Albania and the IMF

Bosnia and Herzegovina and the IMF

Bulgaria and the IMF

Republic of Croatia and the IMF

former Yugoslav Republic of Macedonia and the IMF

Romania and the IMF

Southeast Europe:
Regional Economic Prospects, External Financing Needs, and IMF Programs

Prepared by European I Department
March 20, 2000

Economic Prospects

External Financing

Status of Fund Relations with the Region

Table 1. Southeast Europe: Growth and Inflation, 1998–2000

Table 2. Southeast Europe: External Current Account and Financing Needs

Economic Prospects

  • Prospects for recovery in the region in 2000 have if anything improved since September 1999 when the Fund last reviewed the outlook. GDP is still projected to have contracted (by about ¼ percent) in 1999, in part because of the Kosovo crisis, but more so because of underlying macroeconomic and structural problems in the two largest economies, Romania and Croatia. Nevertheless, generally prudent macroeconomic management in most countries has provided a stable environment in which economic growth should rebound quite strongly in 2000 (see Table 1). Romania and Croatia are projected to continue to grow more slowly on average than the smaller countries, but in both these countries growth is projected to firm during the course of the year. In all cases, the sustainability of growth will depend on further progress in addressing macroeconomic imbalances and implementing structural reforms.

  • Inflation is now low in all of the countries except Romania where it is still over 50 percent. The Romanian government aims to reduce inflation to 27 percent by end 2000. Policies are generally consistent with maintaining low inflation in the other countries.

External Financing

  • Almost all the countries attained better external positions in 1999 than expected with significant reductions in current account deficits in Bosnia and Herzegovina, Croatia, FYR Macedonia, and Romania (Table 2). However, even with continuing adjustment efforts expected in most countries, official balance of payments financing needs, including grants, are projected to be about US$2¼ billion for the region in 2000. Financing for all but about US$300 million of these needs has been provisionally identified, assuming the disbursement of sizable assistance committed, but not used, in 1999, and US$400 million in net purchases in 2000 under existing IMF programs. There remains a case for higher official balance of payments financing to support stronger adjustment and reform programs.

  • The projections in Tables 1 and 2 assume that, in the absence of an acceleration of regional projects, project (as distinct from balance of payments) financing by official creditors will amount to about US$2 billion in 2000, similar to the amounts estimated to have been disbursed in 1998 and 1999 (see Table 2). In view of the high economic and social return to infrastructure spending in Southeast Europe, there is a strong case for additional financing for regional projects. However, taking into account the relatively tight capacity for repayment, due consideration should be given to the appropriate terms for such financing.
Status of Fund Relations with the Region
  • Albania is in the second year of a three-year program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF). The program is on track. The macroeconomic strategy emphasizes fiscal consolidation through strengthening tax revenues. Structural reform priorities are bank and enterprise privatization. The authorities are preparing an interim Poverty Reduction Strategy Paper. An IMF mission has been in the field this month to conduct the final review of the second-year arrangement and to discuss policies for a third year-program.

  • Bosnia and Herzegovina's stand-by arrangement (SBA) was approved in May 1998, although the second and third reviews of the arrangement have not yet been completed. Macroeconomic stabilization continues to rely on a successful currency board arrangement as well as on fiscal adjustment. Progress in the structural area has been hesitant, and an acceleration of reforms, particularly as regards enterprise privatization, will be key to the maintenance of broad-based and rapid growth. Discussions on an extension of the SBA, which expires at end-April, are expected to be held shortly.

  • In Bulgaria, the EFF-supported adjustment and reform program, running from July 1998 to June 2001, is on track. The authorities remain fully committed to the currency board arrangement, which is underpinned by prudent fiscal and incomes policies, and which has given impetus to wide-ranging structural reform. Economic activity is also strengthening. Fund staff have reached understandings with the authorities on policies for 2000 and a Board discussion on the third program review is scheduled for late March.

  • Croatia's inoperative extended fund facility (EFF) arrangement expired this month. The authorities have requested discussions on a SBA. Among other things, a program in support of such an arrangement would be expected to include resolute fiscal retrenchment and structural reforms--including further privatization and restructuring of the health care and pension systems. Assuming early agreement on a program, a twelve- or eighteen-month SBA could be agreed by mid-year.

