Prepared to Aid Albania

The World Bank and IMF are prepared to provide financial aid to Albania to help it out of the present crisis, World Bank President James Wolfensohn said during a March 6 press conference in Madrid. The EU regards reestablishing relations with the IMF, introducing strict financial discipline, and clarifying events that led to the collapse of the country’s pyramid schemes as conditions for support.

Pyramid Schemes and the Limits of Conditionality

International institutions cannot be accused of keeping their eyes shut to the dangers of the pyramid schemes to Albania but they did underestimate the consequences, writes French commentator Francoise Lazare. Both the IMF and the World Bank warned the authorities several times and urged them in vain to eliminate these schemes. "The painful misadventure in Albania shows the limits of economic conditionality. As long as local authorities cooperate with international finance institutions (IFIs), they can manage economic policy together, but if confidence is lacking, the means available to IFIs are limited."

Albania was a master student of international economic institutions two years ago, with a healthy economy (GDP was growing at 8 to10 percent annually), acceptable entrepreneurial structures, and stable political conditions. But the poorest economy in Europe is now shrinking to less than its size in 1990. If new credits from abroad are cut off because of the current chaos, imports could completely collapse. The economy is kept afloat only by the inflow of hundreds of millions of dollars a year from Albanians working in Italy or Greece, and through foreign aid from the EU, the World Bank, Germany, Italy, and the United States. (About a third of last year’s $960 million budget revenues was provided by various foreign sources. Albania has received the highest per capita level of EU aid of any East European state.) Albania’s growth was largely a mirage.

(From comments in Le Monde, the Guardian, Handelsblatt, and Financial Times.)

World Bank Loans to Russia Could Expand

The World Bank expects its loans to Russia to increase by $2 billion to $3 billion a year for the next few years from the current $6 billion, Vice President Johannes Linn told a news conference in Moscow during his early-March trip to Russia. "A doubling of loans outstanding by the end of the century is not impossible," he added. Michael Carter of the Bank’s Moscow office said new loans would fund a bureau for economic analysis to improve economic policymaking and would finance higher education and school textbooks. Work on a new structural adjustment loan is to be completed in the next few months.

Tentative accord was reached on a $300 million loan for the reconstruction of historic parts of St. Petersburg, as well as on a loan of similar size for renovation of the water and drainage networks of several Russian cities, Construction Minister Yefim Basin disclosed. Earlier, the Moscow Times reported that World Bank officials are discussing another loan to Russia’s coal industry, just months after dispensing the second tranche of a $525 million loan targeting the battered sector.

More Satisfactory Projects in Russia

A joint Russian-World Bank review concluded in March shows that Russia’s loan projects have a 65 percent satisfactory rating and that monthly disbursements are running at about $70 million. This is a far cry from early 1996, when a similar review of Russia’s portfolio found that with a less than 40 percent satisfactory performance rating, Moscow was drawing an average of only $25 million a month from its loans. In 1995 Russia’s loan projects were the most troubled in the Bank, with only 39 percent considered to be performing satisfactorily.

But a major joint effort launched by Russian Prime Minister Viktor Chernomyrdin and World Bank President James Wolfensohn has turned the situation around. The review’s target is to reach a satisfactory rating of 80 percent of projects by June. (To get this rating, a lending project must meet all goals outlined in the Bank’s country assistance strategy, must be consistent with the Bank’s overall policies on poverty reduction, and must be using resources efficiently.) The Bank is now Russia’s largest single foreign source of long-term financing for public sector investments.

Since August 1992 twenty-eight loans to Russia have been approved, with a total value of $6.4 billion. This makes Russia the Bank’s third largest borrower after China and India. Loans have been provided for the oil industry; for the transport sector, including road and bridge repairs and improvement of bus services in more than a dozen cities; for strengthening the banking sector and developing capital markets; for the support of agricultural and land reform; for promotion of better health care, education, water supply, and sanitation; and for protection of the environment.

Europe

Chubais Orders Investigation of Use of World Bank Loan

Russian First Deputy Prime Minister Anatoly Chubais has instructed the finance ministry’s control department and the territorial agencies of the main department for the federal treasury to check on whether the World Bank’s 1996 "coal loan" was used correctly, Chubais’s aide Andrei Trapeznikov disclosed. Reports have indicated that the administrations of some coal-mining regions, rather than apply the loan as intended to improve the social conditions of coal miners endangered by mine closures, used the World Bank funds for other purposes. The investigation will affect all of Russia’s twenty-four coal-mining regions. The World Bank’s Moscow office welcomed the news regarding the investigation. "We hope that the ongoing verification effort will clarify the proper use of all budget resources going to the coal sector," the Bank’s communique emphasized.

Summers Urges Greater World Bank Role in Russia

The current phase of economic reform in Russia calls for the broader expertise of the World Bank, Treasury Deputy Secretary Lawrence Summers told members of the U.S.-Russia Business Council on April 1. Summers praised the work carried out thus far by the International Monetary Fund, but said "strengthening the public sector, promoting development of the private sector, and tackling sectoral problems" are better suited to the World Bank. Its conditionality, operating through numerous projects and program loans, is also more focused and surgical than what the IMF can do with a single program, he added. "I call on the World Bank to now take the lead and greatly increase its role in Russian reforms," he said, adding that the Bank was clearly ready to do so and should now "greatly expand" the scope of its activities to provide $2 billion in additional loans this year. He said the Bank should examine areas of fiscal management, social protection, and programs in areas such as agriculture and power.

