for official use only report no.: 18741 - world...

Document ofThe World Bank

FOR OFFICIAL USE ONLY Report No.: 18741

IMPLEMENTATION COMPLETION REPORT

ALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENTT CREDIT(Credit 2649-AL)

and

TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM(Credit 2492-AL)

December 28, 1998

Private and Financial Sector Development DepartmentEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of the of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization.

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CURRENCY EQUIVALENTS(as of October 25, 1998)

Currency Unit = Lek1 Lek = US$0.0071US$1 = Lek 140

AVERAGE EXCHANGE RATES

1994 1995 1996 1997 September 199894.7 92.8 104.5 148.9 140.0

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

BoA - Bank of AlbaniaCAS - Country Assistance StrategyCEO - Chief Executive OfficerCoM Council of Ministers

EFSAC - Enterprise and Financial Sector Adjustment CreditERA - Enterprise Restructuring Agency

ESAF - Enhanced Structural Adjustment FacilityEU - European Union

GDP - Gross Domestic ProductIBRD - Intemational Bank for Reconstruction and Development

IDA - International Development AssociationIMF - International Monetary FundMoF - Ministry of FinanceNAP - National Privatization AgencyNCB - National Commercial BankPFP - Policy Framework PaperPIP - Public Investment ProgramPIU - Project Implementation Unit

RCB - Rural Commercial BankSB - Savings Bank

SDR - Special Drawing RightsSOE - State-owned EnterpriseSME - Small and Medium Enterprises

USAID - United States Agency for International Development

ALBANIA'S FISCAL YEAR

January 1 - December 31

Vice President: Johannes Linn, ECAVPCountry Director: Amtraud Hartrnann, ECCO2

Team Leader: Tunc Uyanik, ECSPFSector Leader: Hennie Van Greuning, ECSPF

FOR OFFICIAL USE ONLY


ALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENT CREDIT(Credit 2649-AL)

TECHNqICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM(Credit 2492-AL)

ContentsP reface ... ............................................. ................................................................ ............................................... i

Evaluation Summary .............................................................. ii

Part I. Project Implementation Assessment .............................................................. 1

Part II. Statistical Tables ............................................................... 17

TABLE 1: SUMMARY OF ASSESSMENTS ................................................................... 1 8

TABLE 2: RELATED BANK LOANS/CREDITS .................................................................. 20TABLE 3: PROJECT TIMETABLE .................................................................. 20TABLE 4: LOAN/CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL ....................................... 2 1TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION .................................................................. 22

TABLE 6: KEY INDICATORS FOR PROJECT OPERATION .................................................................. 25TABLE 8A: PROJECT COSTS .................................................................. 26TABLE 9: ECONOMIC COSTS AND BENEFITS .................................................................. 26TABLE 10: STATUS OF LEGAL COVENANTS .................................................................. 27TABLE 10: STATUS OF LEGAL COVENANTS .................................................................. 27TABLE 10: STATUS OF LEGAL COVENANTS .................................................................. 28TABLE I 1: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ............................................................. 29TABLE 13: BANK RESOURCES: MISSIONS .................................................................. 30

Appendixes:A. Mission's aide-memoireB. Borrower contribution to the ICR

This document has a restricted distribution and may be used by recipients only in the'performance of their official duties. Its contents may not otherwise be disclosed withoutiWorld Bank authorization.


ALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENT CREDIT(Credit 2649-AL)

TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM(Credit 2492-AL)

Preface

This is a combined Implementation Completion Report (ICR) for the Enterprise and FinancialSector Adjustment. Credit (EFSAC) in Albania, for which Credit 2694-AL in the amount of SDR 10.6million equivalent as approved on August 2, 1994, and for the Technical Assistance Project for EconomicReform, (TA Project) for which Credit 2492-AL in the amount of SDR 2.9 million equivalent wasapproved on May 13, 1993. Credit 2649 was made effective on January 5, 1995, and Credit 2492 onOctober 7, 1993.

Credit 2694 was closed on June 30, 1998, compared with the original closing date of December31, 1996. The first tranche, released upon effectiveness, was fully disbursed by April 1996; thesubsequent tranche was released on June 18, 1998, and the credit was fully disbursed by July 2, 1998.Credit 2492 will close on December 31, 1998, by which time the Credit is expected to be fully disbursed.During implementation of the Technical Assistance Project, cofinancing in the total amount of aboutUS$5.2 million equivalent was provided by EU-Phare, Denmark, Greece, Italy, Spain, Switzerland andUSAID, to support the winding down of the pyramid schemes.

The ICR was prepared by Rochelle Hilton, Yvonne Jones and Greta Minxhozi (ECSPF) of theEurope and Central Asia Region and reviewed by Julius Varallyay, Acting Country Director. Theborrower provided comments that are included as appendix B to the ICR. Comments received fromvarious implementing agencies have also been taken into account in the preparation of the ICR.

Preparation of this ICR was begun during the Bank's final supervision/completion mission, fromOctober 26 to November 3, 1998. It is based on material in the project file. The borrower contributed topreparation of the ICR by preparing its own evaluation and commenting on the draft ICR.

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ALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENT CREDIT (CREDIT 2649-AL)TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM (CREDIT 2492-AL)

Evaluation Summary

Introduction

i. In mid-1993, the Bank's country assistance strategy for Albania was stated as follows. "Neither theAlbania's own development strategy, nor the Bank's assistance strategy should attempt to be the blueprintfor the future. The challenge for Albania and the Bank over the next years will be to create an integratedframework for change that will be compatible with short term macro stabilization; will combine 'ruleswith discretion', and will be flexible enough to accommodate the major structural shifts that are likely tocontinue to take place in the economy .... What is needed is a flexible strategy that responds quickly tonew information while maintaining an overall framework that promotes: (i) stability; and (ii) newentrepreneurship and private initiative." The design, objectives and implementation of the Enterprise andFinancial Sector Adjustment Credit (EFSAC) and the Technical Assistance Project helped address theseobjectives. These two operations represented a strategic Bank contribution to the transition policydialogue with Albania.

Project Objectives

ii. The EFSAC aimed to support the reform program, adopted by the Govemment in 1992 anddesigned to deal with the most pressing and necessary structural measures. It aimed at preparing the wayto further assistance that would complete the privatization of the banks and modernize financial servicesin Albania. The principal objective of the EFSAC was to provide support to Albania's efforts toeffectively implement reform programs for the enterprise and financial sectors. The TA Project wasdesigned to support the restructuring of state-owned banks and the overall development of a market-based financial system; continued privatization or liquidation of industrial enterprises; and strengtheningof the legal framework for the enterprise and financial sectors (paras 8-9).

iii. The EFSAC conditionality was ambitious, but comprised priority actions essential to begin thetransition to a market economy, move forward with the reform program and form the basis for recoveringsustainable growth. The TA Project was a necessary complement to the EFSAC because of theGovernment's weak institutional capacity, lack of experienced staff and the paucity of knowledge aboutprivatization, banking sector reform and their consequences. The objectives of the two operations werecomplementary and an important first step to support the Government's program. However, the lack ofpriority given to strengthening public administration, which was reflected in frequent changes of keypolicy-makers and decision-makers, left advancing reform programs too vulnerable to the impact of thelarge-scale civil disturbances in 1997 (paras 11-13).

iv. Although it took longer than originally anticipated to fulfill all of the EFSAC conditions and tocarry out the TA Project, by the time of second tranche release in June 1998, all conditions had beensubstantially met. Overall implementation of both operations has been moderately successful and theyhave achieved their development objectives. In retrospect, the conditionality of the EFSAC wasappropriate and it correctly recognized that much more support would be needed in the future to help

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further advance the transition process. Building on achievements under the EFSAC, in 1997, theGovernment and the Bank agreed to a new strategy for restructuring and privatizing the banking sector.This strategy is being implemented vigorously, and the Government and Bank are collaborating closely,in consultation with other donors, to move as quickly as possible to the next phase (para 37-38).

Implementation Experience and Results

v. Macroeconomic Management: Improving macroeconomic management was an objective of the TAProject. The project focused on reducing macroeconomic imbalances, developing capacity to preparePublic Investment Programs, and reducing subsidies to State-owned Enterprises. The Governmentprepared the first Public Investment Program (PIP) in 1994 which focused not only on specificinvestmnent projects for 1994, but also provided the economic context in which the investments were to bemade and reviewed arrangements within the Government for implementation, coordination, andmanagement. A three year rolling investment program was prepared in each of the subsequent yearsthrough 1996. Through approval of an International Monetary Fund (IMF) Enhanced StructuralAdjustment Fund (ESAF), a macroeconomic framework supportive of the objectives of the EFSAC hasbeen restored after the period of macroeconomic imbalances from early 1996 through late 1997. After aone year hiatus caused by the 1997 crisis, the Govermment reviewed the status of public investments andin early 1998 completed a new PIP, covering 1998-2001. The new PIP, presented at the October 1998Donors' Conference, takes into account Albania's post-crisis priorities, elaborates an appropriate resourceframework, and considers measures for improved coordination and management. The Government hasalso taken a number of measures to reduce subsidies to State-owned Enterprises (paras 15-20).

vi. Enterprise Sector Reform and Privatization: The Government was committed early on toprivatization, with substantial assistance from the TA Project and (as in other areas) support from otherdonors. The Government's prime objective was speedy privatization to reduce fiscal costs, improveresource allocation and encourage the development of a private sector. To this end, the EnterpriseRestructuring Agenacy (ERA) was created to dispose of 32 problematic enterprises. A large number ofsmall and medium enterprises were privatized first through Decree 248, followed by the MassPrivatization Program, most of which took place in 1995 and 1996. The in-built flexibility of the TAProject allowed the Bank to quickly mobilize critical support to help in the design and implementation ofthis program. In late 1996, the emphasis began to shift to preparing the larger, strategic enterprises fortheir eventual privatization, but these activities were interrupted in early 1997 as a result of the politicalcrisis (paras 21-26).

vii. The Govemment appointed following the June 1997 elections undertook to reformulate theprivatization strategy. The new strategy approved in March 1998 included plans for the privatization ofpublic utilities' resource-based enterprises on a sectoral basis, involving, among other modalities, sales tostrategic investors. Technical assistance in support of this ambitious program is being provided withbilateral assistance from Italy in the framework of a program agreed between the Government and theBank. The Government is also committed to completing the privatization of the remainder of the smalland medium enterprises (para 27).

viii. Banking Sector Reform: Reform of the banking sector moved more slowly than that of theenterprise sector, due to a combination of factors. In 1993, Albania had only a rudimentary bankingsystem with little knowledge of commercial banking, few bankers and very poor infrastructure. Untilthen, the banks had been used more as fiscal agents of the Government than as independent financialintermediaries. Early implementation of the privatization strategy was hampered by lack of reliableinformation on bank portfolios and operations, and by the absence of full service private banks. The

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situation was exacerbated by a lack of interested and qualified buyers for banks or branches. TheMinistry of Finance was also unable to effectively exercise its role as owner of the banks (paras. 28-36).

ix. The EFSAC included measures to strengthen banking supervision, regulation and infrastructure.Assistance from many donors was provided to support all of these areas, including from the TA Project.However, progress was mixed. With support from the IMF, banking supervision, licensing and prudentialregulation have been substantially strengthened, although more needs to be done. Progress on improvinginfrastructure was mixed, in part due to inconsistencies in approach from different donors, and wascomplicated by a lack of expertise on the part of the Government, as well as by a lack of experiencedbankers. Over the course of project implementation, at least three different strategies were prepared bythe Government for privatization of the banking sector. However, Ministers of Finance changedfrequently. These decision-makers were able to influence government policy and consequently revisitedstrategies prepared by their predecessors. This in turn resulted in delays in reaching an agreement withthe Bank and, until late 1997, delayed implementation of an agreed strategy (paras. 36, 63).

x. Delays in reforming the banking sector and a lack of functioning commercial banks may have tosome extent facilitated the growth of the pyramid schemes. Following the 1997 crisis, the newGovernment has moved rapidly to exercise its ownership and oversight responsibilities and to implementan agreed strategy for the development of a private banking sector, taking strong steps to deal with theproblematic state-owned banks. Policy advice and technical assistance to the financial sector from theWorld Bank continues through the Recovery Program Technical Assistance Project and other policybased operations are expected (paras. 3 8-40, 64).

xi. Legal Reform: Substantial work has been done on legal reform and Albania has in place the bulk ofthe necessary commercial legislation, including a Law on Bankruptcy Procedures. Work continues to beneeded to ensure consistency among the many pieces of new legislation. Additionally, the judiciary is ill-equipped and inexperienced and there is limited capacity to apply the provisions of the new laws neededto promote private sector development. A major challenge is now to strengthen enforcement capacity ofthe legal system through significant training programs in all areas. This process is being stronglysupported by major donors, but it will necessarily be a long-term process that is outside the framework ofthe EFSAC (paras 41-45).

xii. Project Management and Administration: As the TA project was a complex operation with manydifferent components, coordination among the various beneficiary agencies was essential. Discussionswith the participating institutions indicated that the Project Implementation Unit (PIU) was cooperativeand provided needed assistance for procurement and payments on a timely basis. Although initially well-staffed, the structure and status of the PIU were substantially changed in 1997, which negatively affected theefficiency and effectiveness of the Unit (para. 65).

