Growth in the transition economies of Europe and Central Asia [plus Turkey, which is part of the Bank’s Europe and Central Asia Vice Presidency] is expected to slow to 2.3 percent in 2001, according to Global Development Finance 2001, a new World Bank report. The trend reflects a decline in external demand, the effects of stabilization and structural reform programs, the impact of policy tightening to avoid overheating (in Poland, for example), and the crisis in Turkey. Pressures on fiscal balances include large public sectors, overextended social security systems, significant off-budget expenditures, forthcoming general elections, and ongoing adjustment costs related to the EU accession process. (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, and Turkey are seeking EU membership.) Annual growth in the region is expected to stabilize around 4 percent in 2002 and 2003.

Average GDP in the region posted a strong recovery in 2000, growing 5.6 percent. The Central and Eastern European countries benefited from increased exports to the EU, which contributed to a 4.6 percent rate of growth—a marked improvement over 1999, when growth declined 0.3 percent. The CIS countries posted growth of 6.8 percent, up from 2.6 percent in 1999. In the Russian Federation and Central Asia, higher oil prices allowed for increased fiscal outlays and investment, especially the pay-down of arrears and a shift to cash payments.

Long-term external debt in the region declined slightly to $387 billion in 2000, down from $391 billion in 1999. The debt-to-export ratio improved markedly, falling from 144 percent in 1999 to 114 percent in 2000. The debt-service ratio also improved, falling from 18 percent in 1999 to 14.6 percent in 2000. Net long-term capital flows to the region increased slightly, from $52.5 billion in 1999 to $54.8 billion in 2000.

A total of six to seven projects for Russia amounting to $600 million in new loans are expected in fiscal year 2001, of which three totaling $280 million are still to be completed, said Johannes Linn, Vice President for Europe and Central Asia, after concluding a three-day visit to Moscow in early April. The largest of the three credits likely to be put before the Bank’s board by June is a $150 million loan to kick-start treatment and prevention programs for HIV/AIDS and tuberculosis. Eighty million dollars will be lent in a pilot program to relocate people from high-maintenance cities above the Arctic Circle to warmer climes within Russia. A $50 million program will finance education reform in three regions of Russia. Off the agenda is the fourth structural adjustment loan, aimed at financing fundamental economic reforms. "At this point, when the federal budget and the balance of payments are looking good, Russia doesn’t need such loans," Linn explained. However, the Russian government has requested the World Bank develop a monitoring system which can track the reform efforts. Russia is one of the World Bank’s largest borrowers, with $9.5 billion in loan commitments, $7 billion of which has already been disbursed.

Russia Turns Down IMF Stand-By

In March the Russian Federation turned down a one-year stand-by arrangement proposed by the IMF. While the deal would not have provided Moscow with fresh infusions of cash, it might have helped the government reschedule about $40 billion (45 billion Euros) in debt with the Paris Club group of creditor nations. Russian Finance Minister Alexei Kudrin said Russia decided against signing the agreement "after assessing its capabilities." The IMF’s offer involved no money, unless the Russian economy took a sharp turn for the worse, but the accord would have required the Russian government to charge market rates on central bank loans to the government and release more information about the operations of the Russian central bank and the state-run savings bank, Sberbank. IMF and World Bank economists have noted that Russia has done little to reform its banking sector since the country’s 1998 financial blowout and warned that another crisis is looming if nothing is done.

The IMF last lent money to Russia in the summer of 1999, when it disbursed $640 million as the first part of a $4.5 billion package. That aid program was put on hold amid complaints that Russia failed to meet various reform promises and stashed some central bank funds to offshore banks.

(Based on report of Alan Cullison of the Wall Street Journal)

"No instances of misappropriation of funds were uncovered," wrote Thomas C. Dawson, Director of IMF External Relations Department in his letter to the editor of the Financial Times (April 12, 2001). Dawson was responding to an article in the Financial Times that stated that foreign reserves of the National Bank of Ukraine were misused during 1997–98. "It is not unclear where most of the $700 million in central bank reserves went. In fact, as detailed in the audits the National Bank of Ukraine received all the income streams it was due," wrote Dawson.

According to the article in question, in 1997–98 Volodymyr Bondar, the former first deputy chairman of Ukraine’s central bank, funneled some $700 million in central bank reserves on loan from the IMF through the Cyprus affiliate of Credit Suisse First Boston, the Swiss–U.S. investment bank. Bondar was arrested in March. The investigation into his activities has wide political implications. Those opposing the reform policy of Ukraine’s popular prime minister Viktor Yushchenko hope to use the case to weaken his position as he headed the central bank from 1993 to 1999.

