EASTERN EUROPE: FINANCIAL SITUATION AND OUTLOOK IN 1983-84

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• Collection: General CIA Records
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• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: August 31, 2010
• Sequence Number: 5
• Publication Date: August 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Eastern Europe:
Financial Situation and
Outlook in 1983-84
EUR 84-10151
August 1984
418
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 Directorate of Secret
Intelligence
Eastern Europe:
Financial Situation and
Outlook in 1983-84
This paper was prepared by I Office
of European Analysis. Comments and queries are
welcome and may be directed to the Chief, East-
West Regional Branch, EUR
Secret
EUR 84-10151
August 1984
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Eastern Europe:
Financial Situation and
Outlook in 1983-84
Key Judgments Eastern Europe is recovering from its severe financial crisis. Last year the
Information available region posted its second consecutive hard currency trade surplus and its
as of 16 July 1984 first current account surplus in more than a decade. Bulgaria, Czechoslo-
was used in this report.
vakia, East Germany, and Romania cut their net hard currency debt by an
average of 13 percent, and the region as a whole built up foreign exchange
reserves by 22 percent.
Much of the improvement stemmed from continued belt tightening.
Imports declined for the third consecutive year, albeit not as dramatically
as during the previous two years. Eastern Europe's financial position also
was helped by loans from the IMF and the World Bank, rescheduling
agreements with private and official creditors, and some revival of
commercial lending for the more creditworthy countries.
The pace of improvement seems to be quickening in 1984. Excluding
Poland, Eastern Europe's financing requirements will decline by about 15
percent this year. Prospects for new credits seem better than at any time in
the last four years. While most of the upswing in lending consists of short-
term, trade-related credits, Hungary and East Germany have already
raised medium-term syndications. East Germany also has received a large
government-backed loan from West Germany for the second consecutive
year. Yugoslavia has arranged refinancing with private and official
creditors, and Romania probably will avoid a rescheduling for the first
time in three years.
Despite its recovery from the 1981-82 crisis, most of Eastern Europe still
faces long-term trade and financial problems:
? Even with additional reschedulings, Poland almost certainly will be
unable to close its financial gap, and the regime seems unwilling to
impose the tough adjustment measures needed to restore creditworthi-
ness.
? Yugoslavia's financing requirements are declining, but it will still need
more debt relief in the next few years.
? The drastic import cuts imposed by Romania have drained the economy,
and the possibility of a Romanian rescheduling in 1985 cannot be
excluded.
? The financial recoveries of East Germany and Hungary seem more solid,
but both countries must continue to cover large financing requirements.
? All of the countries of Eastern Europe will be additionally burdened by
growing pressures from the Soviet Union to balance bilateral trade and
provide Moscow with better quality goods.
Secret
EUR 84-10151
August 1984
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A number of economic and political factors still weigh against Eastern
Europe in the risk assessments of Western lenders. To resume economic
growth and maintain external balance, Eastern Europe must do more to
improve its export performance. Many creditors regard the sharp import
reductions of the past few years as a short-run expedient with little impact
on long-term creditworthiness. Many bankers, still skeptical that the East
Europeans will do much to correct fundamental problems, will be examin-
ing more closely than in the past the economic policy and performance of
individual countries. Creditor confidence also could be undermined by
further cooling in the East-West political climate or outbreaks of unrest.
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Key Judgments
Regional Overview
Improvement Continues in 1984 1
Individual Country Performance 6
Czechoslovakia
14
Bulgaria
15
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Eastern Europe:
Financial Situation and
Outlook in 1983-84
Performance in 1983
Eastern Europe's financial position began to improve
in 1983 following the severe difficulties of the previ-
ous two years. The region posted a hard currency
trade surplus of $4.4 billion, more than double the
surplus of 1982 and a sharp reversal of the $3.7 billion
deficit recorded in 1981 (see table 1). The region
pared hard currency imports by about 4.7 percent last
year, a much less severe cutback than the 15-percent
reductions in both 1981 and 1982. The first increase
in exports since 1980-due largely to resales of
Middle Eastern oil-helped limit import reductions.
The trade surplus, along with lower interest pay-
ments, helped produce a $2.2 billion current account
surplus for the region, compared with the $1.9 billion
deficit of a year earlier.
Current account surpluses helped most countries re-
duce their net hard currency debt for the second
consecutive year (see table 2).' Foreign exchange
reserves grew by 22 percent regionwide, offsetting the
precipitous drop that occurred in 1982 at the height of
the credit crunch. Thus, Bulgaria, Czechoslovakia,
East Germany, and Romania cut their net debt by an
average of 13 percent. Net debt increased for the
other three countries because of Poland's climbing
interest arrearages to Western official creditors and
some new credits received by Hungary and Yugosla-
via.
Eastern Europe's financial position was helped by
support from international institutions and by gener-
ally improved relations with Western creditors. Loans
from the IMF and the World Bank encouraged
Western bankers to provide nearly $500 million in
syndicated loans to Hungary. A $400 million
government-guaranteed bank loan from West Germa-
ny helped revive lending to East Germany. East
Germany and Hungary, which together had suffered
a nearly $4 billion loss in bank credit lines between
December 1981 and June 1983, according to BIS
statistics, increased total borrowings by $500 million
during the last half of 1983. In contrast with 1982,
Romania quickly negotiated rescheduling agreements
with Western banks and governments. Negotiations
proved difficult for Poland and Yugoslavia, but both
countries eventually obtained favorable rescheduling
terms from Western banks. Yugoslavia also secured a
package of new credits from the banks, Western
governments, the IMF, and the World Bank.
Improvements in Eastern Europe's hard currency
balances were even more impressive given the eco-
nomic pressures applied by the Soviet Union. The
terms of trade continued to move in Moscow's favor
last year, forcing the East Europeans to export a
greater volume of goods to the Soviet Union just to
maintain existing import volumes. In addition, Mos-
cow apparently stepped up its pressure on some of its
Warsaw Pact allies to improve their bilateral trade
balances after a decade of allowing them to run large
deficits. Last year Eastern Europe's trade deficit with
Moscow declined by $500 million, with the largest
cuts made by East Germany, Poland, and Bulgaria.
Improvement Continues in 1984
The momentum generated by Eastern Europe in 1983
appears to be carrying over to 1984. Excluding Po-
land, Eastern Europe's financing requirements will
drop an estimated 15 percent this year. The increase
in reserves and the reduction in short-term debt have
improved the liquidity position of most countries.