Future Operation and Key Lessons Learned

xiii. Future Operation: The Govemment has demonstrated that it is committed to continuing its reformprogram. This commitment is stated in its report: "The Road to Stabilization and Development," whichwas presented at the recent Donors Conference (October, 1998). Since the restart of activities in late1997, IDA has been pursuing an extensive program to help Albania continue along this path. TheRehabilitation Credit supplemented by the Recovery Program Technical Assistance Project (bothapproved in December 1997), provided balance of payments and institutional support, respectively, for aprogram for designing and implementing reforms in key areas such as banking, public sectormanagement, the civil service and the judiciary. A Structural Adjustment Credit, under preparation, will

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support policies to move forward programs in these areas. The planned Banking Privatization Projectwill specifically address issues relating to the privatization of the largest bank (Savings Bank) and thefurther promotion of private banking and capital market development. Major efforts are also underway tosupport public administration reform and to strengthen the judiciary and judicial administration (para 69).

xiv. Lessons Learned: Following are the key conclusions drawn from an assessment of the design andimplementation of these operations (paras 70-75).

* It is essential to effective program implementation that there be sustained Government commitmentand IDA and Government staff continuity. While commitment was demonstrated, it alone is notsufficient to build up the experience and expertise to implement and modify complex adjustment andinvestment operations. High level policy-making staff need to be trained and retained byGovernment. Likewise, it is essential that IDA maintain staff continuity from project preparationthrough implernentation so that actions taken at one stage of implementation are fully understood andconsistent with project design and earlier actions, particularly project modifications.

* Although the objectives of both operations were clear and remain relevant today, the timetable forreaching the desired goals was overly-optimistic. More realism should be built into the timetables.

* Ultimate operational objectives should be defined by clear interim steps so that the Government canreadily assess whether it is on track for meeting its objectives or not. Better and more detailedanalytical monitoring indicators could have helped in this respect. Furthermore, when dealing withcountries with such limited experience, it is important that advice on project objectives, offered by theBank and by o ther donors, be specific rather than general.

* Intense supervision is required for technical support, particularly for a low income country with littleIDA and other donor experience.

* Although the Government was committed to implementing the programs agreed under the EFSAC,the constant support and guidance of IDA was requested and needed to maintain the momentum inimplementing agreed programs and to adhere to difficult decisions. Strong support from the ResidentMission was an essential ingredient of this visible presence.

* Albania's difficulty in creating a modern banking system is not dissimilar to that of other formerlysocialist economies. Many countries which embarked on the transformation of their banking systemsmuch earlier than had Albania, continued to confront similar, basic problems many years later. Oneof the main problems is that under state ownership the banks and bank managers do not have theright incentives to become strong, effective lending institutions. Technical assistance, while useful, isnot sufficient to change bank operations rapidly.

* The built-in flexibility of the TA Project was a crucial factor in the successful outcome of thisoperation. The TA Project was, however, not a general fund and care should be taken to ensure thatthis is not the case. It was reasonably targeted towards certain activities and sectors with identifiablecomponents. The flexibility facilitated a quick response to address changing priorities as the countrysituation evolved. IDA's willingness to be creative in dealing with changed circumstances hasallowed the activities to evolve through the process of amendment without any changes to theobjectives and a minor change to the TA Project description.


ALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENT CREDIT (CREDIT 2649-AL)TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM (CREDIT 2492-AL)

Part I. Project Implementation Assessment

A. Backgrouiid

1. The demise of communism over 1990-92 was accompanied by economic and political chaos inAlbania, with an almost complete collapse of industrial output (a decline of over 70 percent in 1991-92).This resulted in a fiscal crisis of unprecedented dimensions, since with the collapse of the state enterprisesector, the bulk of the tax base disappeared and fiscal revenues decreased from 44 percent of GDP in1989 to about 16 percent in 1992. At the same time, in mid 1992, government expenditures rose toalmost 60 percent of GDP and the fiscal deficit rose to 52 percent of GDP. Monthly inflation was in the10-15 percent range as the banking system continued to make credits to state enterprises.

2. Despite this extremely difficult environment, the Government which came to power in mid-1992embarked on a very courageous stabilization program, supported by an IMF Stand-by Arrangement,followed by an Enhanced Structural Adjustment Facility (ESAF) in July 1993, and balance of paymentsand emergency support organized under the auspices of the EU/G24, as well as support from the WorldBank'.

3. The center of this program was fiscal consolidation. Public expenditures were reduced by 22percent of GDP in 1993, mainly as a result of cuts in subsidies to state enterprises. On the revenue side,taxes increased by 6 percent of GDP, through the introduction of excise taxes and a broadening of the taxbase. As a result, the ratio of the deficit to GDP fell from 44 percent in the first half of 1992 to 16 percentin 1993. Credit to state enterprises also severely contracted.

4. On the siructural side, the Government eliminated most price controls, unified the foreignexchange market, liberalized current account transactions and eliminated or reduced export and importlicensing requirerments. At the same time, efforts began to develop a two-tier banking system. Tosupport this effoit, laws on central and commercial banking operations were adopted and technicalassistance programs initiated for the institutional development of the central and commercial banks.Complementing these reformns, small-scale privatization was proceeding and the distribution of mostagricultural land had been completed by end- 1993.

5. When the Technical Assistance Project for Economic Reform (TA Project) became effective, thestabilization program was already showing good results. Progress continued, although the fiscal situationremained fragile. By the time the Enterprise and Financial Sector Adjustment Credit (EFSAC) wasapproved, indications were that macroeconomic stability had been established. After a fall in GDP ofabout 30 percent in 1991 and 10 percent in 1992 (to the low level of less than $250 per capita), GDP

In addition to these two operations, a Critical Imports Credit and an Agriculture Sector Adjustment Credit, as well as anumber of sector investment credits, were approved in FY92 and FY93, respectively.

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growth was about 10 percent in 1993. Annual inflation had fallen to about 30 percent in 1993 andcontinued its decline in 1994 to a rate of less than 2 percent a month.

6. These initial results, however, represented only the first steps in what was recognized to be amuch longer journey. Albania lacked the institutions, expertise and infrastructure required for a well-functioning market economy. The Government had to virtually build a new economy. The needs forreform in all sectors of the economy were enormous, but their implementation was constrained by alimited administrative capacity, particularly by the lack of institutional skills in the management of theeconomy at the central administration level and in crucial areas such as the enterprise and financialsectors.

7. To address these challenges, the Government focused its policy priorities on: (i) reform of publicfinances to consolidate the results of the stabilization; (ii) rebuilding of infrastructure necessary to supportprivate sector development; (iii) privatization and restructuring of State-owned Enterprises (SOEs) andsupport for small-scale private initiatives; (iv) divestiture of state-owned banks and development of aviable financial sector; and (v) development of Albania's natural endowments in agriculture, mineral andwater resources.

B. Objectives

8. In line with these priorities, as articulated in the 1993 Country Assistance Strategy, the Bank'sassistance focused on providing support for the establishment of a functioning market economy, fiscalconsolidation, recovery of sustainable economic growth and measures to alleviate poverty. Central to thisstrategy, and based on extensive prior economic and sector work2, the EFSAC was designed to deal withthe most pressing and essential structural reform issues in the inter-dependent enterprise and financialsectors. It aimed at opening the way for further follow up assistance that would help complete theprivatization of the banks and modernize financial services in Albania. The TA Project was designed toprovide institutional support to help implement this first stage of reform. Its main purpose was to help theGovernment improve its ability to formulate and implement reforms in macroeconomic management;enterprise restructuring and privatization; and the financial sector. These two operations represented astrategic Bank contribution to the transition policy dialogue with Albania.

9. The principal measures supported under the EFSAC included the following:

(i) In the area of Macroeconomic Reform: implementation of the agreed 1995-97 Public InvestmentProgram (PIP).

(ii) In the area of Enterprise Sector Reform: (a) Privatization or liquidation of 12 of the 32 pre-identified problem enterprises which were placed in the Enterprise Restructuring Agency (ERA); (b)approval of the 1995 budgetary resources for ERA enterprises, making explicit operating subsidies, on adeclining basis (c) privatization of 12 large SOEs; and (d) privatization of 200 small/medium enterprises.

(iii) In the area of Banking Sector Reform. (a) preparation of a strategy, agreed with the Bank, for theprivatization of the three state-owned commercial banks; (b) limitation on lending ceilings to SavingsBank, based on its satisfactory performance; (c) settlement of National Commercial Bank's obligations tothe BoA; (d) submission to the Bank of external audits for the 1994 accounts of the state-owned banks;(v) satisfactory progress in strengthening BoA's supervisory capacity; (e) introduction of a new chart ofaccounts for all banks; and (f) a review of bank licensing requirements.

2 Country Economic Memoranda were prepared in 1992 and 1994.

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(iv) In the arecr of Legal Reform: adoption of new legislation on bankruptcy proceedings for allenterprises and on loan recovery.

C. Evaluation of Objectives

10. The EFSAC and TA Project were complex operations, but the needs were so great that it wasimportant to address a number of priority areas simultaneously. In view of the institutional weakness ofpublic administration and the complexity of the problems in the enterprise and financial sectors, whichwere linked to an insufficient understanding of the needs of a market economy, the EFSAC was expectedonly to prepare the ground for reform in these sectors. A strength of the EFSAC was that macroeconomicstability had been achieved before it became effective. It was designed to begin to address all the majorissues in the enterprise and financial sectors because of the close linkage of the problems affecting thesetwo sectors.

I1. The EFSAC conditionality was ambitious. It comprised priority actions essential to begin thetransition to a market economy, move forward with the reform program and form the basis for recoveringsustainable growth. While the conditionality was clear, there could have been less emphasis on obtainingquantitative targets and more on improving the efficiency of the enterprise sector. However, its structurewas consistent wilh IDA practice at that time and, in retrospect, was appropriate. The operation alsocorrectly recognized that much more support would be needed in the future to help further advance thetransition process. Building on achievements under the EFSAC, in 1997, the Government and the Bankagreed to a new strategy for restructuring and privatizing the banking sector. This strategy is beingimplemented vigorously, and the Govemment and Bank are collaborating closely, in consultation withother donors, to move as quickly as possible to the next phase.

12. The EFSAC design, supported by the accompanying TA Project, incorporated appropriatesequencing of reforms in the enterprise and financial sectors. Recent Bank analysis of sectoraladjustmnent operations (OED, Structural and Sectoral Adjustment, World Bank Experience, 1980-92), hasdemonstrated that the real sector should be liberalized first. The process had started strongly in Albania.However, the Government, IDA and other donors were over-ambitious in their expectation that the rapidpace of privatization attained with agricultural and small-scale enterprises could be replicated in divestingfrom large scale arnd strategic enterprises.

13. The TA Project was a necessary complement to the EFSAC because of the Government's weakinstitutional capacity, lack of experienced staff and the paucity of knowledge about privatization, bankingsector reform and their consequences. The objectives of the two operations were complementary and animportant first step to support the Government's program. Successive governments have demonstratedtheir willingness to pursue the original reform objectives, while being flexible in the redesign of themethods used to achieve those objectives. (A major example of this flexibility was the adoption of aMass Privatization Program (MPP) which is described in paras 24-25). However, the lack of prioritygiven to strengthening public administration, which was reflected in frequent changes of key policy-makers and decision-makers, left advancing reform programs too vulnerable to the impact of the 1997civil disturbances (para 49).

14. The EFSAC and the TA Project were designed and implemented in close coordination with the(IMF). Structural objectives under the IMF's 1993 ESAF and later, its Emergency Post-ConflictAssistance Program, were linked to the EFSAC objectives. The IMF and the Bank funded technicalassistance to support the institutional strengthening needed to achieve policy objectives. They alsoassisted the Government in identifying other sources of technical assistance funding to support

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privatization and financial sector reform objectives. This coordination was particularly critical in thepost-crisis period.