Between 1996 and 1999 foreign direct investment (FDI) in Bosnia-Herzegovina was just $4.7 million a year. During the same period, annual FDI was $56 million in Albania, $54 million in Moldavia, and $43 million in Macedonia.

The World Bank is ready to help the authorities create a better business climate, according to World Bank Executive Director Pieter Stek. Toward that end, the Bank has prepared a report recommending how to remove obstacles to private investment and improve the business environment. The Bank has also compiled a report on corruption, seen as a major obstacle to economic development in Bosnia-Herzegovina.

In early April the IMF Executive Board approved in principle a three-year $368 million "arrangement" to Vietnam under the Poverty Reduction and Growth Facility (PRGF). The loan is intended to boost growth and reduce poverty. The Board also approved the release of a $53 million loan under the arrangement. Under the program, Vietnam’s GDP growth is projected to rise to 7 percent in 2003 (up from a projected rate of growth of 5 percent this year), with inflation held to less than 5 percent. Per capita income should rise by an average annual rate of 4.5 percent. Vietnam is to accelerate liberalization of its relatively restrictive trade regime. Private sector development and foreign direct investment will be promoted by easing barriers to entry and liberalizing the business environment for both domestic and foreign investors. Policy transparency will also be improved.

Discussions on how the IMF uses conditionality have moved forward, and the Fund is seeking external comments before a Board meeting in June. On March 7 the IMF Board agreed to reduce the use of structural conditionality, applying it only when critical to achieve macroeconomic stability. The need for conditionality will be assessed on a case-by-case basis and applied narrowly. Structural benchmarks, which have tended to be applied much like conditions, will be used more sparingly and only to monitor policy outcomes. Letters of Intent should make a clearer distinction between a government’s overall policy program and that part that is subject to Fund conditionality. Stressing that conditionality cannot compensate for lack of country ownership of the reform process, the Board advised staff to reduce financing where support is lacking. More will be done to test prior commitment and intent through "prior actions." The streamlined approach will be applied immediately.

Since Horst Koehler’s "Streamlining Structural Conditionality" guidance note was issued last September, the average number of structural conditions in Poverty Reduction Growth Facility (PRGF) programs has been reduced by about a third. In some cases they have increased, however, with the addition of new governance conditionality. The IMF has not yet published its paper on governance conditionality—a new priority in its PRGF programs.

The International Finance Corporation (IFC), a private sector arm of the World Bank Group, plans to include corporate governance clauses in loan agreements. IFC Executive Vice President Peter Woicke told the Financial Times that projects supported by the IFC already must meet strict environmental and social requirements. "We want to push for corporate governance, transparency, and minority shareholder protection in our loan agreements," he said.

The ways and means to clean the polluted air in the cities of Central and Eastern Europe and Central Asia were discussed during a three-day workshop, "Clean Air Initiative," held in Bratislava, Slovakia, in mid-April. The workshop was organized by the World Bank Institute and the Europe and Central Asia Region and supported by the Dutch and Japanese governments and the host city. The workshop provided a forum for discussion of various air quality themes, including health, environment, governance, transport, energy, public awareness, capacity building, and project financing.

The World Bank will open a regional office in Zagreb in the fall, in a bid to increase the impact of its assistance in Bulgaria, Croatia, and Romania. "This decentralized structure allows us to be closer to our client countries, other development partners, and stakeholders; to be more effective in our support for economic reforms and development; and to be more cost effective in our operations," said the head of the new office, Andrew Vorkink, Director of the South Central Europe Country Unit, which is responsible for the Bank’s assistance programs in the three countries. According to Vorkink, the move is expected to help the Bank respond better to the needs and challenges of the Stability Pact—launched in 1999 by major Western powers to help overhaul security, infrastructure, and economy in the Balkans—and help integrate the three countries with the European Union. The Bank will continue to maintain its country offices in Bucharest, Sofia, and Zagreb.

The World Bank Group has begun a series of consultations with various social groups in Belarus to gather ideas and feedback that will help design its strategy of assistance to the country (CAS) for the next three years. The CAS, which is expected to be finalized by the end of the year, will contain all the Bank’s planned operations, including lending, analytical work, and technical assistance programs. It will be designed with the government of Belarus, in consultation with a range of representatives from civil society, including NGOs, community groups, the media, professional associations, and religious groups. So far the strategy of assistance covers targeted social protection activities, the impact of the Chernobyl disaster, the HIV/AIDS epidemic, and protection of the environment.