Debt service ratios have improved for all countries
except Poland and Yugoslavia due to a decline in
scheduled debt repayments (see table 3).
Prospects for new borrowing seem better than at any
time in the last four years. Eastern Europe's standing
with bankers appears to be rising because of trade and
current account surpluses. Hungary and East Germa-
ny raised medium-term syndications in the first half
of 1984 and may return to the market later this year.
' Some of the debt reduction was only nominal, reflecting the
depreciation of the nondollar component of the debt against the
dollar, and did not represent an acutal liquidation of obligations.
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Table 1
Eastern Europe: Hard Currency Trade
Total
33,8%
38,830
37,387
36,438
37,404
39,975
Bulgaria
2,335
3,021
3,198
3,298
2,879
2,900
Czechoslovakia
3,734
4,597
4,691
4,357
4,142
4,275
East Germany
5,098
6,565
6,714
7,172
7,625
8,000
Hungary
4,063
4,911
4,877
4,876
4,847
5,000
Poland
6,350
7,506
4,971
4,974
5,402
6,200
Romania
5,522
6,574
7,216
6,235
6,238
6,600
Yugoslavia
6,794
5,656
5,720
5,526
6,271
7,000
Imports
Total
45,556
47,302
41,065
34,695
33,047
35,550
Bulgaria
1,621
2,035
2,546
2,684
2,415
2,500
Czechoslovakia
4,117
4,590
4,432
3,842
3,371
3,500
East Germany
6,908
8,145
6,654
5,663
6,300
7,050
Hungary
4,230
4,632
4,417
4,111
3,970
4,100
Poland
8,038
8,488
5,404
4,616
4,317
4,900
Romania
6,623
8,091
7,012
4,710
4,605
4,800
Yugoslavia
14,019
11,321
10,600
9,069
8,069
8,700
Total
-11,660
-8,472
-3,678
1,743
4,357
4,425
Bulgaria
714
986
652
614
464
400
Czechoslovakia
-383
7
259
515
771
775
East Germany
-1,810
-1,580
60
1,509
1,325
950
Hungary
-167
279
460
765
877
900
Poland
-1,688
-982
-433
358
1,085
1,300
Romania
-1,101
-1,517
204
1,525
1,633
1,800
Yugoslavia
-7,225
-5,665
-4,880
-3,543
-1,798
-1,700
Because of continuing unease about the financial guarantees. The East Europeans seem equally cau-
outlook for many LDCs, bankers seem to be looking tious about new borrowing, with some regimes delib-
for profitable opportunities to lend to those East erately planning to run current account surpluses to
European countries that have weathered the debt reduce debts further. Most of the medium-term,
crisis. untied money secured this year will be in the form of
IMF loans for Hungary and Yugoslavia; the complet-
Bankers, nonetheless, remain cautious and are limit- ed or planned commercial syndications generally are
ing most lending to short-term, trade-related credits tied to trade and project financing. Because the inflow
carrying higher interest spreads than in the past. of credits probably will be small, we expect the region
Private lenders are reluctant to increase exposure again to run a sizable trade surplus of roughly $4.4
significantly unless backed by Western government billion and a current account surplus of $3.4 billion.
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Table 2
Eastern Europe: Gross and Net Hard Currency Debt
at Yearend
Gross debt
83,645
85,085
80,658
81,975
Commercial debt
61,658
59,050
53,031
48,041
Government-backed debt
18,688
21,152
21,133
26,380
IMF/IBRD/BIS
3,299
4,471
6,081
7,154
CEMA banks
NA
412
413
400
Reserves b
10,054
9,838
8,239
10,065
Net debt
73,591
75,247
72,419
71,910
3,536
3,065
2,757
2,463
3,201
2,695
2,292
1,968
335
370
465
495
779
840
1,014
1,076
2,757
2,225
1,743
1,387
4,926
4,508
4,053
3,707
4,066
3,703
3,118
2,732
860
805
935
975
1,256
1,105
742
985
14,098
14,863
13,039
12,630
11,253
11,583
9,489
8,510
2,845
3,280
3,550
4,120
2,506
2,596
2,321
3,597
11,592
12,267
10,718
9,033
Gross debt
9,090
8,699
7,715
8,250
Commercial debt
8,790
8,334
6,955
6,940
Government-backed debt
300
365
525
740
IMF/IBRD/BIS
235
570
Reserves b
2,090
1,652
1,151
1,518
Net debt
7,000
7,047
6,564
6,732
25,000
25,453
24,840
26,400
Commercial debt
14,900
14,188
13,660
10,900
Government-backed debt
10,100
11,265
11,180
15,500
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Table 2
Eastern Europe: Gross and Net Hard Currency Debt
at Yearend (continued)
9,387
10,160
9,766
9,000
Commercial debt
6,537
6,167
5,409
4,900
Government-backed debt
1,670
1,845
1,428
900
IMF/IBRD/BIS
1,180
1,736
2,516
2,800
CEMA banks
NA
412
413
400
300
345
370
250
9,087
9,815
9,396
8,750
17,608
18,337
18,488
19,525
Commercial debt
12,911
12,380
12,108
12,091
Government-backed debt
2,578
3,222
3,050
3,650
IMF/IBRD
2,119
2,735
3,330
3,784
Reserves b
2,473
2,252
1,596
1,489
Net debt
15,135
15,812
16,892
18,036
a Preliminary estimate.
b Excludes gold holdings. Changes in reserves shown may not equal
those in the country balance-of-payments tables because of fluctua-
tions in gold stocks and differing definitions of reserves.
Trade turnover with the West-exports plus im-
ports-will pick up for the first time since 1980.
Economic recovery in the West will increase East
European exports, which-coupled with moderately
more financing-will allow most regimes to ease
import curbs. Even so, hard currency trade is unlikely
to increase at the double-digit pace common in the
1970s. Hard currency sales probably will increase by
around 7 percent while import growth should ap-
proach 8 percent.
Long-Term Problems
Despite its relatively quick recovery from the 1981-82
credit crunch, Eastern Europe still faces long-term
trade and financial problems. The East Europeans
cannot continue to rely on import restraints to achieve
trade and current account surpluses; strong export
gains are imperative if the region is to attain economic
growth and external balance. The regimes, however,
have done little to correct longstanding problems with
competitiveness, and the sizable cuts in imports of
Western capital goods are widening the technology
gap between Eastern Europe and the developed West.
