Measuring Laundered Money

Money laundering is, by definition, a concealed activity. The “dirty” money that is cycled through the international capital “laundromats” is generated by criminal activities that take place far from the eyes of the authorities. These activities, which are particularly important in a relatively small number of countries where crime is organized or corruption is widespread, include, in particular, the production and distribution of illegal drugs, as well as theft and embezzlement, insider trading, traffic in nuclear materials, usury, and prostitution. Although it is impossible to measure directly the size of the net financial gains that accrue annually to those who engage in these activities worldwide, Tanzi and Quirk offer a “guesstimate” of up to $500 billion, or 2 percent of global GDP. Moreover, the value of the total stock of laundered money is probably much larger than the yearly figure—probably larger than the GDP of many countries. According to Quirk, there is empirical evidence of large-scale money laundering throughout the group of industrial countries in direct proportion to Interpol data for overall criminal activity in those countries.

The concentration of vast sums of money in laundering operations has generated progressively more sophisticated attempts to launder the assets. Laundering transactions now involve a broad range of financial instruments, including derivatives. And the intermediaries have increasingly included such traditional financial institutions as banks and near-banks, brokers and dealers in securities, and foreign exchange dealers, as well as unconventional and parallel financial markets.

The increasing technical sophistication of the globalized capital market, meanwhile, has helped to grease the wheels of the money laundering machinery. The much larger volume of legitimate capital flowing relatively freely through the world’s markets has allowed money of questionable origin to spill unobtrusively into this huge money stream. It is thus often impossible to distinguish between capital movements induced by differences or changes in economic policies and capital movements that reflect attempts to launder money.

Macroeconomic Links to Money Laundering

There is currently no theoretical literature on the macroeconomic effects of money laundering. Nonetheless, indirect macro-based empirical research and related studies of crime and the underground economy, coupled with the pervasive role of money laundering in illegal activity, suggest that money laundering may be sufficiently widespread to exert an independent impact on the macroeconomy. Quirk cites empirical evidence, for example, that money laundering has negatively affected growth in industrial countries. The common theme of the available research, he says, is that if crime, underground activity, and the associated money laundering occur on a sufficiently large scale, policymakers must take them into account.

Money launderers generally do not look for the highest rate of return on the money they launder, Tanzi explains, but for the place or investment that most easily allows the recycling of their money—even if this requires accepting a lower rate of return. These movements may well be in directions opposite to those that would be expected on the basis of economic fundamentals. Money may therefore move from countries with good economic policies and activities with higher rates of return to countries with poorer policies and activities with lower rates of return. Thus, because of money laundering the world’s capital tends to be invested less optimally than in the absence of such activities. As a consequence of such counterintuitive capital movements, policymakers may be confused about the policies to be pursued and may respond inappropriately. For example, a shift in apparent money demand—owing to money laundering that is nowhere reflected in the data—could have consequences for interest and exchange rate volatility.

At the national level, therefore, large financial flows related to money laundering could influence variables such as exchange rates and interest rates. On the international level, capital movements originating from laundering activities—especially when they are seen as temporary—could have destabilizing effects because of the integrated nature of global financial markets. Financial difficulties originating in one center can easily spread to others, thus transforming a national problem into a systemic one.

Tanzi and Quirk both emphasize that the development of efficient and stable capital markets requires that participants have full confidence in them. If markets were to be contaminated by money controlled by criminal elements, they would react more dramatically to rumors and false statistics, thus generating more instability.

The transparency and soundness of financial markets are key elements in the effective functioning of economies, and money laundering can threaten both. Criminally obtained money can corrupt financial market officials, and the damage can be long lasting, because the credibility of markets, though quickly lost, takes a long time to be rebuilt.

Implications for Macroeconomic Policy

The large scale of the money laundering problem, its significant effects on financial systems, and the potential impact on economic growth have prompted considerable discussion of the macroeconomic policy implications of anti-laundering effects. Attention has focused, in particular, on the resource cost and benefits of money laundering countermeasures. Discussion at the international level has addressed the implications of these measures for exchange control liberalization, prudent supervision of financial systems, anti-tax-evasion efforts, and legislation.

Exchange Controls. The liberalization of exchange controls has freed up capital flows, permitting more efficient use of the world’s savings; but deregulation has also made it easier for criminal elements to launder their proceeds. One of the recommendations of the Financial Action Task Force (FATF) for countering money laundering (see box, page 248) states, “The feasibility of measures to detect or measure cash at the border should be studied subject to strict safeguards to ensure proper use of information and without impeding in any way the freedom of capital movements.” According to Quirk, the accepted methods of monitoring for money laundering require information on—rather than control of—foreign exchange transactions. The form of information also differs. In countries where they remain in force, exchange controls require information about the economic function of the transaction, while monitoring for money laundering focuses on establishing the identity of individual transactors and the pattern of their transactions.

The main point of potential conflict between anti-laundering measures and exchange decontrol is the effect of the deregulation in vastly increasing the overall volume of international transactions, which provides more opportunity to disguise the sources of funds. However, the same may be said about the effect of deregulation on economic growth and the growth of financial markets in general; exchange controls, far from checking potentially destabilizing flows, have led to thriving parallel markets with close connections to the underground economy.

What this experience suggests, says Quirk, is not to set back the clock on economic and financial reforms, but to find ways and devote resources to implementing effective anti-money laundering measures ahead of the accelerating pace of financial market development.

Prudential Supervision. In a growing number of countries, banks have become subject to official monitoring and prudential regulation. Some tension arises between such regulation and economic efficiency, because banks must weigh their own internal objectives of profitability and survival against the costs of official intervention.

In the absence of a laundering law, it is not necessarily in the direct interest of financial institutions to adopt anti-laundering behavior, says Quirk. For this reason, both the FATF and the Basle Committee on Banking Supervision (representing 12 major industrial countries, under the aegis of the Bank for International Settlements) have issued statements aimed at preventing criminal use of their members’ banking systems for money laundering. The IMF has also been actively engaged in helping its developing and transition economy members establish effective financial market supervision.

Money laundering activities can corrupt parts of the financial system and undermine governance of central banks and supervisory authorities. Once a bank manager is corrupted, nonmarket behavior can spread into operating areas other than those directly related to the money laundering, which undermines the safety and soundness of the bank. Bank supervisors also can be corrupted or intimidated, reducing the effectiveness of supervision. There is thus a clear need for supervisors to support anti-laundering law-enforcement efforts, but this should not crowd out traditional bank supervision responsibilities.

Tax Evasion. Among the underlying forms of criminality, tax evasion is perhaps most closely related to macroeconomic management. In many countries, a government budget deficit is at the heart of economic difficulties, and correcting this deficit is typically the primary focus of an economic stabilization program. The IMF has therefore been involved closely in efforts to help its members undertaking such programs to improve their tax collection capability. There is no conflict between the macroeconomic purposes of monitoring for tax evasion and for money laundering, since both operations focus on identifying individuals and economic entities and their revenues.

Legislation. In recent years, many countries have revised their central banking, commercial banking, and foreign exchange laws. In many cases, however, they have not included specific provisions for money laundering. It may be more appropriate, Quirk suggests, for provisions requiring banks to report certain banking transactions for nonprudential purposes to be included in separate laws and regulations. Provisions for bank secrecy and treatment of offshore banking are aspects of banking legislation particularly relevant to money laundering.

International Policy Coordination

Although domestic money laundering can often be fought at the national level, an effective solution to the international money laundering problem is only possible at the international level, according to Tanzi. International money laundering is based on the exploitation, by sophisticated financial operators, of differences in financial and banking regulations across countries and jurisdictions. The more effective the controls introduced in some countries, the more attempts will be made to exploit the less stringent environment of other countries. The solution for eliminating the scope for international money laundering, therefore, must be found in a mechanism that reduces, if not eliminates, these differences among countries.

Many countries have made substantial progress in implementing the FATF’s 40 recommendations to control money laundering. But despite these advances, Tanzi says, significant drawbacks to the current arrangements remain. The guidelines of the FATF and other groups are only recommendations and have no force of law behind them. Moreover, as long as membership in the FATF is not comprehensive, free-riders will seek to benefit from other countries’ adoption of rules that discourage inflows of illegal capital. The incentives for some countries or territories to gain economic advantage by attracting criminal money through lax controls and regulations are great. So far, there are no mechanisms to penalize them for the costs they impose on others. As long as these possibilities persist, international money laundering will remain a problem.

