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Throughout much of 1992 and the first half of 1993, the Bank of France was forced by high German interest rates andto maintain a 20-40 basis point spread between French and German official rates to prevent further serious pressures on the franc. The interest rate on three-month interbank loans has fallen from 12.1 percent to 5.6 percent between February 1993 and August 1994. However, the average interest rate on long-term government bonds, after declining from 10.6 percent in September 1990 to less than 5.8 percent in October 1993, is expected to rise to 8.3 percent by October 1994, due in part to rising U.S. interest rates.

The Balladur government has continued the "franc fort" (strong franc) policy of its predecessors. The government's objective is to lower the cost of imports and keep inflation and wage increases low, thereby improving French competitiveness. It is also seen as a way to build France's reputation for sound economic policies, and to ensure further progress toward European Monetary Union (EMU). The Franc appreciated 3.0 percent in nominal terms against other OECD currencies between September 1993 and September 1994. However, factoring in France's low inflation rate, the Franc only appreciated 1.7 percent in real terms. Compared to the U.S. dollar, the franc appreciated by 5.2 percent in real terms during this period.

3. Structural Policies

Since it submitted its first budget in mid-1993, the Balladur government's fiscal strategy has been to reduce the budget deficit in the long term (primarily by raising taxes and controlling spending), but offset the immediate restrictive effects through temporary stimulus measures. In addition, many of the French government's fiscal policy proposals in 1993 and 1994 were designed to offset, through state aid, effects of high real interest rates in sectors such as real estate and automobiles where consumption is dampened strongly by high rates.

During 1993, the Balladur government's assortment of supplemental budgets cut corporate taxes by approximately FF50 billion for 1993-94, while increasing taxes on households for these two years by FF100 billion. The government's priority was to limit spiraling unemployment by stopping the hemorrhage of bankruptcies, particularly among labor-intensive small businesses. The government decided to change course in 1994, and to try to boost short-term economic growth by stimulating household consumption. In its 1994 budget, the government reduced personal income taxes by FF19 billion a year. The government also offered several incentives to induce households to withdraw funds from savings accounts, in the hopes of reducing savings and boosting consumption. However, the decrease in income taxes only partially offset the 1993 increases in excise taxes and in the general social contribution (CSG), a supplemental tax on all earned and unearned income. As a result, the government expects total taxes as a percentage of GDP will increase from 43.6 percent in 1993 to 44.5 percent in 1994, before falling to 44.2 percent in 1995. This remains one of the highest ratios among industrialized countries.

In March 1993, the French government began a massive privatization program, and has already sold some of the largest and best known government-owned corporations. A seven-member commission decides the minimum price for the shares to be sold and chooses the core of stable investors for each privatization; and the Economics Ministry decides the percentage of shares to be sold, the proportion to be sold in foreign financial markets, and the size of "core" shareholdings.

To meet deficit reduction targets in its 1994 and 1995 central government budgets, the government has essentially frozen non-interest spending, and is counting on receipts of over FF100 billion in privatization revenues. Fiscal policy, or at least central government spending, is likely to remain tight for many years to come, as the government seeks to meet common macroeconomic criteria agreed among EU members in the Maastricht Treaty: general government budget deficits of no greater than three percent of GDP, and a debt to GDP ratio of no more than sixty percent. In 1993, the government submitted, for the first time, a multi-year deficit reduction plan. In the revised 5-year plan in its 1995 budget, the government maintains the real freeze on government spending, and extends it to 1998. Real non-interest spending would be cut by 0.6 percent in 1996 and 1997, and by 0.4 percent in 1998, the longest and largest sustained reduction in non-interest French government spending since the end of World War II.

4. Debt Management Policies

The budget deficit is financed through the sale of government bonds at weekly and monthly auctions. As a member of the G-10 group of leading financial nations, France participates actively in the International Monetary Fund, the World Bank and the Paris Club. France is a leading donor nation and is actively involved in development issues, particularly with its former colonies in North and West Africa.

5. Significant Barriers to U.S. Exports

U.S. companies sometimes complain of complex technical standards and of unduly long testing procedures. Requirements for testing (which must usually be done in France) and standards sometimes appear to exceed levels reasonable to assure proper performance and safety. Most of the complaints have involved electronics, telecommunications equipment, medical/veterinary equipment/products and agricultural phytosanitary standards.

An area where French trade policy is clearly discriminatory is in audiovisual trade. The 1989 EU Broadcast Directive requiring a "majority proportion" of programming to be of European (i.e. EU or Central European) origin was incorporated into French legislation on January 21, 1992. France, however, goes beyond this rule, specifying a percentage of European programming (60 percent) and French programming (40 percent). These broadcast quotas were approved by the EU Commission and became effective on July 1, 1992. They are less stringent than France's previous quota provisions, which required that 60 percent of all broadcasts be of European origin and that 50 percent be originally produced in French. The new 60 percent European/40 percent French quotas are applicable both during a 24-hour day, and during prime time slots. The prime time rules go beyond the requirements of the EU Broadcast Directive and limit the access of U.S. programs to the French market.