D. Achievement of Objectives

15. Although it took longer than originally anticipated to fulfill all of the EFSAC conditions and tocarry out the TA Project, there were few changes in the Government's program objectives and, overall,both operations have achieved their objectives. Most of the macroeconomic and privatization objectivesof the EFSAC had been substantially met by mid-1996. However, given the lack of progress indeveloping the commercial banking sector, and the evident lack of political resolve and will to act, at thattime, the probability of meeting the second tranche release conditions was not high. After the 1997 crisis,the new Government, realizing that more rapid and deeper reform had to take place, moved quickly andvigorously to implement the needed reforms, including steps to wind down the pyramid schemes, and tostrengthen the banking system. As a result, by June 1998, all EFSAC conditions had been substantiallymet, and the second tranche was released.

Macroeconomic Framework

16. Following the effectiveness of the EFSAC, the Government of Albania made early andsubstantial progress in implementing its ambitious stabilization and structural reform program. Therewere major cuts in the budget deficit and a corresponding decline in inflation. To strengthen its fiscalbalance, since 1994, the Government has taken a number of measures to reduce subsidies and to improvecost recovery in the infrastructure sectors. Prices of goods produced by SOEs are now market-determinedand public utility charges have been adjusted gradually to reduce the remaining budget subsidies. The totalbudgetary expenditures for conservation and liquidation of SOEs fell from Lek 660 million in 1995 (0.3percent of GDP) to Lek 395 million in 1997 (0.1 percent of GDP). Of this latter amount, Lek 93 million wasprovided for what remained of the original ERA enterprises.

17. The Government also made substantive progress in preparing and implementing a PIP. The firstcomprehensive PIP, prepared in 1994, focused not only on specific investment projects for 1994-96, but alsoprovided the economic context in which the investments were to be made. Importantly, given the weaknessof Government institutions, it reviewed arrangements within the Government for implementation,coordination and management. A three-year rolling investment program was prepared in each of thesubsequent years through 1996. The Government made some advances in institutional arrangements in theMinistry of Finance (MoF) in the areas of treasury and budget functions, and in the Council of Ministers(CoM) in general during 1994-96.

18. Albania's impressive transition performance came to a halt in early 1997, following the collapseof the pyramid schemes (para 49) and there was a severe contraction of economic activity. TheGovernment lost control of large parts of the country and most state functions were severely hampered.The coalition Government, appointed in mid-1997, "rapidly took steps to take control of thedisintegrating economy, avert a total collapse of the monetary system and start creating conditions for theresumption of economic development."3 Supported by a six-month IMF program (November 1997 toApril 1998) under the Fund's Post-Conflict Emergency Assistance Policy, the Government implementedmajor measures to restore macroeconomic stability. These measures, together with the restoration, albeitfragile, of political stability and security to the country, led to some important improvements in economicperformance in 1997. These recent achievements are being supported by a follow-up 3-year ESAFprogram, approved in May 1998.

3 See Government's Report: "Albania - On the Road to Stabilization and Development", October 1998.

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19. The actions taken included measures to strengthen customs and tax administration, the mostimportant of which was raising the VAT rate from 12.5 to 20 percent. Together with spending cuts, theyhelped limit the domnestically financed fiscal deficit to less than 11 percent of GDP in 1997 and laid thegroundwork for furilher fiscal consolidation in 1998. For the first eight months of 1998, the fiscal deficitwas around 3 percent of annual GDP. For 1998, GDP is estimated to have grown by about 10 percent,after declining by about 7 percent in 1997. The Lek appreciated immediately after the elections, and hasbeen relatively stable since. Economic activities have begun to recover, noticeably reflected in therevival in construction, private industry and service activities. Throughout the crisis, the authoritiesmanaged to adhere to the floating exchange rate policy with minimal intervention in the foreign exchangemarket.

20. The Government also reviewed the status of public investments and in early 1998 completed a newPIP, covering 1998-2001. This new PIP, which was presented at the October 1998 Donors' Conference,takes into account Albania's post-crisis priorities, elaborates an appropriate resource framework andconsiders measures for improved coordination and management. The Bank intends to continue to play a rolein helping articulate an adequate PIP for the mediumn-term through an overall public expenditure review.

Privatization

21. Privatization during the early years of the transition period was extremely rapid. Before theEFSAC program began, the privatization process had been given the "green light" with passage in 1991of the Law on Sanctioning and Protection of Private Property, Free Initiative and Privatization." In mid-1991, farmers spontaneously dismantled agricultural cooperatives and distributed land and livestockamong themselves and 93 percent of agricultural land had been distributed by the end of 1993. In early1992, as a result of Decree 248, there was a similar rapid privatization of many small-scale trade andservice enterprises., with most being distributed free of charge or for a nominal fee after being taken overby people working there. As in agriculture, there was an impressive supply response to privatization, andretail services, in particular, began to grow rapidly.

22. The ERA was created in 1993 to take charge of 32 particularly problematic large SOEs andprepare them for divestiture. The ERA was to provide financial and managerial technical assistance priorto privatization or liquidation of these enterprises. By 1997, 16 of these enterprises had been totallyprivatized, 2 had been liquidated and 4 more had effectively ceased operations but were awaitingcompletion of legal liquidation procedures. Seven other enterprises had been split up and most partsprivatized. Most of what now remains of them is non-operating with only a skeleton staff for securitypurposes. The three remaining enterprises continue to operate, but at less than 20 percent of their1993/94 employment level. Further cutbacks would be impossible without major social implications.

23. Following the initial spate ofprivatizations, the privatization of other SOEs slowed in mid-1993.Disputes about the treatment of restitution claims, the difficulty of disposing of large enterprises, socialconcerns about the effects of privatizing loss-making enterprises with substantial numbers of workers,and general concerns about transparency, all led to the development of more formal approaches toprivatization. Preparations for a revised privatization strategy started in early 1995 and by mid-1995 hadbeen refined into lwo approaches: sale of small and medium enterprises by Decree 203 privatization (saleby auction to a single buyer or to a consortium of buyers); and sale of larger enterprises through the MPP.

24. The adoplion of the MPP in May 1995, opened the way for the transfer of ownership rights fromthe state to the pri.vate sector, aiming at ensuring speed, social justice and transparency. Under the MPP,which and was designed and implemented with Bank assistance, shares in enterprises were distributed to

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many buyers. Bids, either for the above auction process or under the MPP, could be made in cash, in"privatization Leks" (special vouchers distributed to former political prisoners) or in privatizationvouchers, which were distributed to all citizens not eligible for land distribution or restitution.

25. The MPP involved many institutions. Overall responsibility for the design, implementation andfunding of both the small-scale and mass privatization program rested initially with the MoF, and wassubsequently transferred to the Ministry of Privatization, following its creation in mid-1996. TheNational Privatization Agency (NAP), as the sales agent of the Government, organized public auctions ofassets and small enterprises, and developed a nationwide network of bid collection points to enablecitizens from all-over the country to participate in the MPP. TheBoA, was responsible for designing thevoucher and privatization account schemes. The Savings Bank managed the distribution of privatizationLek accounts and vouchers among the eligible population.

26. From August 1995 to March 1997 (when the MPP came to a halt), about 90 medium and largeSOEs were totally privatized. As part of the MPP, most large and some medium enterprises, includingthe ERA enterprises, were split into smaller parts to facilitate their sale. By 1997, about 30,200 small andmedium enterprises or assets had been privatized.

27. The Government appointed after the June 1997 elections undertook to complete the privatizationprocess and to address the problems of the past. A comprehensive privatization strategy was approved byParliament in March 1998, followed by a number of specific regulations governing the auction processfor the 470 remaining small and medium enterprises. These regulations were designed to ensuretransparency of the privatization process and to allow joint venture partners of SOEs an opportunity tobuy the enterprises in which they already have a stake. The new strategy also covers the privatization ofthe strategic sectors. With the assistance of the Bank and financing from the Govemment of Italy, theGovernment has selected a financial advisor for the sale to strategic investors of the main enterprises inthese sectors and the first enterprises are expected to be sold during 1999.

Banking Sector Reform

28. In 1992, Albania created a two tier banking system by dividing the old State Bank of Albania intoa central bank (the BoA) and three state-owned banks. From mid-1992, the state-owned commercialbanks--the Savings Bank-(SB), the National Commercial Bank (NCB), and the Rural Commercial Bank(RCB)--were officially permitted to function as universal banks.

29. To strengthen the balance sheets of the new commercial banks, the Government assumedresponsibility for most old loans outstanding in mid-1992, to the state enterprises, farms andcooperatives. Most of these loans were considered non-perforning or unlikely to be repaid. However,these old claims gave rise to a complex web of interbank liabilities. They hampered the development ofcommercial relations among the banks as some banks refused to service their liabilities to the other state-owned banks until the government had issued recapitalization bonds and begun to service the old debts.This problem was resolved in 1995 with the implementation of the Government decision to issue five-year interest-free State bonds amounting to Lek 1.7 million.

30. Rapid growth of non-performing loans also characterized the state-owned banks. Reflecting thetransition to a market economy, credit to the emerging private sector increasedmanyfold from 30 percentof new credit outstanding at end-1992 to almost 75 percent at end-1994. Unfortunately, a large share ofthe lending was not repaid on time. By end-1994, the private sector accounted for 90 percent of total,post-1992, non-performing loans. By 1996, that percentage remained high at 83 percent of total loans tothe private sector.

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31. There are a number of reasons for the unsatisfactory loan collection performance by the state-owned banks, which continue to dominate the commercial banking system:

* Following the creation of the second-tier banks, loan volume quickly expanded. Lending wasexecuted by loan officers with no training in credit analysis and no access to financial statements(which were ur3nown under the old regime). Loan officers had little incentive to pursue collectionsince salaries were unrelated to performance and there was little further contact with borrowers, onceloans were disbursed.

* Problems arose with loan collateral. Some loans were made without collateral and some collateralwas overvalued.. Houses were accepted as collateral, but it became socially and politically impossiblefor banks to enforce those claims. Legal provisions for enforcing collateral were weak and the courtslacked the capacity to enforce them. Judges were ill trained in the concepts of market mechanismsand private property rights.

* Due to a sharply upward sloping yield curve, there was inappropriate extension of a large volume ofshort term credits, even where long termn loans were more appropriate.

v Borrowers maintained persistent expectations of loan forgiveness based on old socialist practices.

32. These issues underscored the need for improved management, accounting and legal frameworksfor commercial banks, as well as for improved supervision by the BoA. To address these issues, theGovernment and the BoA undertook a number of measures to reform the state-owned banks and preventfurther deterioration. These included attempts by the Govemment, as the owner, to improve corporategovernance as well as to impose prudent banking practices. The Government appointed newmanagement in the commercial banks; tightened ceilings on new lending; and attempted to improvecollections. More vigorous enforcement of claims through the court system was to be pursued.However, there was a practical limit to the effectiveness of this strategy due to excessive court case loads,a lack of knowledge about appropriate procedures, the absence of a modern bankruptcy law (until 1995)and effective liquidation procedures.

33. The first private bank began operations in 1993 in Albania, with one small branch. Thedevelopment of private banking has been very much effected by the pace of the development of financialsector, legal, and physical infrastructure, as well as macroeconomic, political and social considerations.By mid-1998, there were seven private banks, which are either wholly foreign or foreign joint-ventures.

34. Albania has followed the experience of other transition economies which has been that foreignbanks typically concentrate on servicing foreign investors and undertaking fee-based foreign transactionsin which they have a comparative advantage. While they have a demonstration effect and providetraining, foreign banks generally avoid undertaking domestic banking business. This was the case of theItalo-Albanian Bank in 1995 when 90 percent of its business was trade-related, eaming fee income fromcash transfers abroad and letters of credit. The situation has improved since then and, as of November1997, private banks accounted for 6 percent of total deposits in the Albanian banking system and 16percent of total domestic credit.

35. The Government realized that building a strong banking system would require the developmentof strong private domestic banks. In an effort to encourage the establishment of private domestic banks,in 1994 the BoA adopted and published clear regulations and application procedures, based on aminimum capital requirement of $1 million (now set at $5 million). Application procedures were furtherstreamlined in early 1995.

36. Over the course of EFSAC and TA Project implementation, the development of the commercialbanking.system was slow. It was hampered by a lack of understanding by the Government and bankmanagers of the fact that bank modernization program was necessary, and by continued politicalinterference in state banks. It was also affected by old interbank claims, the lack of recognized standardsfor accounting and auditing, poor reporting by bank branches to their headquarters, a slow and inadequatepayments system, the lack of legal protection for collateral and enforcement of claims, and critically, alack of experience with modem banking techniques, including accounting, risk assessment and portfoliomanagement. Notwithstanding several years of structural adjustment, the formal banking sector was stilldominated by insolvent state-owned banks accounting for about 90 percent of total assets and deposits inthe banking sector.