One solution, suggests Tanzi, is for the international community to establish a set of rules that form the basis for full participation by any country in the international financial market. This market should become an exclusive club with benefits and obligations for those wishing to belong. An international convention would establish minimum standards of statistical, banking, prudential, and financial rules that would be binding on all countries. These rules would drastically reduce the differences in domestic regulations that encourage and, to some extent, make possible international money laundering. The support of the international organizations would need to be enlisted to establish these minimum standards and, subsequently, to monitor and enforce these rules. Punitive measures would also have to be introduced, Tanzi adds, to induce all countries to play by the same rules.

The IMF and Money Laundering

International money laundering is an obstacle to the IMF’s task of maintaining an effectively operating international monetary system. The containment of money laundering activities represents an element of good economic governance. For these reasons, the IMF will continue to promote vigorously the containment of money laundering activities within the context of its broader responsibilities and its resource constraints. As noted in Quirk’s statement at a recent FATF meeting, the IMF intends to examine closely the implications of money laundering, emphasizing the following areas:

• in countries where an analysis of money laundering is particularly important for understanding the behavior of the macroeconomy (for example, in countries where drugs or other illegal exports are known to be large or where weakness in the fiscal regime encourages money laundering);

• in the context of international capital market developments; and

• in the design of IMF-supported economic programs and IMF technical assistance, particularly when money laundering appears to be affecting macroeconomic performance.

Objectives of IMF-Supported Adjustment

Algeria’s IMF-supported program has four major objectives:

• a high rate of economic growth to absorb the increase in the labor force and gradually reduce unemployment;

• a rapid convergence of inflation toward industrial country norms;

• a mitigation of the transitional impact of structural adjustment on the most vulnerable segments of the population; and

• a restoration of balance of payments viability while ensuring adequate foreign exchange reserves.

In pursuing these goals, Algeria has followed a two-pronged strategy predicated upon transforming the Algerian economy into a more diversified private-sector-led market economy fully integrated with the rest of the world, and improving substantially macroeconomic management to reduce internal and external imbalances.

Advances on the Structural Front

Algeria has made substantial progress in improving the efficiency of resource allocation by realigning relative prices and substantially liberalizing the trade and payments system. Domestic prices have been almost entirely liberalized with the lifting of administrative controls on prices and profit margins and the adoption of a competition law to institutionalize free price setting for all products while introducing safeguards against abuses by monopolistic suppliers. The authorities have eliminated generalized subsidies for energy products and all foods—except for pasteurized milk, at least until the end of 1996. The prices of these products subsequently doubled in fiscal 1994/95 (April to March) and increased by 60 percent in fiscal 1995/96. To cushion the impact of the elimination of generalized subsidies on vulnerable social groups, the government overhauled the social safety net; this entailed replacing the previous system of low and poorly targeted income transfers with a self-targeted public works program.

Algeria: Selected Indicators

¹Projections

Data: Algerian authorities and IMF staff estimates

Algeria: Selected Indicators

		1992	1993	1994	1995	19961
		(annual percent change)
GDP at constant prices		1.6	-2.2	-1.1	4.3	4.2
	Hydrocarbon	1.1	-0.8	-2.5	3.5	6.3
	Nonhydrocarbon	1.8	-2.6	-0.7	4.5	3.6
Consumer prices
	Year-end basis	28.0	16.1	38.6	21.9	15.0
	Annual average	31.7	20.5	29.0	29.8	16.9
Terms of Trade		-13.3	-8.7	-8.7	-3.0	-5.1
		(percent of GDP)
Overall fiscal balance		-1.2	-8.7	-4.4	-1.4	0.3
Current account balance		2.8	1.6	-4.3	-5.6	-4.7
Liquidity ratio		48.1	49.2	45.8	38.6	36.3
		(million U.S. dollars)
Overall balance of payments		0.2	—	-4.3	-6.2	-3.8
Foreign exchange reserves		1.5	1.5	2.6	2.1	2.7
	(in months of imports)	2.0	1.9	2.9	2.1	2.5
		(percent of exports of goods and nonfactor services)
Debt-service ratio		76.5	86.3	48.6	43.8	36.8

¹Projections

Data: Algerian authorities and IMF staff estimates

View Table

Algeria: Selected Indicators

		1992	1993	1994	1995	19961
		(annual percent change)
GDP at constant prices		1.6	-2.2	-1.1	4.3	4.2
	Hydrocarbon	1.1	-0.8	-2.5	3.5	6.3
	Nonhydrocarbon	1.8	-2.6	-0.7	4.5	3.6
Consumer prices
	Year-end basis	28.0	16.1	38.6	21.9	15.0
	Annual average	31.7	20.5	29.0	29.8	16.9
Terms of Trade		-13.3	-8.7	-8.7	-3.0	-5.1
		(percent of GDP)
Overall fiscal balance		-1.2	-8.7	-4.4	-1.4	0.3
Current account balance		2.8	1.6	-4.3	-5.6	-4.7
Liquidity ratio		48.1	49.2	45.8	38.6	36.3
		(million U.S. dollars)
Overall balance of payments		0.2	—	-4.3	-6.2	-3.8
Foreign exchange reserves		1.5	1.5	2.6	2.1	2.7
	(in months of imports)	2.0	1.9	2.9	2.1	2.5
		(percent of exports of goods and nonfactor services)
Debt-service ratio		76.5	86.3	48.6	43.8	36.8

¹Projections

Data: Algerian authorities and IMF staff estimates

At the onset of the adjustment program, the Algerian authorities dismantled administrative import restrictions introduced in 1992-93; these restrictions were initially replaced by a list of temporary import suspensions, which was subsequently eliminated. The government is reducing import tariffs over a three-year period to levels prevailing in neighboring countries. At the same time, it is phasing out restrictions on payments for imports of invisibles in order to establish current account convertibility for the Algerian dinar by the end of 1998. These reforms, taken together, have given Algeria the most liberal trade system in the region.

The realignment of prices has also entailed a 50 percent exchange rate adjustment to correct for overvaluation of the dinar in early 1994. This was followed by the gradual transformation of the exchange regime from a peg to a managed float with the introduction, in December 1995, of an interbank foreign exchange market allowing for greater flexibility in the face of adverse terms of trade shocks.

Algeria has also achieved significant progress in the last two years toward dismantling other, more intractable, rigidities of the previous administratively controlled system. In particular, the government has made efforts to reform public enterprises, critical both for strengthening market mechanisms and for the viability of the banking sector. The reforms have aimed at imposing a hard budget constraint on public enterprises and relieving them of their quasi-fiscal functions, in preparation for their eventual privatization. To this end, the government has significantly expanded the institutional framework favoring private sector activity and foreign participation; for example, a 1995 law opens up virtually all sectors of the Algerian economy to privatization. Since April 1996, a World Bank-sponsored privatization program has provided for the sale, liquidation, or offer for concession of more than 200 enterprises.

Beyond these privatization initiatives, the authorities established new institutions to promote private-sector development. These include new investment and commerce codes and a national agency to help potential (domestic and foreign) investors minimize bureaucratic constraints to their investment decisions. The government tightened budget constraints on public enterprises mainly by introducing stringent prudential regulations on commercial banks. These regulations limit risk concentration and establish clear rules for loan classification and provisioning in the context of capital adequacy ratios. They were made possible by the restructuring of state-owned commercial banks and their recapitalization, when appropriate.

Macroeconomic Stabilization Achieved

With respect to macroeconomic stabilization, Algeria’s reform program has relied primarily on strong fiscal adjustment supported by an incomes policy. The authorities complemented this with tight monetary policy and a move to positive real interest rates. The result was a narrowing in the central government budget deficit to 1.4 percent of GDP in 1995 from 8.7 percent in 1993, despite a fall in oil prices. This narrowing was facilitated by a broad consensus fashioned among labor, public enterprises, and the private sector. The deficit reduction reflected both government revenue increases—which were mainly due to depreciation of the exchange rate—and firm public expenditure restraint, especially with respect to wage expenditures, subsidies, net lending, and investment. In 1996, the overall fiscal balance is expected to shift into surplus. This would decrease the budget’s vulnerability to potential oil price declines and provide flexibility in addressing potential claims on public resources during the transition period.

