Road Maps of the Transition : The Baltics, the Czech Republic, Hungary, and Russia

Michael Marrese, Mark Lutz, Tapio Saavalainen, Vincent Koen, Biswajit Banerjee, and Thomas Krueger

• Editorial: INTERNATIONAL MONETARY FUND
• Año: 1995
• ISBN:
  9781557755193

NONE

Contents

Preface

I Stabilization in the Baltic Countries: Early Experience

Tapio O. Saavalainen

Baltic Stabilization Policies

Choice of Monetary and Exchange Rate Regime

Developments in Exchange Rates and Monetary Aggregates

Fiscal Policies

Stabilization Performance

Inflation

Output Developments in Perspective

Did the Policy Regime Matter?

Conclusion

References

II. The Transformation Path in the Czech Republic

Biswajit Banerjee

Rebuilding the External Sector

Reorientation of Exports to Western Markets

Foreign Capital Inflows

Taming Inflation

Output and Employment Performance

Restructuring and Privatization

Monetary Policy and Financial Sector Reform

Monetary Policy Developments

Reform of the Banking Sector

Fiscal Policy and Reforms

Tasks and Challenges Ahead

References

III. Developments and Challenges in Hungary

Mark S. Lutz and Thomas H. Krueger

Structural Reforms

Pre-1990 Reforms

Reforms Since 1990

Macroeconomic Performance

Output and Employment Performance

Inflation

External Balances and Debt

Challenges and Recent Policy Response

References

IV. Stabilization and Structural Change in Russia, 1992–94

Vincent Koen and Michael Marrese

Ups and Downs of Macro Stabilization

Background

Trends

Disruptions

Money, Prices, and Output

Is Inflation Essentially a Monetary Phenomenon?

Is There a Trade-Off Between Output and Disinflation?

Leads, Lags, and Synergies in Structural Reforms

Leads

Lags

Synergies

Conclusions

References

Tables

1.1. Fiscal Balances

1.2. General Government Revenue

1.3. General Government Expenditure

1.4. Industrial Specialization in the Baltic Countries in 1988

1.5. Interest Rate Differentials Between the Baltic Countries, 1994

1.6. Disinflation and Output Loss

2.1. Selected Indicators

2.2. Major Components of Operations of the General Government in the Former Czech and Slovak Federal Republic and the Czech Republic

3.1. Hungary: Selected Economic Indicators

3.2. Hungary: Balance of Payments in Convertible Currencies

4.1. Russia: Summary Indicators

Charts

1.1. Real Output and Prices

1.2. Exchange Rates and Monetary Aggregates

1.3. Consumer Price Index

1.4. Inflation in Baltic and Central European Countries

1.5. Real Wages

1.6. Real GDP

1.7. Exchange Rate and Money-Based Stabilizations: Stylized Facts

1.8. Interest Rates in the Baltic Countries

1.9. Cost of Disinflation

1.10. Real Exchange Rate Developments

1.11. Indirect Indicators of Competitiveness

2.1. Exchange Rate Indicators

2.2. Output Developments

3.1. Hungary: GDP Growth and Inflation

3.2. Hungary: Selected Fiscal Indicators

3.3. Hungary: Selected Monetary Indicators

3.4. Hungary: Selected External Indicators

4.1. Russia: Selected Macroeconomic Indicators

The following symbols have been used throughout this paper:

… to indicate that data are not available;

—to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

–between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

I Stabilization in the Baltic Countries: Early Experience

Tapio O. Saavalainen

In mid-1992, each of the Baltic countries adopted comprehensive stabilization and reform programs. Economic conditions were very difficult; real output was falling sharply, and prices were soaring. To a large extent, these developments reflected inherited macroeconomic imbalances and supply disturbances as suggested by a strong negative correlation between real output and inflation (Chart 1.1). The final collapse of Soviet central planning in 1990–91—a systemic shock—caused widespread disruptions in trade and in financial links, which led to shortages of goods and raw materials, loss of export markets, disfunctioning of payments and monetary arrangements, and a “wait-and-see” attitude among enterprise managers. On the demand side, rising prices severely cut households’ real balances, while price liberalization started to reduce queues and shortages. In 1991, the first year the effects of the systemic shock were truly felt, real net material product in the Baltic countries declined by around 10 percent. At the same time, consumer prices rose 210 percent in Estonia, 124 percent in Latvia, and 225 percent in Lithuania. As a result, those holding cash and savings deposits were severely penalized. In Estonia, for example, the stock of cash and savings deposits held by households lost about 75 percent of its real value between 1989 and 1991.¹

Chart 1.1. Real Output and Prices

(1987= 100)

Source: National authorities; and IMF staff estimates.

