## _wp05213

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---

### I. INTRODUCTION — scope and focus
- Coverage: experience of the EU8 countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia) between 1995 and 2003, when the bulk of capital account liberalization took place.
- Anchor and complements to liberalization:
  - EU membership required full liberalization by the time of accession.
  - OECD accession aided liberalization for the Czech Republic, Hungary, Poland, and the Slovak Republic.
- Focus of analysis:
  - Interest-rate-sensitive portfolio flows and financial credit flows as the principal sources of policy and financial-stability stress; foreign direct investment (FDI) considered less problematic in this context.
- Net effect:
  - Inflows were more consequential for monetary and exchange rate policy than outflows during the transition to EU accession.

### Major findings and policy implications (paper summary)
- Two liberalization-speed groups:
  - Rapid liberalizers: the Baltic countries and the Czech Republic — most transactions already unrestricted by 1995.
  - Cautious liberalizers: Hungary, Poland, the Slovak Republic, and Slovenia — opened capital accounts gradually, achieving full liberalization in 2001-04.
- Sequencing pattern across the EU8:
  - FDI liberalized before financial flows.
  - Inflows liberalized before outflows.
  - Long-term flows liberalized before short-term flows.
- Channels and timing:
  - Foreign direct borrowing by enterprises was important in the 1990s because of incomplete bank restructuring and privatization and easy access by foreign-owned enterprises to foreign banks.
  - From 2000 onward, financial flows through the banking system became dominant in almost all countries as bank restructuring completed and retail banking competition increased.
- Cross-country vulnerability determinants:
  - Cautious liberalizers received larger portfolio inflows than rapid liberalizers.
  - Hungary and Poland experienced prolonged large interest differentials and had more financial assets to invest; effectiveness of remaining capital controls eroded.
  - Narrowing of the interest rate differential with disinflation and the level of public debt were major determinants of interest-rate-sensitive portfolio inflows.
- Government securities market:
  - Opening government securities markets to nonresident investors was decisive — this market became the major channel for interest-rate-sensitive inflows in countries with developed financial markets.
- Policy responses used:
  - Monetary and exchange rate policies were the main instruments to counteract excessive interest-rate-sensitive inflows.
  - Fiscal tightening was seldom used directly in reaction to inflows; lack of fiscal consolidation contributed to slow disinflation and persistent inflows in some countries.
  - Debt-management and bank regulation options were used in several countries.
  - Capital controls as a reaction to inflows were introduced only in Slovenia.
- Policy recommendation for prospective liberalizers:
  - Strive for relatively fast and sustainable disinflation to eliminate the interest rate differential while minimizing risks to the current account, financial stability, and economic growth.
  - Achieving this requires highly coordinated and disciplined economic policies with a more dominant role for fiscal policy in managing domestic demand than observed in most EU8 countries.

### II. LITERATURE survey — selected findings and prescriptions
- Mixed evidence on liberalization and growth:
  - Rodrik (1998): finds no correlation between capital account liberalization and growth.
  - Edwards (2001): finds a strong positive effect, mainly limited to high-income countries.
  - Arteta, Eichengreen and Wyplosz (2001): suggests positive effects only in countries that have previously opened up more generally; sequencing matters.
- Transition-economy-specific insights and prescriptions (selected):
  - Lipschitz, Lane, and Mourmouras (2002) — five policy conclusions:
    - (i) sound economic management, policy transparency, and data dissemination are crucial;
    - (ii) an open capital account reduces monetary-policy independence and makes fiscal policy the main stabilization tool;
    - (iii) sequence reforms: liberalize long-term movements before short-term transactions;
    - (iv) establish strong regulatory and supervisory frameworks before full liberalization; avoid excessive corporate foreign exchange exposure;
    - (v) a floating exchange rate regime generally makes a country less vulnerable than a pegged regime by providing disincentives to large foreign exchange exposure.
  - Buiter and Taci (2003): strengthen prudential supervision and regulation; improve risk management; improve transparency and disclosure; enhance legal framework effectiveness.
  - Ishii and others (2002): operational advice on sequencing and coordination of liberalization with other reforms.

### Differences and similarities of capital account liberalization in the EU8
- IMF Article VIII obligations accepted in all EU8 countries between 1994 and 1996.
- Prospective EU accession served as the ultimate anchor; the EU acquis do not specify sequencing.
- OECD accession aspirations shaped timetables for the Czech Republic, Hungary, Poland, and the Slovak Republic.
- Two main groups:
  - Rapid liberalizers: Czech Republic, Estonia, Latvia, Lithuania.
  - Cautious liberalizers: Hungary, Poland, Slovak Republic, Slovenia.
- Common pattern: inflows liberalized before outflows; countries tended to liberalize long-term before short-term flows.
- Country-specific highlights (selected exact dates and measures preserved):
  - Czech Republic:
    - New Foreign Exchange Act enacted September 1995 liberalized most capital transactions.
    - As of January 1, 1999, restrictions on foreign security transactions, financial derivative operations, sale of collective investment instruments by nonresidents, and extension of financial credits by residents to nonresidents were abolished.
    - Issuance of debt securities abroad by residents and opening of deposits by residents abroad liberalized as of January 1, 2001.
  - Estonia: nearly all controls removed by end-1994.
  - Hungary:
    - Foreign Exchange Act of January 1996; final full liberalization took place in June 2001.
    - Widening of fluctuation band from ±2.5 percent to ±15 percent preceded full liberalization.
  - Poland:
    - New Foreign Exchange Law December 1994; Article VIII accepted June 1995.
    - All remaining short-term restrictions eliminated in October 2002.
  - Slovak Republic:
    - 2000 amendment lifted remaining restrictions on medium- and long-term capital transactions.
    - Financial derivatives and remaining securities transactions liberalized as of January 1, 2003; repatriation obligation abolished as of January 1, 2004.
  - Slovenia:
    - February 1995: 40 percent unremunerated reserve requirement (URR) in tolar on foreign non-trade-related loans with maturity < five years (longer maturities 10 percent).
    - July 1996: requirement on banks to balance additional foreign-currency liabilities beyond July 31, 1996 with corresponding foreign assets.
    - February 1997: requirement on foreign portfolio investments to be conducted through custody accounts; cost borne by foreign investors when selling earlier than six months.
    - January 1999: reduction of URR to zero (system retained right to reimpose).
    - June 2000: timetable to eliminate custody-account-related restrictions by end-2002.
    - July 2001: restrictions on portfolio inflows with maturities above six months eliminated.
    - As of January 1, 2002, all restrictions on cash transactions and on securities operations were abolished.

