Press Release: IMF Executive Board Completes Fifth Review Under An Extended Arrangement With Serbia and Montenegro and Approves US$182.9 Million Disbursement

June 29, 2005

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Serbia and Montenegro's economic performance under an Extended Arrangement. The completion of the review enables the release of an amount equivalent to SDR 125 million (about US$182.9 million), which would bring the total disbursement under the program to SDR 587.5 million (about $US859.7 million).

The Executive Board also granted waivers for the non-observance of the continuous performance criterion on non-accumulation of new external arrears; the end-March performance criterion on outstanding external arrears; the end-December 2004 structural performance criterion concerning the Yugoslav army and union-level civil employees; and the end-February 2004 structural performance criterion on the legal registration of the new electricity transmission and dispatch company. In addition, the Board completed a Financing Assurances Review and approved a request to rephase the eleventh and final disbursement, which would become available upon the completion of the sixth review.

The Extended Arrangement was approved in May 2002 for a total amount equivalent to SDR 650 million (about US$951.1 million) to support Serbia and Montenegro's 2002-2005 economic program (see Press Release No. 02/25).

Following the Executive Board's discussion on Serbia and Montenegro, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Following a mixed program implementation during the third year of their Extended Arrangement with the Fund, the authorities of Serbia and Montenegro have agreed on an appropriate set of corrective actions to deal with the growing macroeconomic imbalances. While economic growth has been commendably strong, the continued strength of domestic demand, sustained by a credit boom and inflows of remittances, as well as the constraints stemming from the high euroization and structural rigidities have contributed to a resurgence in inflation and a persistently large current account deficit. The authorities' policies of further fiscal and monetary tightening and accelerated structural reforms should help reverse the imbalances.

"The tighter fiscal stance is welcome. Following the heavy reliance in the short run on higher revenues, it will now be important to implement the cuts in permanent spending, mostly through pension reform and lower subsidies, that will help achieve a sustainable reduction in the size of the public sector.

"The envisaged monetary tightening should help contain demand and inflationary pressures. The strong pressure from recently established foreign banks competing for market shares to increase credit calls for heightened vigilance, and the authorities should stand ready to take further measures to tighten monetary conditions if needed. The privatization of the two largest state-owned banks in Serbia will be a key priority for the period ahead.

"The use of the exchange rate to bear down on inflationary pressures is understandable given those pressures and the extent of euroization. However, the approach is sustainable only in the measure in which the tightening of macroeconomic policies offsets the impact of this policy on the current account. More fundamentally, structural reforms, in particular, privatization and restructuring of publicly controlled enterprises, need to be accelerated to stimulate export growth, and enhance medium-term external sustainability. Strict enforcement of bankruptcy procedures is also needed to reallocate resources within the economy.

"In Montenegro, the implementation of the agreed reduction in the fiscal deficit of about one percent of GDP will help contain demand and the external deficit in line with the program. The large privatization revenues should be used mainly to retire domestic debt. The development of a debt and asset management strategy, strengthened revenue collection and acceleration of civil service reform will be essential to create room for additional public investment.

"Strong implementation of the envisaged policy package will be key to lowering macroeconomic imbalances, containing program risks, and boosting growth in the medium term. This will also be key to ensuring the international community's continued support for Serbia and Montenegro's adjustment and reform efforts," Mr. Kato said.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100