Introduction

Progress toward creating market economies varies widely across countries in the Europe and Central Asia region (ECA). In 1996 the CEE countries, including the Baltics, experienced a third consecutive year of output growth and a fourth year of declining inflation. Strong advances in creditworthiness in international capital markets and a continued appeal to foreign direct investors enabled the CEE countries to attract external private financing. Fiscal deficits were generally kept under control, although at the price of high tax rates. These positive results, together with the prospect of membership in the EU, continue to encourage the CEE countries to keep up the reform momentum.

Progress in Albania, Bulgaria, and Romania has been much more patchy. Continued stalling on enterprise and banking reforms in Bulgaria contributed to deterioration of the economy in 1996, leading to hyperinflation and macroeconomic crisis. The caretaker government, which took office in April 1997, has begun to implement a program to stabilize the situation and start long-overdue structural reforms. In Albania--after considerable success in implementing reform in the early years--lax fiscal policies and inattention to the danger of pyramid schemes caused a major political and economic crisis that has dominated 1997. And the Romanian situation was typified by some growth but little structural reform until a reform-minded government, elected in November 1996, proceeded quickly to take many previously neglected actions.

Economic performance also differed widely among the CIS (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan) in 1996. Armenia experienced its third consecutive year of recovery from a deep recession and Georgia and Kyrgyz Republic their second year. Kazakhstan and Uzbekistan recorded positive, albeit low growth for the first time. Elsewhere, however, expectations that the recession would bottom out in 1996 proved premature. In Russia and Ukraine, output shrank by an estimated 6 percent and 8.5 percent, respectively. Policy and legal reforms continued to be implemented at a slow pace--particularly in Ukraine--resulting in a climate unfriendly to private investors and businesses.

It is against this backdrop and to meet the challenges ahead that the Bank set its assistance strategy for the region in fiscal 1997.