The authorities’ fiscal retrenchment has underpinned a tight monetary policy. The result was a fall in the liquidity ratio (M2 over GDP) to 39 percent in 1995 from 49 percent in 1993, which eliminated the liquidity overhang that had accumulated during 1992-93. In addition, the authorities abolished ceilings on money market and commercial bank interest rates in the context of a shift toward using indirect instruments of liquidity control. To this end, the Bank of Algeria imposed a reserve requirement on commercial banks in October 1994 and introduced repurchase auctions for its refinancing in May 1995. The government also instituted, in late 1995, a formal auction system to sell negotiable treasury bonds on the money market.

Over the last two years, Algeria’s reform efforts have yielded impressive dividends in financial stabilization. Inflation, which had reached 39 percent in 1994, fell to an estimated 15 percent annual rate by late 1995—mostly because of the large depreciation of the Algerian dinar and adjustments of administered prices of subsidized commodities. The tightening of demand management policies, coupled with the depreciation of the dinar and the availability of large amounts of exceptional financing, have also contributed to a significantly strengthened external position. Algeria’s gross official foreign exchange reserves increased to $2.5 billion at the end of March 1996 from $1.5 billion at the end of 1993. Moreover, the 2 percent fall of real GDP in 1993 was cut to 1 percent in 1994 before shifting to an estimated 4.3 percent positive real growth in 1995-96. This improved growth performance—driven by a strong, export-led expansion in the hydrocarbon sector, a rebound of agriculture after two consecutive years of drought, and an expansion in the construction and services sectors—has permitted the first increase in per capita income in more than five years. Nevertheless, manufacturing output has continued to decline, partly because of import liberalization and partly because of structural problems related to the obsolescence of capital equipment and product lines of many public enterprises.

Looking Ahead

Notwithstanding these early successes, Algeria faces three major challenges:

• to complete macroeconomic stabilization by bringing inflation down to single digits in 1997;

• to promote higher, sustained growth and increase the labor intensity of production; and

• to sustain the restructuring of the public sector, despite substantial labor shedding, and eliminate the remaining impediments to market mechanisms.

These challenges constitute the main reform agenda for the final two years of Algeria’s IMF-supported adjustment program.

Alain Féler

IMF Middle Eastern Department

Stand-By, EFF, SAF, and ESAF Arrangements as of June 30

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

Stand-By, EFF, SAF, and ESAF Arrangements as of June 30

Member	Date of Arrangement	Expiration Date	Amount Approved	Undrawn Balance
			(million SDRs)
Stand-by arrangements			15,370.56	5,601.49
Argentina	April 12, 1996	January 11, 1998	720.00	642.00
Azerbaijan	November 17, 1995	November 16, 1996	58.50	36.86
Belarus	September 12, 1995	September 11, 1996	196.28	146.28
Cameroon	September 27, 1995	September 26, 1996	67.60	39.40
Costa Rica	November 29, 1995	February 28, 1997	52.00	52.00
Djibouti	April 15, 1996	June 14, 1997	4.60	1.73
El Salvador	July 21, 1995	September 20, 1996	37.68	37.68
Estonia	April 11, 1995	July 10, 1996	13.95	13.95
Hungary	March 15, 1996	February 14, 1998	264.18	264.18
Latvia	May 24, 1996	August 23, 1997	30.00	30.00
Lesotho	July 31, 1995	July 30, 1996	7.17	7.17
Mexico	February 1, 1996	August 15, 1996	12,070.20	3,312.18
Pakistan	December 13, 1995	March 31, 1997	401.85	214.32
Panama	November 29, 1995	March 31, 1997	84.30	55.30
Papua New Guinea	July 14, 1995	January 13, 1997	71.48	38.14
Romania	May 11, 1994	April 24, 1997	320.50	226.23
Tajikistan	May 8, 1996	December 7, 1996	15.00	—
Ukraine	May 10, 1996	February 9, 1997	598.20	397.20
Uruguay	March 1, 1996	March 31, 1997	100.00	100.00
Uzbekistan	December 18, 1995	March 17, 1997	124.70	118.50
Yemen	March 20, 1996	June 19, 1997	132.38	68.38
EFF arrangements			9,525.43	7,917.95
Algeria	May 22, 1995	May 21, 1993	1,169.28	675.28
Egypt	September 20, 1993	September 19, 1996	400.00	400.00
Gabon	November 8, 1995	November 7, 1998	110.30	66.18
Jordan	February 9, 1996	February 8, 1999	200.80	175.80
Lithuania	October 24, 1994	October 23, 1997	134.55	72.45
Moldova	May 20, 1996	May 19, 1999	135.00	123.75
Philippines	June 24, 1994	June 23, 1997	474.50	438.00
Russia	March 26, 1996	March 25, 1999	6,901.00	5,966.49
SAF arrangements			181.75	—
Zambia	December 6, 1995	December 5, 1996	181.75	—
ESAF arrangements			3,479.93	1,561.85
Albania	July 14, 1993	July 13, 1996	42.36	11.30
Armenia	February 14, 1996	February 13, 1999	101.25	84.38
Bolivia	December 19, 1994	December 18, 1997	100.96	50.48
Burkina Faso	June 14, 1996	June 13, 1999	39.78	33.15
Cambodia	May 6, 1994	May 5, 1997	84.00	42.00
Chad	September 1, 1995	August 31, 1996	49.56	33.04
Congo	June 28, 1996	June 27, 1999	69.48	69.48
Côte d’Ivoire	March 11, 1994	June 13, 1997	333.48	47.64
Georgia	February 28, 1996	February 27, 1999	166.50	138.75
Ghana	June 30, 1995	June 29, 1996	164.40	109.60
Guinea	November 6, 1991	December 19, 1996	57.90	11.58
Guinea-Bissau	January 18, 1995	January 17, 1998	9.45	5.78
Guyana	July 20, 1994	July 19, 1997	53.76	26.68
Honduras	July 24, 1992	July 24, 1997	47.46	13.56
Kenya	April 26, 1996	April 25, 1999	149.55	124.63
Kyrgyz Republic	July 20, 1994	July 19, 1997	88.15	48.38
Lao P.D.R.	June 4, 1993	May 7, 1997	35.19	5.87
Malawi	October 18, 1995	October 17, 1998	45.81	30.54
Mali	April 10, 1996	April 9, 1999	62.01	51.68
Mauritania	January 25, 1995	January 24, 1998	42.75	21.38
Mozambique	June 21, 1996	June 20, 1999	75.60	63.00
Nicaragua	June 24, 1994	June 23, 1997	120.12	100.10
Niger	June 12, 1996	June 11, 1999	57.96	48.30
Senegal	August 29, 1994	August 28, 1997	130.79	59.45
Sierra Leone	March 28, 1994	March 27, 1997	101.90	20.29
Togo	September 16, 1994	September 15, 1997	65.16	32.58
Uganda	September 6, 1994	September 5, 1997	120.51	46.87
Vietnam	November 11, 1994	November 10, 1997	362.40	181.20
Zambia	December 6, 1995	December 5, 1998	701.68	50.00
Total			28,557.67	15,281.29