### Capital flows and financial markets (1995–2003) — key statistics and composition
- Aggregate composition for EU8 (1995–2003):
  - FDI: US$134 billion.
  - Other investment: US$41.4 billion.
  - Portfolio investments: US$28.2 billion.
- Among portfolio items, inflows into debt securities far outweighed those into equities.
- Financial structure notes:
  - Banking sector dominant in intermediation vs capital markets.
  - Fixed-income markets (almost exclusively government securities markets) more developed than stock markets in many countries.
- Other investment flows:
  - “Other investment flows” include trade credits and loans (financial credits) and currency and deposits.
  - Share of other investment in total net inflows in 1995-2003 ranged from -6 percent (in Hungary) to 70 percent (in Latvia).
  - Sectoral patterns (1995-2003):
    - Financial credit flows channeled mainly through banking sector in Estonia, Latvia, Slovenia, and Hungary.
    - Enterprise sector received bulk of inflows in the Czech Republic, Lithuania, and Poland.
    - Slovak Republic: shares of banking and enterprise sector roughly equal.
  - Monetary authorities and general government net outflow for region: nearly US$10 billion during 1995-2003.
    - Cumulative net outflow: US$7.6 billion for Poland.
    - Cumulative net outflow: nearly US$3.8 billion for Hungary.

### Portfolio flows — determinants and cross-country patterns
- Cautious liberalizers received the largest interest-rate-sensitive portfolio inflows.
- Two key determinants attracting interest-rate-sensitive inflows:
  - Wide interest rate differential.
  - Available financial assets to invest in (liquidity of fixed-income markets).
- Country examples:
  - Poland and Hungary: sizable interest rate differentials until the early 2000s and relatively high domestic debt — major recipients of interest-rate-sensitive inflows.
  - Slovenia: smaller interest rate differential and substantially lower fixed-income market capitalization reduced inflows.
  - Czech Republic: falling interest rates after 1997-99 made debt securities unattractive; capital account mainly recorded portfolio outflows despite sizable fixed-income market.
  - Baltic countries: low interest rates and low market capitalization limited nonresident interest in debt securities.
- Liquidity vulnerability:
  - Liquid government securities markets attracted nonresident investors but increased vulnerability in regional outflow episodes because foreign investors can liquidate positions more easily.
- Exchange rate regimes (selected):
  - Estonia and Lithuania: currency boards.
  - Latvia: hard peg.
  - Slovenia: depreciating currency up to EU accession.

### Policy responses to capital inflows — instruments and country practices
- Principal instruments: monetary and exchange rate policies; prudential supervision and regulation improvements; selective use of debt management and administrative measures.
- Sterilized intervention:
  - Actively used in Hungary until widening of the band in 2001.
  - Poland phased out sterilized intervention earlier and stopped intervening in 1998.
  - Slovak Republic (during fixed rate period) and Slovenia used sterilized intervention.
- Exchange rate path and policy moves:
  - Slowing the rate of crawl used in Hungary and Poland for disinflation; Poland widened intervention band from ±2 percent in 1995 to ±15 percent in 1999.
- Inflation-targeting regimes and differing approaches:
  - Poland: “pure” IT with little concern for capital flows/exchange rate developments.
  - Hungary: used interest rate policy to keep exchange rate in a relatively narrow band consistent with inflation target.
  - Czech Republic: IT regime with less active interest rate policy after achieving low inflation.
- Capital controls:
  - Only Slovenia introduced major capital controls (URR and custody accounts).
  - Slovenian URR not effective in reducing total inflows but changed composition by discouraging short-term inflows; custody accounts reduced portfolio inflows.
  - Czech Republic and Hungary maintained legal possibilities for controls but never activated them.
- Debt management measures (selected exact actions):
  - Hungary used part of privatization receipts to repay debt to international financial institutions in the second half of the 1990s.
  - Slovak Republic repaid a large amount to the IMF before maturity.
  - Poland established a special central bank account from privatization revenues to finance future debt service; used to fund buybacks of Brady bonds in 2000-02.
  - Several countries shifted from external to domestic borrowing; Hungary decided to renew all maturing external and domestic debt in domestic currency in 2002.
- Other targeted regulatory responses:
  - Latvia tightened reserve requirements in response to large financial inflows.
  - Czech Republic introduced limits on banks’ net short-term liability positions to nonresidents in 1995 (largely ineffective).
  - Hungary reduced reserves remuneration if a bank’s on-balance-sheet open position exceeded 30 percent of its capital and used moral suasion to stem inflows.

### Interest-rate transmission, fiscal policy, and macro interactions
- Interest-rate transmission:
  - Uncertain and likely weak in the EU8 countries.
  - Larger EU8 countries mostly avoided negative real policy rates; Slovak Republic had prolonged negative real policy rates.
- Fiscal policy groupings and Government Balance (As a percent of GDP) 1995–2003 (selected exact entries):
  - Prudent fiscal-policy group (helped offset inflows): Estonia, Latvia, Lithuania, Slovenia.
    - Estonia: 1995 -0.5, 1996 -1.6, 1997 -0.3, 1998 -4.3, 1999 -0.6, 2000 0.4, 2001 1.4, 2002 2.9
    - Latvia: 1995 -3.9, 1996 -1.7, 1997 0.1, 1998 -0.8, 1999 -3.9, 2000 -3.0, 2001 -2.0, 2002 -2.3, 2003 -1.6
    - Lithuania: 1995 -4.5, 1996 -4.5, 1997 -4.8, 1998 -4.4, 1999 -8.5, 2000 -2.8, 2001 -1.9, 2002 -0.8, 2003 -1.7
    - Slovenia: 1995 0.1, 1996 0.2, 1997 -1.2, 1998 -0.5, 1999 -0.6, 2000 -1.3, 2001 -1.3, 2002 -1.5, 2003 -1.4
  - Looser fiscal-policy group (did not offset inflows): Czech Republic, Hungary, Poland, Slovak Republic.
    - Czech Republic: 1995 0.2, 1996 -0.4, 1997 -1.2, 1998 -0.6, 1999 -1.6, 2000 -3.3, 2001 -5.0, 2002 -6.6, 2003 -6.0
    - Hungary: 1995 -6.2, 1996 -3.1, 1997 -4.8, 1998 -4.8, 1999 -3.7, 2000 -3.0, 2001 -4.7, 2002 -9.4, 2003 -7.2
    - Poland: 1995 -3.1, 1996 -3.3, 1997 -3.1, 1998 -3.3, 1999 -3.0, 2000 -3.0, 2001 -5.3, 2002 -6.3, 2003 -5.8
    - Slovak Republic: 1995 0.4, 1996 -1.3, 1997 -5.2, 1998 -5.0, 1999 -3.6, 2000 -12.3, 2001 -6.0, 2002 -5.7, 2003 -3.7
- Fiscal consolidation challenge:
  - Fiscal consolidation remains the biggest challenge to euro adoption in the four larger Central European countries after inflation was brought down to low-single-digit levels.