First World Bank Guarantee to Ukraine

A partial risk guarantee of $120 million approved by the World Bank on March 18 will support a pre-export guarantee facility (PGF) established by the government of Ukraine. The PGF will encourage foreign investors to finance the working capital or fixed capital requirements of Ukrainian agricultural enterprises, agroprocessing enterprises, and private distributors. The Guarantee Administration Unit (GAU), an independent public entity, will sell guarantee contracts against government performance and political force majeure risks, back-stopped by a World Bank guarantee. Since Ukraine joined the World Bank in September 1992, Bank commitments have totaled about $1.6 billion for ten projects. World Bank Managing Director Caio Koch-Weser said at a recent news conference in Kiev that the Bank could provide Ukraine up to $1 billion in loans this year if it quickly passed the 1997 budget and a package of tax reforms to underpin it. The budget would also pave the way for Ukraine’s receipt of a $2.5 billion to $3 billion extended fund facility loan from the IMF.

Fund-raiser for Bosinia and Herzegovina Postponed Again

An international donors conference aimed at raising $1.4 billion for reconstruction in Bosnia and Herzegovina has been postponed for the second time this year. The conference should have been held in March but was postponed until April to give the Bosnian government time to adopt economic reforms and clinch a deal with the IMF. Now the April date will also be missed. Before committing funds to Bosnia and Herzegovina, foreign donors want to see it sign an agreement with the IMF, which in turn wants to see a functioning central bank, an agreement on common currency, and finance and budget laws in place. In another development, with support from the World Bank, the government has established an Investment Guarantee Agency (IGA) to offer guarantees to foreign investors providing credits to local industries. "This ensures that a guarantee holder is fully protected by an independent and strong financial source outside Bosnia and Herzegovina," Lamija Kosaric, the agency’s director, said. The World Bank group’s MIGA grants guarantees for larger and longer-term investments beyond the coverage offered by IGA.

Croatia Receives IMF Loan

The IMF announced on March 13 that it has approved a three-year $486 million extended fund facility loan to Croatia, $158 million of which will be available this year. The credit is designed to help the government push ahead with structural reforms while meeting postwar expectations of higher living standards. Healthy growth is likely to continue this year. Croatia’s Deputy Prime Minister Borislav Skegro announced that the country is close to completing an $80 million to $100 million financial and enterprise structural adjustment loan from the World Bank. The loan will be used to help overhaul Croatia’s banking system and restructure and privatize large public sector firms.

Camdessus Sees IMF Capital Account Mandate

An agreement to give the IMF a mandate to promote capital account convertibility (progressive liberalization of capital account transactions among its members) could be reached at this year’s IMF-World Bank Annual Meetings, IMF Managing Director Michel Camdessus said on March 7, at a conference on Asian financial integration in Hong Kong. Mr. Camdessus said that he would recommend that the IMF establish capital liberalization as an objective, although he added that prudence was needed in approaching the process. Stressing the risks for emerging economies in the process of globalization, he said that they should secure their macroeconomic balances and the soundness of their financial system while opening up their capital markets.

World Bank to Pay More Attention to Environment

In the future the World Bank will ask independent environmental NGOs for advice in the institution’s credit commitments, World Bank President James Wolfensohn said at the Rio-plus-Five summit. The Bank in the past has disregarded environmental sustainability in projects it financed and has made serious mistakes, said Wolfensohn, adding that the Bank was now a reformed institution trying to give greater weight to social, cultural, and human issues alongside economic issues, when deciding on what to finance. (Of the World Bank’s $25 billion in annual loans, some $7.2 billion flows to environmental projects. Since 1989, when the Bank set up an environment department, it has supported some 153 projects in 62 countries.)

Nam Theun II Project: No Decision Yet

"The World Bank, which initially promised to help finance Laos’s Nam Theun II dam, has put the brakes on its support. Alarmed by the $1.2 billion estimated cost of the project, equal to the country’s annual GNP and three times as big as the government’s budget, the Bank fears the outlay could push the Lao PDR into debt," claimed a recent article in the French newspaper Le Figaro. Officials of the World Bank told the Transition newsletter that contrary to the newspaper’s information, no decision has yet been made regarding the project. The World Bank considers it vital to obtain stakeholder evaluation of the projects it supports. A series of public consultations will be held in order to ensure participation at local, regional, and national levels. Only after all these public forums have taken place and several studies completed (about alternatives, economic impact, an environmental and social action plan, a resettlement action plan, an environmental assessment and management plan) will the Bank reach a decision on whether or not to support this project.

Romanian Finance Minister Mircea Ciumara said that the country expects to receive about $1 billion in loans from the IMF, World Bank, and European Union. The IMF share is $400 million, with approval expected in mid-April.

$225 Million for Reforms in Hungary