Milestones of Transition

Romanian officials in 1996 expect 4.5 percent growth in GDP, 4.7 percent growth in industrial production, a 3.5 percent increase in agricultural production, and an 8.8 percent increase in investment. Inflation is forecast at 20 percent. It has been announced that a majority (51 percent) ownership in 554 companies will be offered to international investors for cash, swapping 49 percent of holdings for coupons that Romanians earlier received for free.

Romania's first stock exchange since World War II opened on 20 November in Bucharest. A total of seven companies was quoted at the opening session, with five more due to appear in the near future. Of the seven listed companies, only one is completely in private hands; the Romanian state still holds a 70 percent stake in the other six. Initially, it will operate only once a week. Brokers' commissions are subject to a maximum of 8 percent. In 1996

EU member countries, meeting in Madrid on 16 December, said they expected to start membership talks with East European countries (as well as with Cyprus and Malta) within six months after the EU's intergovernmental conference, scheduled to end in mid-1997. All applicants will have the same starting conditions. The summit asked the EU Commission to conclude reports on the countries seeking membership. Meanwhile, Bulgaria has become the eighth East European country to formally apply for membership.

The Czech economy is poised to surge ahead in 1996, analysts say. Industrial production boomed in 1995, pumping up a third-quarter GDP that was 6.3 percent higher year-on-year, mostly the result of strong domestic demand. In 1996, GDP growth is expected to be between 5.5 and 6.0 percent. Real GDP for the first nine months of the year stood at 4.8 percent, according to official figures. Year-on-year inflation stood at 8 percent in November and unemployment at 2.8 percent. Out of the 1996 budget expenditures of 497.6 billion koruny ($18.7 billion), social welfare will receive the most, one in three koruny. The state sector will account for 43.3 percent of GDP next year, a decline of 0.9 percent.

The Czech Republic in November recorded its third highest monthly current account deficit of the year, according to figures of the Statistics Office released on 27 December. The shortfall in November was 10.6 billion koruny ($398 million), compared with 12 billion koruny ($451 million) in October, the worst showing to date for 1995. For the first eleven months of 1995, the cumulative trade deficit was 86.7 billion koruny ($3.26 billion), more than seven times higher than for the same period last year.

The Czech Republic became the first postcommunist state in Eastern Europe to gain access to the Organization for Economic Cooperation and Development (OECD), when it joined the membership on 27 November. Hungary and Poland are expected to follow in its footsteps in 1996. In January the Czech Republic is to submit an application to join the EU.

The recent annual United Nations Conference on Trade and Development reported in early December that Central and Eastern Europe, including the former Soviet Union—a region with more than 300 million people—took in about $6.5 billion in direct foreign investment in each of the last two years. That is less than the FDI recorded for Singapore alone, with a population of less than three million people.

The National Bank of Hungary (MNB) plans to maintain the current crawling peg devaluation of the forint—1.2 percent per month—during the first half of 1996. and to lower that rate during the second half of the year. The MNB predicts a 1996 current account deficit of less than $2 billion (compared to $3 billion in 1995), GDP growth 1.5 to 2.0 percent higher than the expected 0.5 to 1.5 percent in 1995, investment 9 to 11 percent higher than in 1995, and consumer price inflation of 19 to 21 percent (compared with about 30 percent tin 1995). The Ministry of Industry and Trade predicts a 7 to 10 percent rise in exports and a 4 to 6 percent rise in imports in 1996—a narrowing of the trade deficit, due to productivity growth, economic restructuring, and macroeconomic stabilization. There are 25,000 foreign companies in Hungary, and total foreign investment now stands at around $8 billion. Real wages are expected to fall next year, but the downward trend should end by 1997, with a modest rise in 1998.

On 2 November Latvia fundamentally reformed its pension system, linking benefits to contributions, which are in turn tied to wages. Other provisions include indexing benefits to inflation, allowing workers to choose when to retire (though the pension is lower the younger they retire), a gradual reduction in the rate of social tax on employers (from 37 percent to 33 percent), and an increase in that rate on workers (from 1 percent to 5 percent). A better link between benefits and contributions is expected to increase incentive to refrain from activities yielding undeclared income. Latvia now has perhaps the most modern pension system in the region.