  • In FYR Macedonia, the Fund does not currently have an active program. Progress in discussions of a three-year program that could be supported by a mix of PRGF and general account resources will require the authorities' strong commitment to structural reforms, and to enterprise privatization in particular.

  • Romania's stand-by arrangement (SBA) was approved in August 1999. The program's focus is on continued fiscal consolidation and the restructuring and privatization of banks and enterprises. Performance under the SBA has been generally good, although completion of the review, originally due by late October 1999, has been considerably delayed, most recently by the need to agree on the budget for 2000. The authorities have requested a two-month technical extension of the SBA, which is due to expire at end-March 2000, to provide time to complete the review and reach agreement on a further extension of the SBA to end-February 2001.

  • Under the terms of UN Security Council Resolution No.1244, Fund staff are continuing to provide technical assistance to the interim UN administration in Kosovo, albeit on a diminished scale now that budgetary and payments systems have been successfully put in place. Fund staff are also monitoring budgetary policies and developments on a regular basis. The Fund does not have regular relations with Kosovo, which is a province of a non-member country.

Table 1. Southeast Europe: Growth and Inflation, 1998-2000
(In percent)
  1998     1999 2000
    Prel. Proj.

Real GDP Growth        
   Albania 8.0   8.0 8.0
   Bosnia and Herzegovina 12.4   10.0 15.0
   Bulgaria 3.5   2.5 4.0
   Croatia 2.5   -1.0 2.5
   FYR of Macedonia 2.9   2.7 6.0
   Romania -5.4   -3.2 1.3
Average of six countries        
   Weighted by countries' GDP -0.5   -0.2 3.5
   Median 3.2   2.6 5.0
Inflation growth, end-of-period        
   Albania 8.7   -1.0 3.0
   Bosnia and Herzegovina 10.0   5.0 3.0
   Bulgaria 1.0   6.2 3.5
   Croatia 5.4   5.0 3.5
   FYR of Macedonia -3.1   2.4 1.0
   Romania 40.6   54.8 27.0
Average of six countries        
   Weighted by countries' GDP 21.7   26.5 13.7
   Median 7.1   5.0 3.5
Memorandum items:        
   GDP (US$, millions) 85,925   78,178 81,302
   Population (in millions) 45.8   45.4 45.3

Sources: country authorities and Fund staff estimates.

Table 2. Southeast Europe: External Current Account
and Financing Needs

  1998   1999 2000
    Est. Proj.

  (In percent of GDP)
Current account balances        
   Albania -6.0   -8.5 -8.6
   Bosnia and Herzegovina -26.8   -17.4 -16.6
   Bulgaria -0.5   -5.2 -4.0
   Croatia -7.1   -6.4 -5.0
   FYR of Macedonia -8.8   -4.0 -9.1
   Romania -7.2   -3.8 -3.9
Average, weighted by countries' GDP -7.1   -5.7 -5.5
  (In billions of US dollars)
Required regional financing from official creditors 3.2   3.4 4.4
   Current account deficit, excluding official grants 6.5   5.0 4.7
   (plus) change in reserves 0.4   1.6 2.2
   (plus) repayments of debt to official creditors 1.5   1.5 1.4
   (minus) non-official financing, net1 5.2   4.7 4.0
Project financing by official creditors2 2.0   1.9 2.1
   Multilateral institutions 0.9   0.8 1.0
   Bilateral creditors 1.1   1.1 1.1
Balance of payments and/or budget support3 1.2   1.5 2.3
   Identified2 1.2   1.5 2.0
      Multilateral institutions 0.8   1.0 1.5
      Bilateral creditors 0.4   0.5 0.5
   Unidentified (residual) financing gap 0.0   0.0 0.3
Memorandum item:        
   IMF financing, net4 0.0   0.1 0.4

Sources: country authorites and Fund staff estimates.
1Includes private capital, errors and omissions, debt relief, and changes in arrears.
2For 2000, based on existing commitments and expected disbursements.
3Includes non-project official grants and humanitarian aid.
4For 2000, based on existing programs.