¹Prelimary estimates.

Economic difficulties were aggravated in early 1992 as Estonia, Latvia, and Lithuania faced a serious terms of trade shock. Russia moved to world market prices for fuel exports to the Baltic countries and initiated a price liberalization process that increased prices of its exported raw materials and intermediate inputs. In all three Baltic countries, the terms of trade deteriorated by 30–40 percent, or by 10–15 percent of GDP, while domestic price increases reached magnitudes of 50 percent or more a month.² Owing to their strong dependency on trade with Russia and other states of the former Soviet Union, the Baltic countries experienced a much higher terms of trade deterioration than did the Eastern European countries with the dissolution of the trade system of the Council for Mutual Economic Assistance (CMEA) and the move to spot prices from traditional reference prices in their trade with the countries of the former Soviet Union. For example, in Poland, Hungary, and the former Czechoslovakia the terms of trade shock in 1991 ranged between 3 percent and 5½ percent of GDP.³

Under these conditions, there was little scope for a gradualist approach in policy response. In particular, the terms of trade shock and high inflation during the first half of 1992 called for rapid action to avoid a prolonged decline in output.⁴ A delayed response to these problems could have led to renewed government intervention with a high likelihood of increasing political resistance to market-based reforms. In addition, the newly regained independence from the former U.S.S.R. and the strong political will to rapidly re-establish historical links to Western Europe worked against a gradualist response to the economic difficulties.

Developments in Exchange Rates and Monetary Aggregates

The confidence in the new Baltic currencies and their adopted stabilization policies was reflected in the developments of the exchange rates and foreign reserves (Chart 1.2). Estonia’s nominal exchange rate began to appreciate against the ruble immediately after the currency reform, and against the U.S. dollar it moved in line with the deutsche mark/ dollar cross rate, given the deutsche mark peg. As an indication of confidence in the fixed rate regime, foreign reserves began to accumulate rapidly.

Chart 1.2. Exchange Rates and Monetary Aggregates

Source: National authorities.

In Latvia, a notable premium against the ruble began to develop in August, but the rate against the U.S. dollar stabilized only in October 1992. The delay in the stabilization against the U.S. dollar reflected the authorities’ concerns about competitiveness, as the Russian ruble continued to depreciate against the dollar. With a shift of emphasis toward price stabilization, monetary policies were gradually tightened and the currency began to appreciate against the U.S. dollar. Later, with the growth of monetary aggregates slowing down to levels already prevailing in Estonia under the currency board arrangement, tight credit and high interest rates led to considerable capital inflows, accumulation of foreign reserves, and further currency appreciation. The overall money supply became endogenous with the de facto fixed exchange rate regime in February 1994. While credit policy remained tight during 1994, the appreciation of the lats against the U.S. dollar has reflected more the weakness of the dollar relative to the SDR than the stance of domestic monetary policies.

In Lithuania, monetary discipline remained weak initially as the Bank of Lithuania continued to give in to a wide spectrum of credit demands. In addition, liquidity was boosted by large ruble inflows in late 1992. As a result, the exchange rate against the Russian ruble remained broadly unchanged, and it depreciated substantially against the U.S. dollar until spring 1993. The demand for talonai declined, and currency substitution expanded. In spring 1993, the authorities estimated that some 30–50 percent of transactions were being conducted in foreign currency. The course of monetary policy was radically reversed in May by a substantial tightening of reserve requirements.⁹ Monetary stabilization gained momentum, foreign reserves began to rise, and the currency appreciated against the U.S. dollar between May and August 1993. After that, the litas remained stable. In April 1994, it was anchored to the U.S. dollar by a currency board arrangement to divest the influence of interest groups from the formulation of monetary policies.

Stabilization Performance

Inflation

Successful financial polices have been reflected in a rapid slowdown of inflation in the Baltic countries (Chart 1.3). As in Poland and the former Czechoslovakia, the price level began to stabilize quickly after the adoption of stabilizat...

Índice

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I Stabilization in the Baltic Countries: Early Experience
• II. The Transformation Path in the Czech Republic
• III. Developments and Challenges in Hungary
• IV. Stabilization and Structural Change in Russia, 1992–94
• Tables
• Footnotes