### Policy implications and recommendations (preserved wording and emphasis)
- Live with sizable capital inflows tied to real convergence but mitigate size and volatility of interest-rate-sensitive inflows.
- Interest-rate-sensitive inflows pose difficulties to monetary and exchange rate policy until the interest rate differential is greatly narrowed or eliminated.
- Given expectations for long-run exchange rate appreciation (Balassa-Samuelson effect), the interest rate differential needs to be eliminated by lowering domestic nominal interest rates.
- Key operational conclusions:
  - Interest rate policy limitations:
    - Interest rate policy is much less effective in influencing domestic demand in emerging economies than in mature markets.
    - The interest rate transmission mechanism is weak, even in IT regimes, for some time due to low private-sector indebtedness, easy availability of foreign exchange-denominated loans, high structural demand for borrowing, and structural liquidity surplus in the financial system.
    - Exchange pass-through is generally stronger in emerging economies than in mature economies.
    - Authorities should avoid contributing to one-way bets via implicit guarantees or hints at targeted levels.
  - Speed of disinflation:
    - Speed of disinflation is key; slow disinflation leads to persistent portfolio inflows (Hungary and Poland experience).
    - Czech Republic example: relatively quick disinflation reduced interest-rate-sensitive inflows.
    - Policy mix should focus on relatively fast and sustainable disinflation while minimizing risks to the current account, financial stability, and growth; requires highly coordinated policy elements.
  - Role of fiscal and incomes policies:
    - Fiscal and wage policy discipline is essential for quick disinflation.
    - Fiscal tightening was rarely used as a direct response to inflows in the EU8.
    - Even countries with significantly smaller budget deficits than the EU8 should consider tightening fiscal and wage policies to reduce emerging imbalances.
  - Capital account liberalization sequencing:
    - A cautious approach served more vulnerable EU8 countries well.
    - Countries with slow disinflation and relatively large securities markets are especially advised to open capital accounts cautiously (examples: Hungary and Poland).
    - Effect of newly introduced capital controls likely limited and temporary in economies with large foreign ownership in financial and enterprise sectors.
  - Complementary measures:
    - Debt management and bank supervision/regulation can supplement monetary and fiscal responses.
    - Keeping privatization revenues off the interbank market (Czech Republic) or repaying external debt early (Hungary and Poland) can alleviate exchange rate pressure.
    - Administrative measures and bank regulation measures such as tightening reserve requirements on foreign liabilities (Latvia) can help reduce large financial inflows contributing to credit booms.

### Appendix — Selected numeric tables (representative entries preserved exactly)
- Table A1. Selected EU8 Countries: Nonresident Holdings of Government Securities, 1997-2004 (End of period; percent of total stock) — selected country series:
  - Czech Republic: 8.7...............5.417.6
  - Hungary: 2.88.611.216.820.627.227.428.6
  - Lithuania: 1.21.44.76.73.73.75.57.5
  - Poland: ......7.415.113.116.717.822.2
  - Slovak Republic 1/: .........10.08.08.312.419.4
  - Note: No data available for Slovenia. Estonia not reported due to very small stock of government securities.
- Table A2. EU8 Countries: Real GDP Growth and the Current Account Balance, 1995-2003 (selected series preserved exactly)
  - Czech Republic:
    - Real GDP growth: 6.4 4.8 -1.0 -2.2 -0.8 3.1 2.6 1.5 3.1
    - Current account balance: -2.7 -7.4 -6.1 -2.4 -3.0 -4.8 -5.4 -5.6 -6.2
  - Poland:
    - Real GDP growth: 7.0 6.0 6.8 4.8 4.1 4.0 1.0 1.4 3.8
    - Current account balance: 4.2 -1.0 -3.0 -4.3 -7.5 -6.0 -2.9 -2.6 -1.9
  - Slovenia:
    - Real GDP growth: 4.1 3.5 4.6 3.8 5.9 4.1 2.9 2.9 2.3
    - Current account balance: -0.5 0.2 0.1 -0.8 -3.3 -2.8 0.2 1.4 0.1

*Source: _wp05213 - References .............................................................................................................*

### References .............................................................................................................

### _wp05213 - References .............................................................................................................

### I. INTRODUCTION — scope and focus
- Coverage: experience of the EU8 countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia) between 1995 and 2003, when the bulk of capital account liberalization took place.
- Anchor and complements to liberalization:
  - EU membership required full liberalization by the time of accession.
  - OECD accession aided liberalization for the Czech Republic, Hungary, Poland, and the Slovak Republic.
- Focus of analysis:
  - Interest-rate-sensitive portfolio flows and financial credit flows as the principal sources of policy and financial-stability stress; foreign direct investment (FDI) considered less problematic in this context.
- Inflows were more consequential for monetary and exchange rate policy than outflows during the transition to EU accession.

### Major findings and policy implications (summary bullets from the paper)
- Two distinct liberalization-speed groups:
  - Rapid liberalizers: the Baltic countries and the Czech Republic — most transactions already unrestricted by 1995.
  - Cautious liberalizers: Hungary, Poland, the Slovak Republic, and Slovenia — opened capital accounts gradually, achieving full liberalization in 2001-04.
- Sequencing observed across the EU8:
  - FDI liberalized before financial flows.
  - Inflows liberalized before outflows.
  - Long-term flows liberalized before short-term flows.
- Channels and timing of inflows:
  - Foreign direct borrowing by enterprises was important in the 1990s because of incomplete bank restructuring and privatization and easy access by foreign-owned enterprises to foreign banks.
  - From 2000 onward, financial flows through the banking system became dominant in almost all countries as bank restructuring completed and retail banking competition increased.
- Cross-country vulnerability and determinants:
  - Cautious liberalizers received larger portfolio inflows than rapid liberalizers.
  - Hungary and Poland experienced prolonged large interest differentials, had more financial assets to invest, and saw the effectiveness of remaining capital controls erode — increasing vulnerability to inflows.
  - The narrowing of the interest rate differential with disinflation and the level of public debt were major determinants of the size of interest-rate-sensitive portfolio inflows.
- Government securities market:
  - Opening government securities markets to nonresident investors was decisive — this market became the major channel for interest-rate-sensitive inflows in countries with developed financial markets.
- Policy responses used:
  - Monetary and exchange rate policies were the main instruments to counteract excessive interest-rate-sensitive inflows.
  - Fiscal tightening was seldom used directly in reaction to inflows; lack of fiscal consolidation contributed to slow disinflation and persistent inflows in some countries.
  - Debt-management and bank regulation options were used in several countries.
  - Capital controls as a reaction to inflows were introduced only in Slovenia.
- Policy recommendation for prospective liberalizers:
  - Strive for relatively fast and sustainable disinflation to eliminate the interest rate differential while minimizing risks to the current account, financial stability, and economic growth.
  - Achieving this requires highly coordinated and disciplined economic policies with a more dominant role for fiscal policy in managing domestic demand than observed in most EU8 countries.