The French government has recently revised its legal services system. Non-EU lawyers may no longer practice as legal consultants and are required to qualify as "avocats," on the basis of full-fledged membership in the French bar. Under implementing legislation which went into effect on January 29, 1993, this means that non-EU lawyers will have to pass either a "short-form" exam or the full French bar exam. Non-EU lawyers qualify for a "short-form" exam provided they are able to prove that the foreign state or territory in which they practice allows French lawyers to practice law "under the same conditions." Failing that, they must take the full French bar exam. Due to EU regulations, France is required to recognize law degrees for EU nationals but not third country nationals. Nevertheless, non-French EU lawyers, who are also required to qualify as "avocats," may do so via exams less stringent than those for non-EU lawyers. Meaningful access will hinge on how implementing regulations are administered, including the interpretation of what is meant by granting access on a "reciprocal basis" and the nature of the exam imposed on non-EU lawyers.

Since September 1988, foreign investors establishing new businesses in France are no longer subject to advance notice and approval requirements. However, there are still several administrative procedures related to acquisition of French firms that burden foreign investors. Unless firms are controlled by French nationals or "established" EU investors, they must receive prior approval from the Ministry of Economics in order to purchase existing French businesses valued at more than FF50 million or having more than FF500 million in sales. To qualify as an "established" EU-controlled firm, a business must have annual sales of more than FF1 billion and have been in business for at least 3 years. EU-controlled firms not qualifying as "established" and non-EU controlled firms purchasing smaller French entities are required to notify the Ministry in advance. The Ministry can block large acquisitions deemed not to be in the national interest, as well as any acquisition, irrespective of size or nationality of the investors, which the Minister sees as a threat to public health, public order or national security.

There are several restrictions on foreign holdings in French firms that are privatized. A December 1993 privatization law prevents the government from selling more than twenty percent of a firm's capital to non-EU investors at the time shares are first sold. The law does not prohibit private EU-investors from selling their shares to non-EU investors thereafter, and shares held by non-EU investors before the law went into effect are not affected by the 20 percent limit. The Balladur government also gave the privatization commission the option of waiving the 20-percent limit if the purchase is part of an industrial, commercial, or financial cooperation agreement. This option has not yet been exercised in privatizations to date.

Through "golden shares" in key companies being privatized, the government retains the following rights: to block the sale of any assets "essential to the national interest;" to prevent certain investors from purchasing additional shares; and to exert significant control over company management, even after privatization is completed. Finally, any investor seeking to own more than five percent of outstanding shares of a privatized company in the health, security or defense sectors will be required to seek the approval of the Economics Ministry.

The French government has notified the OECD that it treats foreign investors differently than domestic investors and may not provide national treatment in the following sectors: agriculture, aircraft production, air transport, atomic energy, audio

visual, accounting and financial services, defense, insurance, maritime transport, road transport, publishing, telecommunications, and tourism.

France is a party to all the relevant GATT codes, including those on government procurement and standards.

6. Export Subsidy Policies

France is a party to the OECD guidelines on the arrangement for export credits, which includes provisions regarding the concessionality of foreign aid. The government has begun examining ways to concentrate the benefits of its export promotion efforts more on small and medium-sized businesses.

There are virtually no direct French government subsidies to agricultural production. Direct subsidies come primarily from the budget of the European Union. The French government does offer indirect assistance to French farmers in many forms, such as easy terms for loans, start-up funds, and retirement funds.

7. Protection of U.S. Intellectual Property

France is a strong defender of intellectual property rights worldwide. Under the French intellectual property rights regime, industrial property is protected by patents and trademarks, while literary/artistic property is protected by copyrights. France is a party to the Bern Convention on Copyright, the Paris Convention on Patents, the Universal Copyright Convention, the Patent Cooperation Treaty, and the Madrid Convention on Trademarks. By virtue of the Paris Convention and the Washington Treaty Regarding Industrial Property, U.S. nationals have a "priority period" after filing an application for a U.S. patent or trademark, in which to file à corresponding application in France.

8. Worker Rights

The French constitution guarantees the right of workers to form unions. Although union membership has declined to ten percent of the workforce, the institutional role of organized labor is far greater than its numerical strength might indicate. The French government regularly consults labor leaders on economic and social issues, and joint works councils play an important role even in industries that are only marginally unionized. The principle of free collective bargaining was reestablished after World War II, and subsequent amendments in labor laws encourage collective bargaining at the national, regional, local, and plant levels. French law prohibits anti-union discrimination and forced or compulsory labor.

