Press Release: IMF Mission Statement on Discussions in Serbia and Montenegro

March 29, 2004

An IMF mission led by Mr. Emmanuel Zervoudakis held discussions in Belgrade and Podgorica during March 15-26 with a delegation of the State Union of Serbia and Montenegro headed by National Bank of Serbia Governor Radovan Jelašić, which included representatives of the Serbian, Montenegrin, and Union authorities. The mission held discussions on the third review under the Extended Arrangement for 2002-05 (EA) of about $960 million that was approved by the IMF Board in May 2002.

The mission noted that macroeconomic conditions had, in several respects, improved over the past year: inflation was almost halved, the foreign reserves of the National Bank of Serbia rose by almost one half, new foreign investment was strong. Moreover, economic activity continued to recover, albeit by less than expected.

However, the larger-than-expected current account deficit—at 12½ percent of GDP in 2003—is a source of concern that requires prompt corrective policy action.

Fiscal developments in late 2003 also fell short of targets. The end-December ceiling on government borrowing from the domestic banking system was exceeded by 0.4 percent of GDP. This contributed to the pressure on the external accounts. Other credit and external sector targets under the IMF-supported program were met.

Regarding structural reforms, privatization largely exceeded expectations. The introduction of a new Serbian payments system, pension reform in both republics, and trade regime harmonization within the union are also welcome developments. However, other critical steps (notably further reform of enterprise and banking sectors, including through the early passage and effective implementation of laws on bankruptcy and energy) have been delayed.

Against this background, the mission discussed policies to redress the existing macroeconomic risks and support sustainable growth. In Serbia, special attention was given to the 2004 budget and its implications for macroeconomic/external developments. Further discussions in this area will be needed, regarding, in particular, the consistency of the budget deficit with macroeconomic objectives, the projections for fiscal revenue, the transfers to the social insurance funds, and the appropriate rate of spending increase. In Montenegro, the discussions focused on the fiscal implications of the government's tax reform package, and it was agreed that they would continue in April.

Discussions also covered a number of structural issues. The mission welcomes the authorities' intentions to complete rapidly the preparation of an appropriate resolution plan for the largest Serbian bank, to initiate the sale of smaller banks, and to accelerate enterprise restructuring. To maintain the credibility of the privatization process, the mission urges the authorities to ensure that all asset sales are carried out in accordance with international best practice, including the competitive hiring of investment advisors and transparent international tenders.

Discussions with the Serbian and Montenegrin authorities will continue in April in Washington with a view to reaching understandings on policies for 2004 and completing the third review under the Extended Arrangement.


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