee gas import payments nor bail out industrial firms that run up arrears to external gas suppliers. The authorities have further authorized a number of wholesalers to procure gas directly from foreign companies, hence partly removing the government from gas import operations. The recent cessation of external arrears accumulation can, in part, be explained by the above measures.

The paper also stresses the need for reinforcing the “no guarantees” policy; the benefits of such a policy will be reaped only if it is effectively and credibly implemented in practice. Otherwise, the IMF study warns, domestic gas users will be tempted to treat the new stance as a hollow threat.

Domestic Arrears. The rise in the stock of domestic arrears amounted to approximately 8 percent of GDP during the first half of 1995 from about 4 percent during 1994. While the pace of arrears accumulation slowed in the second half of 1995, it rose again in early 1996.

Nonpayment by end users is the main cause of domestic arrears. This can be explained by the following factors:

  • Prices for cooking gas, heat, and electricity have risen several times faster than the average wage, thus constraining the ability of some households to pay their energy bills. The authorities have recently significantly increased energy prices, thus reducing open-ended subsidies, while strengthening the social safety net.

  • The double shock of a dramatic rise in the cost of inputs and the imposition of new social expenditures on domestic enterprises has made it difficult for some Ukrainian firms to pay their gas import bills. And the absence of hard budget constraints has enabled many of these firms to postpone adjustment. The study accordingly suggests that the Ukrainian government needs to support a major restructuring and privatization effort to alter the capital stock and product mix of these firms.

  • As stressed above, the all-pervasive role played by the government (including guaranteeing gas import payments, subsidizing gas usage, and intervening in decisions to cut off supplies to delinquent payers) has created a moral hazard problem, whereby domestic users ignore their bills on the well-founded assumption that—in the end—they will be bailed out by the authorities. The government accordingly needs to turn over the operation of Ukraine’s gas industry to private agents. As discussed below, the Ukrainian government has recently adopted a number of measures in this regard.

  • Weak collection efforts by energy companies are compounded by problems of energy theft and underreporting. The recent decision to confine UGP’s bill collecting activities to larger users—subcontractors will be given responsibility for dealing with small firms—is a step in the right direction.

The government’s gas subsidy policy has contributed further to the arrears problem. Price subsidies to households are provided through local governments to gas and heat suppliers. Local governments do not pay the subsidies, which results in suppliers not being able to pay their own gas bills to importers. Since this is frequently not the households’ fault, gas and heat providers are reluctant to interrupt supplies. Actions by the state government against delinquent local governments, while possible, are often constrained by legal considerations.

Despite large subsidies, budgetary organizations (such as schools, hospitals, and universities) are major accumulators of gas and utility arrears; this is often the result of the subsidies being used for purposes other than to cover operating costs. To rationalize these subsidies, the IMF paper calls for a stronger public expenditure review program and for the introduction of user fees.

The paper stresses that two conditions are necessary for a lasting solution to the domestic arrears problem. The Ukrainian government has already implemented a number of measures that constitute steps in the right direction:

  • The economic cost of energy consumption needs to be made transparent through such actions as liberalizing energy prices, terminating open-ended subsidies, and moving utility tariffs to their long-term marginal cost levels. Significant rises in administered energy prices have been implemented, and further increases are expected in early July 1996.

  • Users must be prepared to shoulder the cost of energy consumption. This can be achieved by the imposition of financial discipline on end users. Cut-off of gas supplies to delinquent consumers has recently accelerated. In addition, the government has announced its determination not to interfere in the commercial relations between gas distributors and their customers. To assist those customers who are verifiably unable to pay higher energy bills, the IMF study recommends a combination of targeted social protection and an accelerated program of enterprise restructuring and privatization. Measures have recently been adopted to protect low-income families by providing targeted housing subsidies.

Ukraine: Domestic and External Gas Arrears

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For domestic arrears, data as of November 16.

For 1995, data reflect debt restructuring deal with Russia.

For 1993, the flow is for the complete year; for 1994, the flow is for half-year, for 1995, the flow is for each quarter.

Data: Ukrainian authorities

Further Steps

The lack of financial discipline in the energy sector is endemic to most economies in the former Soviet Union. This has significantly complicated these countries’ reform efforts and hindered the resumption of growth and stability. Gas arrears have been especially important in Ukraine where significant domestic payment arrears continued through February 1996. The Ukrainian government announced a reform program earlier this year that endeavors to address some of the underlying problems. Partly as a result, no new external government arrears have been accumulated since late 1995.

To move the process forward, a number of additional, longer-term steps will be necessary, the study concludes. These include a restructured gas sector divided into separate trading, transmission, and distribution entities; strengthened billing and collection departments within utility companies; the liberalization of gas prices to reflect long-term marginal cost levels; and the introduction of user fees for services offered by schools, hospitals, and other public institutions.

Ukraine’s Gas Arrears: Issues and Recommendations, by Amer Bisat, is No. 96/3 in the IMF’s Papers on Policy Analysis and Assessment (PPAA) series. Copies are available for $7.00 from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax (202) 623-7201; Internet:

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan • Sharon Metzger

Assistant Editor Editorial Assistant

Lijun Li

Staff Assistant

Philip Torsani • In-Ok Yoon

Art Editor Graphic Artist

The IMF Survey (ISSN 0047-083X) is published by the International Monetary Fund 23 times a year, in addition to an annual Supplement on the IMF, an annual Index, and other occasional supplements. Editions are also published in French and Spanish. Opinions and materials in the IMF Survey, including any legal aspects, do not necessarily reflect the official views of the IMF. Address editorial correspondence to Current Publications Division, Room IS9-1300, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-8585. The IMF Survey is mailed by first class mail in Canada, Mexico, and the United States, and by airspeed elsewhere. Private firms and individuals are charged an annual rate of US$79.00. Apply for subscriptions to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430. Cable: Interfund. Fax: (202) 623-7201. Internet:

IMF Survey: Volume 25 1996
Author: International Monetary Fund. External Relations Dept.