With a few minor exceptions for those enrolled in recognized apprenticeship programs, children under the age of 16 may not be employed. France has a minimum wage of approximately $6.50 per hour. The legal work week is 39 hours long, and overtime is restricted to 9 hours per week. In general terms, French labor legislation and practice, including that pertaining to occupational safety and health, are fully comparable to those in other industrialized market economies. France has three small export processing zones, where regular French labor legislation and wage scales apply. Labor law and practice are uniform throughout all industries of the private sector.

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1. General Policy Framework

The economic reforms being carried out by the Government of Georgia aim to reduce inflation to single digits by the end of 1994, arrest the decline in output by accelerating systematic reforms, promote private sector activities, improve the gross external reserve position of the National Bank, and provide social assistance to society's most vulnerable groups. The IMF granted Georgia a $40 million Structural Transformation Facility loan in December 1994 to support its reform program.

However, in 1994 economic decline continued in Georgia. In July, only 80 percent of 1,362 registered industrial enterprises reported to the government. Total industrial production fell by 49.5 percent compared to the same period last year. Production of paper, manganese, wool yarn, milk, and soap increased, while production of the 70 remaining Georgian products decreased. Production declined due to interruptions in energy supplies from Russia, Azerbaijan and Turkmenistan. In October 1994, Turkmenistan cut the delivery of gas on a credit basis because of unpaid Georgian bills. According to most estimates, the underground economy is greater in size than the official economy.

The crisis-in-payment system in Georgia and between Georgia and other NIS countries made it very difficult to maintain trade links with other countries of the former Soviet Union. At the same time, a chronic fiscal deficit and the National Bank's subsidizing monetary policy led to hyperinflation with prices increasing roughly 60 percent a month from mid-1993 through mid-1994. About 80 percent of the deficit was caused by spending on electricity, natural gas and bread. Spending on education, science, and administration did not exceed three percent of GDP. Under the IMF program, the cash budget deficit was to be reduced to 3.8 percent of GDP, bringing the deficit for the year down to 9.1 percent of GDP, still quite high but about a quarter the 1993 figure.

coupons =

Since September the value of the coupon has fluctuated significantly, but has maintained an upward trend, rising from 2.5 million coupons = Ĭ USD to 1.5 million 1 USD. High inflation was responsible for the currency's collapse in value during the first three quarters of 1994, which increased the use of rubles and U.S. dollars in Georgia. Improved financial policies seem to have begun to reverse this trend, as reflected in the improved exchange rate, and may increase the public's willingness to use the national currency.

2. Exchange Rate Policy

In July 1993 the National Bank of Georgia modified its fixed official exchange rate system after the Central Bank of Russia withdrew Soviet rubles from circulation and moved to a floating exchange rate regime. The official exchange rate of the interim currency, the coupon, against other major currencies is determined by the Interbank Currency Exchange. This is the only currently operating exchange market, established in April 1993 as a counterbalance to the Caucasian Exchange, where the actual exchange rate was defined. The banknote rate is defined at the currency exchange kiosks, which need to have special permission to do so. The banknote rate exceeds the cash rate usually by 15-18 percent.


In October 1993 the coupon traded at 21,000 = 1 USD, and in October 1994 the rate was 2.4 million coupons 1 USD. The Interbank Exchange operates twice a week. Gross volume of coupon-dollar trading increased from 50,000 USD to 250300,000 USD a week. There is a requirement to surrender 35 percent of foreign exchange earnings at the exchange rate determined by the Interbank market auction. Nonresidents may hold both foreign exchange and local currency accounts and may freely transfer these balances offshore. However, individual Georgian banks may have difficulty transferring large amounts due to a foreign exchange shortage.

As a rule, the National Bank of Georgia is the only seller of hard currency on the exchange market. However, trends since September 1994 show that since Interbank Currency Exchange is the only operating currency market, banks are more willing to participate as sellers.

Neither the foreign exchange system in Georgia nor exchange controls have any impact on the price competitiveness of U.S. exports.

3. Structural Policies

Pricing Policies: The government freed most prices in February 1992. In response to IMF and World Bank requirements, the Cabinet of Ministers of Georgia increased prices of electricity and natural gas to world market levels, and bread prices are scheduled to be raised to reflect full market cost by the end of December.

Tax Policies: The parliament adopted a new tax system in December 1993 which is composed mainly of four taxes: a 14 percent value-added tax (VAT); a corporate profit (income) tax with a 20 percent rate for enterprises, a 10 percent rate for construction enterprises, and a 35 percent rate for banks; excise taxes of up to 90 per

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