Growing Soviet demands for more and better goods
from Eastern Europe also may limit the region's
ability to sell in hard currency markets. Financial
problems in developing countries not only have hurt
East European sales to those countries, but also have
made the Third World a more aggressive competitor
in developed country markets.
Even with the recent debt reductions, debt service
obligations will remain large for most countries, and
increases in international interest rates will further
burden current account performance. The reluctance
of lenders to increase their medium- and long-term
exposure will leave Eastern Europe vulnerable to
rapid reductions in short-term credit lines as occurred
in early 1982. The breathing space given by debt
reschedulings for Poland, Romania, and Yugoslavia
will expire in the next few years, forcing these
countries to repay their obligations, refinance them
with new loans, or negotiate new rescheduling terms.
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Table 3
Eastern Europe: Selected Financial Indicators
Proportion of Bank Loans With Less Bank Loans
With Less Than One Year Maturity
Reserves as a Share of Debt Maturing
in One Year
1979 a 1980 a 1981 a 1982 a 1983 b
1979 a 1980 a 1981 a
1982 a
1983 c
39.9 36.3 37.0 34.0 33.6
28.8 29.0 28.1
23.1
27.0
Bulgaria
41.1 36.3 48.1 51.7 52.8
31.0 53.5 59.4
90.1
123.2
Czechoslovakia
47.1 43.1 37.6 31.2 32.8
46.8 65.3 67.8
55.8
95.6
East Germany
42.7 38.6 42.6 39.0 38.8
46.7 45.2 42.3
48.2
68.6
47.4 42.9 40.4 33.2 36.0
27.2 34.0 25.0
29.0
31.7
39.1 33.1 36.1 32.8 29.3
14.7 7.5 9.7
9.0
7.2
50.5 42.7 35.3 38.9 32.8
9.6 9.4 8.9
9.5
16.7
22.6 28.1 28.4 26.7 30.0
46.3 36.9 38.3
18.0
23.8
Undisbursed Bank Commitments as a Share
of Outstanding Debt
Debt Service Ratios d
Eastern Europe
16.5 17.4 11.7 8.4 7.5
36.7 39.9 48.7
56.7
61.0
Bulgaria
8.4 16.7 24.5 15.5 18.3
33.7 32.5 33.9
26.9
22.1
Czechoslovakia
9.7 8.3 6.7 10.4 9.7
20.6 21.8 20.1
19.4
17.8
East Germany
16.5 15.2 16.2 13.3 11.1
44.6 43.9 51.6
53.2
45.9
5.2 8.4 4.6 7.2 5.5
33.1 30.9 32.7
33.0
30.7
24.6 23.9 11.8 4.8 4.3
86.0 97.1 174.6 r
214.6 r
245.7 r
a At yearend.
b At midyear.
c Preliminary estimate at yearend.
d Repayments of medium- and long-term debt and interest pay-
ments on gross debt as a share of current account earnings.
c Reserves held by the National Bank of Yugoslavia.
r Ratio computed on the basis of obligations owed which were much
larger than amounts actually paid.
The warming of relations between Western lenders
and several East European countries will likely be
limited. The debt crisis of 1981-82 has changed
bankers' long-term thinking about Eastern Europe.
The banks can no longer point to Eastern Europe's
financial conservatism and unblemished payments
record, and they have learned that they cannot trust
in Soviet financial support as adequate protection for
lending to the region. Instead of making blanket
judgments about the area's creditworthiness, bankers
are likely to draw sharper distinctions among the
countries on the basis of economic policy, perform-
ance, and prospects
As a prerequisite for increased lending, bankers will
likely look for evidence that the East Europeans are
making structural changes to improve trade perform-
ance. Many creditors regard sharp import reductions
as a short-run expedient with little positive impact on
long-term creditworthiness. Some bankers consider
the Western recession as only one factor in the
disappointing export performance in recent years, and
they remain skeptical that the East Europeans will or
can do much to correct their fundamental problems.
25X1
25X1
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Political developments, as in the past, could again
influence borrowing prospects. Any further cooling in
the East-West political climate or outbreaks of unrest
or violence could undermine creditor confidence.
Threats to political stability could result from popular
reaction to the pinch of austerity measures or from
struggles over succession. Political problems in any
one country could spill over and poison lenders'
attitudes about the whole region, even though some
countries-such as Czechoslovakia and Bulgaria-
may be judged creditworthy solely on economic terms.
Table 4
Poland: Financing Requirements and
Sources, 1982-84
Individual Country Performance
The following sections summarize the recent financial
performance of the individual countries and discuss
their longer term prospects
Poland
Warsaw continued last year to pursue a policy of
limited adjustment by running a trade surplus large
enough to meet the minimum demands of its creditors
but not so great as to strain the beleaguered economy
and risk unrest. Warsaw ran a record trade surplus of
$1.1 billion as exports jumped 9 percent and imports
fell 6 percent. Nonetheless, this surplus, coupled with
other service earnings of $400 million (net), fell far
short of the $3.3 billion owed in interest (see table 4).
As a result, Warsaw slipped even further behind in
meeting its debt repayments.
New credits and debt relief from banks covered little
more than $2 billion of Warsaw's $15 billion financ-
ing requirement, which included almost $7 billion in
arrears from 1982. Credit availability continued to
decline as lines extended before 1982 were nearly
exhausted. Warsaw was able to draw only $565
million in new money-about half in trade credits
from Libya and China-plus $338 million in trade
credits available from the 1982 and 1983 bank re-
scheduling agreements. Western banks agreed to re-
schedule $1.2 billion in principal-95 percent of the
payments due in 1983-until 1988-92. The banks
agreed to relend 65 percent of the interest due on
original loan contracts as short-term credits to finance
imports for Warsaw's export industries.
