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Implementation Completion Report (ICR) Review - Enterprise and Financial Sector Adjustment Credit

1. Project Data:   
Project ID:
Project Name:
Enterprise and Financial Sector Adjustment Credit
Privatization, Private Sector Development
L/C Number:
Partners Involved:
Prepared By:
Laurie Effron, OEDCR
Reviewed By:
Alain Barbu
Group Manager:
Ruben Lamdany
Date Posted:

2. Project Objectives, Financing, Costs, and Components:

The EFSAC, approved in August 1994 and effective in January 1995, provided $15 million to support the implementation of the Government's reform program adopted in 1992. The credit was to be disbursed in two equal tranches: the first on effectiveness and the second 10 months later. The main objectives of the program supported by the credit were: (i) privatization of large SOEs and downsizing of large problem SOEs and privatization of 200 medium SOEs (ii) strengthening the financial sector, including bank restructuring and privatization, and upgrading bank infrastructure; and (iii) promoting private sector development by improving the legal framework. There were 15 conditions for the release of the second tranche.

3. Achievement of Relevant Objectives:

The project had a slow start because of uncertain commitment and weak implementation capacity. The reform program came to a halt with the collapse of the pyramid schemes in late 1996, followed by widespread civil unrest, political turmoil, and economic disarray. A coalition government appointed in mid-97 regained control of the macroeconomic situation and some of the adjustment objectives were eventually accomplished and the second tranche was released in June 1998, two and a half years later than expected. The large problem SOEs were privatized or downsized; the legal framework was improved with the passage of a bankruptcy law and legislation on collateral for loans; and some progress was made in the banking sector.

4. Significant Outcomes/Impacts:

Most of the 32 large SOEs targeted for action were broken up and privatized, downsized, and liquidated, or were awaiting liquidation at the time of the ICR (end-98). Three remaining SOEs were operating with 20% of the original employment levels. About 90 medium and large SOEs were privatized and many others were split up into smaller units to be privatized: between 1994 and 97 about 3,000 small and medium enteprises were privatized (in addition to the 2,000 that had been prior to 94). The Rural Commercial Bank was effectively closed.

5. Significant Shortcomings (include non-compliance with safeguard features):

Progess in the banking sector was slower than expected and the financial sector remains dominated by problem-ridden state banks. Banking reforms were carried out, although more slowly than expected, but two of the three state banks were allowed to continue lending, to the private sector. Their performance did not improve, however, as many private clients did not repay their loans on time. Efforts to improve the situation through changes in bank management and strengthening BoA's supervision were not effective. Now, in 1999, Government is proceeding with privatization of these two state banks, but the reforms undertaken in the EFSAC did not serve to strengthen the banks. In addition, although the legal framework improved for bankruptcy and loan collateral, the legal framework is not internally consistent and enforcement and implementation capacity is weak.
6. Ratings:ICROED ReviewReason for Disagreement/Comments
SatisfactoryMarginally Satisfactory
    Reforms were eventually carried out as foreseen, but did not have the anticipated outcome, particularly in banking and in the legal framework: see section 5 above.
Institutional Dev.:
    Institutional development linked more closely to TA project
Bank Performance:
    Credit was ambitious and complex, and the implementation schedule unrealistic, particularly given the capacity of the Albanian government at the time.
Borrower Perf.:
    Government did not prevent, and in some instances actively promoted, the pyramid schemes that ultimately collapsed, causing large-scale civil unrest, bringing down the Government, and severely disrupting the economy. In some respects, its performance should be considered highly unsatisfactory. But it remained committed to privatization and did accomplish an ambitious program; for this reason, its overall performance is considered satisfactory.
Quality of ICR:

7. Lessons of Broad Applicablity:

As found in many adjustment operations and as pointed out in the ICR, policy-based operations should be relatively simple, with realistic timetables, and based on an assessment of Government's commitment and capacity to carry out the reforms.

8. Audit Recommended?  No


9. Comments on Quality of ICR:

The ICR is satisfactory. Although OED gives different weights to certain elements of the program and the Bank's role in designing it, the ICR gives a balanced account of a complex operation.

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