37. After the 1997 civil unrest, and following the June 1997 elections, the new Government movedaggressively to reform the banking system, with the objective of establishing an environment conduciveto the operation of a well-functioning private banking system. The Government's strategy, which isbeing supported by the Bank and the IMF, includes: privatization or liquidation of the state-owned banksand creation of an environment conducive to the development of privately owned and prudentially soundbanks. It also includes the further strengthening of the legislative framework and banking infrastructure.

38. Substantial progress has already been made in implementing these reforms, and in addressingmajor structural problems. A new Bank of Albania Law, aimed at strengthening BoA's independence,was adopted early this year and a new Banking System Act was approved in summer 1998. The RuralCommercial Bank (one of the three State-owned banks) was liquidated at the end of 1997. A foreignChief Executive Officer (CEO) has been appointed to assist in divestiture of the National CommercialBank (NCB) and its privatization is now underway. With the assistance of a foreign bank; the SavingsBank (the largest State-owned bank) has been put under tight governance, with the objective ofprivatization by end-1 999. A debt recovery mechanism has been established for the resolution of the badassets of the State-owned banks. In addition, to assist the banks manage their credit risk more effectively,a Credit Information Bureau is being established in the BoA.

39. Good progress, albeit slower than would have been desirable, has been made in establishing achart of accounts. The Bank of Albania has developed a new Chart of Accounts, adopted by its Board inearly 1998, which is consistent with Intemational Accounting Standards. It is being implemented by theSavings Bank, NCB and the private banks. The Savings Bank and NCB produced their 1997 accountsaccording to the new Chart. Work is underway to modify the format of the mandatory supervisionreports of the banks, based on the new Chart and standing BoA regulations.

40. The Banking System Act was revised to ensure adequate bank capitalization and proper rules forentry and exit. The minimum regulatory capital for banks has been raised from Lek 200 million in 1996to Lek 350 million in 1997 to Lek 700 million (about US$5 million) in April 1998. Licensingrequirements have been tightened to include additional information on business plans and thequalifications of directors. In light of these revisions, all licensed commercial banks in Albania, state-owned and private, are undergoing recertification.

Legal Framework

41. In October 1995, Albania adopted Law No 8017 on Bankruptcy Procedures. This law wasdrafted in consultation with intemational experts and conforms to international standards. The lawdetermines the disposition of cases based on insolvency of physical and legal persons, including non-exempt SOEs. Under this law, subject to exceptions for certain personal property and income, all of the

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debtor's assets are included in the bankruptcy estate, whether located in or out of Albania. A significantfeature of the law is its provision for reorganization, designed to ensure the continuity of a debtor'sbusiness activity. The Law provides that only BoA is authorized to initiate bankruptcy proceedings forbanks.

42. For loan recovery, legislation has been developed in several different areas. The substantivelegal basis for collateral is now guaranteed by the 1994 Civil Code. The code contains provisionsconcerning the mortgaging of immovable property and the pledging of movable property as collateral.Mortgages on immovable property must be notarized and filed with an immovable property register. Thisregister was established under a separate law, Law on Immovable Property Register. An additionalimportant piece of legislation is the Law on the Bank Asset Resolution Trust. This Law established anagency responsible for the collection of the bad loan portfolio of the state-owned banks.

43. With the above legislation, Albania has in place the bulk of the necessary commercial legislation.In addition, a preliminary draft of a law on movable property as collateral (the Secured TransactionsLaw) is under discussion. The draft law provides strong security for credits given by banks and sellers ofgoods. It creates ;a property interest which can be used for financing equipment, inventory, accountsreceivable, and other movable property. It provides effective alternatives for enforcement, in the event ofdefault by the debtor. Actions are also at an advanced stage to create a register for movable property.The adoption of the Secured Transactions Law and the establishment of the movable property registerwill further stimulate the development of a functioning market economy and will complement thebankruptcy legislation.

44. Despite the progress described above, work is needed to ensure consistency among the newlegislation. Moreover, the judiciary is ill-equipped and inexperienced, resulting in little capacity to applythe provisions of t:he laws. In fact, no bankruptcy or commercial reorganization cases have taken place.Poor implementation of the commercial laws continues to be a serious impediment to the development ofa functioning private sector. In summary, lack of enforcement of laws and regulations is a very seriousproblem and impediment for the development of a robust financial sector in Albania.

45. A major challenge for the Government will now be to strengthen enforcement capacity throughsignificant training programs for bankruptcy judges, official receivers, lawyers, accountants, managers ofcreditor institutions and managers of debtor companies. This process is strongly supported by Albania'smajor donors, but it will necessarily be a long-term process that was not envisaged within the frameworkor the timeframe of the EFSAC and the TA Project.

46. Support firom the TA Project has contributed to the achievements in each of the above areasincluded in the EFSAC. For example, (i) Project-financed experts assisted in the preparation of the firstPIPs. More recently, the EU-PHARE has been providing technical assistance for both preparing the PIPdocument and the follow-up monitoring of investments. Steps are being taken to fully integrate the PIP withthe Budget. (ii) U'S Treasury took the lead in supporting the establishment of a Treasury system in theMinistry of Finance. This was supplemented with resources for information technology equipment from theTA Project. Although the Treasury system is now operating, some regional Treasury offices are stillmaintaining their information manually and could have benefited more from training on the operation of thespecially developed computer software. (iii) Assistance provided to establish a macroeconomic forecastingand analysis capacity yielded substantial benefits. By 1996 a Macroeconomic Forecasting Unit was able toproduce regular monthly or quarterly reports evaluating macroeconomic developments and to providegeneral policy recommendations. Staff were also trained in the use of econometrics and forecasting modelsso that they could effectively use up-to-date techniques in their work. This Unit, following severalgovernment reorganizations, was relocated to the Ministry of Economic Cooperation and Trade. (iv) The

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ERA received technical assistance through the TA Project for carrying out sector studies that identifiedthe main strengths and weaknesses of these companies and recommended their privatization/liquidation.ERA staff also benefited from the expertise of foreign consultants and study tours in countries that wereprivatizing SOEs. With its program substantially completed, the ERA was disbanded in October 1996and integrated into the Ministry of Privatization. (v) Support was mobilized very quickly to providecritical assistance in the design and implementation of the MPP. (vi) The first audits of state-ownedcommercial banks, although inconclusive, were an important effort to establish the true financialcondition of the banks and served as a basis for the subsequent audits.

47. Some components, originally included in the TA Project, were either financed by other donors ordid not materialize (see para 65). These changes, however, did not negatively affect the achievement of theproject's development objectives as they allowed the needed flexibility to support other critically importantareas, such as the MPP and the resolution of the pyramid schemes.

E. Major Factors Affecting the Project

48. Two major factors affected both the EFSAC and the TA Project: frequent changes in ministers offinance and other key counterparts, together with an inadequate central administration, affectedimplementation of both operations. Between 1993 and 1998 there were five different Ministers ofFinance and four Governors of the Bank of Albania. While commitment to the overall objectives of theEFSAC and the TA Project did not change, each new government was inexperienced and needed timebefore it was able to understand and to advance the program. This led to delays in implementation, themost important of which was, a two-year lag in implementation of banking reform. This risk wasrecognized at appraisal. But even so, the Bank was over-optimistic about the time it would take toachieve the agreed targets.

49. The growth of the pyramid schemes and their subsequent collapse dashed the hopes of Albaniansof "getting rich quick". The pyramid schemes started in 1993-94. In the absence of a viable formalfinancial sector and a lack of bank intermediation, several trading companies began borrowing directlyfrom the public, at very attractive interest rates. Although initially not pure pyramid schemes because thecash financed their trading activities, they soon realized that money raising was extremely profitable inand of itself and rapidly expanded their activities. Following their initial success, trading companies weresoon joined by pure pyramid schemes and the competition for funding increased, pushing interest rateshigher and higher. It became evident in early 1996 that the schemes were rapidly growing out of control.By the second half of 1996, some schemes were offering monthly interest rates of 40-50 percent,resulting in a dramatic increase in deposits. Because the borrowing companies raised money as personalloans and did not engage in relending depositors funds, these businesses did not fall under the definitionof banking activities. Thus, they managed to remain beyond the purview of the banking law and avoidsupervision of the BoA. The first scheme collapsed in October 1996 and all pyramid schemes suspendedpayments to creditors at the beginning of 1997.

50. It is estimated that about 60 percent of all Albanian families lost some of their life savings inthese schemes and were left impoverished by their collapse. The crisis that erupted in early 1997 erodedmany of the achievements made during the early years of transition. The massive social unrest was soprofound that the economy was severely disrupted. Irreparable damage was done to private and publicproperty and the Government fell. The magnitude of the pyramid scheme phenomenon wasunprecedented and difficult to foresee.

51. The Government appointed in June 1997 moved rapidly to arrest the deteriorating situation,including taking measures to wind down the pyramid scheme operations. At the Government's request

and in response to requests from the main international donors, including the EU, USA, Greece and Italy,IDA took the lead in mobilizing trust funds to finance the needed actions. The TA Project was amendedto permit financing, in the shortest time possible, of the first phase of the work of external administratorsto audit the' largest pyramid schemes. Follow up actions are covered through the Trust Funds and will bereported on separately when this program has been completed. (That review will cover the disposition ofassets, followed by the distribution of the proceeds to depositors in the schemes.)

52. There are signs that the impact of this support was positive, but it is too early to reach anydefinitive conclusions since the assistance is continuing. Although very costly, the support and assistanceof international donors minimized the risk of a public backlash, which could have occurred because of thefinal size of the losses of investors. Although no price can be put on the avoidance of further civil unrest,it cannot be concluded that this was the only way to handle this very sensitive situation.

F. Project Sustainability

53. Although ambitious, the programs supported by these operations were only the first step inAlbania's far-reaching reform. While the operations took longer than expected to complete, their impactcan be seen in the contribution they have made to the development of both the private and bankingsectors. Through policy and technical support, the operations have assisted in the privatization of aconsiderable number of SOEs, improvements in the legal framework of both the enterprise and thebanking sectors, development of an accounting framework and strengthening of the supervisory capacityand authority of the Bank of Albania. Together, the EFSAC and TA Project have prepared the ground forthe continuation of substantial reforms. These reforms encompass the privatization of commercial banksand of strategic companies.

54. Following the 1996-97 hiatus, the Government is moving to the next phase of its reform. Withcontinued support from Bank and other international donors, it is strengthening its economic managementand taking measures to regain the progress lost by the 1997 civil unrest. In addition, priority is now beinggiven to reform of the public administration and strengthening of the judiciary. Strengthening theseinstitutions will help combat corruption and enhance the ability of the Government to run the country.The Government recognizes that improvements in these areas are essential if the reforms which are nowwell underway are to be sustained.

G. Bank Performance

55. Since early 1992, the Bank has been a key partner of the Government in its efforts to transformthe country into a market economy, even before preparation of the EFSAC began. From the earliest days,the Government welcomed and relied on the Bank's extensive policy advice and technical assistance.These eventually led to the formulation of the EFSAC program and the TA Project. This closecollaboration has been maintained throughout the implementation of the operations. During preparationand the early years of supervision, efforts were made to have at least one team member in the countryevery month. In early 1996, it became apparent that the pyramid schemes were rapidly growing out ofcontrol and were beginning to cause a severe deterioration in the economic and social conditions in thecountry. The Bank reduced its presence at that time and decided that any consideration to release theEFSAC second tranche should be postponed until the issue was resolved. Release of this tranche (in June1998) was subsequently processed speedily, as soon as the macroeconomic conditions were judged to besatisfactory and evidence was provided of adequate progress in banking sector reform. The high numberof staff weeks recorded against the EFSAC preparation activities and this subsequent support indicate theintensity of effort that was essential to give the Government the guidance and assistance it needed tocontinue implementing its reform program.

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56. Preparation and implementation of the TA Project cannot be separately examined. Until late1992, it was envisaged that the EFSAC would be a hybrid credit with a policy and technical assistancecomponent. The decision to separate the operations permitted the technical assistance to move aheadquickly and provide needed resources to help initiate the reform program. Separate teams prepared themacroeconomic, enterprise and banking components.

57. Supervision of this project was adequate, with about two missions per year and regular follow upfrom the Resident Mission. This does not include the work carried out as part of the regularmacroeconomic and banking sector dialogue or for the MPP, which was recorded separately. Nor does itreflect the separate missions to monitor issues relating to the pyramid schemes. For the MPP alone, ninemissions took place between January 1995 and September 1996. Bank staff demonstrated flexibilityduring implementation, allowing a shift in activities to respond to evolving priorities, such as revisingspecific activities to make available resources for launching and implementing the MPP as quickly aspossible. Subsequently, the TA Project was amended and Credit funds reallocated, to help resolve thepyramid schemes.