Financing requirements
10,788
14,592
15,805
Current account balance
-3,039
-1,807
-760
Trade account balance
358
1,085
1,300
Exports
4,974
5,402
6,200
Imports
4,616
4,317
4,900
Interests
-3,799
-3,299
-2,560
Other net invisibles,
(excluding interest)
402
407
500
Repayments of medium-
and long-term debt due
7,061
5,447
4,045
Paris Club creditors
2,573
1,825
1,808
Banks
2,442 d
1,436 d
619
Other creditors
2,046
2,286
1,618
Repayments of short-term
debt due
110
263
0
573
6,906
10,800
-5
-69
-200
Financing sources
3,882
2,103
7,900
Credits
1,670
903
600
Debt relief
2,050 f
1,200
7,300
Other
162
0
0
Arrears/gap
6,906
12,489
7,905
a Preliminary.
b Projection.
c Amounts are for interest due rather than interest paid. Because
Poland has not paid all interest due, the figures for interest and the
current account deficits overstate the hard currency outflows.
d Includes principal payments deferred until the following year
under the bank rescheduling agreements for 1981 and 1982.
c Arrearages at the end of 1983 according to Polish data. The total
is not consistent with the $12.5 billion total we compute from data
and estimates of current account performance, obligations due,
payments made, new credits and reschedulings.
f Includes interest deferred until 1983 under the 1982 bank
agreement.
Poland's large financial gap resulted primarily from
failure to conclude a debt rescheduling with the Paris
Club. Western government creditors, who had sus-
pended debt rescheduling talks in January 1982 fol-
lowing Warsaw's imposition of martial law, agreed in
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principle in mid-1983 to negotiate debt relief and sent
a technical team to Poland. The opportunity for
progress was lost in November, however, when Polish
officials made their first appearance at the Paris Club
in two years and asked for a comprehensive package
including generous debt relief, new credits, and IMF
membership. The creditors responded that IMF mem-
bership and new credits were outside the scope of the
Paris Club, and that further debt relief could not be
provided until Poland met unpaid obligations under
the 1981 rescheduling agreement.
The trends of the past two years-some improvement
in the current account, dwindling credit availability,
and difficult rescheduling negotiations-are being
repeated in 1984. Poland owes about $16 billion this
year, two-thirds of which represents payments over-
due from as long ago as 1981. The current account
deficit could fall below $800 million as interest pay-
ments drop to around $2.6 billion and if Warsaw
achieves another record trade surplus as anticipated.
Exports and imports are projected to increase by 20
percent and 14 percent, respectively. First-quarter
statistics suggest that the projected $1.3 billion trade
surplus is reachable
The likelihood of new credits remains slim. Polish
officials hope for over $2 billion in new credits this
year, but they have acknowledged that they received
only $90 million in the first quarter. Warsaw is more
likely to receive around $600-800 million this year,
including new money coming out of rescheduling
agreements.
After three years of rescheduling, roughly three-
fourths of Warsaw's debt to Western banks has now
been rescheduled. About $600 million in principal is
due this year, well below the levels of the past two
years. This relatively small sum encouraged the banks
to negotiate a multiyear rescheduling on the following
terms:
? Rescheduling over 10 years of 95 percent of princi-
pal payments due from 1984 through 1987, includ-
ing a grace period of five years.
? An interest rate of 1.75 percentage points over
LIBOR on rescheduled obligations.
? Payment in 1984 of the remaining 5 percent of
principal, a 1-percent fee, and interest due this year
The banks also agreed to extend about $700 million in
short-term credit facilities over the next two years.
Embassy reporting indicates that $330 million will be
new credits. Each bank will contribute an amount
based on its exposure, with approximately $230 mil-
lion to be made available this year. The remaining
$370 million is an extension on repayment of trade
credits from the 1982 agreement, which come due in
1985. The rescheduling was contingent on Poland
paying off some $100 million in interest arrearages.[
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The accord was signed on 13 July. The scheduled
signing was threatened at the last moment when the
Poles insisted that all banks accept the new money
portion of the agreement. They eventually agreed to
less than 100-percent approval.
Progress with the Paris Club has been slowed by
Warsaw's delays in meeting the creditors' conditions
for resuming debt relief negotiations. Warsaw initially
agreed to pay all creditors 20 percent of the arrear-
ages under the 1981 Paris Club rescheduling agree-
ment as well as all of the unrescheduled debt due the
United States in 1981. The money was due at the end
of May, but many creditors have reported receiving
only partial payments. In addition, Warsaw now
maintains that it will pay only 20 percent of $34
million in unrescheduled principal and interest due
under the 1981 bilateral agreement with the United
States. In early July, the Polish delegation informed
creditors that payments could not be met because of
lack of funds. The regime in Warsaw apparently has
set aside a fixed amount for debt repayments, and this
limit cannot be exceeded. The delegation repeated its
request that new financing was needed to meet debt
obligations. A working group of the Paris Club has
scheduled its next meeting for September and only
then if the payments problem has been resolved.
Even if it eventually completes reschedulings with
commercial banks and the Paris Club and obtains
some new credits, Poland will still face a financial gap
of nearly $8 billion this year. This includes $2.7
on all of the debt to be rescheduled.
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Table 5
Romania: Financing Requirements and
Sources, 1982-84
Financing requirements
3,820
1,998
710
Current account balance
655
902
1,000
Trade account balance
1,525
1,633
1,800
Exports
6,235
6,238
6,600
Imports
-4,710
-4,605
-4,800
Net interest
-917
-725
-730
Other services
47
-6
-70
2,830
2,219
1,528
749
956
338
-502
-293
-182
Arrears from previous year
1,143
388
0
Financing sources
3,316
1,876
755
Credits
1,591
1,056
560
Medium- and long-term
334
586
220
Short-term
956
338
300
IMF, net
301
132
40
Debt relief
1,700
749
0
Change in reserves
-25
-71
-195
116
122
-45
Financing gap/arrears
388
0
0
a Preliminary.
b Projected.
billion due Paris Club creditors in 1984 under original
loan contracts and obligations owed to individual
companies, LDCs, and CEMA banks. Moreover,
Warsaw would be burdened with resuming payments
to governments after two and a half years of self-
imposed debt relief.
Despite four years of debt reschedulings, Warsaw still
faces unmanageable financing requirements in 1985
and beyond. Not only will further reschedulings be
necessary, creditors almost certainly will have to
renegotiate agreements already concluded.
Romania
In narrow financial terms, Romania's turnaround has
been the greatest in Eastern Europe and one of the
most dramatic among all problem debtors. Bucharest
has run sizable surpluses in its hard currency accounts
the past two years in contrast to the large deficits
recorded between 1977 and 1981. The current ac-
count surplus climbed to over $900 million in 1983-
up from $655 million a year earlier (see table 5).