### II. LITERATURE survey — selected findings and prescriptions
- Mixed evidence on liberalization and growth:
  - Rodrik (1998): finds no correlation between capital account liberalization and growth.
  - Edwards (2001): finds a strong positive effect, mainly limited to high-income countries.
  - Arteta, Eichengreen and Wyplosz (2001): suggests positive effects only in countries that have previously opened up more generally; sequencing matters.
- Transition-economy-specific insights:
  - Lipschitz, Lane, and Mourmouras (2002):
    - Surge of inflows is intrinsic to transition and convergence.
    - Offer five policy conclusions:
      - (i) sound economic management, policy transparency, and data dissemination are crucial;
      - (ii) an open capital account reduces monetary-policy independence and makes fiscal policy the main stabilization tool;
      - (iii) sequence reforms: liberalize long-term movements before short-term transactions;
      - (iv) establish strong regulatory and supervisory frameworks before full liberalization; avoid excessive corporate foreign exchange exposure;
      - (v) a floating exchange rate regime generally makes a country less vulnerable than a pegged regime by providing disincentives to large foreign exchange exposure.
  - Buiter and Taci (2003) — transition-country financial-sector challenges:
    - (i) strengthen prudential supervision and regulation;
    - (ii) improve risk management of institutions and supervisory agencies;
    - (iii) improve transparency and disclosure and market discipline;
    - (iv) enhance legal framework effectiveness.
  - Ishii and others (2002): operational advice on sequencing and coordination of liberalization with other reforms; Hungary used as a case study.
- Bank-lending and short-term flows:
  - Buch and Lusinyan (2002): share of short-term debt increases with development; pegged exchange rates have smaller shares of short-term debt securities; EU membership not significant for short-term bank lending share.
  - Buch, Heinrich, and Piazolo (1999) and Buch and Heinrich (2002): transition economies had already achieved fairly high financial integration by end-1990s but with different flow structures compared with developed economies; portfolio investment was less important for most transition economies between 1990 and 1999 (with the exception of Hungary).
- Case-study evidence on sequencing and controls:
  - Hungary: characterized as gradual opening; credibility depended critically on supportive macroeconomic and structural policies; short-end controls described as “throwing sand in the wheels” but not strictly prohibitive and helped macroeconomic stability.
  - Poland: gradual, coordinated approach with macro developments and exchange rate/monetary policy; cautious approach helped avoid currency and financial crises.
  - Slovenia: research finds mixed results on capital controls (unremunerated reserve requirement — URR). Findings include:
    - URR not effective in reducing total inflows but somewhat successful in changing inflow composition by discouraging short-term inflows.
    - In mid-1998, short-term credits were 18.5 percent of foreign bank loans in Slovenia — less than half of values observed in the peer group.
    - Caprirolo and Lavrac (2002): requirement for banks to balance additional liabilities abroad with foreign claims as of July 31, 1996, effectively prohibited banks from borrowing abroad.

### Structure of the paper (as provided)
- Section II: brief literature survey focusing on transition economies.
- Section III: differences and similarities of capital account liberalization schedules in the EU8 and requirements facing authorities.
- Section IV: analysis of broad capital flow patterns.
- Section V: discussion of policy responses to inflows.
- Section VI: conclusions and implications for countries yet to liberalize.

*Source: _wp05213 - References .............................................................................................................*

### introduction of custody accounts was also quite effective in reducing nonresidents’ portfolio

### _wp05213 - introduction of custody accounts was also quite effective in reducing nonresidents’ portfolio investments.

### Differences and similarities of capital account liberalization in the EU8
- IMF Article VIII obligations were accepted in all EU8 countries between 1994 and 1996.
- Prospective EU accession served as the ultimate anchor for capital account liberalization; candidate countries have to fully liberalize their capital account by the time of EU accession at the latest.
- The EU acquis do not contain legal obligations or procedural steps on the sequencing of capital account liberalization for candidate countries.
- OECD accession aspirations shaped liberalization timetables for the Czech Republic, Hungary, Poland, and the Slovak Republic (applications in 1993-94 for these four).
- Two main groups among EU8 countries:
  - Rapid liberalizers: the Czech Republic, Estonia, Latvia, Lithuania.
  - Cautious liberalizers: Hungary, Poland, the Slovak Republic, Slovenia.
- Common pattern: countries tended to liberalize inflows before outflows.
- The IMF encouraged liberalization, but operational pace and sequencing were mostly country-driven (examples: ideological fast liberalization in Estonia; pragmatic, macro-driven approach in Poland).

### Rapid liberalizers (Czech Republic and the Baltic countries)
- Czech Republic:
  - De facto liberal approach applied to foreign credits of banks and companies in 1994-95.
  - New Foreign Exchange Act enacted September 1995 liberalized most capital transactions including short-term portfolio and credit inflows; included a safeguard clause (never activated).
  - OECD accession in December 1995; five-year program adopted in early 1996 to eliminate remaining limitations.
  - As of January 1, 1999, restrictions on foreign security transactions, financial derivative operations, sale of collective investment instruments by nonresidents, and extension of financial credits by residents to nonresidents were abolished.
  - Issuance of debt securities abroad by residents and opening of deposits by residents abroad liberalized as of January 1, 2001.
  - Signs that liberalization was premature and contributed to the May 1997 currency crisis amid heavy short-term financial credit inflows.
- Baltic countries (Estonia, Latvia, Lithuania):
  - Estonia: nearly all controls on capital account transactions removed by end-1994.
  - Latvia and Lithuania: by 1994-95 most restrictions on FDI, credit, and portfolio flows were gone.
  - Some restrictions on real estate and pension fund investments retained for some years; transitional arrangements on agricultural and forestry land at EU entry.
- By late 1995 the Czech Republic and the Baltic countries had opened their capital accounts substantially to interest-rate-sensitive and equity flows.