58. Throughout the project cycle, collaboration with the IMF and other donors was extensive andexcellent. The Bank and IMF jointly prepared Policy Framework Papers. Several joint or overlappingmissions took place with the IMF, to evaluate macroeconomic questions and to review BoA activities,such as bank supervision and prudential regulations. This collaboration served to ensure consistency ofconditionality in both IMF and Bank operations. Close collaboration was also maintained with otherdonors, such as EU-Phare and USAID/Treasury, Germany, Italy, and the United Kingdom. Some prioritytechnical assistance needs (such as support for the Ministry of Finance-Treasury, establishment of a chartof accounts for banks and support for banking supervision) were eventually financed through availablegrants, instead of the TA Project. Of special comment is the strong donor collaboration that came intoplay in regard to the restart of operations in late 1997 and the program that was mobilized to help in thewinding down of the pyramid schemes. The Bank and the IMF were at the forefront of this effort. TheBank was instrumental in helping to mobilize over $5 million in donor funds (supplemented with somefunding available from the TA Project) which were placed in trust funds, administered by the Bank underthe umbrella of the TA Project.

H. Borrower Performance

59. The performance of the Borrower and other implementing entities was satisfactory. TheGovernment institutions have been cooperative and receptive to the Bank's advice and guidance and werein compliance with the legal covenants. The Government was committed to the implementation of thereforms supported under the EFSAC and TA programs but, during the process, could not avoid mistakesand delays of both a political and economic nature. Implementation of both projects was a learningprocess for the Bank, as well as for the institutions involved. Training, study tours and foreign expertsfinanced from the TA Project helped to increase the professional level of Borrower's staff. However, thevarious levels of technical staff were affected by frequent changes of Government, which createddifficulties for a smooth continuation of the project. These changes also negatively affected the ProjectImplementation Unit (PIU) in the Ministry of Finance, which suffered from a deterioration in its status,staff changes and staff shortages during project implementation. Despite these problems, the PIUhandled successfully and with professionalism difficult procurement issues, and played a crucial role inproject implementation.

60. The Government recognized the need for pressure from the international donor community,particularly from the World Bank, to enable it to take difficult and potentially unpopular decisions,

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embodied in the EF SAC. The strong commitment of a small team of top officials was critical for thedesign and initial implementation of the program. Changes in Government affected the pace ofimplementation, bul: the commitment and constructive dialogue continued. Institutional capacity is stillweak, but has improved substantially.

1. Assessment: of Outcome

61. Albania's initial results in implementing its overall economic reform program were impressive.Between 1993 and 1996, Albania was a star performer for the Region, with annual GDP growthaveraging 8-10 percent. However, progress in implementing the structural reforms was mixed. Thecreation of the necessary enabling environment for long-term sustainable growth of a market economylagged. This, in addition to the lack of adequate checks and balances, weak institutions and inadequatecapacity for and poor enforcement of laws led, amongst other things, to the growth of the pyramidschemes and ensuing crisis. This crisis not only dwarfed the achievements to date but also reversed muchof the progress that: had been made. However the Government appointed after the June 1997 electionsrecognized the need to move quickly to restore order and create the conditions necessary for theresumption of growth. This resolve is especially evident in the forceful manner in which the Governmenthas moved ahead with implementation of its strategy to reform the banking sector.

62. The privatization process in Albania, and the MPP in particular, has positively impacted theeconomy through advancing the primary policy objective of rapid distribution of the property to thosewho had contributed to its establishment. However this process had also distortions and imperfections inachieving its goals. A highly political process, it has always been at the center of political debates and thecenter of attention of Government(s) and the population. The main weaknesses and reasons for the delaysin implementation of the privatization process are as follows:

- Property restitition had a negative impact on privatization. Some companies were privatized withouta final decision on the site ownership rights. Without a clear register of the new private shareholders,the company remained somewhere between state-owned and private. The government is working toresolve the reTnaining restitution issues. A new package of laws and regulations is expected to beapproved soon by the CoM.

* Funds from the TA project were available for a public education program but the publicity campaignand information on the MPP remained at a low level and did not fully convey to the citizens thepotential benefits. As result, only about 9 percent of the total distributed value of privatizationvouchers was used.

* The MPP brought about private companies with a great number of shareholders. The wide dispersionof ownership resulted in the absence of a group of shareholders owning enough shares to effectivelymanage the privatized enterprises. This problem was exacerbated because the rights and duties ofshareholders, as well as of the management, were not yet well understood.

* Lack of post-privatization support. The financial system offered little support for the newlyprivatized companies and many of them became bankrupt.

63. With regard to the banking sector, Albania has made good progress towards establishing anappropriate legal and regulatory framework for the functioning of a market-based banking sector,although much more remains to be done. Its prudential regulations are generally in line withinternationally accepted standards, but problems with the enforcement of these regulations remain.Efforts are underway to address these problems and a strong banking sector with effective banking

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supervision is a priority area for the BoA. Progress in the strengthening and divestiture of the state-owned commercial banks was much more difficult to achieve. Between 1994 and 1996, severalprivatization strategies were agreed with the Bank with different Ministers of Finance, but, for severalyears, it proved impossible for the Government to implement difficult and sometimes controversialdecisions and the losses of the banks continued to mount. Poor accounting practices made it virtuallyimpossible to accurately assess the true extent of the potential losses.

64. The events triggered by the collapse of the pyramid schemes may have represented a watershedfor reform of the banking sector. Since mid-1997, the BoA has taken concrete steps to exercise itscontrol of the state-owned banks and to minimize the losses stemming from their bad financial situationand poor management. The Government has also acted vigorously and decisively to implement an agreedprivatization strategy. Although it is too early to assess the results of this strategy, and continuedintensive support from the Bank and other donors will continue to be needed, initial indications are thatprogress is being made. RCB was closed at the end of 1997, the Savings Bank is under a strictgovernance contract and the privatization process for NCB is underway. The successful privatization ofthis bank, with the participation of a strategic investor, will be a critical signal that the program is on theright track. Improvements in banking infrastructure have also been disappointingly slow. Increasedemphasis is now being devoted to this area.

65. Implementation/Project Management: Some areas originally identified for support from the TAProject were subsequently funded by other donors. For example, advisers to help establish the Treasurysystem were provided by the US (Treasury and USAID). Support to establish a chart of accounts for thebanks was provided by the EU. Support to help establish national accounts never materialized. After muchdelay, a suitable adviser was ready to take up a resident assignment in Albania but was unable to do so as aresult of the 1997 disturbances. The Institute of Statistics, with direct support from European statisticaloffices such as INSEE, has made some progress in preparing for the establishment of national accounts, butfurther support is needed. As financing is no longer available from the TA Project, the Institute of Statisticsis exploring other sources to provide assistance in this area. In agreement with the Bank of Albania, an earlydecision was also made not to fmance equipment for the Bankers Training Center because of the absence ofagreement on the strategic direction and role of this entity. These changes enabled resources from the TAProject to be used for other priority areas. This flexibility was a critical factor when the Governmentrequested support to help launch the MPP. The speedy earmarking of funds for this purpose, althougheventually not all funds were required, enabled the Bank to quickly mobilize a team to provide the neededadvice and support. Similarly, when resources were needed for experts to help wind down the pyramidschemes, it was possible to quickly amend this operation to finance the initial support. World Bank supportfor this activity was crucial for attracting and coordinating funding from other intemational donors andresulted in special donor trust funds of over $5 million being made available.

66. The TA Project provided essential support for the implementation of the reform program. Thequality of the services provided has, in general, been high. The Govemment and recipient agencies havewelcomed the combination of technical and policy advice, from both consultants and Bank staff. Inaddition, overseas training and study tours were beneficial, by providing officials exposure to moderntechniques in the areas of debt management, macroeconomic management, banking practices, legalissues, and in procurement and disbursement practices. However, closer monitoring and follow up of thistraining would have made it easier to judge the real benefits.

67. The broad scope of the EFSAC and TA Project was both their main strength and weakness.These operations required extensive coordination on the part of the Government which had limitedcapacity as well as little experience either in the implementation of the ambitious reform program or inworking with comparatively expensive foreign advisers. In hindsight, the Bank over-estimated the

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absorptive capacity of the Borrower and its newly established institutions in preparing the timetable forimplementation of these operations. This limited capacity contributed to the delay in the achievement ofthe objectives of both operations.

68. In summary, the outcome of the EFSAC was satisfactory, although implementation of theprogram took longer than anticipated and much more remains to be done. The overall outcome of the TAProject was also moderately satisfactory, but implementation of the various components was uneven andexecution has been somewhat slower than anticipated. As described above, Albania is beginning to makegood progress in implementing the primary reform objectives supported by the EFSAC, and in thedifficult process of reforming the banking sector.

J. Future Operation

69. The Government has demonstrated that it is committed to continuing its refonn program. Thiscommitment is stated in its report: "The Road to Stabilization and Development," which was presented atthe recent Donors Conference. Since the restart of activities in late 1997, IDA has been pursuing anextensive program to help Albania continue along this path. The Rehabilitation Credit supplemented bythe Recovery Program Technical Assistance Project (both approved in December 1997), providedbalance of payments and institutional support, respectively, for continuing and accelerating reforms inkey areas such as banking, public sector management, the civil service and the judiciary. A StructuralAdjustment Credit, under preparation, will support policies to move forward programs in these areas.The planned Banking Privatization Project will specifically address issues relating to the privatization ofthe largest bank (Savings Bank), the creation of an environment conducive to the development of privatebanking, as well as to capital market development. Major efforts are also underway to support publicadministration reform and to strengthen the judiciary and judicial administration.

K. Key Lessons Learned

70. It is essential for effective program implementation that there be sustained Governmentcommitment, as well as IDA and Government staff continuity. While commitment was demonstrated, italone is not sufficient to build up the experience and expertise to implement and modify complexadjustment and investment operations. High level staff need to be trained and retained by theGovernment. This staff function did not exist before 1992, but it is being developed now. Likewise, it isessential that IDA maintain staff continuity from project preparation through implementation so thatactions taken at one stage of implementation are fully understood and consistent with project design andearlier actions, particularly project modifications.

71. Although the objectives of both operations were clear and remain relevant today, the timetablefor reaching the desired goals was overly-optimistic. More realism should be built into the timetables.Ultimate operational objectives should be defined by clear interim steps so that the Government canreadily assess whether it is on track for meeting its objectives or not. Better and more detailed monitoringindicators, including interim steps and benchmarks, could have helped in this respect. Furthermore, whendealing with countries with such limited experience, it is important that advice on project objectives,offered by the Bank and by other donors, be specific rather than general.

72. Intense supervision is required for technical support particularly for a low-income country withlittle IDA, and other donor, experience.

73. Although the Government was committed to implementing the programs agreed under theEFSAC, constant support and guidance of IDA was requested to help maintain the momentum in

- 16-

implementing the agreed programs and to adhere to difficult decisions. Strong support from the ResidentMission was an essential ingredient of this visible presence.

74. Albania's difficulty in creating a modem banking system is not dissimilar to that of otherformerly socialist economies. Many countries which embarked on the transformation of their bankingsystems much earlier than had Albania, continued to confront similar, basic problems many years later.One of the main problems is that under state ownership the banks and bank managers do not have theright incentives to become strong, effective lending institutions. Technical assistance, while useful, is notsufficient to change bank operations rapidly.

75. The built-in flexibility of the TA Project was a crucial factor in the successful outcome of thisoperation. The TA Project was, however, not a general fund and care should be taken to ensure that thisis not the case. It was reasonably targeted towards certain activities and sectors with identifiablecomponents. The flexibility facilitated a quick response to address changing priorities as the countrysituation evolved. IDA's willingness to be creative in dealing with changed circumstances has allowedthe activities to evolve through the process of amendment without any changes to the objectives and withonly a minor change to the TA Project description.