These gains stem almost entirely from tight import
curbs that enabled Bucharest to run trade surpluses in
both years exceeding $1.5 billion. The current account
surplus in 1983 allowed Romania to reduce its net
hard currency debt by nearly $650 million from the
1982 level of $9.4 billion
Despite the improved current account, debt relief
from Western banks and governments was needed
again in 1983. Bucharest's rescheduling efforts pro-
ceeded more smoothly than the 1982 negotiations. As
early as February 1983, Romania and major Western
banks had agreed on terms, albeit tougher than those
of 1982: only 70 percent of some $900 million in
principal payments to banks were rescheduled instead
of the 80 percent in 1982, and short-term debt was not
covered. The Paris Club agreed to reschedule 60
percent of principal due in 1983 on medium- and
long-term guaranteed credits
Romania so far has made good on its goal of avoiding
a rescheduling this year. This is largely due to a
projected hard currency trade surplus of $1.8 bil-
lion-assuming growth of about 4 percent in both
exports and imports-and lower debt service obliga-
tions. But to keep current on meeting bank repay-
ments, Romania is squeezing foreign suppliers
Romania has delayed payments on
imports and pressed suppliers to accept either coun-
tertrade deals or discounted repayments in cash.
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In addition, Romania must cope with the cancellation
of the final drawings of its 1981 IMF standby ar-
rangement (worth nearly $300 million). Romania and
the Fund agreed to end the standby credit because
Bucharest refused to raise energy prices further and
complete some studies requested by the Fund. Ac-
cording to press reports, the Romanians will not
Table 6
Hungary: Financing Requirements
and Sources, 1982-84
request a new standby arrangement.
Romania's financial progress has been costly and may
be short lived. The huge trade surpluses-primarily
the result of a 42-percent drop in imports in 1981-
82-have drained the economy and damaged the
outlook for genuine recovery. Investment fell over 10
percent in 1981-82, and the officially acknowledged
drop in consumption in 1982 was the first decline
since World War II. In addition, industrial production
growth has averaged a little over 1 percent the last
three years, which is the slowest growth in the
postwar era.
The breathing space associated with rescheduling
ends in 1985 when Bucharest must begin to repay
obligations rescheduled in 1981. Total repayments of
medium- and long-term debt, including IMF repur-
chases, are scheduled to climb to almost $1.7 billion.
The Ceausescu regime most likely will respond to the
pressure of covering its external obligations by con-
tinuing to earn large trade surpluses rather than deal
with underlying economic problems that hurt compet-
itiveness and prevent sustainable and balanced
Financing requirements
4,208
3,048
3,351
-63
297
400
766
877
900
Exports
4,876
4,847
5,000
Imports
4,110
3,970
4,100
Net interest
-976
-662
-580
Repayment of medium- and
long-term debt
894
1,216
1,534
4,244
3,151
3,251
3,663
3,751
3,240
1,764
2,123
1,700
235
352
440
BIS
510
0
0
Change in reserves
-581
600
11
Errors and omissions
-36
-103
100
a Preliminary.
b Projected.
growth
Hungary
Hungary's financial position improved in 1983 even
though Budapest failed to meet all its goals. The
borrowing campaign fared reasonably well, bringing
in roughly $1.3 billion in medium-term loans (see
table 6). In addition to $352 million in IMF credits,
Budapest obtained a $200 million three-year club loan
from Western banks, $239 million in project credits
from the World Bank, a $275 million commercial loan
to cofinance World Bank projects, and increased
trade credits. A surge in short-term borrowings late in
the year helped boost gold and foreign exchange
reserves by $600 million. The major disappointment
was that the trade surplus reached only $877 million
and the current account surplus only $297 million.
Overly buoyant domestic demand bears some of the
blame, but depressed export prices and a substandard
grain harvest also kept export gains well below the
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original goal.
Unlike other East European countries, Hungary is
again counting heavily on medium-term bank loans to
cover much of its 1984 financing requirement. Buda-
pest faces $1.5 billion in medium- and long-term debt
repayments-up from $1.2 billion in 1983-and its
IMF stabilization program calls for a reduction in
short-term debt to limit vulnerability to the type of
liquidity crisis that occurred in 1982. While total debt
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repayments thus are $800 million more than last year,
Budapest plans to increase its current account surplus
to only $400 million. Hungary is obtaining some $440
million in standby credits from the IMF, but it will
need more than $1 billion in medium- and long-term
commercial financing to prevent erosion of its re-
serves.
This year's borrowing campaign is off to a good start
and should meet the $1.1 billion target. A $150
million bankers' acceptance was oversubscribed-
eventually reaching $210 million-and an Arab con-
sortium drummed up $50 million. The World Bank
has approved another $200 million in project loans;
commercial cofinancing loans for these projects will
likely reach $450 million. Budapest may seek another
syndication toward the end of the year to help offset
any shortfall in the current account and to buttress
foreign exchange reserves. Foreign exchange holdings
dropped around $400 million in the first quarter of
1984 as Budapest reduced its short-term debt in
compliance with the IMF program.
Early indicators for trade and current account per-
formance seem favorable. Despite the lifting of some
import restrictions, the hard currency trade surplus
increased to $213 million in the first quarter of 1984
from $150 million in the same period of last year. The
current account was in balance in contrast to last
year's first-quarter deficit, indicating that the goal of
a $400 million surplus for the year remains attainable.
The Hungarians, nonetheless, must record substantial
increases in exports since they have removed more
import restraints in accordance with their IMF stabi-
lization program. Sustained export gains are uncer-
tain because they depend significantly on the outcome
of this year's harvest.
The success of Hungary's foreign borrowing effort has
led many observers to conclude that the country is
close to financial recovery. Hungary's bankers exude
increased confidence and insist that a debt reschedul-
ing would only increase borrowing costs and yield
little relief in managing medium- and long-term debt.
This optimism, however, tends tc obscure important
challenges facing Hungary's economic and financial
managers. Budapest must cover large debt repay-
ments in the next two years, $1.5 billion in 1985 and
$1.2 billion in 1986. Improvements in the economy's
efficiency and competitiveness are needed to increase
the trade surplus. Budapest-with prodding from the
IMF-is working out a new package of structural
reforms to be introduced in 1986 for the purpose of
improving trade performance. Hungary's experience
shows, however, that the payoff from reform is not
quick. Trade prospects also depend on the willingness
of Hungary's CEMA trade partners, in particular the
USSR, to allow Budapest to continue running large
surpluses in intra-CEMA hard currency trade. In
recent years, Hungary has relied on these surpluses to
offset deficits in trade with the developed West, and
Budapest is concerned that the Soviets will not want
to continue this practice. None of these problems
foreshadow an imminent financial crisis, but Hunga-
ry's position will remain vulnerable for the next
several years.