### Cautious liberalizers (Hungary, Poland, Slovak Republic, Slovenia)
- Hungary:
  - High external debt and low reserves in early 1990s led to a cautious approach.
  - Inward FDI liberalized early (1989); major capital account liberalization advanced with the Foreign Exchange Act of January 1996.
  - Principle: liberalize long-term flows before short-term flows.
  - OECD accession (joined May 1996) and improved macro conditions accelerated liberalization (sales/issues of securities to nonresidents with original maturities of more than one year liberalized in 1996).
  - Final full liberalization took place in June 2001; preceded by widening of fluctuation band from ±2.5 percent to ±15 percent.
  - London offshore forint market and dominant foreign ownership in financial sector reduced effectiveness of some restrictions.
- Poland:
  - Gradual schedule favoring long-term flows; inflows liberalized before outflows.
  - FDI inflows and some portfolio inflows liberalized in 1990-94; treasury securities maturity restriction removed in 1993; portfolio investment on Warsaw Stock Exchange liberalized September 1994.
  - New Foreign Exchange Law December 1994; Article VIII obligations accepted June 1995; liberalization accelerated during OECD negotiations (November 1994–November 1996).
  - Remaining short-term restrictions postponed; all remaining short-term restrictions eliminated in October 2002.
  - Offshore zloty market in London occasionally a source of speculative pressure.
- Slovak Republic:
  - Gradual liberalization; long-term before short-term flows; preference for inflows over outflows.
  - Liberalizations in 1996 related to OECD talks; reform slowdown until 1999 limited inflows.
  - 2000 amendment to Foreign Exchange Act lifted remaining restrictions on medium- and long-term capital transactions.
  - Joined OECD in 2000; plan to remove remaining restrictions by EU accession implemented: short-term financial credits liberalized in 2001; financial derivatives and remaining securities transactions liberalized as of January 1, 2003; repatriation obligation abolished as of January 1, 2004; resident operations with foreign deposit accounts and foreign currency operations liberalized as of January 1, 2004.
  - Liberalization among the slowest in EU8; interest-rate-sensitive inflows relatively modest due to undeveloped capital markets.
- Slovenia:
  - Introduced major capital controls and was one of the slowest to liberalize.
  - Controls introduced because domestic residents were borrowing heavily abroad in 1994-96 due to large interest rate differentials (differential between bank lending rates in Slovenia and LIBOR+depreciation was 15-25 percent in 1994-95 and around 10 percent in 1995-99).
  - Three phases: capital controls in 1995-99; liberalization of credit operations in 1999-2000; full liberalization in 2001-02.
  - Measures (based on Caprirolo and Lavrac (2002)):
    - February 1995: Introduction of a 40 percent unremunerated reserve requirement (URR) in tolar on foreign non-trade-related loans with a maturity of less than five years; for longer maturities, the deposit requirement is only 10 percent.
    - December 1995: Requirement on foreign exchange offices to balance daily sales and purchases of foreign currency.
    - July 1996: Requirement on banks to balance any additional liability in foreign currency beyond their position as of July 31, 1996 with corresponding claims in foreign assets.
    - August 1996: Lengthening of the maturity of loans subject to the URR to seven years.
    - February 1997: Requirement on foreign portfolio investments to be conducted through custody accounts with a fully licensed bank; cost borne by foreign portfolio investors when selling such securities to residents earlier than six months after their purchase.
    - January 1999: Reduction of the URR to zero (system retained to reserve the right to reimpose a deposit requirement).
  - June 2000: timetable set to eliminate custody-account-related restrictions by end-2002.
  - July 2001: restrictions on portfolio inflows with maturities above six months eliminated.
  - As of January 1, 2002, all restrictions on cash transactions and on securities operations were abolished (almost full liberalization of inflows).
  - Elimination of restrictions on investment in foreign securities by mutual and investment funds in 2004 led to appreciable increase in portfolio outflows.
  - Slovenia’s capital controls responded mainly to domestic residents’ foreign borrowing, in contrast to other countries where nonresident portfolio inflows were the main concern.

### Capital flows and financial markets (1995-2003)
- Aggregate composition for EU8 (period 1995-2003):
  - FDI: US$134 billion.
  - Other investment: US$41.4 billion.
  - Portfolio investments: US$28.2 billion.
- Among portfolio items, inflows into debt securities far outweighed those into equities.
- Financial system character in transition economies:
  - Dominant role of the banking sector in intermediation compared with capital markets.
  - More developed and larger fixed-income markets (almost exclusively government securities markets) compared with stock markets.
- The focus is on other investment and portfolio flows because they posed more difficulties for monetary authorities than FDI did.

### Other investment flows
- “Other investment flows” include trade credits and loans (financial credits) and currency and deposits.
- Share of other investment in total net inflows in 1995-2003 ranged from -6 percent (in Hungary) to 70 percent (in Latvia) for different countries.
- Sectoral patterns (1995-2003):
  - Financial credit flows channeled mainly through banking sector in Estonia, Latvia, Slovenia, and Hungary.
  - Enterprise sector received bulk of inflows in the Czech Republic, Lithuania, and Poland.
  - Slovak Republic: shares of banking and enterprise sector roughly equal.
- Reasons for direct foreign borrowing by enterprises in the 1990s:
  - High inflation and nominal interest rates, trend real appreciation increased attractiveness of foreign-exchange-denominated borrowing.
  - Domestic banks burdened by nonperforming loans, high reserve requirements, low efficiency, raising domestic borrowing costs.
  - Foreign-owned banks linked domestic creditworthy firms to foreign headquarters, facilitating direct foreign borrowing.
  - Early enterprise restructuring increased creditworthiness, facilitating foreign borrowing.
- Bank restructuring, privatization, reduced reserve requirements, falling nominal interest rates, and increased competition shifted direct enterprise borrowing into the banking channel from 2000 onward (except Lithuania and Poland).
- A net outflow from monetary authorities and general government of nearly US$10 billion was recorded for the region as a whole during 1995-2003:
  - Cumulative net outflow reached US$7.6 billion for Poland.
  - Cumulative net outflow nearly US$3.8 billion for Hungary.
- Banking channel dominance and ensuing credit booms in most countries were driven mainly by competition for retail banking market share and profit margins.

### Portfolio flows
- Cautious liberalizers received the largest interest-rate-sensitive portfolio inflows, indicating that factors beyond legal liberalization mattered (starting conditions, macroeconomic performance).
- Interest-rate-sensitive portfolio inflows proxied by nonresidents’ investment in domestic government securities (growing share of nonresident holdings of government securities).
- Two key factors for attracting interest-rate-sensitive portfolio inflows:
  - Wide interest rate differential.
  - Available financial assets to invest in (liquidity of fixed-income markets).
- Poland and Hungary had sizable interest rate differentials until the early 2000s and relatively high domestic debt; these were major recipients of interest-rate-sensitive inflows.
- Slovenia: smaller interest rate differential and substantially lower fixed-income market capitalization reduced inflows.
- Czech Republic: falling interest rates after 1997-99 made debt securities unattractive; capital account mainly recorded portfolio outflows despite sizable fixed-income market.
- Baltic countries: low interest rates and low market capitalization limited nonresident interest in debt securities.
- Interest-rate-sensitive flows related to public debt and inflation:
  - Countries with high public debt and slow disinflation—Hungary and Poland—were most vulnerable to surges of portfolio inflows.
- Liquidity in government securities markets attracted nonresident investors but made markets vulnerable in periods of regional outflows (foreign investors can liquidate positions more easily in liquid markets).
- Pace of disinflation influenced portfolio inflows: Baltic countries and Czech Republic achieved low inflation by 1999 and virtually eliminated interest rate differentials vis-à-vis euro rates; Poland, Slovak Republic, and Hungary had very high interest rate differentials in the 1990s.
- Exchange rate regimes:
  - Estonia and Lithuania: currency boards.
  - Latvia: hard peg.
  - Slovenia: depreciating currency up to EU accession.
- Summary finding: cautious liberalizers received larger portfolio inflows both in absolute terms and relative to GDP. Restrictive measures, where maintained, increased transaction costs and tilted composition toward long-term flows, but were increasingly ineffective in preventing large interest-rate-sensitive inflows. Restrictions on lending to nonresidents in domestic currency and on financial derivatives mitigated volatility and speculative attacks where they were kept.

