Section Four
1996 Regional PerspectivesEUROPE AND CENTRAL ASIA
Throughout Central and Eastern Europe and the Baltic countries, output continued to grow during 1995, and in several other countries of the former Soviet Union (FSU)--Armenia, Kyrgyz Republic, and Moldova--growth resumed in 1995. There is evidence that such growth is being sustained during 1996. In the other countries of the FSU, output continued to decline, although at a slower rate--about 6 percent in 1995 versus 15 percent in the year before. There is some evidence, particularly if the new emerging private sector is fully included, that 1996 will witness the bottoming out of output decline.
Private sector growth and improvements in the external sector are largely responsible for recovery of output in those countries where output grew. For the region overall, exports grew at 22 percent in 1995; Estonia, Hungary, and Kazakstan experienced export growth in excess of 40 percent in current dollar terms. Foreign direct investment nearly doubled between 1994 and 1995.
Throughout the region inflation has been reduced, notably in the countries of the FSU. In spite of progress on inflation, countries in the region continue to struggle on the fiscal front as they deal with legacies from the past while, at the same time, they work to create scaled-down, yet effective public sector structures needed in a market economy. In many countries--in particular, in Central and Eastern Europe--government spending--and revenues to finance it--continues in the range of 50 percent of gross domestic product (GDP). In some countries, however, progress has been made in reducing fiscal aggregates. For example, the share of public expenditures in GDP in Hungary was cut by some 7 percent to about 55 percent in 1995, helping to restore macroeconomic equilibria. By contrast, in some FSU countries, the decline in public expenditures reflects a failure to collect broad-based revenues.
Generally in line with growth trends, the fall in real earnings has been stemmed. Real wages increased during 1995 throughout most of Central and Eastern Europe and the Baltics. The unemployment rate declined in almost all countries of Central Europe, but it is leveling out at rates comparable with those of Western Europe, with evidence of structural unemployment and little turnover in the pool of unemployed.
By contrast, there was an upward drift in unemployment--from far lower levels--in the countries of the FSU; by the end of 1995, 3 percent of the labor force in Russia was registered as being unemployed, and 8 percent was unemployed as measured by labor-force surveys. The initial collapse of output and increase in inequality to market-economy levels reduced real incomes for large portions of the population, within both lower- and middle-income households. Many households have been able to adjust to the new opportunities, however, in particular those headed by younger and well-educated workers living in areas with a diversified resource base or employed in jobs linked to exports and the service sector. At the same time, poverty has increased, and many households remain vulnerable, even in countries where significant resources have been directed towards social protection. Those headed by the very elderly have seen their pensions eroded or, in some cases, have seen their pension eligibility vanish. Other vulnerable households include those that depend on earnings of less well-educated workers, in line with greater dispersion of wages in a market economy and their predominance in the ranks of the structurally unemployed. Growth is critical to improving household income and reducing poverty. Early evidence from Poland and Estonia, for example, indicates that growth has resulted in a decline in the number of poor in 1995. However, an important challenge of the transition is to assure that vulnerable groups are not left behind.
Table 4-10 Activities of the Bank
During fiscal 1996, Bosnia and Herzegovina fulfilled the requirements providing for succession to membership of the Socialist Federal Republic of Yugoslavia (see Box 4-3); twenty-seven countries are now active borrowers in the Europe and Central Asia (ECA) region. As shown in Figure 4-1, the volume of lending was $4.4 billion, roughly comparable to the peak of $4.5 billion in fiscal 1995. Disbursements increased sharply to more than $3.7 billion.
Figure 4-1
BOX 4-3. BOSNIA AND HERZEGOVINA: TWO-PRONGED STRATEGY FOR POST-CONFLICT RECOVERY
The signing of the Dayton Peace Agreement on December 14, 1995 ended Europe's most destructive war in the past fifty years. By providing an institutional framework for the rebuilding of Bosnia and Herzegovina, the agreement opened the door for peace in the country. Given Bosnia's exceptional needs and circumstances after the war, the Bank adopted a two-pronged strategy to support the country's redevelopment. First, without waiting for financial normalization and membership in the Bank, an initial wave of emergency projects was prepared to help jump-start the reconstruction effort. In order to finance these urgently needed projects, a $150 million Trust Fund for Bosnia and Herzegovina was set up, funded through the surplus account of the International Bank of Reconstruction and Development, the World Bank's main lending arm. Its establishment was formally approved by the governors of the Bank on February 23, 1996. Some $25 million is being provided to Bosnia as a grant for immediate needs, while the remaining $125 million is to be lent on "IDA terms": no interest, forty years' maturity, and a ten-year grace period.