Yugoslavia
Belgrade's creditors recognized by early 1983 that the
country could not meet its debt obligations. The IMF,
which was shepherding Yugoslavia through the last
year of a three-year stabilization program, pressed
Western governments and banks to adopt a rescue
plan for 1983 that would refinance maturing medium-
and long-term credits, halt the erosion of short-term
debt, and ensure enough new credits to rebuild Yugo-
slavia's depleted reserves. The IMF hoped-at least
initially-that the refinancing package, coupled with
improvement in Yugoslavia's current account, would
produce a strong enough revival in commercial lend-
ing so that Yugoslavia would not require more help in
1984. The plan eventually grew into a complicated
package involving new credits and refinancing:
? Western governments pledged nearly $1.2 billion in
export credits, financial loans, and rollovers of
maturing officially backed loans.
? Western banks refinanced $1.0 billion in medium-
term loans for six years with a three-year grace
period, kept in place $900 million in short-term
credits, and extended $600 million of new untied
loans.
? Net funding from the IMF-involving the last
drawings from the 1981 standby credits-and the
World Bank amounted to nearly $700 million.
? The Bank for International Settlements contributed
$500 million in short-term bridge loans.
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Yugoslavia achieved a major improvement in its trade
and current accounts in 1983 (see table 7). Belgrade
cut its trade deficit from $3.5 billion in 1982 to $1.8
billion in 1983 as a result of an upturn in exports and
sharp cuts in imports. The delayed disbursement of
credits in the refinancing package contributed to the
reduction in imports, but the improvement in trade
performance also resulted from the large devaluation
of the dinar demanded by the IMF and Yugoslavia's
success in redirecting exports from CEMA to convert-
ible currency markets. Because of the reduced trade
deficit and a revival of tourism earnings, Yugoslavia
moved its current account balance from a $1.6 billion
deficit in 1982 to a $300 million surplus in 1983. F_
Despite the 1983 refinancing package and improved
current account, Yugoslavia is seeking more debt
relief in 1984. Belgrade faces an estimated $3.6
billion financing requirement, including $2.7 billion in
repayments on medium- and long-term debt. The
IMF projects a current account surplus of only $500
million for this year, leaving a large amount of
maturing loans to roll over. Belgrade is not yet able to
resume normal borrowing on its own, and its official
foreign exchange reserves, which dropped $55 million
last year to under $1 billion, give little scope for
helping to cover the financial gap. Indeed, in the
IMF's view, the reserves need to be increased by $500
million while the Yugoslavs would like to increase
them by over $800 million
Belgrade is making progress toward covering this
year's financing requirement. First-quarter current
account results indicate that the IMF's projection of a
$500 million surplus for the year is attainable. Reso-
lution of a dispute with the IMF over pricing policies
has permitted renewed disbursement of this year's
$400 million standby credit. More important, settle-
ment of this problem paves the way for completion of
refinancing packages linked to the new IMF program:
? Private bankers have agreed to refinance $1.3 bil-
lion in debts falling due this year.
? Western governments are deferring about $800
million in maturing credits and carrying over nearly
$400 million in unused credits from last year's
package.
Table 7
Yugoslavia: Financing Requirements
and Sources, 1982-84
Current account balance
-1,602
299
500
Trade account balance
-3,543
-1,798
-1,700
Exports
5,526
6,271
7,000
Imports
9,069
8,069
8,700
Net interest
-1,692
-1,489
-1,550
Other services, net
1,970
1,976
1,650
1,663
1,610
2,300
Repayments of medium- and
long-term debt
1,764
2,363
2,745
Repayments of short-term debt c
2,312
1,810
1,140
Net credits extended
-177
- 157
-200
Financing sources
5,325
4,125
3,585
Credits
4,314
4,070
4,095
Medium- and long-term
1,815
250
Short-term
1,810
900
563
410
10
125
280
505
2,340
2,430
790
1,190
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1,550 1,240 25X1
a Preliminary.
b Projected.
Includes net change in outstanding supplier credits.
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In addition, Belgrade is counting on over $500 million
in World Bank loans and about $250 million in
medium- and long-term loans from other sources.
Finally, last year's refinancing agreement commits
banks to maintain some $900 million in short-term
credit lines.
Yugoslavia almost certainly will require additional-
albeit smaller-refinancing packages after 1984.
Even with increasing current account surpluses, Yu-
goslavia will have larger borrowing needs than it can
cover in the market and will require additional debt
relief. Repayments of medium- and long-term debt
are around $2.5 billion annually in 1985-86.
Belgrade
would like to avoid further Paris Club refinancings.
But such a move could upset bankers who are con-
cerned that all creditors should be treated equally.
Some bankers still harbor ill feelings about the 1983
rescue package. They feel private banks were treated
unfairly since they were required to put up new
money, some of which was then used to pay off
government creditors.
The Yugoslavs apparently are approaching further
debt relief with one eye on Latin American debtors,
according to the Embassy. Belgrade is monitoring
closely Latin America's efforts to obtain debt relief,
and Yugoslav officials have stressed increasingly the
common difficulties shared by Third World debtors.
We do not believe Belgrade is interested in joining a
debtors' cartel as it wishes to keep current on its
financial obligations and eventually resume normal
borrowing. But Belgrade would argue that its finan-
cial record should entitle it to more favorable terms
should this occur in Latin American reschedulings.
foreign resources receive hard currency
Financial recovery ultimately depends on Belgrade's
ability to regain the confidence of Western bankers by
attacking systemic problems that contribute to the
imbalance between supply and demand and encourage
reliance on Western imports. To date, Belgrade's
administrative controls and the IMF's prescribed
tight monetary policy have not slowed inflation. Bel-
grade will have to work harder to restrain increases in
wages, prices, and domestic credit and to improve
efficiency and competitiveness through systemic re-
form. This would involve abandoning policies that
have given primacy to regional interests over integra-
tive market forces. In addition, policies that misallo-
cate investment resources have been used to protect
jobs by shoring up money-losing enterprises and to
subordinate efficiency to political objectives. An effi-
cient national foreign exchange market also is needed
to ensure that all producers pay the true cost of
foreign exchange and that those best able to use
Despite professions of good intentions from officials
and some steps in the right direction, Belgrade's
capacity to overhaul its economy remains suspect.