### Policy responses to capital inflows
- Policy response depended on nature of inflows (FDI vs interest-rate-sensitive flows) and macro goals (disinflation vs growth).
- Continuous improvements in prudential supervision and regulation were crucial for liberalization.
- Monetary and exchange rate policies were the most common responses in Central European countries (note: Baltic countries had constrained options due to exchange rate regimes).
- Main policy tools and country practices:
  - Sterilized intervention:
    - Actively used in Hungary until widening of the band in 2001.
    - Poland phased out sterilized intervention earlier and stopped intervening in 1998 as part of move to full exchange rate flexibility.
    - Slovak Republic (during fixed rate period) and Slovenia used sterilized intervention to maintain exchange rate paths.
  - Slowing the rate of crawl (reducing monthly depreciation) used in Hungary and Poland for disinflation; Poland widened intervention band from ±2 percent in 1995 to ±15 percent in 1999.
  - Cautious and gradual interest rate cuts along the disinflation path; central banks aimed to maintain low positive real interest rates to not discourage savings.
- Move to more flexible exchange rates was partly motivated by increased capital flows; policy responses were differentiated by inflow type after currency floatings.
- Inflation-targeting (IT) regimes and differing strategies:
  - Poland: “pure” IT with little concern for capital flows/exchange rate developments—policy of nonintervention placed costs of volatility on market participants.
  - Hungary: used interest rate policy to try to keep exchange rate in a relatively narrow band consistent with the inflation target—implying belief in strong exchange rate pass-through.
  - Czech Republic: IT regime with less active interest rate policy after achieving low inflation relatively soon.
- Consequences of IT and tight monetary policy included very large inflows of interest-rate-sensitive capital accompanying disinflation success in some countries.

*Italic source: Extracted from the IMF working paper content unit titled "_wp05213 - introduction of custody accounts was also quite effective in reducing nonresidents’ portfolio investments."*

### introduction of IT.

### introduction of IT.

### Interest-rate transmission and policy rates
- Interest rate transmission was uncertain and likely weak in the EU8 countries.
- The larger EU8 countries mostly avoided maintaining negative real policy rates for fear of their effect on inflation and savings, and of a sudden turnaround of capital flows.
- Among the Central European countries, only the Slovak Republic had prolonged periods of negative real policy rates, as it was more concerned about the effect of large capital inflows on the exchange rate than about their potential effect on inflation (Appendix Figure A3).
- Note: "Though infrequently, they resorted at times of foreign exchange market stress, to intervention." (footnote context)

### Fiscal Policy — experience and country groupings
- Fiscal policy responses to capital inflows were mixed; fiscal policy can mitigate inflows’ effects on the real exchange rate, the current account, and inflation, but is relatively inflexible due to long budgetary procedures and response lags.
- Transition-era structural fiscal challenges (pension reform, reform of transfers and subsidies, major infrastructure investments) made some countries reluctant to tighten fiscal policy despite large capital inflows.
- Two main groups in terms of fiscal policy:
  - Group with generally prudent fiscal policies (helped offset inflows): Estonia, Latvia, Lithuania, and Slovenia.
    - Governments in these countries maintained prudent fiscal policies almost throughout 1995-2003, as required by currency boards and hard pegs, though there were episodes of fiscal loosening following the Russian crisis.
    - These countries were helped by low public debt; fiscal stance reflected general commitment to tight fiscal discipline rather than direct response to capital inflows.
    - Government Balance (As a percent of GDP) 1995–2003 for selected countries:
      - Estonia: 1995 -0.5, 1996 -1.6, 1997 -0.3, 1998 -4.3, 1999 -0.6, 2000 0.4, 2001 1.4, 2002 2.9
      - Latvia: 1995 -3.9, 1996 -1.7, 1997 0.1, 1998 -0.8, 1999 -3.9, 2000 -3.0, 2001 -2.0, 2002 -2.3, 2003 -1.6
      - Lithuania: 1995 -4.5, 1996 -4.5, 1997 -4.8, 1998 -4.4, 1999 -8.5, 2000 -2.8, 2001 -1.9, 2002 -0.8, 2003 -1.7
      - Slovenia: 1995 0.1, 1996 0.2, 1997 -1.2, 1998 -0.5, 1999 -0.6, 2000 -1.3, 2001 -1.3, 2002 -1.5, 2003 -1.4
  - Group with looser fiscal policies (did not offset inflows; sometimes exacerbated problems): Czech Republic, Hungary, Poland, Slovak Republic.
    - These larger Central European countries posted rather large deficits, especially from 2001.
    - There was no sign of fiscal tightening as a reaction to large capital inflows during most of the period in these four countries.
    - Slovak and Czech Republics tightened fiscal policy toward the end of the period, but not seen as direct reaction to capital inflows.
    - Loose fiscal policy contributed to slow disinflation in Hungary and the Slovak Republic, and to large current account deficits in the Czech and Slovak Republics, and Hungary (Appendix Table A2).
    - The lack of fiscal response placed most of the burden of disinflation on monetary and exchange rate policies, especially in Poland and Hungary.
    - Tight monetary policy in Poland in 1999-2001 and in Hungary after 2002 contributed significantly to increased portfolio inflows.
    - Government Balance (As a percent of GDP) 1995–2003 for selected countries:
      - Czech Republic: 1995 0.2, 1996 -0.4, 1997 -1.2, 1998 -0.6, 1999 -1.6, 2000 -3.3, 2001 -5.0, 2002 -6.6, 2003 -6.0
      - Hungary: 1995 -6.2, 1996 -3.1, 1997 -4.8, 1998 -4.8, 1999 -3.7, 2000 -3.0, 2001 -4.7, 2002 -9.4, 2003 -7.2
      - Poland: 1995 -3.1, 1996 -3.3, 1997 -3.1, 1998 -3.3, 1999 -3.0, 2000 -3.0, 2001 -5.3, 2002 -6.3, 2003 -5.8
      - Slovak Republic: 1995 0.4, 1996 -1.3, 1997 -5.2, 1998 -5.0, 1999 -3.6, 2000 -12.3, 2001 -6.0, 2002 -5.7, 2003 -3.7
- Fiscal consolidation remains the biggest challenge to euro adoption in the four larger Central European countries after inflation was brought down to low-single-digit levels.

### Capital Controls
- Of the EU8 countries, only Slovenia introduced major capital controls during the period.
- The Slovene URR (unremunerated reserve requirement) was not effective in reducing total inflows but was somewhat successful in changing composition by discouraging short-term inflows; introduction of custody accounts reduced portfolio inflows.
- Czech Republic and Hungary maintained legal possibilities for controls (deposit requirements) but never activated them.
- The prolonged process and postponement of capital account liberalization steps (such as for short-term transactions in Poland) were also responses to inflows.
- Restrictions on financial derivatives and on lending to nonresidents in domestic currency—eliminated as last steps in most countries—were important in reducing vulnerability in outflow episodes (e.g., Russian crisis).

### Debt Management
- Some countries used debt management to mitigate inflow effects:
  - Hungary used part of privatization receipts to repay debt to international financial institutions in the second half of the 1990s.
  - Slovak Republic repaid a large amount to the IMF before maturity.
  - Poland established at the central bank a special account from privatization revenues to finance future debt service; this account was used to fund buybacks of Brady bonds in 2000-02.
  - Several countries shifted from external to domestic borrowing:
    - Hungary decided to renew all maturing external and domestic debt in domestic currency in 2002.
    - Poland and Slovenia shifted to borrowing from the domestic market after 2000 and 2001, respectively.
  - Motivations included developing the domestic government securities market and risk-management considerations.