The first project supported by the Trust Fund, an Emergency Recovery Project, was approved by the Bank's board of executive directors on February 29, 1996. It provides financing for critical imports for agriculture, power, and transport; lines of credit for small- and medium-sized enterprises; support for the functioning of key government institutions; and an Emergency Social Fund to provide minimal levels of cash assistance for the poorest households during 1996. The Trust Fund also helped finance six additional projects--for transport, water supply, agriculture, district heating, war-victims rehabilitation, and education--which were approved by the executive board later in the fiscal year.
The second prong of the Bank's strategy is designed to provide full-scale support to Bosnia's reconstruction program and systemic transformation to a market economy over the medium term. Given the vast size of reconstruction needs in Bosnia (they are estimated to be $5.1 billion over the next three-to-four years), its fragile fiscal capacity, and limited creditworthiness, the Bank stands ready to provide an exceptional level of IDA support over the fiscal 199699 period, which would be in addition to the resources provided by the Trust Fund. To respond to the country's needs for immediate significant support, to rebuild infrastructure and jump-start the economy, a significant proportion of this assistance will be front-loaded during the first two years and will support further projects in de-mining, electric power, housing, employment-creation, industry, and health. At least one Structural Adjustment Credit in support of economic reforms in the enterprise and banking sectors and in public finance, is anticipated. Bosnia is expected to borrow a comparatively large amount from IDA over the next three years. As its creditworthiness improves, IDA lending will be phased down, and loans from the IBRD are expected to increase.
Bosnia, which has fulfilled the conditions of succession to the membership of the former Yugoslavia in the Bank, can access the Bank's lending resources as a result of the approval late in fiscal 1996 of a loan-consolidation package of up to $620.6 million that cleared the country's outstanding obligations to the IBRD, including principal arrears, interest arrears, and principal not yet due.
Approval of the package follows the sanctioning by the Bank's executive board in March of an innovative arrears-clearance approach that, in addition to maintaining the financial integrity of the Bank--it does not incorporate any financial concessionality on the part of the IBRD--also ensured a substantial positive net flow of funds to Bosnia.
Donor contributions to pay off one of the highest-interest loans have been arranged and include contributions from the governments of Italy, the Netherlands, Norway, and Switzerland.
The Bank expects--subject to approval of individual operations by the board--to make a positive net transfer of funds to Bosnia of about $450 million over the next four years, most of which will be on concessional terms. The Bank's executive directors will revisit the assistance package in 1997. At that time, the shape of future assistance would be based on an assessment of Bosnia's performance and absorptive capacity and its creditworthiness.Over the past four years, the project portfolio for the most recent member countries has more than doubled. The entire portfolio now exceeds $20 billion, of which $12 billion represents undisbursed commitments, as illustrated in Figure 4-2. The portfolio spans a range of sectors: Support for infrastructure and energy continues to be significant; lending in support of the financial sector and onlending to the private sector is also robust, as is that for agriculture and natural resources; and the share directed to the social sectors is increasing. Adjustment lending remains an important vehicle, representing 34 percent of the portfolio.
Figure 4-2 Enhancing Results on the Ground
As a result of the rapid increase in the portfolio and in undisbursed commitments and in response to signs of portfolio problems, the Bank is placing more emphasis on enhancing the development effectiveness of previously approved projects. Increased resources are being devoted to strengthening borrower implementation capacity so as to assist the absorptive capacity of the borrowers. During the past year, resources devoted to project supervision increased by 12 percent (to close to ninety staff years). The proportion of operations with unsatisfactory progress on implementation continued to decline in fiscal 1996, and six problem projects, largely in the mature borrowing countries, were restructured.
Many of the projects in newer member countries are at the early stage of implementation, where, typically, projects have a slower rate of disbursement. At the same time, legal and administrative requirements within countries frequently have delayed effectiveness. The Bank has become increasingly alert to internal procedures for processing approvals in borrowing countries and in integrating them into the sequence of actions so as to avoid delays in disbursements. Clients are also becoming more familiar with Bank procedures. The translation of standard bidding documents and assistance in strengthening national procurement procedures, for example, have facilitated procurement. As a result, during fiscal 1996, the ratio of disbursements to opening balances for projects increased from 12 percent to 18 percent, compared with a Bankwide average of 19 percent.