Needed adjustment policies and structural reforms
may impose a higher price than society is willing to
pay. The population is already grumbling about fall-
ing living standards, and resistance could intensify as
consumption levels decline further. Differences
among regions and nationalities further complicate
the collective leadership's task of reaching a consensus
on burden sharing policy. At the same time, a greater
reliance on market forces challenges official ideology
and threatens the prerogatives of powerful vested
interests in the republics. Moreover, repeated disputes
over the IMF stabilization program do little to inspire
creditor confidence.
East Germany
East Germany's financial position strengthened con-
siderably in 1983 due to another current account
surplus, increased short-term trade financing, and
special financial credits from West Germany, as well
as new government-backed trade loans from other
Western countries. Although faced with total debt
repayments of more than $4 billion, the East Germans
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Table 8
East Germany: Financing Requirements
and Sources, 1982-84
Financing requirements
4,081
2,935
2,610
Current account balance
1,239
1,310
1,080
Trade account balance
1,509
1,325
950
Exports
7,172
7,625
8,000
Imports
5,663
6,300
7,050
Net interest
-1,220
-865
-820
Other net invisibles
950
850
950
Repayments of medium- and
long-term debt
3,000
2,790
2,300
Repayments of short-term debt
2,320
1,430
1,390
Credits
3,865
2,344
NA
Medium- and long-term
2,130
2,230
NA
Short-term
1,460
1,390
NA
Change in reserves
-275
1,276
NA
e Preliminary.
b Projected.
c Includes net change in supplier credits.
met their obligations, reduced their gross debt to
Western banks by $400 million, and built up reserves
by an estimated $1.3 billion to a record $3.6 billion
(see table 8). In contrast to 1982, the regime was able
both to run a current account surplus and increase
imports from the West.
East Germany's trade surplus fell slightly, to $1.3
billion, in 1983 as a result of an 11-percent increase in
imports and only a 6-percent gain in exports.' The
2 A persistent problem in analyzing East German trade perform-
ance is the discrepancy between totals announced by East Berlin
and by Western partners. East Germany, for example, reports that
its exports to nonsocialist countries rose 24 percent in 1982 and
imports rose 13 percent. OECD and intra-German trade data,
however, show East German exports rising 4 percent and imports
falling by 10 percent. This discrepancy may be explained by
different statistical procedures, the lack of LDC partner data, and
failure to count East German commodity resales in Western
statistics. We use East German data to compute the overall trade
balance, but rely on Western sources to estimate trends in exports
current account surplus remained around the $1.3
billion level. The East Germans continued to maxi-
mize cash receipts by reselling for hard currency oil,
silver, and other commodities obtained through barter
arrangements with LDCs and on clearing account
available import financing and to build up a convert-
ible currency surplus. Capitalizing on West German
trade credit facilities, East Germany boosted imports
from west Germany by more than 30 percent during
the first half of 1983 over the same period of 1982 and
increased its net short-term debt to West Germany by
roughly $300 million. During the same period, the
from West Germany.
As in 1982, East Germany pursued a differentiated
trade policy between West Germany and the other
OECD countries in order to make maximum use of
rest of the OECD.
East Germans ran a $300 million surplus with the rest
of the OECD. The pattern shifted in the second half
of the year when more credits became available from
other Western sources. East Berlin ran a $250 million
surplus in intra-German trade through a slowdown in
imports and a boost in exports and paid back most of
the increase in indebtedness to West Germany. While
moving into surplus with West Germany, the East
Germans ran a surplus of only $60 million with the
In addition to trade financing, West Germany helped
ease East Germany's liquidity problems by granting a
$400 million government-guaranteed financial credit
with a five-year maturity. Unlike other intra-German
credits, this loan was in convertible currency and not
tied to trade; thus, East Berlin could use the proceeds
to cover debt service payments to non-German credi- 25X1
tors. By demonstrating West Germany's financial
umbrella, the loan apparently encouraged Western
bankers to revive lending to East Berlin and helped
improve the terms East Germany could obtain on new
credits.
Even though the likelihood of an East German re-
scheduling has diminished, the country will face
financial pressures over the next few years. Repay-
ments of medium- and long-term debt in 1984-85 will
fall from the 1982-83 level, but at more than $2
billion annually they will remain substantial. The
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East Germans must also roll over a large short-term
debt. We expect smaller hard currency trade surplus-
es than in the past two years because East Berlin
seems intent on expanding imports. Increased hard
currency service receipts from West Germany will
help offset some of the impact of smaller trade
surpluses on the current account
The East Germans have been actively seeking more
trade financing and have been particularly anxious to
raise additional medium-term credits-including syn-
dicated loans-in order to refurbish their credit rating
and to stretch out the maturity structure of their debt.
East Germany's foreign trade bank succeeded in
raising a $75 million credit in the Euromarkets in
May. While not large, the credit represents East
Germany's first medium-term untied loan since late
1981 and may open the door to more such lending. In
late July, West German banks extended a new $330
million untied loan guaranteed by the West German
Government
Given recent improvements in East Germany's finan-
cial position, there is no pressing need for the new
West German money. But the loan demonstrates the
continuation of the West German financial umbrella
and reduces doubts held by many creditors. They
remain wary about East Germany, especially because
of the lack of basic economic and financial data. For
example, much uncertainty surrounds East Germa-
ny's recent reserve buildup. Some Western observers
argue that the buildup has been funded by increased
borrowing from outside the BIS area, and hence East
German debt has not fallen as much as BIS statistics
indicate. Lacking credible statistics on East Germa-
ny's trade and current account performance and on
future debt service, many bankers count on continued
West German financial support to offset the informa-
tion gap.
