November 21, 2001
1. This statement provides information on developments since the circulation of the staff report (EBS/01/184, 11/7/01). These developments do not change the thrust of the staff appraisal.
2. Preliminary data for the first nine months of 2001 suggest that budget execution continues to be prudent and somewhat less expansionary than programmed, thus allowing scope for increased capital spending through year-end to help support economic activity.
3. Provisional data now available for five out of the seven quantitative benchmarks for end-September suggest that macroeconomic performance continues to be broadly on track. All benchmarks appear to have been observed, except that on net international reserves (N1R), which was missed marginally. However, with the release of the first tranche (US$100 million) of the Bank’s Poverty Reduction Support Credit in October, gross official reserves reached US$3.8 billion (9¾ weeks of prospective imports) on November 9 (above the end-year target of US$3.6 billion), suggesting that NIR is now running above its programmed path. The benchmark on net domestic assets was met, mainly through the less-than-programmed use of bank credit by the budget. Overall credit growth slowed further from 29 percent through end-June to 28 percent at end-September, slightly above the rate programmed.
4. The staff is satisfied that all prior actions envisaged in Table 6 of the staff report have been implemented. In particular, with respect to the two prior actions that remained to be verified when the staff report was issued:
- The SBV issued a directive on October 30 for the four large state-owned commercial banks (SOCBs) that specifies the conditions for a phased recapitalization of these banks, including the milestones and operational targets as detailed in the Supplementary Memorandum on Economic and Financial Policies (MEFP). Relative to the aggregate milestones set out in the Supplementary MEFP, the target set for each bank’s NPL resolution is more ambitious than that implied by the minimum aggregate target, and each bank’s timetable for achieving some of the milestones is being advanced by about three months. In monitoring SOCBs’ compliance with this directive, the authorities have confirmed that they intend to follow the definition for debt resolution set out in Annex II of the Supplementary MEFP.
- Through Prime Ministerial Decisions 149 and 150 issued on October 5 and Decision 1390 issued on November 7, the government approved financial restructuring guidelines for the SOCBs that were broadly consistent with the principles set out in paragraph 11 of the Supplementary MEFP, with one exception. Instead of providing for two debt recovery units (an asset management company to deal with collateralized debt and a loan workout unit to handle noncollateralized debt), a single, debt and asset management company will be established within each bank to deal with both types of NPLs. This single-unit approach is judged to be acceptable in light of the limited capacity of SOCBs. Under the guidelines, NPL resolution is expected to be linked to improvements in the financial soundness of stale-owned enterprises, and a tight oversight is envisaged by the newly established Steering Committee for Financial Restructuring of Commercial Banks that will report directly to the Prime Minister.