To assist project implementation, several investment projects now include components that strengthen what often limits project impact: institutional capacity to effect systemic change. For example, considerable institutional strengthening in Russia's banking sector has been achieved under the Financial Institutions Development Project approved in May 1994. Among the criteria for participation in the project (and follow-up credit lines) are annual audits by international accounting firms and adherence to prudential banking norms that are much stricter than central bank regulations. There has been keen interest among the leading Russian commercial banks to be accredited under the project: Some forty banks have been screened, and thirteen banks have been accredited. While disbursements have been limited, the project already has achieved a good part of its institution-building objectives through the introduction of international banking standards and more extensive disclosure. Again in Russia, the auctioning-off of municipal land to the private sector, a component of fiscal 1995's Housing Project, has had the effect of introducing the concept of land as an asset, establishing a transparent system of land allocation and transfer of ownership from local governments to the private sector, and introducing new market- oriented planning processes at the city and oblast levels.
The portfolio also includes an increasing number of innovative projects that are testing community approaches on ways to reduce the social cost of restructuring. In Ukraine, for example, the Bank is supporting a pilot project designed to mitigate the social and environmental impact of the government's decision to close coal mines. Ways to close mines safely will be tested, and out-of-work miners seeking employment elsewhere will be able to choose assistance from a menu of options. The lessons from the pilot project will be built into future support for coal-sector restructuring.
With implementation of the portfolio moving to center stage, high-level Country Portfolio Performance Reviews (CPPRS) with member countries are now a central vehicle for ensuring effectiveness of Bank assistance, particularly in those countries experiencing implementation difficulties. Eight CPPRS were held during the fiscal year. During the cppr for Russia, for example, important bottlenecks were resolved, quantitative performance indicators and key targets were established, and corrective actions were identified for both the government and the Bank so as to improve the pace of implementation of the project portfolio. By the end of the fiscal year, performance ratings for individual projects met or exceeded the expectations for improvements established during the cppr, and signed contracts and project disbursements accelerated and appear likely to meet agreed targets with a delay of between one and two months.
In Poland considerable progress was made during the year on implementing decisions from the previous year's country-strategy implementation review (CSIR), in particular, reallocating resources under lines of credit. The fourth annual CSIR exercise resulted in agreement on action plans to address cross-cutting issues in the portfolio, including amendments and clarifications of Polish procurement regulations and extension of sovereign guarantees. The meeting also was used to advance preparations for the next country-assistance strategy, which is being prepared in a participatory program with Polish authorities.
The Turkey cppr addressed mutual concerns of the government and the Bank, with broader participation of the core ministries and implementing agencies than in the past. The Bank's resident missions--with presence in almost all active borrowing member countries--play an increasingly prominent role in routine supervision and monitoring.
Supporting Market Institutions
The Bank is devoting increasing resources to supporting institutions essential to the functioning of private markets and to consolidating progress in privatization and liberalization. Through a combination of new private start-ups, formal privatization, and sales of enterprise assets to the private sector, the private sector share of economic activity continues to rise. Private sector shares in GDP and employment have reached over 50 percent in all but a handful of countries in the region. Large increases in the private sector share of GDP have taken place in countries that recently have implemented comprehensive privatization programs such as Georgia and Moldova. While progress in privatiz-ation of large-scale enterprises remains slower than that of small- and medium-scale enterprises, there were several notable large-scale privatizations in 1995, including a large part of the energy sector in Russia, energy-sector utilities in Hungary, telecommunications in Hungary and the Czech Republic, and several large banks in Hungary and Poland through sales to private investors. In Romania, the Financial and Enterprise Sector Adjustment Loan supports the accelerated program of mass privatization--with the design of the cash auctions resulting in broad local private sector participation. To support the implementation of the mass privatization program in Poland, the Bank financed the fees of the national investment funds.
Table 4-11 Banking system reforms, combined with a sound regulatory and legal environment for secured lending, are essential to ensure adequate access to credit for emerging private and privatized enterprises. These twin goals were the focus of adjustment operations in Kazakstan and Kyrgyz Republic. In the face of a banking crisis in late 1995, the Bank provided timely advice to the Government of Latvia on how to address the underlying structural problems of the sector.