### Other Policy Responses
- Banking regulation and supervision continuously improved during the transition period, helping monitor and reduce risks from heavy capital flows; measures directly responding to capital flows were rare.
- Examples of targeted measures:
  - Latvia tightened reserve requirements in response to large financial inflows through the banking system that fueled private sector credit growth.
  - Czech Republic introduced measures in 1995 aimed at reducing short-term speculative inflows, including a limit on banks’ net short-term liability positions to nonresidents and a limit for “short” short-term positions by banks to nonresidents; these measures were largely ineffective.
  - Czech Republic converted bulk foreign currency privatization receipts directly at the central bank to mitigate exchange rate pressure; the government pays a fee that increases with the cumulative amount converted to compensate the central bank for possible valuation losses; funds converted are sterilized by the central bank through repurchase operations.
  - Hungary reduced reserves remuneration if a bank’s on-balance-sheet open position exceeded 30 percent of its capital and used moral suasion and threats of stricter reserve requirements to stem inflows (response to large short-term inflows in 2000).

### Policy Implications for other countries
- Successful transition economies must learn to live with sizable capital inflows related to real convergence, but should try to mitigate the size and volatility of interest-rate-sensitive inflows.
- In an environment of increasingly open capital accounts, interest-rate-sensitive inflows pose difficulties to monetary and exchange rate policy until the interest rate differential is greatly narrowed or eliminated.
- Given expectations for long-run exchange rate appreciation (the Balassa-Samuelson effect), the interest rate differential needs to be eliminated by lowering domestic nominal interest rates.
- Key conclusions based on EU8 experience:
  - Interest rate policy limitations:
    - Interest rate policy is much less effective in influencing domestic demand in emerging economies than in mature markets.
    - The interest rate transmission mechanism is weak, even in IT regimes, for some time due to low private-sector indebtedness, easy availability of foreign exchange-denominated loans, high structural demand for borrowing, and structural liquidity surplus in the financial system.
    - Exchange pass-through is generally stronger in emerging economies than in mature economies, giving exchange rate policy special prominence.
    - The exchange rate regime influences capital inflows, as it can alleviate or exacerbate discontinuities in the pricing of risk.
    - Authorities should avoid contributing to one-way bets via implicit guarantees or hints at targeted levels.
  - Speed of disinflation:
    - Given the need to reduce domestic nominal interest rates and uncertainties about interest rate transmission, the speed of disinflation is key.
    - If disinflation is slow, portfolio inflows will be persistent because of prolonged interest rate differentials (experience in Hungary and Poland).
    - Persistent portfolio inflows can lead to high credit growth and large current account deficits.
    - The Czech Republic shows that relatively quick disinflation to levels comparable to mature markets or only slightly above can greatly reduce interest-rate-sensitive inflows in the near or medium term.
    - Policy mix should focus on relatively fast and sustainable disinflation while minimizing risks to the current account, financial stability, and growth; this requires highly coordinated policy elements.
  - Role of fiscal and incomes policies:
    - Since monetary policy effectiveness is limited and openness to global capital markets reduces monetary policy room, fiscal and incomes policies should play a major role in managing demand.
    - Fiscal and wage policy discipline is essential for quick disinflation.
    - Fiscal tightening was rarely used as a direct response to inflows in the EU8, contributing to slow disinflation and widening current account deficits in some countries.
    - Even countries with significantly smaller budget deficits than those of the EU8 should consider tightening fiscal and wage policies to reduce emerging imbalances because relying exclusively on tighter monetary policy has limited effectiveness.
    - It is highly unlikely a government can change the fiscal stance with the magnitude and rapidity required to offset large capital account shifts.
  - Capital account liberalization:
    - A cautious approach to liberalizing the capital account seems to have served more vulnerable EU8 countries well.
    - Countries with slow disinflation and relatively large securities markets are especially advised to open capital accounts cautiously (examples: Hungary and Poland).
    - The effect of newly introduced capital controls is likely limited and temporary in economies with large foreign ownership in financial and enterprise sectors.
  - Complementary measures:
    - Debt management and bank supervision/regulation can be useful additions to monetary and fiscal responses.
    - Keeping privatization revenues off the interbank market (Czech Republic) or repaying external debt early (Hungary and Poland) can alleviate exchange rate pressure.
    - When inflows are large even absent interest differentials (e.g., motivated by gaining market share in retail banking), administrative measures may be most effective.
    - Bank regulation measures such as tightening reserve requirements on foreign liabilities (Latvia) can help reduce large financial inflows that contribute to credit booms.

*Source: IMF PDF chapter "introduction of IT."*

### REFERENCES

### _wp05213 - REFERENCES

### References cited
- Arteta, C., B. Eichengreen, and C. Wyplosz, 2001, “When Does Capital Account Liberalization Help More Than It Hurts?” NBER Working Paper No. 8414.
- Bakker A., and B. Chapple, eds., 2003, Capital Liberalization in Transition Countries: Lessons from the Past and for the Future.
- Begg, D., and others, 2003, “Sustainable Regimes of Capital Movements in Accession Countries,” Policy Paper 10.
- Buch, C., 1999, “Capital Mobility and EU Enlargement,” Kiel Working Paper No. 908.
- Buch C., and Hanschel E., 1999, “The Effectiveness of Capital Controls − The Case of Slovenia,” Kiel Working Paper No. 933.
- Buch C., R. Heinrich, and D. Piazolo, 1999, “Financial Flows to Transitional Economies in an Integrated Europe,” Economic Policy in Transitional Economies, Vol. 9 (no.2), pp. 89-122.
- Buch C., and R. Heinrich, 2002, “Capital Flows to Transition Economies: How Risky Is Financial Integration?” ICEGEC Working Paper No.2.
- Buch, C., and L. Lusinyan, 2002, “Short-Term Capital, Economic Transformation and EU Accession,” Bundesbank Discussion Paper 02/02.
- Buiter, W., and A. Taci., 2003, “Capital Account Liberalization and Financial Sector Development in Transition Countries,” in Capital Liberalization in Transition Countries: Lessons from the Past and for the Future, pp. 105-41.
- Caprirolo, G., and V. Lavrac, 2002, “Managing Capital Inflows in Slovenia: Experience and Options,” ICEGEC Working Papers No. 3.
- Christensen, J., 2004, “Capital Inflows, Sterilization, and Commercial Bank Speculation: The Case of the Czech Republic in the Mid-1990s,” IMF Working Paper 04/218.
- Cottarelli, C., G. Dell’Ariccia, and I. Vladkova-Hollar, 2003, “Early Birds and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and in the Balkans,” IMF Working Paper 03/123.
- Edwards, S., 2001 “Capital Mobility and Economic Performance: Are Emerging Countries Different?” NBER Working Paper 8076.
- Égert, B., 2004, “Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can We Have DEER with BEER without FEER?” William Davidson Institute Working Paper No. 664.
- IMF Independent Evaluation Office, 2005, “Report on the Evaluation of the IMF’s Approach to Capital Account Liberalization.”
- Ishii, S. and others, 2002, Capital Account Liberalization and Financial Sector Stability, IMF Occasional Paper No. 211.
- Lipschitz, L., T. Lane, and A. Mourmouras, 2002, “Capital Flows to Transition Economies: Master or Servant?” IMF Working Paper 02/11.
- Lipschitz, L., T. Lane, and A. Mourmouras, 2005, “Real Convergence, Capital Flows, and Monetary Policy: Notes on the European Transition Countries” in: Euro Adoption in Central and Eastern Europe: Opportunities and Challenges, ed. by S. Schadler.
- Nord, R., 2003, “The Liberalization of the Capital Account in Hungary: Experiences and Lessons,” in Capital Liberalization in Transition Countries: Lessons from the Past and for the Future, pp. 195-208.
- Rodrik, D., 1998, “Who Needs Capital Account Convertibility?” (unpublished).
- Sadowska-Cieslak, E., 2003, “Capital Account Liberalization in Poland,” in Capital Liberalization in Transition Countries: Lessons from the Past and for the Future, pp. 225-43.
- Schipke, A., and others, 2004, Capital Markets and Financial Intermediation in the Baltic States, IMF Occasional Paper No. 228.
- Sutela, P., 2002, Managing Capital Flows in Estonia and Latvia. BOFIT Discussion Papers.
- Thiel, E., 2003, “Recent Codes-Based Liberalization in the OECD“, in Capital Liberalization in Transition Countries: Lessons from the Past and for the Future, pp. 85-104.
- Wagner, N., and D. Iakova, 2001, “Financial Sector Evolution in the Central European Economies: Challenges in Supporting Macroeconomic Stability and Sustainable Growth,” IMF Working Paper 01/141.