-17-

Part II. Statistical Tables

Table 1: Summary of AssessmentTable 2: Related. Bank Loans/CreditsTable 3: Project TimetableTable 4: Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8: Project Costs and FinancingTable 9: Economnic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

- 18 -

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not applicable

Macro Policies (1) Lj l IZ

Sector Policies (1) E E El

Financial Objectives (3) El [ ] /

Institutional Development (2) 0 E El

Physical Objectives (2) /

Poverty Reduction []Gender Issues (3) I = IIv

Other Social Objectives El 0 0]

Environmental Objectives (3) [] El []Public Sector Management (3) El ElPrivate Sector Development (3) [/ EliOther (specify) El El El 0

B. Project Sustainability (3) Likely Unlikely Uncertain

HighlyC. Bank Performance (3) Satisfactory Satisfactory Deficient

Identification n E[

Preparation Assistance El ElAppraisal El ElSupervision El /

(Continued)

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Highly D. Borrower Perfornance Satisfactory Satisfactory Deficient

Preparation (3) I [

Implementation (3)

Covenant Compliance []

Operation (if applicable) L iii

Highly HighlyE. Assessment of Outcome (3) satisfactory Satisfactory Unsatisfactory unsatisfactory

Note: (1) EFSAC only(2) TA. Project only(3) Rating applies to both operations

- 20 -

Table 2: Related Bank Loans/Credits

Credit Title Purpose Year of StatusApproval

Preceding operations

1. Agriculture Sector Agricultural sector adjustment program 1993 ClosedAdjustment Credit with line of credit for agricultural

investments and technical assistance

Following operations

1. Rehabilitation Credit Single tranche policy based support for 1997 CompletedGovernments economic recoveryprogram

2. Recovery Program Institutional development and support for 1997 OngoingTechnical Assistance banking sector reforn, economic

management public administration andjudicial reform

3. Structural Adjustment Structural adjustment focussing on public PlannedCredit administration, judicial, financial sector

reforms

4. Banking Privatization Privatization of SB and promotion of Plannedprivate sector banking

Table 3: Project Timetable

EFSAC Technical Assistance forEconomic Reform

Steps in Project Cycle Date Planned Date Actual/ Date Planned Date Actual/Latest Estimate Latest Estimate

Identification (Executive Project Summary) 09/92 09/30/92 11/92 11/92

Preparation 12/92 12/18/92 12/92

Appraisal 05/94 05/27/94 03/01/93 03/01/93

Negotiations 06/94 06/15/94 03/30/93 03/30/93

Letter of Development/Sector Policy - 06/17/94 - -

Board Presentation 08/02/94 08/02/94 05/11/93 05/13/93

Signing 08/94 08/22/94 05/93 06/07/93

Effectiveness 08/94 01/05/95 06/93 10/07/93

First Tranche Release 08/94 01/05/95 - -

Second Tranche Release 06/95 06/18/98 - -

Mid-term Review - - 3/31/94 03/29/95

Loan Closing 12/31/96 06/18/98 06/30/96 12/31/98

- 21 -

Table 4: Credit Disbursements: Cumulative Estimated and Actual(SDR millions)

EFSAC FY95 FY96 FY97 FY98 FY99

Appraisal eslimate 5.3 10.6 10.6 10.6 10.6

Actual 5.1 5.3 5.1 5.1 10.6

Actual as % of estimate 96 50 48 48 100

Date of final disbursement July 2, 1998

Note: Disbursements fluctuate between FY96 and FY97 as a result ofaccounting adjustments.

Technical Assistance for FY94 FY95 FY96 FY97 FY98 FY99Economic Reform (projected)Appraisal estimate 1.09 2.54 2.90 2.90 2.90 2.90

Actual 0.36 1.24 1.82 1.95 2.81 2.90

Actual as % of estimate 33 49 63 67 97 100%

Date of final disbursement Expected by December 31, 1998

- 22 -

Table 5: Key Indicators for Project ImplementationEFSAC

Estimated Tranche Release Actual Tranche Release (June 1998)(December 1995)

Key implementation indicators in PR

Macroeconomic Reform: Satisfactory progress in Ongoing. Latest PIP covers 1998-2001implementing agreed 1994-97 PIP

Enterprise Sector Limited use of conservation funds Government has taken a number of measures to reduceReform: and operating subsidies to state subsidies. Total budgetary expenditures to SOEs fell from Lek

enterprises in ERA and PIP 660 million in 1995 (0.3% of GDP) to Lek 395 million in 1997(0.1 % of GDP)

Approval of ERA budget for Budget of Lek 500 million approved in early 1995, declining1995 from Lek 1.8 billion in 1994. This further decreased to Lek 250

million in 1996, the final year of ERA's existence

Complete privatization or By May 1998, 16 enterprises completely privatized, and 2liquidation of at least 12 ERA liquidated, 4 others effectively no longer existed (formalenterprises liquidation awaiting completion of legal procedures). All but 3

of the remaining enterprises are partially privatized and mainlynon-operating

Privatization of SEs Privatization of at least 12 large Many enterprises were, after preparation of the EFSAC splitSOEs and an additional 200 into smaller parts. By March 1997, about 90 medium and largesmall/medium SOEs SOEs were totally privatized. Over 2,000 small/medium

enterprise privatized through Decree 248 in 1994, additional3,000 enterprises privatized by March 1997 through the MPP

Legal Framework Adoption by CoM of draft New Bankruptcy Law adopted by Parliament: Oct. 1995. Loanlegislation on bankruptcy recovery legislation: substantive legal basis for collateralproceedings for all enterprises and guaranteed by the 1994 Civil Code, Law on Immnovableon loan recovery Property Register adopted in 1994, and Law on the Bank Asset

Resolution Trust in March 1998Restructuring of State-owned Banks:

(i) Improve financial Submission of an acceptable plan New plan agreed in Sept. 1997, now under implementation.situation of state-owned to restructure/privatize NCB and Included closing (by June 1998) operations of RCB;banks privatize SB and RCB privatization by end 1998 of NCB; and preparing SB for

privatization by end 1999. RCB ceased operations in Dec. 1997

Revision of lending ceilings for Had been done on quarterly basis. Since late 1997, inSB to be subject to perfornance compliance with the prudent banking regulations of BoA, SB issatisfactory to the Bank currently forbidden from extending any credit

Clearing of NCB capital Obligation settled with implementation of Government decisionobligation to BoA with equivalent of Aug. 1995, by the issue of 5-yr interest-free State Bondsvalue of equity of MoFinvestment in NCB

(ii) Strengthen Submission of external audit of December 1995. Extemal auditors were appointed inoperations of banks 1994 accounts for state-owned September 1995 to audit NCB and SB's 1994 accounts. Lack of

banks information and poor accounting practices limited the value ofthese audits but they helped serve as a baseline for thesubsequent audit of the 1997 accounts

(iii) Strengthen bank Satisfactory progress in Substantial progress made in impToving supervisory capacity,supervision and strengthening BoA's supervisory Resident Advisor in place 1994-96, but more needs to be done.regulation capacity and review of licensing Several licensing requirement reviews carried out, including in

requirements for banks 1996 and early 1998

Introduction of new chart of A new chart of accounts was introduced in 1998 and by Aprilaccounts for all banks 1998 all banks were producing reports according to these

requirements

- 23 -

Table 5: Key Indicators for Project ImplementationTECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM

Estimated Actual

1. Key implementation indicators in Memorandum of the President

1. Development and operation of June 1994 Not yet completed.new sunrey methodology

2. Preparation and updating of July 1993 Delayed. Adviser provided support to DEDAC fromtwice-yearly macroeconomic October 1996 to January 1998. Regular reportsforecast and different budgetary being prepared since beginning 1997.scenarios

3. Establishment of reporting January 1995 System in place. Assistance provided by USsystem for local treasury offices Treasury 1993-96. Hardware procured mid-I 995and manual of governmentaccounts

4. Preparation of draft PIP for September 1993 First PIP produced in early 1994 covering 1994-96.Donors meeting PIPs have been updated regularly with support from

EU-Phare

5. Preparation of strategy for and December 1995 Incorporated in the Mass Privatization Program,privatization of most individual launched in mid-1995medium and large non-strategicstate enterprises

6. Eliminate financial losses in December 1995 By mid-1998, only 3 enterprises were still inERA enterprises, winding down a operation. Employment in former ERA enterprisesnumber of these enterprises as was about 3,000 (less than 20% of the 1993-94required level). In 1997, total budgetary expenditures for

these enterprises was only about Lek 93 million.

7. Managerial and technical December 1995 Canceled since support was being provided directlysupport to the ESU in the MoF to by Gtz and also it focussed more on restructuringmeet demand-driven needs of the before privatization. The ESU was dissolved in mid-enterprise sector 1995.

8. Implementation of an December 1994 A Bankruptcy Law was adopted in October 1995 butaccounting law and bankruptcy to date no bankruptcy proceedings have taken placelaw and poor implementation of commercial laws in

general continue to create an impediment to thedevelopment of private enterprise. Overallimplementation capacity of legal system was beyondthe scope of the TA Project but will be pursued insubsequent IDA-financed operations. TheAccounting Law was approved in 1992 becameeffective for the year beginning January 1994 forproductive, commercial and service activities, andJanuary 1995 for other businesses.

(cont)

- 24 -

Table 5: Key Indicators for Project ImplementationTECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM

Estimnated Actual

9. Improved bank management and December 1995 Reflecting delays in implementing the EFSACservices in key areas, and improved program, improvements in bank management lagged.supervisory capacity in BoA Support to the former RCB was provided from a

separate Credit (ASAC); EU-Phare is supporting aprogram to improve govemance in the SavingsBank. The NCB is currently benefiting from majorsupport to improve management and prepare thebank for privatization by end 1998, from the followup Recovery Program TA Project. The projectprovided limited support to improve BoA'ssupervisory capacity as this was handled primarilyby the IMF and through assistance fromUSAID/Treasury.

10. Establishment and operation of a March 1994 Functioning effectively since mid-1995.bank courier system Procurement of vehicles took substantially longer

than planned. Under its agreement with the MoF,BoA will start repaying for MoF the cost ofestablishing this service. Courier system providesonly a rudimentary service, focus now is ondeveloping a more modem payments system for thebanks.

11. Development and equipping of September 1993 Canceled. Intention was for EBRD to supportcomputer lab for Bankers Training development of this center, together with.aCenter curriculum. However, no agreement was reached on

the objectives or strategy for the BTC andeventually, in agreement with BoA, it was decidednot to pursue this component as it was not providingthe banks with needed services.

12. Training and study tours for December 1995 Over the implementation period, GovernmentMoF, and other government officials, officials participated in over 20 training programs toBoA and state-owned commercial build up expertise in different areas of the MoF,banks CoM and DEDAC, 7 programs were carried out

relating to banking supervision and commercialbanking practices, and 8 programs were completed inrelation to enterprise privatization. About 70officials benefited from these difference programs.

II. Modified indicators (if applicable)

Support for winding down the Appoint international Task was separated into two phases. The first phase,pyramid schemes (DCA amendment - administrators of the supported by the TA Project, completed in mid-August 1997) 5 major schemes 1998, provided an assessment of the assets and

which were still in liabilities of the schemes and the likelihood ofoperation at that recovery. Subsequent phases and internationaltime. audits are being financed from the Trust Funds set up

by other donors.

- 25 -

Table 6: Key Indicators for Project Operation

Not applicable

Table 7: Studies Included in Technical Assistance Project for Economic Reform

Study Purpose as Defined at Status ImpactAppraisal/Redefined

Public Investment Plan Preparation of a preliminary public Since preparation of Substantial. Theinvestment pipeline for prioritizing initial PIP in 1994, they most recent PIP wasinvestments that need to be continued to be updated presented at thesupported with scarce state budget annually on a 3-year October 1998funds and donor financing rolling basis. The most Donors'

recent one was prepared Conference.in mid-1998 and thequality has beenimproving.

Sub-sector reviews andpreparation of businessplans for following ERA Assistance in the preparation and Completed Substantial. Theseenterprises: implementation of business plans narrowly focussed

Coal for ERA enterprises, including studies were used toGlass action plans for winding down guide ERA in itsPVC Factory enterprises as appropriate decisions regardingTextiles the disposition ofPaper enterprises.SteelTires

- 26 -

Table 8: Project Costs and Financing

EFSAC

Appraisal estirnate Actual/latest estimates(US$ million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

IDA - 15.0 15.0 - 15.0 15.0

Total - 15.0 15.0 - 15.0 15.0

Technical Assistance for EconomicReform

Appraisal estimate Actual/latest estimates(US$ million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

IDA - 4.0 4.0 - 4.2 4.2

Government 0.6 - 0.6 1.02 - -

Cofmanciers' - - - - 5.2 5.2

0.6 4.0 4.6 1.02 9.4 10.4

1 Covers Trust Funds established in early 1998 to help wind down the pyramid schemes2 Local costs is an estimated amount attributed to items provided in kind by the Government during

implementation (office facilities and support, interpreters, etc.)

Table 9: Economic Costs and Benefits

Not applicable

-27 -

Table 10: Status of Legal Covenants

EFSAC

Covenant Present Original Revised Description of Covenant CommentsAgreement Section T'ype Status Fulfillment Fulfillment

Date DateDCA 3.01(a) 09 C The borrower and the Association shall None

from time to time, at the request of eitherparty, exchange views on the progressachieved in carrying out the Program anthe actions specified in Schedule 3 to thisAgreement.

