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1997 In Review: IMF Officials Assess 'Nations In Transition'

  • Robert Lyle



Washington, 15 December 1997 (RFE/RL) --Top officials of the International Monetary Fund (IMF) say the countries of Central and Eastern Europe and Central Asia are generally far better off at the end of 1997 than they were at the beginning, and that they can expect even more improvements in the year ahead.

The officials gave their economic assessments of the situation of the nations in transition to our economics correspondent in Washington. The officials, who asked that they not be named, were in agreement that these countries dealt with the on-going Asian financial crisis far better than many expected.

Said one: "Eastern Europe has been fortunate because, at a time when they could potentially have gotten into trouble here, they've gotten the clear warning signals and are taking the right steps."

Another agreed, adding, that while both Russia and Ukraine were hit hardest by the effects of the Asian crisis, they changed their policies appropriately to avoid being overtaken by it.

An official who deals with Russia and Ukraine said they were most adversely influenced, because they were borrowing heavily on international capital markets when the crisis prompted investors to begin pulling their money out of emerging markets.

"Both responded with tighter monetary policy," said the official, but "in the case of Russia it took them a few weeks and they lost quite a lot of reserves in that period" -- around 5,000-million dollars according to official Russian statistics.

Once the Moscow authorities acted, said the official, the outflow stopped, reserves are "more or less stable," the stock market is "much calmer, and the ruble has actually been appreciating the last few days." Interest rates are quite a bit higher, he said, but that is what has stopped the hemorrhaging of foreign reserves.

In Ukraine, said the official, monetary policy was tightened and interest rates have risen, but it has "not yet settled to the extent it has in Russia." That's partly because people have "more doubts" about the basic commitment to reform in Ukraine, he said. He did note, however, that President Leonid Kuchma has announced a tighter state budget for 1998. "We're very pleased to hear that," said the official, because in a situation where Ukraine is not able to raise money abroad for awhile, it must cut back on borrowing altogether.

The situation in Kyiv and Moscow will "continue to be difficult," says the official, because of a far more cautious attitude on the part of international investors about emerging markets. The official said he felt there was "excessive euphoria in the first half of the year" over investment prospects in these countries, but that now it has "become a little more balanced."

The IMF officials give the following overall assessments of the individual countries:

Of the 15 countries which were part of the Soviet Union, the top official dealing with this area says eleven are going forward, two have not started reforms, and two are now going backwards.

The two regressing states are Belarus and Uzbekistan, says the official. Both would like to borrow from the IMF, he says, but they have reversed course, are returning to central planning and cannot meet fund conditions.

The two former Soviet states which haven't even started reforms are Tajikistan and Turkmenistan. Turkmenistan isn't interested in either reforms or borrowing from the IMF, says the official, and Tajikistan is unable to because of the civil war.

The official notes, however, that a peace agreement has been reached in Tajikistan and the country is in the process of integrating the main opposition group into the government. "There's a ray of hope," said the IMF official, but it's a "very tricky situation" and the fund will have to await developments.

The fund has noted, he adds, that the people in the Tajik government and the opposition all support economic reforms.

Of the eleven former Soviet states moving ahead with reforms, the official identifies the three Baltic countries -- Latvia, Lithuania and Estonia -- plus Georgia and Azerbaijan, as the nations which have "done very well this year." Kazakhstan and Kyrgyzstan are one step below, doing "reasonably well," said the official, with Russia and the others on a third level of those moving ahead.

The official said all of the former Soviet republics have good relations with the IMF and most will record growth in their economies this year. Actually, he said, the official statistics vastly understate output growth because they don't record the fastest growing segment of the economy, the new private sector.

These countries are also doing better than expected in getting inflation under control, he said, with ten and maybe as many as 15 expected to record inflation below 20 percent this year. Lowering inflation is a "necessary condition for improved growth in transition economies," says the official, so the exceptionally good record is warmly welcomed by the IMF.

The officials dealing with both former Soviet republics and the nations of Central and Eastern Europe agree that the one thing needed in all is more structural reform. "We're disappointed," said one official, because structural reforms are the most important in the long run, but "have not been going as rapidly as we would have liked."

There is also, he said, a common problem of local "vested interests" working to keep the present intermediate situation --- hovering between planned economies and market economies. He would not identify those who are benefiting from this intermediate situation, but said they are preventing implementation of many of the market reforms in some countries.

As for the countries in Central and Eastern Europe, the IMF official specializing in that area said Albania, Bulgaria and Romania have been the rising stars in 1997, each going through "night-and-day" changes that have left them "in a much better position today than they were 12 months ago." Their vulnerability to external risks is less as a result, he said.

Albania started the year with a situation that "was out of control," said the official, and global leaders were doubting that the country would ever come back with any meaningful public infrastructure. "Yet, clearly that is happening," he said. Albania has a long way to go, but it is definitely moving in the right direction.

The story in Romania was much the same, said the IMF official, where at the end of last year, it was virtually out of business as far as the global financial community was concerned. The situation improved dramatically with the new government at the start of the year, although enthusiasm for reforms waned during the Summer. Now, however, with a series of new officials put in charge of economic reform programs, the outlook is much better he said, although "there's a long way to go in Romania, because they have such deep-seated structural problems."

Bulgaria also had a major turn-around, said the official, starting the year with monthly inflation of 200 percent -- it's now down to between two-and-three percent -- and an exchange rate that was sliding 50 percent a month. Now, said the official Bulgaria's currency is "rock solid," under the currency board, pegged to the Deutsche mark. Interest rates were around 25 percent per month at the start of 1997, but are now down to around six percent, a far more normal rate, he said.

These three countries have long been lagging in reforms, said the official, and each had a succession of governments, which missed in getting the reforms started. But now that they have learned the formula for success, said the official, "I would be reasonably optimistic that these countries will prove to be firmly in the ranks of improved performance" in 1998.

The official said that the situation the former Yugoslavia was divided between Bosnia and Serbia -- where everything is a "prisoner of politics" -- to Slovenia, Croatia and Macedonia, where there has been real economic progress. While not as "spectacular as they had hoped," these three states have brought inflation down and made a start on structural reforms.

The official said there has been "distinct improvement" in Macedonia's reforms recently, and with some "very decided steps toward better performance" in 1997, he is "fairly optimistic" for the future.

Poland, the Czech Republic and Hungary are in a category of their own, said the official, much further along in basic reforms, but still in need of structural changes, and very vulnerable to global market conditions.

He said the earlier Czech currency crisis had been a "wake-up" call to these nations, so that they were taking the proper steps when the Asian crisis hit. That reinforced their understanding of the need to adjust their fiscal and monetary policies, he said.

These countries have "clearly arrested the deterioration that was underway," said the official. The Asian crisis has brought home to all the nations in transition that it is not sufficient to just control fiscal deficits and central bank accounts, he said. They are learning that a country must "pay a great deal of heed" to what is happening in its banking system and the interaction between the banking system and country's enterprises.

"Eastern Europe has been fortunate in that respect," said the official. "At a time when they could potentially have gotten into serious trouble there, they got the clear warning signals. What I'm hearing is that they are taking the right steps," said the IMF official.
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