### Appendix — Figures (titles and contents)
- Figure A1. Selected EU8 Countries: Public Debt (As a percent of GDP)
  - Series shown: Czech Republic, 1993-2004; Hungary, 1993-2004; Lithuania, 1993-2003; Poland, 1994-2001; Slovak Republic, 1996-2003.
  - Legend: Domestic debt / Foreign debt.
  - Source: IMF, IFS.

- Figure A2. EU8 Countries: End-of-Period CPI Inflation, 1995-2004 (In percent)
  - Countries shown: Czech Republic; Estonia; Hungary; Latvia; Lithuania; Poland; Slovak Republic; Slovenia.
  - Time span labels: 1995 through 2004 (annual end-of-period CPI inflation).
  - Source: IMF, IFS.

- Figure A3. Selected EU8 Countries: Monetary Policy and Exchange Rate Reactions
  - Panels and notes:
    - Czech Republic, 1997-2004 — series: Koruna/EUR (left), CPI (right), CNB policy rate (right); note: May 1997, fixed exchange rate abandoned.
    - Hungary, 1999-2004 — series: Forint/EUR (left), CPI (right), Bank rate (right); notes: Narrow band widened to +/-15 percent and full capital account liberalization; Speculative attack (three annotations).
    - Poland, 1999-2004 — series: Zloty/EUR (left), CPI (right), Bank rate (right); notes: April 2000, zloty freely floating; October 2002 - controls on short-term capital flows removed; Inflation targeting introduced.
    - Slovenia, 1999-2004 — series: Tolar/EUR (left), CPI (right), BOS policy rate (right); notes: Full liberalization of inflows; URR reduced to 0.
    - Slovak Republic — series: Koruna/EUR rate, CPI (right), NBS policy rate (right); note: Fixed exchange rate abolished.
  - Sources: IMF, IFS; and national central banks.

### Appendix — Tables (selected numeric entries preserved exactly)

- Table A1. Selected EU8 Countries: Nonresident Holdings of Government Securities, 1997-2004
  - Columns: 1997 1998 1999 2000 2001 2002 2003 2004
  - Country entries (End of period; percent of total stock):
    - Czech Republic: 8.7...............5.417.6
    - Hungary: 2.88.611.216.820.627.227.428.6
    - Latvia: .........2.89.21.94.24.2
    - Lithuania: 1.21.44.76.73.73.75.57.5
    - Poland: ......7.415.113.116.717.822.2
    - Slovak Republic 1/: .........10.08.08.312.419.4
  - Notes: No data available for Slovenia. Estonia not reported due to its very small stock of government securities throughout the period.
  - 1/: Ownership of government bonds only.
  - Sources: National central banks and ministries of finance.

- Table A2. EU8 Countries: Real GDP Growth and the Current Account Balance, 1995-2003
  - Header: 1995   1996   1997   1998   1999   2000   2001   2002   2003
  - Czech Republic
    - Real GDP growth: 6.4 4.8 -1.0 -2.2 -0.8 3.1 2.6 1.5 3.1
    - Current account balance: -2.7 -7.4 -6.1 -2.4 -3.0 -4.8 -5.4 -5.6 -6.2
  - Estonia
    - Real GDP growth: 4.3 3.9 10.6 4.7 -0.1 7.8 6.4 7.2 5.1
    - Current account balance: -4.4 -9.2 -12.2 -9.2 -4.4 -5.5 -5.6 -10.2 -13.2
  - Hungary
    - Real GDP growth: 1.5 1.3 4.6 4.9 4.2 5.2 3.8 3.3 2.9
    - Current account balance: -5.6 -3.7 -2.1 -4.9 -7.9 -8.7 -6.2 -7.2 -8.9
  - Latvia
    - Real GDP growth: -0.8 3.3 8.6 3.9 1.1 6.6 8.0 6.4 7.5
    - Current account balance: -0.4 -4.6 -5.1 -9.8 -9.8 -6.4 -8.9 -6.5 -8.6
  - Lithuania
    - Real GDP growth: 3.3 4.7 7.3 5.1 -3.9 3.9 6.4 6.8 9.7
    - Current account balance: -10.2 -9.1 -10.3 -12.1 -11.2 -6.0 -4.7 -5.2 -7.0
  - Poland
    - Real GDP growth: 7.0 6.0 6.8 4.8 4.1 4.0 1.0 1.4 3.8
    - Current account balance: 4.2 -1.0 -3.0 -4.3 -7.5 -6.0 -2.9 -2.6 -1.9
  - Slovak Republic
    - Real GDP growth: 6.9 6.6 6.5 4.4 1.9 2.0 3.8 4.6 4.5
    - Current account balance: 2.2 -11.2 -10.1 -10.4 -5.7 -3.5 -8.4 -8.0 -0.9
  - Slovenia
    - Real GDP growth: 4.1 3.5 4.6 3.8 5.9 4.1 2.9 2.9 2.3
    - Current account balance: -0.5 0.2 0.1 -0.8 -3.3 -2.8 0.2 1.4 0.1
  - Note: (GDP growth in percent and current account balance as a percent of GDP)

*Source: _wp05213 - REFERENCES (PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp05213.pdf_