DCA 3.02 10 C Except as the Association shall otherwiseagree, procurement of the goods to befinanced out of the proceeds of theCredit shall be governed by theprovisions of Schedule 2 to thisAgreement.

DCA 3.03(b) 01 C 06/30/96 Furnish to the Association as soon as Report for the 1996(ii) available, but in any case not later than accounts was received

six months after the end of each such 12/31/97, inyear, a certified copy of the report of accordance withsuch audit by said auditors, of such scope Schedule agreed withand in such detail as the Association the Association. Noshall have reasonably requested. disbursements were

made in 1997 andaccordingly no auditreport was required.

- 28 -

Table 10: Status of Legal Covenants

TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM

Covenant Present Original Revised Description of Covenant ComrnentsAgreement Section Type Status Fulfillment Fulfillment

Date DateDCA 3.03 © 09 CD 03/31/1994 3/25/1995 Government to carry out a mid- None

term review evaluating theprogress of the project.

DCA 3.03 (d) 02 C 05/30/1995 Government to enter into relending According to the Mayarrangements with its Central 1995 agreement,Bank, in order to carry out Part B repayments are to start in(ii) (development of bank courier January 1999.services), under terms andconditions acceptable to theAssociation.

DCA 4.01 (a) 01 C Government shall maintain or Nonecause to be maintained records andaccounts adequate to reflect inaccordance with sound accountingpractices the operations, resourcesand expenditures in respect of theProject.

DCA 4.01 (b) 01 Soon 06/30/1998 Government shall have the records Report for 1997 accountsand accounts for each fiscal year was expected by end-audited.... by independent auditors Sept. 1998 (as part of anacceptable to the Association; overall audit contract forfurnish to the Association ..... not IDA-financed projects)later than six months, after the end but has not yet beenof each such year, a certified copy received. Auditorsof the report of such audit. indicate that report has

been completed and it isexpected by Nov. 16

DCA 5.01 (a) 10 C -- two additional staff havebeen appointed to the ProjectImplementation Unit in the MOF.

Covenant types: Present Status:

1. = Accounts/audits 8. = Indigenous people C = covenant complied with2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting CD complied with after delay

beneficiaries 10. = Project implementation not covered CP complied with partially3. = Flow and utilization of project funds by categories 1-9 NC not complied with4. = Counterpart funding I 1. - Sectoral or cross-sectoral budgetary5. = Management aspects of the project or executing or other resource allocation

agency 12. = Sectoral or cross-sectoral policy/6. = Environmental covenants regulatory/institutional action7. = Involuntary resettlement 13. = Other

- 29 -

Table 11: Compliance with Operational Manual Statements

Not applicable

Table 12: Bank Resources: Staff Inputs

EFSAC Technical AssistanceProject for Economic Reform

Actual Actual

Stage of project cycle Weeks US$ Weeks us$

Preparation to Appraisal 259.8 778.7 10.2 34.3

Appraisal 25.4 62.5 1.9 6.4

Negotiations through Board 12.5 38.1 3.7 11.2approvalSupervision 185.1 420.3 128.9 308.8

Completion' 7.2 23.0 4.2 9.6

Total 490.0 1322.6 148.9 370.3

I Completion inputs are estimatesNote: Staff inputs for the TA Project do not include inputs for the MPP

- 30 -

Table 13: Bank Resources: Missions

EFSACPerformance Rating2 Types of

Stage of project cycle Month/ No. of Days in Specialization' Implem. Developm. Proble 3

Year Persons Field Status objectivesThrough Appraisal

Identification 9/92 6

Preparation 11/92 2

Pre-appraisal 12/92 6

1/93 2

3/93 1

4/93 1

5/93 1

7/93 8

9/93 1 5

11/93 5 40

2/94 2 9 E

3/94 1 10 B

4/94 5 E, F, B, L

Appraisal through BoardapprovalAppraisal 5/94 4 20 FE, F, E

9/94 4 26 FE, F,B, PO

Supervision 11/94 4 28 FE, F, L S

1/95 4 25 FE, F, E S

3/95 4 FE, O,F, E S

5/95 3 FE, F,A S S

Updating mission 9/95 1 3



4/96 3 FE, F,A S S

Update without mission 6/96 S S

11/96 1 3 FE S S

5/98 4 18 F, O, P, L S S

Completion 10/98 3 15 0, P S S

I - Key to Specialized staffskills: 2 - Key to Performnance Ratings:A Accountant L Lawyer HS Highly satisfactoryFE Financial Economist B Banking Sector S SatisfactoryF Financial Sector Specialist E Economist U Unsatisfactory0 Operations Officer P Project Officer HU Highly unsatisfactory

31 -

Table 13: Bank Resources: Missions

TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC REFORM

Performance Rating2 TypesofStage of project cycle Month/ No. of Days in Specialization' Implem. Developm Problemso

Year Persons Field Status objectivesIdentification through pre-appraisal carried out as partof EFSAC preparation. Noseparate informationavailable.

Pre-appraisal 12/92 3 12

Appraisal 3/93 2 8 E, P

Supervision 6/93 2 15 0, F 1 19/93 2 12 0, L 1 1

3/94 1 6 0 2 2

6/94 1 7 0 U S

3/95 4 10 0,P,E,FE S S


2/96 3 9 0,P,E S S


9/96 1 5 0 S S

Update without mission 7/97 U S S-P, T

9/97 3 11 O, P S S

5/98 2 8 O, P S S

Completion 10/98 3 6 0, P S S

Total

I - Key to Specialized staff skills: 2 - Key to Performance Ratings:A Accountant L Lawyer HS Highly satisfactoryFE Financial Economist B Banking Sector S SatisfactoryF Financial Sector Specialist E Economist U Unsatisfactory0 Operations Of ficer P Project Officer HU Highly unsatisfactory

In addition, between January 1995 and September 1996, 9 missions were carried out under to help launch the MPP.

Appendix AALBANIA

ENTERPRISE AND FINANCIAL SECTOR ADJUSTMENT CREDIT (Credit 2649) andTECHNICAL, ASSISTANCE FOR ECONOMIC REFORM PROJECT (Credit 2492)

Aide-Memoire of Implementation Completion Report Mission

1. A Bank mission comprising Mmes. Yvonne Jones, Rochelle Hilton and Greta Minxhozi visitedAlbania between October 26-November 2, 1998, to discuss preparation of a combined InplementationCompletion Report for the Enterprise and Financial Sector Adjustment Credit (EFSAC) and the TechnicalAssistance Project for Economic Reform (TA Project). The mission met with representatives of theMinistry of Finance, Bank of Albania, Ministry of Privatization, Ministry of Economic Cooperation andTrade and the National Privatization Agency. The mission would like to thank the various Albanianofficials for all the cooperation and assistance provided. The main findings of this mission aresummarized below and are subject to confirmation by Bank management.

Background

2. The Government which took office in 1992 embarked on an ambitious program of reform totransform the country, which was emerging from over 40 years of isolation and centralization, to amarket-based economy. The Government was faced with a daunting task which entailed virtuallybuilding a new economy as the institutions, expertise and infrastructure required for a well-functioningeconomy did not exist. It moved quickly with the initial stages, with extensive support from theinternational donor community. The EFSAC and the TA Project were critical elements of this earlysupport.

Project Objectives

3. The Government's reform program was designed to sustain the stabilization and address the mostpressing and necessary structural measures. In support of this program, the EFSAC was designed as aquick-disbursing operation, with two tranches. Its principal objectives were the restructuring of state-owned banks and the overall development of a market-based financial system; continued privatization orliquidation of industrial enterprises; and strengthening of the legal framework for the enterprise andfinancial sectors. The TA Project was designed to contribute directly to the preparation of the EFSACprogram by improving Government's ability to formulate and implement reforms in three criticallyimportant areas: macroeconomic management, enterprise restructuring and privatization and financialsector reform.

Summary Assessment

4. The EFSAC conditionality was ambitious but comprised priority actions essential to begin thetransition to a market economy, move forward with the reforn program and form the basis for sustainablegrowth. The TA Project was a necessary complement to the EFSAC because of the Government's weakinstitutional capacity, lack of experienced staff and the paucity of knowledge about privatization, bankingsector reform and their consequences. The objectives of the two operations were necessarily a first stepto support the Government's program. However, insufficient emphasis on strengthening publicadministration, along with political instability, reflected in frequent changes of government, did notpermit the reforms to withstand the impact of the large-scale civil disturbances in 1997, arising from thecollapse of the pyramid schemes.

Aide-Memoire Page 2 of 4

5. Although it took longer than originally anticipated to fulfill all of the EFSAC conditions and tocarry out the TA Project, by the time of second tranche release in June 1998, all conditions had beensubstantially met. Overall both operations have been successfully implemented and have achieved theirdevelopment objectives. In retrospect, the conditionality of the EFSAC was appropriate and it recognizedthat much more support would be needed in the future to help further advance the transition process. It isnoteworthy that implementation of the agreed strategy for the development of the banking sector has beengathering momentum since mid-1997 and the Government and Bank are collaborating closely, inconsultation with other donors, to move as quickly as possible to the next phase.

Macroeconomic Management

6. Improving macroeconomic management was an objective of the TA Project. The project focusedon reducing macroeconomic imbalances, developing capacity to prepare Public Investment Programs,and reducing subsidies to state-owned enterprises. Through approval of an IMF ESAF, a macroeconomicframework supportive of the objectives of the EFSAC has been restored after a period of macroeconomicimbalances from early 1996 through late 1997. The Government prepared the first Public InvestmentProgram (PIP) in 1994 which focused not only on specific investment projects for 1994, but alsoprovided the economic context in which the investments were to be made and reviewed arrangementswithin the Government for implementation, coordination, and management. A three year rollinginvestment program was prepared in each of the subsequent years through 1996. After a one year hiatuscaused by the 1997 crisis, the Govemment reviewed the status of public investments and in early 1998completed a new PIP, covering 1998-2001. The new PIP, presented at the October 1998 Donors'Conference, takes into account Albania's post-crisis priorities, elaborates an appropriate resourceframework, and considers measures for improved coordination and management. Finally, theGovernment has taken a number of measures to reduce subsidies to State-owned enterprises.

Enterprise Sector Reformn and Privatization

7. The Government was committed early on to privatization, with substantial assistance from theTA Credit and (as in other areas) support from other donors. The Government's prime objective wasspeedy privatization to reduce the fiscal cost, and to encourage the development of a private sector. Tothis end, the Enterprise Restructuring Agency (ERA) was created to dispose of 32 problematicenterprises. A large number of small and medium enterprises were privatized first through Decree 248,followed by the mass privatization program, most of which took place in 1995 and 1996. In late 1996,the emphasis began to shift to preparing the larger, strategic enterprises for their eventual privatization,but these activities were interrupted in early 1997 as a result of the economic and political crisis.

8. The new Government which came to power following the June 1997 elections quickly acted toreformulate the privatization strategy. In March 1998 a new privatization strategy, including plans for theprivatization of public utilities' resource-based enterprises on a sectoral basis, involving, among othermodalities, sales to strategic investors. Technical assistance in support of this ambitious program is beingprovided with bilateral assistance from Italy in the framework of a program agreed between theGovernment and the Bank. The Government is also committed to completing the privatization of theremainder of the small and medium enterprises.


Banking Sector Reform

9. Refonn of the banking sector moved more slowly than that of the enterprise sector, due to acombination of factors. In 1993, Albania had only a rudimentary banking system with little knowledge ofcommercial banking, few bankers and very poor infrastructure. Until then, the banks had been used moreas fiscal agents of the Government than as independent financial intermediaries. Early implementation ofthe privatization strategy was hampered by lack of reliable information on bank portfolios and operations,and by the absence of full service private banks. The situation was exacerbated by a lack of interestedand qualified buyers for banks or branches. The Ministry of Finance was also unable to effectivelyexercise its role as owner of the banks.

10. The EFSAC included measures to strengthen banking supervision, regulation and infrastructure.Assistance from many donors was provided to support all of these areas, including from the TA Project.However, progress was mixed. With support from the IMF, banking supervision, licensing and prudentialregulation have been substantially strengthened, although more needs to be done. Progress on improvinginfrastructure was mixed, in part due to inconsistencies in approach from different donors, and wascomplicated by a lack of expertise on the part of the Government as well as a lack of experiencedbankers. There wets also a substantial delay in reaching an agreement between the Bank and successiveGovemments on a strategy for privatizing the banks.