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

View Table

Stand-By, EFF, SAF, and ESAF Arrangements as of June 30

Member	Date of Arrangement	Expiration Date	Amount Approved	Undrawn Balance
			(million SDRs)
Stand-by arrangements			15,370.56	5,601.49
Argentina	April 12, 1996	January 11, 1998	720.00	642.00
Azerbaijan	November 17, 1995	November 16, 1996	58.50	36.86
Belarus	September 12, 1995	September 11, 1996	196.28	146.28
Cameroon	September 27, 1995	September 26, 1996	67.60	39.40
Costa Rica	November 29, 1995	February 28, 1997	52.00	52.00
Djibouti	April 15, 1996	June 14, 1997	4.60	1.73
El Salvador	July 21, 1995	September 20, 1996	37.68	37.68
Estonia	April 11, 1995	July 10, 1996	13.95	13.95
Hungary	March 15, 1996	February 14, 1998	264.18	264.18
Latvia	May 24, 1996	August 23, 1997	30.00	30.00
Lesotho	July 31, 1995	July 30, 1996	7.17	7.17
Mexico	February 1, 1996	August 15, 1996	12,070.20	3,312.18
Pakistan	December 13, 1995	March 31, 1997	401.85	214.32
Panama	November 29, 1995	March 31, 1997	84.30	55.30
Papua New Guinea	July 14, 1995	January 13, 1997	71.48	38.14
Romania	May 11, 1994	April 24, 1997	320.50	226.23
Tajikistan	May 8, 1996	December 7, 1996	15.00	—
Ukraine	May 10, 1996	February 9, 1997	598.20	397.20
Uruguay	March 1, 1996	March 31, 1997	100.00	100.00
Uzbekistan	December 18, 1995	March 17, 1997	124.70	118.50
Yemen	March 20, 1996	June 19, 1997	132.38	68.38
EFF arrangements			9,525.43	7,917.95
Algeria	May 22, 1995	May 21, 1993	1,169.28	675.28
Egypt	September 20, 1993	September 19, 1996	400.00	400.00
Gabon	November 8, 1995	November 7, 1998	110.30	66.18
Jordan	February 9, 1996	February 8, 1999	200.80	175.80
Lithuania	October 24, 1994	October 23, 1997	134.55	72.45
Moldova	May 20, 1996	May 19, 1999	135.00	123.75
Philippines	June 24, 1994	June 23, 1997	474.50	438.00
Russia	March 26, 1996	March 25, 1999	6,901.00	5,966.49
SAF arrangements			181.75	—
Zambia	December 6, 1995	December 5, 1996	181.75	—
ESAF arrangements			3,479.93	1,561.85
Albania	July 14, 1993	July 13, 1996	42.36	11.30
Armenia	February 14, 1996	February 13, 1999	101.25	84.38
Bolivia	December 19, 1994	December 18, 1997	100.96	50.48
Burkina Faso	June 14, 1996	June 13, 1999	39.78	33.15
Cambodia	May 6, 1994	May 5, 1997	84.00	42.00
Chad	September 1, 1995	August 31, 1996	49.56	33.04
Congo	June 28, 1996	June 27, 1999	69.48	69.48
Côte d’Ivoire	March 11, 1994	June 13, 1997	333.48	47.64
Georgia	February 28, 1996	February 27, 1999	166.50	138.75
Ghana	June 30, 1995	June 29, 1996	164.40	109.60
Guinea	November 6, 1991	December 19, 1996	57.90	11.58
Guinea-Bissau	January 18, 1995	January 17, 1998	9.45	5.78
Guyana	July 20, 1994	July 19, 1997	53.76	26.68
Honduras	July 24, 1992	July 24, 1997	47.46	13.56
Kenya	April 26, 1996	April 25, 1999	149.55	124.63
Kyrgyz Republic	July 20, 1994	July 19, 1997	88.15	48.38
Lao P.D.R.	June 4, 1993	May 7, 1997	35.19	5.87
Malawi	October 18, 1995	October 17, 1998	45.81	30.54
Mali	April 10, 1996	April 9, 1999	62.01	51.68
Mauritania	January 25, 1995	January 24, 1998	42.75	21.38
Mozambique	June 21, 1996	June 20, 1999	75.60	63.00
Nicaragua	June 24, 1994	June 23, 1997	120.12	100.10
Niger	June 12, 1996	June 11, 1999	57.96	48.30
Senegal	August 29, 1994	August 28, 1997	130.79	59.45
Sierra Leone	March 28, 1994	March 27, 1997	101.90	20.29
Togo	September 16, 1994	September 15, 1997	65.16	32.58
Uganda	September 6, 1994	September 5, 1997	120.51	46.87
Vietnam	November 11, 1994	November 10, 1997	362.40	181.20
Zambia	December 6, 1995	December 5, 1998	701.68	50.00
Total			28,557.67	15,281.29

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

Evaluating Central Banking Reforms

Four years into the transition to market-based arrangements, disparities in the pace of central banking reforms and, to some extent, in the availability of skills to manage the requisite organizational and institutional changes, have led to considerable differences among countries in their institutional and policy-setting frameworks. In most countries, following the introduction of new laws, the central bank has de jure independence from political authorities in the pursuit of the primary objective of price stability. It has the authority to formulate and implement monetary policy and to implement foreign exchange policy—the exchange system frequently being decided by the government. Except for the currency boards of Lithuania and Estonia—and Latvia’s informal peg to the SDR—the central banks manage exchange rates flexibly, in some cases within large bands. Most countries have liberalized deposit and lending rates and rely mainly on indirect instruments, although the use of market-based instruments is limited.

In countries with IMF-supported adjustment programs, interest rate and exchange rate management is typically governed by a ceiling on net domestic assets of the central bank and a floor on net international reserves. These targets afford the authorities some scope for managing the path of reserve money and, therefore, of the exchange rate. In practice, there are no restrictions on current account transactions, and in one third of the countries, little or no restrictions on capital flows (except on inward flows). Many countries in the region have developed money, securities, and foreign exchange markets, but progress in terms of the volume and type of operation suffers from uncertainty about the enforceability of legal contracts.

Monetary management is exercised primarily through reserve requirements, refinance facilities, and intervention in the foreign exchange market—and, to a limited extent, through auctions of treasury bills and central bank paper. In most countries, central bank financing of the banking system is provided on market-related terms, mostly through credit auctions that are increasingly collateralized. Short-term Lombard facilities limited to collateral posted by the banks are being introduced to support the payment system. Some countries have introduced longer-term lender-of-last-resort facilities for banks under conservatorship. Direct central bank credit to the government, although decreasing, remains an important source of reserve money creation in some countries. Liquidity absorption is conducted mainly through a combination of foreign exchange sales, outright sale of treasury bills, deposit auctions, and increases in reserve requirements. In some countries, the cost of sterilizing capital inflows remains an issue. Fairly high and unremunerated reserves continue to be the norm. Public debt management is based on treasury-bill auctions, which are being developed in most countries; secondary market activity typically remains limited.

Foreign exchange operations, and the management of the exchange rate, are in most cases conducted through an interbank auction arrangement, although dealing outside the auctions is increasingly prevalent. After an initial sharp depreciation of their currencies, countries with strong adjustment programs and generally open exchange systems have experienced a relative stabilization of their exchange rate and a strengthening of their foreign reserve positions. Lack of coordination between foreign exchange operations and the management of banking system liquidity remains an issue to be addressed.

In the payment system, central banks provide most clearing and settlement services and have streamlined operations to meet user needs. Clearing and settlement cycles are still too long and unpredictable in more than half the countries. In others, reforms based on readily available solutions have helped stabilize these cycles, reducing the variability of float that initially interfered with monetary control. Most countries are well advanced in plans for a specialized large-value transfer system settling on a gross basis; the latter is essential for developing financial markets and reducing risks of contagion from bank insolvencies.

Many countries still fall short of internationally accepted accounting standards. New policies are needed to support central bank market operations, particularly concerning accrual versus cash basis, valuation of foreign exchange operations, market-based valuation of assets, recognition and distribution of central bank profits and losses, and development of internal audit.

Progress in financial stabilization and financial market development—and the concomitant increases in interest rate flexibility—have often been undermined by banking sector weaknesses. The ratio of nonperforming loans to total loans in the region varies from 14 to 63 percent; nonperforming loans are often concentrated in the five largest banks, which suggests that the problem may be systemic. At the same time, banking sector intermediation ratios have become extremely low, which, other things being equal, tends to contain the financial impact of bank restructuring.

Progress in stabilization and financial market development is often undermined by bank sector weaknesses.

The central bank’s role in supervising the banking system and in remedial action—while usually broadly established in new legal frameworks—remains severely constrained in many countries in the region, including by the courts. This influences the pace of restructuring needed to restore banking soundness and remove constraints on interest rate flexibility. As a result, the potential consequences of unsound banks for policy effectiveness and the risks of policy reversals have become a source of concern.

The May meeting provided the occasion for an exchange of views on bank restructuring strategies. Participants agreed that the causes of systemic bank insolvencies had typically been a combination of poor lending decisions, inadequate licensing and supervision procedures, and structural changes in the public enterprise sector. Participants cited the various approaches to financial restructuring of banks but agreed that good governance of commercial banks was critical. In most countries, a systematic approach to bank restructuring has not yet emerged. Typically, restructuring measures consist mainly of license withdrawals and liquidation procedures directed at small banks. Most countries appear reluctant to close or rehabilitate large banks, although several have implemented short-term stop-gap measures. These include curbs on the activities of problem banks and limits on ad hoc injections of funds by the authorities.