The Latvian Economic Court on 12 December declared Banka Baltija, formerly the largest commercial bank in the Baltic States, officially bankrupt. The activities of the bank were suspended in May 1995. Losses to the bank's 200,000 depositors are estimated at some 200 million lati ($370 million). The government has paid out slightly more than 1 million lati in compensations to 6,214 depositors.

In late December Lithuanian police arrested high officials of the country's two largest commercial banks, Litimpeks Bank and Akcinis Inovacinis Bank (LAIB) on charges of squandering large sums. Both banks have been shut down until further notice, bringing Lithuania's financial sector activity to a halt. Litimpeks squandered 150 million litai ($37.5 million) and LAIB 271 million. Citizens have deposited some 300 million litai ($75 million) in LAIB. The government guaranteed interbank loans of up to 300 million litai to avoid a paralyzing chain reaction. By 20 January the banks should resume operation.

The average monthly income of a Lithuanian family member in the third quarter of 1995 was 265 litai ($66), according to a survey of 1,244 families conducted by the Lithuanian Statistics Department. In real terms income rose by only 5.6 percent, and it actually decreased by 13.8 percent compared with a year ago. Food purchases accounted for 57 percent of all expenses, with housing, heating, and energy costs making up 11 percent. A mere 2.1 percent was spent on health care, compared with 4 percent on alcohol and tobacco.

Russian President Yeltsin issued a presidential decree abolishing as of 1 December, all export duties on refined oil and timber products. From 1 January 1996, export duties on all other products are scrapped, except those on crude oil, gas, and some industrial goods, on which export duties will be halved. The government is responding to the fact that crude oil exports fell 5.1 percent in the first ten months of 1995. The tax on crude oil exports is currently $46 per metric ton. The duty on gas exports was increased in early November from $2.6 to $6.5 per 1,000 cubic meters.

In the first eleven months of 1995, Russia's GDP fell by 4 percent and industrial output by 3 percent compared with the same period in 1994, according to official figures released in mid-December. GDP for 1995 is estimated at 1,650-1,700 trillion rubles ($360-$368 billion). The rate of economic decline slowed in 1995 in comparison with 1994, when Russia's GDP and industrial output were down 15 percent and 21 percent, respectively. Official figures also show a 12 percent decline in real income over the first eleven months of 1995.

In Russia the ruble corridor has been extended for the six months beginning on 1 January, and the ruble will be allowed to float between 4,550 and 5,150 to $1, instead of the present 4,300-4,900 band. That means the ruble will be allowed to devalue by up to 13 percent. First Deputy Prime Minister Anatolii Chubais and others oppose devaluation because it will tend to increase inflation. (Figures for November show inflation to be holding at 4.5 percent per month.) Exporters want the ruble to fall in order to restore their profitability. Aleksandr Livshits, President Yeltsin's chief economic adviser, in a 22 November interview expressed support for both an easing of conditions for exporters and some relaxation in interest rates.

Agriculture ministry official Alexander Vasyutin said Russia's main grain harvest in 1996 could recover to 77 million-80 million metric tons after the drought damage of 1995. But an Economy Ministry forecast suggests that reserves of domestic grain could be exhausted by June 1996, and that Russia might need to buy up to 6 million metric tons of grain by the summer of 1996.

Russia and the London Club of 600 creditor banks have concluded a framework agreement on the rescheduling of loans and interest totaling $32.5 billion. In a mid-November meeting in Frankfurt it was decided that Russia will be granted a seven-year grace period, during which it will only pay interest. The agreement does not formally forgive any of Russia's debt, as did a similar agreement with Poland, but it spreads out the repayments over twenty-five years. Over the past four years the banks rolled the loans forward every ninety days. On 15 November the Paris Club of official creditors had also agreed to reschedule the $40 billion it is owed by Russia, although a timetable was not agreed upon.

The number of Russian banks registered as of 1 October 1995—2,570 commercial banks and 5,760 bank branches—is still relatively scant, in relation to the size of the economy, and many banks are quite small, according to Sergei Dubinin, the new head of the Central Bank. According to a survey conducted by the Public Advisory Committee on Banking Legislation of the Federation Council, 40 percent of the commercial banks were founded with a capital base of less than 500 million rubles ($110,000). In the first nine months of 1995, 114 commercial banks had their licenses revoked for violating financial legislation.