11. Delays in r eforming the banking sector and a lack of functioning commercial banks may have tosome extent facilitated the growth of the pyramid schemes. Following the 1997 crisis, the newGovernment has mroved rapidly to exercise its ownership and oversight responsibilities and to implementan agreed strategy for the development of a private banking sector, taking strong steps to deal with theproblematic state-owned banks. Policy advice and technical assistance to the financial sector from theWorld Bank continues through the Recovery Program Technical Assistance and other policy basedoperations are expected.

Legal Reform

12. Substantial work has been done on legal reform and Albania has in place the bulk of thenecessary commercial legislation, including a Law on Bankruptcy Procedures. Work continues to beneeded to ensure consistency among the many pieces of new legislation. Additionally, the judiciary is ill-equipped and inexperienced and there is limited capacity to apply the provisions of the new laws neededto promote private sector development. A major challenge is now to strengthen enforcement capacity ofthe legal system through significant training programs in all areas. This process is being stronglysupported by major donors, but it will necessarily be a long-term process that is outside the framework ofthe EFSAC.

Project Management and Administration

13. As the IA project was a complex operation with many different components, coordinationamong the various beneficiary agencies was essential. Discussions with the participating institutionsindicated that the PIU was cooperative and provided needed assistance for procurement and payments ona timely basis. Although initially well-staffed, the structure and status of the Project Implementation Unitwere substantially changed in 1997, which negatively affected the efficiency and effectiveness of the Unit.


Borrower's Evaluation of Project Implementation

14. The Borrower's responsibilities in the preparation of the ICR, as indicated in the Bank'sOperational Manual Statement, were discussed with the various officials and copies of the Bank's GoodPractices for ICR Preparation (GP 13.55 of April 1994, paras 4 and 5), were provided to the Ministry ofFinance and to the Bank of Albania.

15. The Borrower agreed to prepare its evaluation of project implementation, in consultation with theother concerned beneficiaries, and to provide this to the Bank by the first week of December 1998.

Operational Plan

16. The Bank's guidelines for preparation of ICRs (April 1994) require the preparation of anoperational plan by the Borrower and the implementing agencies. This plan should indicate the actionsand measures to be taken by the Borrower, the relevant government agencies and the project entities toensure satisfactory fature implementation and operations under the project, and the achievement of theproject objectives.

17. The new Government has confirmed its commitment to continued implementation of itseconomic reform program, and its desire to continue to collaborate closely with international donors tohelp achieve its objectives. Follow up operations financed with IDA support this effort. The RecoveryProgram Technical Assistance Project is providing needed financing in a number of priority areas relatingto bank privatization and public administration reform. A number of policy-based loans have beenprovided or are under preparation to continue this effort.

Outputs and Schedule

19. It was agreed that the following timetable would be followed to enable timely completion of thefinal ICR:

Bank to send draft ICR to MoF for its review by November 21, 1998MoF to provide its implementation evaluation by December 4, 1998Final report to Executive Directors December 31, 1998

Coordination of ICR Preparation

20. The following persons will coordinate preparation of the ICR:

For MoF: Ms. Adriana BerberiMr. Rezar Turdiu

For the World Bank- Ms. Greta Minxhozi

Tirana, AlbaniaNovember 1998

Appendix B

REPUBLIC OF ALBANILAMISTRY OF FINANCE

The Minister's Office

Boulevard "Def hmoret c Kombit" Tirana Tel. 2840S Fax. 355-42 28494

Tirana, December 16, 1998

Memorandum of the Government of Albania

on the implementason of te projects

Technical Assistance for Economic Reformand

Enterprise and Financial sector Adjustment Credit

1. The two projects of the World Bank and the respective credit on Technical Assistancefor Economic Reform and Enterprise and Financial sector Adjustment Crediz, arevaluably considered in support of the govermnent program for the economic reformgenerally, and the structural reform particularly. Initiated since at the beginning of thereform in Albania and implemented during 1993-1998, they have supported thefullfillment of the cointry strategy to creating a functional markst economy, for thefiscal consolidation, to achiving a stable economic growth, as well as the reduction ofpoverty.

2. At the time these projects were perceived, the albanian economy had started gettingout of the economic and politocal chaos of 199-1992. The economic growth had juststarted, the inflation had been reduced drastically, even it was high, as a result ofliberalising the prices and trade. The budget deficit started to be under control, redusingit from 44% at the first half of 1992 to 16% in 1993, as a result of the revenues increasefrom the extension of the taxation and applying of the new tax, and in particular fromthe reduction of the enterprise subsidies.

3. The peiod in which both projects were implemented was full of complex situation: a)m-aroecononmic stability, high economic growth, inflation and budget deficit undercontrol, smootlae implementation of the programmed structural reform, including theprivatization of small and medium enterprises and agricultural land, and on the otherhand, too much fragility on the financial sector and low level of reforming of this sectoruntil the end of 1996; b) the year 1997, that clearly laid open the insdtutional weaknesas well as the fragility of the previeus achivement; and recently in 1998, period in wichthe macroeconomic stability was succesfully recoverd, inflation and deficit under

control, and above all, it was redementioned the reform on the financial and bankingsector.

4. The events of early 1997 plunged Albania into the deepest crisis it had ever known.Law and order broke down, a large proportion of the population acquired arms andalmost the whole of the country fell from government conlrol. To resolve this situationrequired the establishment of a National Reconciliation Government and the activeparticipation of the international community. This involved the setng up anddeployment in Albania of the Italian led Multintional Protection Force. Close co-operation between the Organization for Security and Co-operation in Europe (OSCE)and the Albanian National Reconciliation Goverrment enabled a general election to beheld in June 1997 which brought to power the five party centre left coalition.

5. The events of 13-14 September showed that democracy and its institutions in Albaniaare still fragile. They also emphasized that democratic practices need not to be strictlyobserved by all. This will require fundamental changes in some of the political parties sothat they can live up to their obligations in facilitating the development and prosperity ofthe country.

6. Strengthening democracy, law enforcement, institutional reform and economicconsoIidation and development remain the four main challenges and priorities of thenew government.

6.1. Security and the rule of law and public order improved considerably during thesecond half of 1997 and 1998. The rebuilding of the police forces has played a centralrole in the restoring internal security. However, the govemment is fully aware thatachievements to date are limited and that there remains much room for improvement.

6.2. The slow progress made since 1991 in reforming public sector institutions wasidentified in the Rome Conference as having been a major factor contributing to thedisturbances in early 1997. The Government recognises the urgency of removingbottlenecks to institutional reform and for introducing effective measures during 1999.

6.3. The Government considered one of its most urgent priorities the approval of thenew Constitution which ensures the rights of Albanian citizens and provides the basisfor a stable political process. The public referendum for the approval of the Constitudonwas held in November 1998, and the Constiuion was approved by the majority of thevoters.

6.4. Between 1991 and 1994 considerable progress was made in establishing a modemjudicial system based on the separation of powers and the independence of the judiciaxy.Subsequently, the judicial system became subject to increasing political interference andabuse by the State. This contributed significantly to the conditions that led to theeventual crisis in March 1997. In the aftermath of the 1997 crisis the judicial system wasfaced with: (i) an almost total paralysis in its functions; (ii) a lack of moral integrity inthe judiciary and a more general absence of professionalism; (iii) excessive political andcriminal interference; and (iv) a total lack of public confidence.

The new government initiated a major reform of the judicial system involving: (i) theapproval of a new Constitution that protects the nghts of Albanian citizens; (ii) thepassing of other basic legislation including a law to protect the independence of the

judiciary; and (iii) measures to ensure more adequate financing with the establishmentof a separate budged for the judiciary.

6.5. The targets of the Post-Conflict Agreement, agreed upon with the 1MAF in the mid1997, were naot only met but even exceeded in some areas, such as the revenecollection, bludgetary discipline, monetary position, and resolution of the pyramidschemes. This made possible a successful negotiation and approval of the ESAF E

Agroement with the RAF. This provides a set of objectives to be met in the next threeyears in the macroeconomic framework as well as in the field of institutional andstrucural reforms.

7. Strong measwures have been taken in the field of monetary policy and in the bankingsystem. The Bank of Albania has kept a tight monety stance to help fight inflation.Broad money expansion has been consistent with fiscal targets and inflation objectives.The Government of Albania proved its full commitment to modernise the bankingsystem of the country by maintaining and strengthening the independence of the Bank ofAlbania, restructuring and privatisation of the second tier state banks, designing legaland regulatory framework for promoting expansion of private banks, as well asdesigning a new modem payrnent system. Rural Commercial Bank was liquidated asnon-performing bank. Its best assets and liabilities were tansferred to Savings Bank.Bank Assets Resolution Trust was ceated to handle all non-performing loans. A foreignmanagement team was appointed to consolidate activities of the Savings Bank withfurther aim of its privatization by late 1999. A foreign CEO and a privatization advisorhave been appointed for the National Commercial Bank, and the goverment has made aformal decision to privatize the bank and Ias advertise it for sale. A law on privatizationof the bankc will be aproved by parlament by mid-January 1999. Credit ceilings havebeen applied for state banks based on their non-performance loans. The Government andBank of Albania are continuously working to clarify, stengthen and improve the legal,regulatory and supervisory framework under which banks operate. A new, modern Lawon Banking System was adopted by the Parliament in April 1998.

8. The implementation of the programme brought promising results as early as in late1997. GDP decline and annual inflation was less than predicted. Progress inmacroeconomic consolidation during emergency post-conflict programme paved theway for a 3 year ESAF arrangement with the 1MF. It provides for further reduction ofthe domestically-financed deficit in 1998-1999. For the first year of the programme itwill be reduced to about 6.5% of GDP, and in 1999 to about 5%, with the aim ofreaching 3% level on 2001. External support to sustain budget deficit during 1998 willbe Lek 8 billion (1.75% of GDP). Inflation is expected to reach 10% in 1998 and 7% in1999, while gross official reserves should be 370 million USD in late 1998 and 375million one year later.

9. To achieve the above targets, the tax-to-GDP ratio must be raised, while kerpingexpenditures on track. The main point of fiscal reform is the movement toward directtaxation. The system of direct taxation is being currently revised (with the IMFassistance), with the aim of starting reforms in 1999- No exemptions will be grantedduring ESAF. On the expenditure side, in the view of a comprehensive civil servicereform, further budgetaxy manpower cuts will be explored during 1999. Within thedeficit limits, the government is determined to preserve, and possibly to strengtheninvestment on infrastructure improvement and spending on social services, includinghealth and education. Budgetary procedures and public expenditures management will

be improved with the assistance of the IMF staff- A new organic law is being preparedand will be submitted to the Parliament as soon as possible. Also, a system of cashmanagement will become operative by end of 199g. The government will conduct aPu,NIic Expenditure Review during 1998-99, in consultation with the World Bank, tofurther improve expenditure administration.

10. In November 1997, Deloitte and Touche began the process of administration of thefive big pyramid schemes which had collected the majority of the savings of thepopuIation. The struggle of the authorities with the bosses of the pyramid schemes andindividuals or political forces supporting them became a real marathon which delayedthe process. The recommendations of Deloitte and Touche made in January 1998 madeit possible for the Government of Albania to proceed with the process of recoveringassets and giving them back to the creditors. In March-1 998, foreign administrators wereappointed for the remaining 12 companies identified by the Govemment as havingoperated as pyramid schemes, all of which had ceased operation by February 1997. Theobstacles and the non-cooperation attitude of the pyramid bosses created many delays inthe process, but were basicaly concluded in May 1998. Thus, the full control over thecompanies was assuned by the Administrator. Currently the process is going on and hasentered a stage of liquidation of assets and creation of funds to be distributed to thecreditors.

i 1. The Government considers privatisation as one of its priorities, it is committed toimprove the procedures and transparent character.

The focus of the privatisation programme is now on the sale of state-owned enterpriseand state shares of non strategic industies, as well as restructuring and moderriisation ofstutegic enterprises aiming at their privatisation through the sale of shares,concessionary contacts or/and different partnership schemes. Ihe privatisation of non-strategic industries includes 600 medium size enterprises. Currently around 300 suchenterprises have entered the privatisation process with the remainder included by theend of 1998. Thus, the privatisation of non-strategic sectors is expected to be concludedwthin the first 6 months of 1999.

Privatisation process of strategic sectors will continue with the restnuctuing of thecompanies of those sectors and, simultaneously, a legal framework for this is underpreparation. Until now several enterprises such as the Albanian Telecom, Durres Port,Albbaker etc. have been tansformed in joint-stock companies. A restructuring processis initiated for Albpetrol which will transform it into three separate companies.Similarly, the legal procedures have started to enable a management contract for theTirana and Durres water supply.

Deputy Minister

oAdriann

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