The Way Ahead

Participants at the May meeting recognized the dramatic advances made by most central banks in the region in introducing market-based instruments of monetary and exchange management, and in fostering money and exchange markets. Recent gains, they agreed, need to be consolidated through more specialized reforms, such as microstructures for secondary markets in government securities, closer coordination between the money and foreign exchange desks, dedicated central bank systems for large-value payments, and specialized accounting modules. Most countries have new work ahead of them in restructuring their banking systems.

Gabriel Sensenbrenner

IMF Monetary and Exchange Affairs Dept.

Peru: EFF

The IMF approved a three-year credit for Peru in an amount equivalent to SDR 248.3 million (about $358 million) under the extended Fund facility (EFF) to support the government’s medium-term economic and reform program during the period 1996-98. An amount equivalent to SDR 148.97 million (about $215 million) will be available for disbursement during the first year of the credit.

The government that took office in 1990 started to address the crisis facing the Peruvian economy by carrying out a program of macroeconomic adjustment and structural reform aimed at sharply reducing inflation and creating the conditions for sustained economic growth and a progressive return to external viability. The program was initially supported by an IMF-monitored rights accumulation program (RAP) through the end of 1992. Building on the improvement in economic performance under the RAP, the government developed a three-year economic program that was supported by an extended arrangement from the IMF in an amount equivalent to SDR 1.0 billion (about $1.5 billion), which expired on March 17, 1996. After an initial disbursement of SDR 642.7 million (about $926 million), Peru opted not to make any further drawings. All quantitative performance criteria through December 1995 were met with margins. Performance under this program was impressive: during 1993-95, output growth averaged 8.5 percent a year, inflation was reduced to 10 percent during 1995, and the net international reserves position of the Central Reserve Bank improved significantly. This performance can be traced to a large extent to prudent fiscal and monetary policies, a comprehensive program of structural reforms, and the continued support of the international financial community. During 1995, however, the external current account deficit widened to 7.2 percent of GDP from 5.2 percent in 1994, reflecting a strong increase in domestic expenditure, particularly in private investment. The decline in inflation subsided in the second half of 1995, and, in the first five months of this year, inflation edged up—reflecting in part a shortfall in the supply of food products—while output growth came to a halt.

Peru: Selected Economic Indicators

Data: Peruvian authorities and IMF staff estimates

¹Program.

Peru: Selected Economic Indicators

	1934	1995	19961	19971	19981
	(percent change)
Real GDP	12.8	6.9	3.0–4.5	5.5	6.0
Consumer prices (end of period)	15.4	10.2	9.5–11.5	6.0	4.0
	(percent of GDP)
Combined public sector balance	-2.3	-2.6	-1.3	-0.7	-0.2
External current account balance	-5.2	-7.2	-5.7	-5.3	-4.8

Data: Peruvian authorities and IMF staff estimates

¹Program.

View Table

Peru: Selected Economic Indicators

	1934	1995	19961	19971	19981
	(percent change)
Real GDP	12.8	6.9	3.0–4.5	5.5	6.0
Consumer prices (end of period)	15.4	10.2	9.5–11.5	6.0	4.0
	(percent of GDP)
Combined public sector balance	-2.3	-2.6	-1.3	-0.7	-0.2
External current account balance	-5.2	-7.2	-5.7	-5.3	-4.8

Data: Peruvian authorities and IMF staff estimates

¹Program.

Medium-Term Strategy and 1996 Program

The government’s medium-term strategy aims at consolidating gains made during 1993–95 by lowering inflation to industrial country levels by the end of the program period, creating the conditions for sustained real output growth, which will rise to at least 6 percent by 1998 from 3-4.5 percent in 1996, and by consolidating progress toward external viability by reducing the external current account deficit to below 5 percent of GDP in 1998 from 7.2 percent in 1995.

To achieve these goals, the program relies strongly on an improvement in the overall position of the combined public sector, which is projected to move to near balance in 1998 from a deficit of 2.6 percent of GDP in 1995. Achievement of these objectives will require a further strengthening of tax administration and the continued implementation of tight expenditure policies. The authorities will continue to pursue a disciplined monetary policy.

The program for 1996 aims at containing inflation to 9.5–11.5 percent and at narrowing the external current account deficit to 5.7 percent of GDP. Real GDP growth is assumed to slow to 3–4.5 percent in 1996. The overall deficit of the combined public sector will be halved to 1.3 percent of GDP, and monetary policy will be consistent with the attainment of the program’s inflation and balance of payments objectives.

Structural Reforms

The government will deepen its structural reform efforts. Significant progress has been made in the privatization of public enterprises, and this process is expected to be stepped up, for completion by the end of 1998. During 1996-98, the government will complete the reform of the pension system that was undertaken in recent years and, as part of its program of modernization of the state, intends to decentralize its wage policy and to introduce a system of remuneration that links wage increases to performance and productivity. The Superintendency of Banks and Insurance will continue to improve banks’ capitalization and provisioning. To promote private investment, the authorities are improving the regulatory framework, and, in the trade area, they intend to maintain their current policy of trade liberalization.

Addressing Social Needs

The government will continue its efforts to reduce extreme poverty and will increase expenditure in education and health and strengthen the safety net that protects poorer segments of the population. During the program period, the government will redirect public spending in primary health care and other basic services toward the poorest areas of the country.

The Challenge Ahead

Peru’s return to external viability by the end of the program period will require the steadfast implementation of agreed policies and the continued support of the international community. Despite a projected improvement in its external position, Peru will need to continue to rely on exceptional financing. Covering the financing gaps will require external debt rescheduling from Paris Club and other bilateral creditors.

Peru joinec the IMF on December 31, 1945. Its quota is SDR 466.1 million (about $672 million) Its outstanding use of IMF credit currently totals the equivalent of SDR 643 million (about $926 million).

Press Release No. 96/37, July 1

Venezuela: Stand-By

The IMF approved a 12-month stand-by credit for Venezuela equivalent to SDR 975.7 million (about $1.4 billion) to support the government’s 1996-97 economic program.

Following a decade of sluggish economic growth, the Venezuelan economy expanded vigorously in the early 1990s as a result of the confidence generated by the policy reforms supported by the 1989 extended Fund facility from the IMF and the rise in world oil prices associated with the Middle East War of 1990. Subsequently, however, world oil prices fell sharply, and public finances and the balance of payments weakened. In 1994, these difficulties were exacerbated by a major banking crisis; exchange and price controls were introduced mid-year; economic activity fell by 3 percent; and 12-month inflation reached 70 percent by the end of December.

In 1995, exchange controls were relaxed and a parallel market for foreign exchange was legalized. This allowed imbalances to spill over into the balance of payments. Banking difficulties continued, public finances remained weak, and the 12-month inflation rate reached 57 percent by the end of December. In mid-December, the bolivar was devalued in the official market, but imbalances persisted. Although real GDP rose by 2 percent in 1995, the non-oil economy grew very little, and unemployment rose to 10.5 percent of the labor force.

The 1996-97 Program

To redress this situation and set the stage for sustained growth and a reduction in poverty, in April 1996 the Venezuelan authorities began implementing an ambitious and front-loaded economic program aimed at a rapid and substantial reduction in inflation, restoring confidence, and improving resource allocation. Following an effective communications strategy to achieve a social and political consensus, the authorities increased domestic fuel prices, liberalized interest rates, unified the exchange system, abolished controls on current and capital transactions, eliminated price controls (except on medicines), and started strengthening the social safety net.

The economic program, which the standby credit supports, seeks a reversal of the decline in real GDP during the fourth quarter of 1996 and real GDP growth of 4 percent in 1997; a reduction in the monthly rate of inflation to 1.5–2 percent in the second half of 1996, 1 percent in the first half of 1997, and to international levels thereafter; and an increase in the external current account surplus from 2.4 percent of GDP in 1995 to 4.3 percent in 1996, followed by a halving of the surplus in 1997. Net international reserves are targeted to increase by $1.6 billion in 1996, to the equivalent of 5.6 months of imports, and to rise further in 1997.

To these ends, the centerpiece of the adjustment effort is a major reduction in the underlying public sector deficit (excluding net assistance to banks) to less than 1.5 percent of GDP in 1996 from 4.3 percent in 1995. In 1997, the underlying fiscal position is projected to be in balance. The fiscal effort will rely on expenditure restraint and increasing tax revenues, as well as on improving the efficiency and equity of the tax system. Revenue measures include an increase in the rate of the general sales and luxury tax to 16.5 percent from 12.5 percent and a considerable increase in domestic fuel prices.