Russia reduced energy supplies to CIS member countries in 1995. For the period January-November 1995, Russian deliveries of gas, crude oil, and petroleum products were down in volume by 9 percent, 19.5 percent, and 57 percent, respectively, compared with the same period in 1994, despite a higher unit price. The value of Russia's overall exports to CIS countries for this period declined by 3.5 percent to $12.4 billion against the same period last year. Imports totaled $11.5 billion, up by a spectacular 24.2 percent against the same period in 1994, mainly on account of foodstuffs imported by Russia from CIS countries. Overall Russian exports during the first eleven months of the year rose 21 percent and the trade surplus widened to $31 billion.

Russian oil and gas production in 1995 is projected at 296 million tons of crude oil and 551 billion cubic meters of gas, a 4 to 5 percent drop compared with the corresponding figures for last year (308 million tons and 581 billion cubic meters, respectively), according to the government's Economic Situation Center.

Ukraine will step up structural reforms and bring down rising inflation to a monthly average of 1 percent in 1996, President Leonid Kuchma said. National Bank Chairman Viktor Yushchenko said that sluggish privatization is a major reason the budget deficit exceeded the IMF-supported target of 7.2 percent of GDP in 1995. Only 2 trillion ($11 million) of the 92 trillion karbovantsi ($526 million) expected from privatization in the first nine months of 1995 has been collected. The government has been forced to underfinance government activities rather than print money to avoid further jumps in inflation. As a result, hundreds of thousands of Ukrainian coal miners, teachers, physicians, and academics have not been paid since the spring 1995.

In Slovakia, which, according to the Financial Times, is the second fastest growing economy in Eastern Europe, the current account for the first eleven months of 1995 remained in surplus, at 3.3 billion koruny ($111.5 million). The 1996 budget plans on revenues of 162.4 billion koruny ($5.6 billion) and expenditures of 189.4 billion koruny, GDP growth of 5 to 6 percent, and inflation of 6 to 7 percent.

Cuba's economic plan for 1996 aims to increase the pace of economic recovery through a rebound in sugar production and higher revenues from the growing tourist industry. José Luis Rodriguez, economy minister, forecast GDP growth of 5 percent in 1996, double the 2.5 percent announced for 1995 (compared with an overall 35 percent decline from 1989 to 1993). Exports should increase by 20 percent and imports by 15 percent. In the first detailed statistical report on its economy in five years, Cuba has used IMF guidelines to compile previously unpublished balance of payments figures. The report puts the total foreign debt at $9.1 billion at the end of 1994.

Poland's GDP is expected to grow 5.5 percent in 1995 and 6.5 percent in 1996, Finance Minister Grzegorz Kolodko announced. In 1996, imports are projected to grow 13.6 percent and exports 16 percent, while investment will increase by 8.5 percent. Real wages will grow 3.5 percent (5.5 percent in the public sector). The unemployment rate remained steady at 14.7 percent in November. While Kolodko forecasts consumer price inflation for 1996 at 17 percent, down from 22.7 percent in 1995, the national bank projects 19 to 21 percent. To stem inflation, the central bank recently revalued the zloty by 6.4 percent from 2.7 to 2.53 zlotys per dollar. By early November, foreign reserves reached $13.5 billion, up from $6 billion at the start of the year.

Nine hundred fourteen state enterprises (27 percent of the total) in Poland were transformed into joint-stock companies owned by the state treasury between July 1990 and October 1995, according to the Polish Privatization Ministry. The process will get a boost as coupons are distributed under the new mass privatization program launched on 22 November. Up to 28 million adults should become shareholders, and new management should be brought to more than 500 firms. Each citizen is allowed to have one coupon, costing 20 zlotys ($8) apiece. After twelve months, the coupon holders—if they do not sell their coupons on the free market—can exchange their certificates into fifteen shares, one for each of the fifteen national investment funds, which will be traded on the Warsaw Stock Exchange. (The fifteen funds, which control the 500 firms, are worth a total of about $3.1 billion.) Analysts say that up to 30 percent of the firms participating in the program, mostly medium-size firms, are in a difficult financial situation.

Latest Polish statistics put the number of people currently working in the underground economy at at least two million, with 43 percent not paying taxes and another 57 percent holding second jobs with untaxed earnings.