The Bank is also assisting newly privatized enterprises to adjust to the opportunities of the market economy. In Moldova, for example, where by end-June 1995, 741 medium- and large-scale enterprises and 563 small-scale enterprises had been privatized, a Bank-assisted project is focusing on measures to restructure private enterprises and build indigenous business-management skills. The project is also providing medium-term finance for private sector enterprises in the context of a strengthened regulatory and supervisory environment for banks. The Bank continues to facilitate the sharing of experiences throughout the region. It cosponsors and supports financially the Central and Eastern European Privatization Network that brings together privatization officials from eighteen countries in the region for sharing of experiences. This experience-sharing has as its goal the transferring of the lessons learned by the more advanced transition economies to other countries. The Network's newly created Financial Forum brings together officials from finance ministries and central banks, as well as securities regulators and market participants, to share their experiences. In Budapest, the Bank organized a Pension Reform Conference in cooperation with the East-West Institute and the United States Agency for International Development, attended by officials from seven countries of Eastern and Central Europe. The purpose was to learn from the experiences of countries in implementing multipillar pension systems.
Facilitating Social Consensus and Reducing Social Costs
Social consensus is critical to the sustain-ability of the economic transition in the countries of the region. As understanding of its newer member countries and rapport with its clients have grown, the Bank is increasingly listening to, and seeking advice from, nongovernmental organizations (NGOs), community groups, local governments, public service providers, trade unions, the academic community, and the growing private sector. The Armenia Social Investment Fund Project, for example, aims to promote self-help and community solidarity. The project was designed based on the lessons learned from a pilot implemented by an NGO. With financial support from the project, the communities identify eligible microprojects based on their priorities, manage the implementation of their microproject, select contractors and supervisors, and devise a plan for maintaining the facility after microproject completion. A project to support the divestiture of housing from Russian enterprises incorporated the views and concerns of tenants into both project design and the implementation process through surveys of tenant preferences and the establishment of condominium associations as the most effective way to encourage voluntary resident participation in decisions. Through the Bank's Economic Development Institute (EDI), the Bank is supporting seminars to inform parliamentarians and a broad range of civil society--in the Kyrgyz Republic and Ukraine, for example--on transition issues. The EDI, with financial support from Switzerland, also organized the Former Yugoslav Republic (FYR) of Macedonia's Forum for Senior Policymakers ("Vision of the Future"), which brought together the country's president, parliamentarians, private sector representatives, academics, journalists, and out-of-country policymakers with relevant experiences to share for a wide-ranging dicussion of the future of the country.
A critical element of the Bank's assistance program is to support the social agenda surrounding the restructuring of the enterprise sector, including facilitating the movement of workers to higher-productivity jobs. In addition to the pilot project in the coal sector in Ukraine, reported on earlier, the $500 million Russia Coal Sector Adjustment Loan and a companion implementation-assistance project will provide assistance to those affected by that country's coal sector-restructuring program. Community support and diversification programs are being supported in five coal basins (Eastern Donbass, Kisel, Kuzbass, Moscow, and Pechora). To ensure that affected communities receive adequate information, a countrywide network of major coal cities was established, and public information and social impact- monitoring activities are being supported. Elsewhere, Bank-assisted adjustment lending continues to facilitate budgetary outlays to assist workers dismissed from large, distressed enterprises. During the past fiscal year incentives and financial support were provided to more than 50,000 workers leaving troubled enterprises in Romania, as well as to workers in Kazakstan, Kyrgyz Republic, and FYR Macedonia. Projects currently under implementation that support employment services-- from countries as diverse as Hungary and Kazakstan--are enabling workers not only to collect unemployment compensation but also to receive counseling to facilitate their search for other jobs. Such counseling has proven to be very cost-effective.
Given that the incidence of poverty remains high in the region, the Bank accelerated its work in this area, completing an additional five poverty assessments during the year. Eight such assessments--designed to provide the basis for a collaborative approach to poverty reduction by country officials and the Bank--have so far been completed, with several others under preparation. Restoration of growth is essential to reverse the poverty trends. At the same time, given that fiscal constraints are tight, the Bank's adjustment lending is supporting improved targeting of social safety net assistance to the poor. In Georgia, for example, the government is developing a backup program of social assistance, focusing on the most vulnerable groups--in particular, children, the elderly, and invalids--to assist destitute families who are not protected by other programs. In Armenia, child allowances, focused in particular on younger children, are being increased with assistance from the Bank. Armenia's attempt to target its humanitarian assistance better centers around a pioneering attempt to track and quantify the numbers of needy in a "social passport," and it is being reviewed as a possible vehicle for targeting general cash transfers. Again in Armenia, as well as in Albania, projects are providing employment opportunities through microprojects managed by local communities for marginalized and vulnerable groups.