Fiscal consolidation will facilitate the implementation of credit policies consistent with the inflation and net international reserves objectives of the program. Both the net domestic assets of the central bank and its credit to the public sector are projected to decline during 1996; this will permit a reduction in the stock of central bank securities and losses relative to GDP.

Exchange rate policy will be aimed at lowering inflationary expectations while providing a reasonable degree of exchange rate flexibility. For this purpose, in early July, in accordance with the economic program, the central bank established bands around a central rate that will be adjusted in line with the preannounced inflation target for the fourth quarter of 1996.

Venezuela: Selected Economic Indicators

¹Estimates.

²Program.

³Projected.

Data: Venezuelan authorities and IMF staff estimates

Venezuela: Selected Economic Indicators

	1993	19941	19951	19962	19973
	(percent change)
Real GDP growth	0.3	-2.8	2.2	-1.1	4.0
Consumer price index (end of period)	45.9	70.8	56.6	86.7	8.6
	(percent of GDP)
Public sector underlying balance	-1.4	-1.2	-4.3	-1.2	0.2
External current account balance	-3.7	4.9	2.4	4.3	2.1
	(months of Imports)
Reserves	6.2	6.9	4.0	5.6	5.8

¹Estimates.

²Program.

³Projected.

Data: Venezuelan authorities and IMF staff estimates

View Table

Venezuela: Selected Economic Indicators

	1993	19941	19951	19962	19973
	(percent change)
Real GDP growth	0.3	-2.8	2.2	-1.1	4.0
Consumer price index (end of period)	45.9	70.8	56.6	86.7	8.6
	(percent of GDP)
Public sector underlying balance	-1.4	-1.2	-4.3	-1.2	0.2
External current account balance	-3.7	4.9	2.4	4.3	2.1
	(months of Imports)
Reserves	6.2	6.9	4.0	5.6	5.8

¹Estimates.

²Program.

³Projected.

Data: Venezuelan authorities and IMF staff estimates

Structural Reforms

The program envisages major structural reforms to achieve sustained economic growth. The groundwork for a major reform of the public sector will be prepared and the privatization effort will be resumed. The authorities consider it essential to continue strengthening the banking system to restore confidence, improve the efficiency of financial intermediation, and maintain macroeconomic stability. Therefore, the program gives high priority to strengthening bank supervision and the capital base of banks. A contingency fund is being established to facilitate bank mergers and acquisitions and possibly loan purchasing or rescheduling operations. The system of severance payments will be reformed to promote employment. In addition to the reprivatization of nationalized banks, the privatization effort will include the sale of the remaining government shares in the telecommunication company (CANTV), and the sale of state-owned aluminum, steel, and electricity companies.

Social Issues

The program seeks to protect the living standards of the most vulnerable social groups. Spending on social safety net programs will be increased by 1 percent of GDP in 1996. A transportation subsidy was introduced to avoid an immediate increase in public transportation fares resulting from the rise in gasoline prices, and the social safety net will be improved further with the assistance of the World Bank and the Inter-American Development Bank.

The Challenge Ahead

The success of Venezuela’s ambitious economic program will require strict adherence to policy implementation and the continued decisiveness and strong commitment of the Venezuelan authorities, as well as the strengthening of institutional capacity to respond rapidly and effectively to changing developments.

Venezuela joined the IMF on December 30, 1946. Its quota is SDR 1.9 billion (about $2.8 billion), and its outstanding use of IMF credit currently totals SDR 1.3 billion (about $1.9 billion).

Press Release No. 96/38, July 12, 1996

Kazakstan: EFF

The IMF approved a three-year credit for Kazakstan equivalent to SDR 309.4 million (about $446 million) under the extended Fund facility (EFF) to support the government’s medium-term economic reform program for 1996-98. Of the total approved, credits equivalent to SDR 37.2 million (about $54 million) will be available to Kazakstan in 1996.

The year 1995 was the most successful year for the Kazak economy since independence. Under the authorities’ program, supported by a stand-by credit from the IMF, inflation was reduced significantly, and the balance of payments performed consistently better than expected. Progress was made in privatization and public enterprise restructuring, and the decline in output began to level off. Tight financial policies laid the ground for renewed domestic and external confidence. Fiscal policy bore the brunt of the adjustment effort, as the overall deficit was reduced to 2.3 percent of GDP. Revenue performance remained weak, however, which squeezed expenditures and led to the accumulation of budgetary arrears.

Medium-Term Strategy and 1996 Program

The program seeks to consolidate and deepen the progress made to date, while simultaneously moving ahead with structural reforms that have lagged behind. Key macroeconomic targets over the medium term include reducing annual inflation from 60 percent in 1995 to 26 percent in 1996, and to 10 percent or less by 1998. The decline in output is expected to stabilize in 1996 before rebounding to at least 2 percent of positive growth a year in 1997–98. The external current account deficit is projected to stay in the range of 4–5 percent of GDP and is expected to be covered without recourse to exceptional financing after 1997. Gross international reserves are targeted to rise to the equivalent of about 4 months of imports of goods and nonfactor services during 1996-98 from 3.2 months in 1995.

Continued fiscal restraint is a key component of the program, supported in 1996 by a sizable revenue package designed to yield approximately 1.1 percent of GDP. Revenue measures for the program period include increases in selected indirect taxes, further reductions in tax exemptions and benefits, increased contribution from the natural resources sector, and improvements in tax administration. Expenditures are expected to increase somewhat as a share of GDP, due to additional outlays associated with the restructuring process.

Structural Reforms

The medium-term program provides for an acceleration of systemic reforms, focusing on completion of privatization programs and enterprise restructuring; reform of the financial sector, by enhancing the financial position of banks, improving banking supervision, and restructuring part of the banking system; overhaul of civil service and state structures; and sector-specific reform measures aimed at the health, education, energy, transportation, and agricultural sectors.

Addressing Social Needs

Under the program, the social security system and the social safety net will be reformed with the dual objective of increasing cost-effectiveness and enhancing the targeting of benefits. Important measures include developing a minimum subsistence level to serve as an anchor for social benefits and streamlining the unemployment benefits system. In addition, the pension system will be modified to improve its financial position while introducing voluntary, privately managed pension schemes.

The Challenge Ahead

Full implementation of Kazakstan’s ambitious and complex program will place a significant burden on the authorities’ existing administrative capacity. Well-designed and carefully targeted technical assistance from the IMF and other multilateral institutions and bilateral donors will be essential for the success of the program.

Kazakstan joined the IMF on July 15, 1992; its quota is SDR 247.5 million (about $357 million); and its outstanding use of IMF credit currently totals SDR 384 million (about $553 million).

Press Release No. 96/39, July 17

Kazakstan: Selected Economic Indicators

¹Program projections.

Data Kazak authorities and IMF staff estimates

Kazakstan: Selected Economic Indicators

	1994	1995	19961	19971	19981
	(percent change)
Real GDP	-25.0	-6.9	0.4	0.9	2.8
Consumer prices (end of period)	1,160.0	60.4	25.9	15.0	9.0
	(percent of GDP)
General government balance	-6.8	-2.3	-2.8	-2.4	-2.4
External current account balance	-8.0	-4.2	-4.4	-4.8	-4.2
Gross reserves (in months of imports)	1.5	3.2	3.6	4.1	4.4

¹Program projections.

Data Kazak authorities and IMF staff estimates

View Table

Kazakstan: Selected Economic Indicators

	1994	1995	19961	19971	19981
	(percent change)
Real GDP	-25.0	-6.9	0.4	0.9	2.8
Consumer prices (end of period)	1,160.0	60.4	25.9	15.0	9.0
	(percent of GDP)
General government balance	-6.8	-2.3	-2.8	-2.4	-2.4
External current account balance	-8.0	-4.2	-4.4	-4.8	-4.2
Gross reserves (in months of imports)	1.5	3.2	3.6	4.1	4.4

¹Program projections.

Data Kazak authorities and IMF staff estimates

Bulgaria: Selected Economic Indicators

¹Program.