East Berlin's decision to revive imports and to press
Western bankers and governments for new loans
shows that East German planners still see trade with
the West as an important element of their economic
strategy. The regime probably will hold to a more
cautious borrowing strategy than in the late 1970s,
but East Germany probably will be more aggressive
than Bulgaria and Czechoslovakia in seeking new
loans to increase imports. Nonetheless, East Germany
Table 9
Czechoslovakia: Financing Requirements
and Sources, 1982-84
Financing requirements
1,365
664
590
Current account balance
195
581
605
Trade account balance
515
771
775
4,357
4,142
4,275
Imports
3,842
3,371
3,500
Net interest
-380
-260
-250
Other net invisibles
60
70
80
Repayments of medium- and
long-term debt c
320
435
405
Repayments of short-term debt
1,240
810
790
Financing sources
1,468
607
NA
Credits
1,105
850
NA
Medium- and long-term
355
100
NA
Short-term
750
750
NA
Change in reserves
-363
243
NA
Net errors and omissions
-103
- 57
NA
a Preliminary.
b Projected.
Includes estimated net change in supplier credits.
can no longer rely on its strategy of the 1970s that
attained rapid economic growth and improvements in
living standards through large resource transfers from
the West.
Czechoslovakia
In 1983 Czechoslovakia maintained its cautious policy
toward hard currency imports and reduced its net
debt for the second consecutive year. The foreign
trade plan envisioned a modest increase in both hard
currency exports and imports. But a 5-percent decline
in sales prompted Prague to cut imports by nearly 9
percent in order to meet its financial targets. These
reductions resulted in trade and current account
surpluses of $771 million and $581 million, respec-
tively, both up from their 1982 levels (see table 9).
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Czechoslovakia seems to face few borrowing prob-
lems, and its liquidity has improved. The Czechoslo-
vaks used part of their current account surplus last
year to add more than $240 million to reserves in
Western banks. To demonstrate its increased cre-
ditworthiness, Prague raised a $50 million medium-
term club loan from Western banks in mid-1983.
Prague's senior banker described the small credit as a
"symbolic question of getting back on the Euromar-
kets" after the 1981-82 credit squeeze. The Czecho-
slovaks apparently balked at emulating Hungary's
example of disclosing more information on their debt
and balance of payments in return for a larger loan.
There appears to be some uncertainty about the
future direction of Czechoslovakia's financial policy.
In early 1984, Prague announced that it plans to pay
off its debt to Western banks.
Czechoslovakia's net debt to banks at $1.8
billion and intends to pay off $600 million
annually, about equal to the decline shown in BIS
statistics for 1983. This seemed to reflect the leader-
ship's frequently voiced concern that external debt
provides the West with a tool for political and eco-
Prague now has scaled back it
Bulgaria
Sofia's relatively low debt and lack of dependence on
the West paid off during Eastern Europe's credit
crunch. Creditors seemed less anxious to reduce their
exposure to Bulgaria than to the rest of Eastern
Europe. Although bank claims dropped somewhat, the
decline probably reflected Sofia's policies as much as
banks' efforts to reduce exposure. Not only was the
bank pullout less severe for Bulgaria, but also the
country faced minimal financing requirements as its
low debt and comfortable maturity structure resulted
in small repayments.
Bulgaria-along with Czechoslovakia-remains in 25X1
the strongest financial position of any East European
country. Several consecutive years of current account
surpluses have enabled Sofia to cut its gross debt to
about $2.5 billion at the end of 1983 and to build up
reserves of $1.1 billion, enough to cover over five 25X1
months' worth of imports. Creditors continue to give 25X1
high marks to Sofia's financial conservatism.F__1 25X1
Bulgaria's financial strength allows it a range of
options in managing its hard currency accounts. It
could maintain its policy of holding down imports and
reducing its debt even further. Or Sofia could use the 25X1
cushion provided by the conservatism of recent years 25X1
to pursue an expansion of hard currency imports.
Some reports have suggested that Bulgaria was con- 25X1
sidering the latter option as Sofia was interested in
negotiating contracts for Western equipment and
plan for debt reduction and will permit some increase
in imports of Western capital goods.
The regime may have softened its stance against
foreign borrowing in response to criticism from both
Western bankers and Czechoslovak planners about its
reluctance to modernize industry through greater
Western imports. Prague's long-held financial
conservatism has contributed to the technological
decline of Czechoslovakia's industry and the stagna-
tion of the economy. Even with economic recovery in
the West, inherent weaknesses undermine export per-
formance, permitting little if any growth in real
imports. Some Czechoslovak economists have been
arguing that a judiciously planned pickup in invest-
ment-using borrowed Western resources-could
help modernize key industrial sectors and jolt the
economy out of its doldrums. Although the leadership
may now be giving more credence to these arguments,
fear of the political consequences of reliance on
Western credits will probably continue to dissuade the
Husak regime from adopting an aggressive strategy
on Western imports and borrowing.
technology needed to modernize its industry.
Trade performance in 1983, however, shows that
Sofia still chose to limit hard currency imports in
order to maintain healthy trade and current account
surpluses (see table 10). Imports from nonsocialist
countries were down 10 percent from the 1982 level.
The decision to reduce imports probably was driven
by the 13-percent drop in exports to the West. Sales
were off significantly to Iran, Iraq, and Libya, which
rank among Sofia's largest hard currency trading
partners. Bulgaria ended the year with a trade surplus
of $464 million, down $150 million from a year
earlier. The current account surplus was $624 million,
compared to $669 million in 1982.
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Table 10
Bulgaria: Financing Requirements and
Sources, 1982-84
Financing reguirenseets
811
816
650
Current account balance
669
624
600
Trade account balance
614
464
400
Exports
3,298
2,879
2,900
Imports
2,684
2,415
2,500
Net interest
-215
-130
-120
Other net invisibles
270
290
320
Repayments of medium- and
long-term debt
640
510
490
Repayments of short-term debt c
840
930
760
Financing sources
996
1,083
NA
Credits
1,170
1,145
NA
Medium- and long-term
270
385
NA
Short-term
900
760
NA
Change in reserves
174
62
NA
Net errors and ooiseioee
-185
-267
NA
^ Preliminary.
b Projected.
c Includes net change in outstanding supplier credits.
Exports must recover if Bulgaria is to meet its plans
for modest expansion of trade with the West. Sofia,
however, cannot count on large export gains because
Bulgaria is not very competitive in developed country
markets and must rely on Third World customers who
are struggling with debt problems. If it chose to do so,
Sofia probably could finance a larger volume of
imports because of its good standing with bankers.
The regime, however, probably will keep a
close eye on its balance-of-payments performance and
will not allow a repetition of the comparatively large
deficits that occurred in the mid-1970s.
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Secret
Secret
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