Table 4-12 Rationalizing the Public Sector
The Bank is also helping to facilitate the process by which the state adapts its role and priorities in the transition to a market economy, and during the past year, it expanded its nonlending support in this area. Public expenditure reviews were carried out in nine countries of the FSU, and measures were identified to improve fiscal management and reorient expenditures. In several countries of the region, underlying budgetary systems require revamping. In Turkey, for example, expenditure management and control is hampered by complex and outdated budgetary framework and systems, the plethora of agencies and funds that are effectively outside the budgetary process, and deficiencies in cash management and public sector accounting; partly as a result, government expenditures have exceeded targets in recent years. The Bank-assisted Public Financial Management Project is attempting to enhance the government budget's usefulness as a fiscal policy instrument and as a tool for managing public finances by reducing the number of sources of government spending that now operate outside budgetary channels and by introducing budgeting of public administration positions and payroll. A similar effort, also supported by the Bank, is under way in Kazakstan.
About a third of the Bank's portfolio in the region is supporting efforts to increase the effectiveness of governments' role in critical infrastructure and energy networks. Road-improvement projects currently under way in Albania and Russia have introduced competitive bidding by private contractors for awarding contracts. In Bulgaria, reforms, aimed at ensuring that the railways operate independently in a commercial manner according to market principles are being supported by the Bank and European and North American cofinanciers.
Capacity rehabilitation for both energy production and distribution needs public and private sector collaboration. Through its sector work and program of donor coordination, the Bank is assisting Ukraine to develop a competitive electricity subsector that will be an attractive target for private investments in the future. In Kazakstan, the Bank is working on the rehabilitation of the Uzen oil field in a way that facilitates foreign investment.
Support for Agriculture and Environmental Rehabiltation
In most countries of the region reform in agriculture has been slow. But, because most state or collective farms had been inefficient producers and because the commercial links were highly monopolistic, restructuring of farms and marketing structures are essential prerequisites to increased agricultural productivity. For example, the breakup of Kazakstan's grain monopoly during implementation of a structural adjustment loan approved in fiscal 1995 has been instrumental in dramatically improving farmgate prices. (As late as 1994, the monopoly was paying only about 50 percent of world market prices for the purchase of domestically produced grain.) While access to private plots of land has been essential in helping households across the region cope with the general economic crisis, the difficulty of reaching political and social consensus on issues of land ownership has compounded the difficulties of creating an environment in which private rural activity can flourish. The Bank continues to actively pursue reform in this area through an active dialogue and outreach program. In Georgia, it convened a series of seminars attended by officials at the highest levels of government; its agricultural sector work in Armenia is being used as a textbook published by the government; and in Romania, Bank staff, together with local officials, are analyzing problems that conspire to hinder rural entrepreneurship and are developing policy options to mitigate them.
The Bank is also supporting a number of activities aimed at the emerging class of private farmers, including operations approved during the past year supporting extension and research services in Croatia and FYR Macedonia. In Estonia, the Bank is supporting efforts to stimulate the rural economy through a project that is helping to privatize rural lands and privatize and rehabilitate select rural infrastructure.
The Bank is also working with its member countries to reverse serious environmental degradation. It continued to assist governments in developing and implementing national environmental action plans (NEAPS). One was completed in the fiscal year, adding to eleven completed earlier, with preparation under way for an additional five. Strengthening environmental institutional capacity is also receiving increasing attention.
Although Ukraine has serious environmental problems, especially in its industrial regions, local environmental agencies lack experience with modern regulatory practices. An Institutional Development Fund grant in Donetsk oblast, one of Ukraine's "hot spots," is supporting capacity building and practical training in monitoring and controlling pollution, carrying out environmental audits of main polluting plants and impact assessments of investment projects, and applying economic instruments in regulatory activities. Through innovative financing of pollution reduction in Slovenia, the Bank is demonstrating how solutions to local environmental problems--conversions from low-quality coal to gas or district heat to reduce dust and sulfur dioxide--can also address regional and global concerns over sulfur. The Global Environment Facility and the Bank are working together on another coal-to-gas conversion project in Poland to reduce greenhouse gas emissions, particularly those of carbon dioxide and methane. The Bank continued to be involved in regional programs to address degradation of economically important bodies of water--the Aral, Baltic, Black, Caspian, and Mediterranean seas, as well as the Danube river.
1996 Regional Perspectives
Africa
East Asia and Pacific
South Asia
Latin America and the Caribbean
Middle East and North Africa
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