Bulgarian National Bank governor Todor Valchev on 15 December suggested that the projected 1996 budget deficit of 4.5 to 6.0 percent of GDP will hurt health, education, and the legal system. (A deficit of 7 percent GDP equivalent is expected in 1995). For 1996 the government projects 20 to 25 percent inflation (35 to 40 percent in 1995); an exchange rate of 80 to 83 leva to the dollar (currently 69.4 leva), a budget deficit of 4.5 to 6.0 percent of GDP, 2.5 percent growth of GDP (about the same as 1995), and a 25 percent annual interest rate (4 percent at end 1995). The projection calls for reintroducing administrative control over wages at state enterprises for the first time since 1990. Bulgaria's foreign reserves stand at $1.4 billion while debt payments in 1996 will be $1.25 billion.

The United Nations 1995 Human Development Report—which measures GDP, real spending power, life expectancy, and education level—put Bulgaria in 65th place among the 174 UN members. In 1991 Bulgaria ranked 33rd and in 1994 it was 48th. According to the report, average life expectancy went down by almost four years since 1991, and is now 71.2 years. Men's life expectancy is only 67.6 years, and women's 74.4. Some 7 percent of the Bulgarian population are "absolutely illiterate." A ranking of women's emancipation, which includes women's participation in economic and political decisionmaking, puts Bulgaria in 20th place, two below Hungary. Bulgaria and Hungary are the only former Communist countries among the top 20.

China's adjusted GDP is seen growing 9.7 percent in 1995, according to China Securities, citing State Information Center data. Figures released by the State Economic and Trade Commission predict a gradual cooling of China's overheated economy in 1996, with 9 percent GDP growth, compared with 11.8 percent in 1994 and 9.8 percent in the first nine months of 1995. The retail price index is forecast to rise by 15.5 percent in 1996, almost the same rate as measured for the first eleven months of 1995 on a year-on-year basis (15.4 percent). Retail prices are expected to rise an annual 14 percent in 1997.

Inflation in Albania was 0.7 percent for October. Since the national bank expects inflation to run at between 1 percent and 1.2 percent during November and December, the goal of 10 percent annual inflation in 1995 appears attainable. The budget deficit target, 7 percent of GDP, is also within reach. These figures continue the improving trend that began in 1992, when inflation was in the triple digits and the budget deficit was a double-digit share of GDP.

In Tirana a stock market will open in March 1996, and will trade shares in Albania's recently privatized companies. The government is preparing to set up a register of shares. In the first round of privatization, twenty large and medium-size state-owned enterprises were privatized through the sale of vouchers. Of the 4,000 shareholders in Albania, 2,700 are employees of the privatized companies, mainly in public services, trade, construction, and agriculture. The second round of privatization will include industrial enterprises. A total of 350 companies will become private by the end of 1996. Meanwhile, 4.4 billion lek ($48 million) in privatization bonds have been provided to people persecuted for political reasons under communism.

According to the International Labour Organization, restrictive income policies in Central and Eastern Europe, have not resulted in economic recovery and can lead to serious social tensions. After the fall of communist regimes in the region, most countries slashed real wages to curb inflation and rein in soaring budget and current account deficits. "If real wages further decline ... we see some serious economic and social risks," says Werner Sengerberger, director of the ILO's Central and East Europe Team. The restrictive policies have not only aggravated social and political problems in the region; they have also proved economically inviable as consumption fell along with living standards, according to ILO counselor Daniel Vaughan Whitehead. The ILO suggested that the region's governments should try to improve productivity instead of restraining wages.

The government of Kazakhstan has accepted an economic reform plan extending through 1998 and a draft budget for 1996. In a 28 November session, Kazakhstan Prime Minister Akezhan Kazhegeldin pledged to continue macroeconomic stabilization and economic restructuring. The program aims to bring inflation below 12 percent in 1998, a significant drop from the 42.4 percent it ran in the first ten months of 1995. It is hoped that next year's inflation rate will be 26 to 28 percent, while the value of the tenge will drop from 63.3 to $1 down to 71 to $1. GDP in 1996 should reach 1.31 trillion tenge at the latter rate. Kazakhstan's cabinet has approved a draft 1996 budget that plans a deficit of 3.3 percent of GDP, a halving of inflation, and stability for the national currency.

Slovenia becomes a member of the Central European Free Trade Agreement (CEFTA) in January 1996, joining the Czech Republic, Hungary, Poland, and Slovakia. Slovenia's Minister of Economic Relations and Development Janko Dezelak expects a substantial increase in trade with CEFTA members.