Data: Bulgarian authorities and IMF stall estimates

Bulgaria: Selected Economic Indicators

	1993	1994	1995	19961	19971
	(percent change)
Real GDP growth	-1.5	1.8	2.6	—	2.5
Consumer price index (year-on-year)	63.8	121.9	32.9	105.0	20.0
	(percent of GDP)
Overall fiscal balance	-10.9	-5.8	-5.7	-4.7	-2.6
External current account balance	-12.8	-2.1	2.2	3.1	2.0
	(months of imports)
Gross official reserves	2.0	3.0	3.1	2.8	3.5

¹Program.

Data: Bulgarian authorities and IMF stall estimates

View Table

Bulgaria: Selected Economic Indicators

	1993	1994	1995	19961	19971
	(percent change)
Real GDP growth	-1.5	1.8	2.6	—	2.5
Consumer price index (year-on-year)	63.8	121.9	32.9	105.0	20.0
	(percent of GDP)
Overall fiscal balance	-10.9	-5.8	-5.7	-4.7	-2.6
External current account balance	-12.8	-2.1	2.2	3.1	2.0
	(months of imports)
Gross official reserves	2.0	3.0	3.1	2.8	3.5

¹Program.

Data: Bulgarian authorities and IMF stall estimates

Bulgaria: Stand-By

The IMF approved a 20-month stand-by credit for Bulgaria equivalent to SDR 400 million (about $582 million) in support of the government’s 1996–97 economic and financial program. In view of the substantial policy actions already implemented by the Bulgarian authorities and the country’s immediate need to replenish reserves, the IMF will disburse 40 percent of the total amount within the next two months.

Bulgaria achieved remarkable macroeconomic stabilization in 1995 as inflation fell sharply, real GDP growth edged up, and the external current account moved into a substantial surplus. But delays in addressing financial indiscipline in the public enterprise and banking sectors undermined these results and contributed to the destabilization of the economy. Overconfidence led to easing of financial policies in the second half of 1995 and structural reforms stalled. Illiquid banks facing localized runs—often reflecting underlying insolvency—increasingly turned to the central bank for refinancing, which became a major source of excess liquidity. Failure to prevent this liquidity from spilling into the foreign exchange market, while attempting to maintain a stable exchange rate through heavy official intervention, led to a severe fall in official reserves. This raised concerns about the banks’ and the country’s ability to meet their foreign currency liabilities, triggering the current banking and exchange crisis, marked by a sharp decline in the value of the lev.

The 1996-97 Program

Bulgaria’s economic program, supported by the stand-by credit, aims at restoring macro-economic stability, fending off the present financial crisis, and moving forcefully with long-delayed structural reforms. The authorities have resolved to tackle the underlying problems and have begun to implement a radical reform and stabilization program that aims at stabilizing the economy, reducing the role of the public sector, and setting the stage for sustained economic growth.

The main macroeconomic objectives of the program are to achieve real GDP growth of 2.5 percent in 1997, after an expected stagnation in 1996; sharply reduce inflation from 20 percent a month to 2.5 percent a month by the end of 1996, and to 1.5 percent a month by the end of 1997; achieve an external current account surplus of 3.1 percent of GDP in 1996 and 2 percent in 1997; and increase official international reserves by 50 percent by the end of 1996 to a level that will cover over 2.8 months of imports of goods and nonfactor services, and to 3.5 months in 1997.

To achieve these goals, the program is centered on a substantial up-front fiscal adjustment, supported by a tight monetary policy, and an incomes policy designed to dampen inflationary pressures. The authorities have adopted measures to raise at least the equivalent of 2 percent of GDP in additional revenues in the second half of 1996 and to increase revenues further by 1 percentage point of GDP in 1997. The measures include an increase in the value-added tax from 18 percent to 22 percent, an improvement in tax administration, a substantial increase in excise taxes on alcohol and tobacco, and a temporary 5 percent import surcharge on goods for final consumption. On the expenditure side, the authorities intend to keep noninterest expenditures, other than wages and social expenditures, as close as possible to the nominal allocations approved in the budget in order to achieve the equivalent of a 2 percent of GDP cut in the level of spending compared with 1995. The fiscal adjustment will be concentrated during the second half of 1996, when domestic bank borrowing needs of the budget are to be substantially reduced. Building on this adjustment, the fiscal deficit is targeted to decline from 4.7 percent of GDP in 1996 to 2.6 percent in 1997. The authorities stand ready to take additional measures, if needed, to safeguard the objectives of the program.

The exchange rate will be market-determined and intervention will be limited to what is needed to rebuild official reserves and to smooth short-term fluctuations. Together with the reduction in the fiscal deficit, tight monetary policy should help to achieve an early stabilization of financial and exchange markets and a correction of the recent overshooting of the exchange rate.

Monetary policy will be supported by a restrictive incomes policy. Wages in the budgetary sphere are capped by a nominal limit on the wage bill, while wages in state-owned enterprises are to be adjusted for only 70 percent of the excess of inflation above 20 percent during 1996, unless productivity developments permit a larger increase. This policy should help to preserve external competitiveness and strengthen the external position.

Structural Reforms

Comprehensive structural reforms—to be supported by financial assistance from the World Bank—are the cornerstone of the authorities’ strategy to prevent a recurrence of macroeconomic instability, reduce the role of the state, and lay the lasting foundations for a market economy and sustainable economic growth. While significant structural reforms were introduced in the early 1990s, the effort has stalled in recent years. As a result, banks continued to be ill supervised, the majority of industrial enterprises remained in the hands of the state, and utilities continued to provide subsidized inputs and services. Enterprise losses—in the past leading to quasi-fiscal deficits on the order of 4–5 percent of GDP—are expected to be cut by two thirds through liquidation and isolation of large loss-making enterprises and by privatization. Large administered price adjustments, led by a more than doubling of fuel and electricity prices over the past few weeks, have ended excessive subsidization and brought revenues in line with operating costs and the need to finance investments. Banks have been prohibited from lending to enterprises on the isolation list and to all borrowers with overdue payments of more than three months. A bank liquidation law has been adopted, giving the Bulgarian National Bank much needed powers to effectively supervise banks. The final impetus to a lasting resolution of problems of financial indiscipline in enterprises and banks will come from privatization. Cash privatization will be accelerated while the mass privatization program will be enhanced so that at least 25 percent of state-owned assets will have been transferred to private ownership by the end of 1996 and at least an additional 25 percent next year.

Selected IMF Rates

Selected IMF Rates

Week Beginning	SDR Interest Rate	Rate of Remuneration	Rate of Charge
July 15	3.97	3.97	4.34
July 22	3.96	3.96	4.33

View Table

Selected IMF Rates

Week Beginning	SDR Interest Rate	Rate of Remuneration	Rate of Charge
July 15	3.97	3.97	4.34
July 22	3.96	3.96	4.33

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.

Date: IMF Treasurer’s Department

Social Issues

The costs related to the retrenchment of workers of liquidated and isolated enterprises will be financed with assistance from the World Bank. As part of a medium-term strategy toward improving the system of social insurance and assistance and reducing its burden on the budget, the government will establish measures to better target benefits to the most needy. Such a scheme has already been adopted in the context of the recent administered price increases.

The Challenge Ahead

The Bulgarian authorities have embarked on a strong adjustment and reform program to help deal with the current crisis in financial markets. The stabilization package provides an appropriate response to the current circumstances. Its success will depend importantly on perseverance in implementing the structural reform program. The program is subject to a number of risks, but these risks have been lessened by the significant number of bold policy actions already implemented and the willingness of the authorities to strengthen policies as needed. The support of the international community is crucial to the success of the program.

Bulgaria joined the IMF on September 25, 1990. Its quota is SDR 464.9 million (about $676 million), and its outstanding use of IMF credit currently totals SDR 385 million (about $559 million)

Press Release No. 96/40, July 19

Africa’s Recent Progress

Let me tell you why I believe that success is possible. The situation in Africa has improved. It is clear that an economic recovery began in 1994. Real GDP growth in sub-Saharan Africa is expected to average roughly 5 percent in 1996-97, compared with only 1 percent in 1991-93. Real per capita GDP growth will be clearly positive for the first time in many years.

This turnaround in economic performance is particularly striking in the case of the CFA franc zone countries, which since the early 1980s had been sinking deeper and deeper into poverty. In 1991-93, for example, average per capita GDP in the CFA franc zone countries fell by about 2 percent a year. In 1996, however, the movement has been in the opposite direction, and average per capita GDP is expected to rise by 2 percent.