To help small and medium-size enterprises gain greater access to financing and consulting services, the International Finance Corporation and the Small Enterprise Assistance Funds (SEAF) have launched a $2.5 million global partnership initiative. SEAF, an NGO based in the Netherlands and the United States, operates a network of 14 commercially driven investment funds around the world. With $140 million under its management, it invests in small and medium-size enterprises (firms with 10–100 employees and annual revenues of $200,000–$2 million) with high growth potential. After taking a minority equity position, SEAF provides a combination of fee-based and donor-funded customized consulting services in key areas, such as marketing, finance, and management, before eventually selling its stake. In 12 years of operation it has helped create 7,000 jobs and boosted the competitiveness of more than 160 small and medium-size enterprises.

IMF Managing Director Horst Köhler has proposed a joint survey by South Korea and the World Bank to help rebuild North Korea’s devastated economy. Following a survey of the economic situation, workshops would be organized with the participation of the two Koreas and the two international agencies. President Kim Dae-Jung has responded favorably to the suggestion, agreeing that a special analytical model is needed to rebuild the North’s economy.

North Korea’s economy is in a shambles after it collapsed because of mismanagement and the halt of major subsidies following the break-up of the former Soviet Union. As result, factories are at a standstill, hunger is widespread, and people are freezing in their unheated homes. Kim Jong-Il, has made a call for "new thinking," which officials in the South Korea say could lead to the opening up of the socialist economy to outside investment and technology.

A decade after the break-up of the Soviet Union, some of its former republics are still desperate for investment. Armenia, Georgia, the Kyrgyz Republic, Moldova, and Tajikistan, which are among the poorest countries in the world, need foreign assistance and reform, according to a joint report by the IMF and the World Bank released in March. (The report, "Armenia, Georgia, the Kyrgyz Republic, Moldova, and Tajikistan: External Debt and Fiscal Sustainability," is available on the Web, at http://www.imf.org/external/np/eu2/2001/edebt/eng/main.pdf.)

Having suffered severe financial strains after the break-up of the Soviet Union in 1991, the combined external debts of these countries—debt-free a decade ago—have ballooned to more than $5.7 billion. That sum represents a staggering debt load, averaging 422 percent of their annual government revenues and 122 percent of their annual exports, according to the report.

The two principal authors of the study, Mohammad Shadman-Valavi, IMF Assistant Director, and Samuel Otoo, World Bank Sector Manager, confirmed that this debt burden creates serious fiscal difficulties and will adversely affect poverty reduction efforts in the coming years. The report finds that the key to improving matters is gaining the confidence of foreign investors, which requires significant progress toward curbing corruption, increasing transparency, and improving the judicial process so that investors have some protection under the law.

China: $105.5 million project loan (5-year grace period, 20-year maturity) for environmental recovery of the Huai River and its tributaries. The loan will provide facilities for collecting and treating wastewater and establishing municipal wastewater utilities.

Georgia: $25.9 million, three-phase adaptable program credit (10-year grace period, 40-year maturity) to support the development of primary and general secondary education over the next 12 years. Phase 1 will develop a national curriculum for primary and general secondary education, train teachers and principals, and provide basic learning materials.

Mongolia: $34 million IDA credit (10-year grace period, 40-year maturity) to reconstruct and upgrade roads in Mongolia’s central and western regions, implement a financial accounting system for the railways, and initiate a system of annual vehicle inspections.

Romania: $80 million adaptable program loan (5-year grace period, 17-year maturity) for the development of rural finance services, providing access to investment capital and safe banking services to individual farmers, rural microentrepreneurs, and small and medium-size businesses.

Web site: http://www4.worldbank.org/sprojects/Project.asp?pid=P056891.

Russia: $85 million project loan (5-year grace period, 17-year maturity) to improve efficiency of district (municipal) heating systems and promote sound cost-recovery policies and commercial practices. Project funds will initially go to 9–10 Russian cities, including Syzran, Nerungri, Mytishi, and Dubna. Kostroma, Krasnoyarsk, Volgograd, Kazan, and Tambov could join the project later.

Ukraine: $28.2 million project loan (5-year grace period, 20-year maturity) to improve Sevastopol’s heating supply by introducing decentralized gas-fired mini-boilers. Sevteploservis, a new enterprise, will improve heating services in this major city on the Black Sea on a commercial basis.

Web site: http://www4.worldbank.org/sprojects/Project.asp?pid=P055738.