It is also encouraging that this growth has become increasingly widespread. Just five years ago, it was a privilege shared by few, as only 20 countries enjoyed positive per capita GDP growth. In 1996 that number nearly doubled.

The “Afro-pessimists” will tell you that this recovery will be short-lived—that it is readily explained by an uptick in the terms of trade due to shifts in commodity prices. How wrong they are. Africa’s stronger growth is explained not by higher commodity prices, but by the fact that an increasing number of countries have undertaken courageous adjustment and structural reform programs. This is the key to Africa’s progress.

What have these programs involved? Reducing public sector deficits to a level such that they could be financed without fanning inflation or building up excessive levels of debt; preserving monetary stability, while establishing and maintaining realistic exchange rates and liberalizing prices; mobilizing domestic savings and pursuing steady trade liberalization; and freeing the productive energies of these economies through comprehensive structural reform.

Finally, as Melles Zenawi, your outgoing Chairman, told me yesterday evening, these programs have been successful because governments have made them their own.

In embarking on this path, more and more of your countries have become part of the “silent revolution”—the change in economic thinking and approach that has transformed so many countries in every region of the world from inward-looking, heavily regulated, undercapitalized countries into stable, outward-looking ones that are rightfully proud of their dynamism and growth. What has prompted these countries to take this route? The clear recognition that “alternative strategies” based on indebtedness, government deficits, excessive protectionism, and interventionism are futile; a strong desire to get their economies moving again for the good of their own people; and a keen sense of pragmatism regarding what it takes to achieve this.

A New Partnership

Yet despite the progress made, the pace of economic recovery is still far too slow to reduce poverty in a significant way. How then do we negotiate the transition from recovery to development and a lasting increase in the standard of living throughout the region? What is needed now is a new tripartite partnership among the poorest countries (most of which are located in Africa), the most economically advanced countries, and the multilateral institutions. The aim of this partnership is clear: to enable all developing countries to integrate themselves into the world economy, to escape marginalization, and to benefit from the opportunities of globalization while avoiding its risks.

Africa’s Responsibility. Africa’s responsibility is to ensure that its successes become widespread. What are the components of this strategy?

First, clear fiscal adjustment and the elimination of inflationary deficits are not enough; the quality of expenditure is every bit as important. Unproductive outlays—and especially military spending—must be reduced so that more resources can be devoted to essential investments in health, education, agriculture, social safety nets, and basic infrastructure.

Recent Use of IMF Credit

(million SDRs)

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 rounding.Data: IMF Treasurer’s Department

Recent Use of IMF Credit

(million SDRs)

		Jun.	Jan.-Jun.	Jan.-Jun.
		1996	1996	1995
General Resources Account		829.3	2,965.1	8,750.0
	Stand-by arrangements	81.0	1,288.3	6,988.9
	EFF arrangements	573.7	1,502.2	1,273.1
	CCFF	174.6	174.6	0.0
	STF	0.0	0.0	488.0
SAF and ESAF arrangements		113.7	335.7	261.7
Total		943.0	3,300.8	9,011.7

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 rounding.Data: IMF Treasurer’s Department

View Table

Recent Use of IMF Credit

(million SDRs)

		Jun.	Jan.-Jun.	Jan.-Jun.
		1996	1996	1995
General Resources Account		829.3	2,965.1	8,750.0
	Stand-by arrangements	81.0	1,288.3	6,988.9
	EFF arrangements	573.7	1,502.2	1,273.1
	CCFF	174.6	174.6	0.0
	STF	0.0	0.0	488.0
SAF and ESAF arrangements		113.7	335.7	261.7
Total		943.0	3,300.8	9,011.7

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 rounding.Data: IMF Treasurer’s Department

Second, it must be recognized that structural adjustment is no instant cure that will get the patient back on his feet in short order, enabling him to revert to the bad habits that caused his problem in the first place. Rather, in this constantly changing world it is a permanent discipline. Structural adjustment must add up to a critical mass of reform that lightens the heavy load of domestic regulation and promotes greater competition, efficiency, and transparency.

Third—and here we come to the heart of your responsibilities as heads of state—there is no sustainable development without sound, responsible management of public affairs. This is a universal truth. This means first and foremost that governments must demonstrate that they have no tolerance for corruption in any form, and that they manage public funds frugally.

Fourth, the conduct of economic policy must be firm and steadfast if economic agents are to be convinced that progress is irreversible and that the country is indeed integrating itself into the world economy. Governments can help foster this confidence by demonstrating greater transparency.

Africa’s Partners. What should Africa’s partners—the industrial nations, other countries in a strong economic position, and the multilateral institutions, including the IMF, World Bank, African Development Bank, the United Nations, and the OAU—do to encourage these countries to continue on this path toward sustainable development?

First, the largest industrial countries have a special responsibility to promote world economic growth and stability by pursuing sound economic policies in their own countries, by adjusting the structures of their economies, and by cooperating among themselves to minimize potential sources of instability in the international economy—whether in the foreign exchange markets, or the banking sector, or wherever else problems could arise.

Second, industrial countries—and indeed the rest of the world—must open their markets to products in which developing countries, including those in Africa, have, or are likely to develop, a comparative advantage. I am thinking in particular of agricultural commodities, mineral products, and basic manufactures.

Third, donor countries must strengthen their bilateral assistance to countries that have demonstrated a commitment to reform. This implies several things. To begin with, it means reversing the declining trends in official development assistance (ODA). As important as private investment is for sustained growth, countries still need a minimum amount of public investment in physical and human capital in order for private investment to take root, and bilateral assistance is an essential source of financing for such investment.

As I said in Lyons (see IMF Survey, July 15, page 229), industrial countries must make a major effort to help increase the flow of bilateral assistance. For social and human investments, grants are the appropriate financing formula. The industrial countries must first arrest the decline in ODA and then restore its upward trend. At the same time, bilateral aid needs to be provided more rapidly, to be better coordinated, and to be more closely related to individual country needs. And bilateral assistance needs to be provided within the framework of a comprehensive program of macroeconomic stabilization and structural reform.

Fourth, industrial and other economically advanced countries must ensure that the multilateral institutions have the necessary resources to provide this framework for adjustment and otherwise to fulfill their respective roles.

The IMF’s Contribution. Our ability to continue promoting and supporting sound policies in Africa depends in large part on the continuation of the enhanced structural adjustment facility (ESAF), the IMF’s main tool for assisting our poorest members. We have been working hard to ensure the long-term future of the ESAF, even if this should require using a small fraction of the IMF’s gold holdings. In Lyons, I was encouraged by the Group of 7’s commitment to continue the ESAF as the centerpiece of the IMF’s support for the poorest countries, and its invitation to consider ways of “optimizing its reserve management in order to facilitate the financing of ESAF.” I am hopeful that agreement will be reached on how to finance the ESAF beyond the year 2000 by the time of the World Bank-IMF Annual Meetings in October.

At the same time, we are continuing to work with the World Bank to finalize a framework for action to resolve the external debt problems of the heavily indebted low-income countries. The objective is to reduce these countries’ external debt burden to sustainable levels through a concerted effort on the part of all major creditors to provide debt relief beyond currently available mechanisms. It has been agreed in principle that the IMF will contribute to this initiative via its ESAF, and our Executive Board has recently discussed the modalities of such a contribution. We are now working with our colleagues from the World Bank to flesh out key elements of the current proposal, which will be presented to both our Boards in early September. In Lyons, G-7 leaders supported this approach and called for Paris Club creditors to provide debt relief beyond existing Naples terms for the world’s poorest countries. I welcome these promising Lyons terms, which could became a centerpiece of this new partnership.

The OAU’s Role

The OAU has a remarkable opportunity this year to help support the transition from economic recovery to sustained growth and development by providing the key elements of an African response to the Lyons Summit’s offer of a new partnership for development. The OAU can encourage its member countries to strengthen macroeconomic policies, embrace more comprehensive structural reforms, and improve “governance” in the knowledge that stronger economic performance on the part of individual OAU members will ultimately improve the economic prospects of the region as a whole.

If this OAU Summit were to define a strong joint African strategy so as to seize development opportunities in a context of globalization, then it would indeed provide a welcome response to the offer of a new partnership made in Lyons. Let us all—bilateral donors and creditors, multilateral institutions and the countries of Africa—make this partnership a new, decisive opportunity for Africa.