Republic of Montenegro and the IMF

Republic of Serbia and the IMF

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Serbia and Montenegro—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
April 1, 2003

The following item is a Letter of Intent of the government of Serbia and Montenegro, which describes the policies that Serbia and Montenegro intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Serbia and Montenegro, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Use the free Adobe Acrobat Reader to view Annexes A-E (671 kb PDF file).

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

Firm implementation of our medium-term economic program supported by the Fund under the current extended arrangement has ensured significant progress toward lowering inflation as well as setting the foundation for sustainable growth, improved living standards, and external viability. To ensure continued progress, we have updated our economic and policy targets for 2003-05, as described in detail in the attached Memorandum on Economic and Financial Policies, to reflect the latest developments. On this basis, we request completion of the first review under the current extended arrangement, including a financing assurances review.

We believe that the policies and measures described in the attached memorandum are sufficient to achieve our program objectives, but we stand ready to take timely additional measures and seek new understandings with the Fund, as necessary, to keep the program on track. We will remain in close consultation with the Fund in accordance with the Fund's policies on such consultations, and will provide the Fund with all information that it requests to assess the implementation of the program. The program will continue to be reviewed by the Fund on a semiannual basis, with the second review expected to be brought to the IMF Board in June 2003. Implementation of the general government budget and the payment system reform, exchange rate policy, and progress in bank and enterprise reform will be the main subjects of the second review. The third and fifth reviews will focus in particular on the annual budgets and financial programs for 2004 and 2005, respectively. Moreover, each purchase under the arrangement will continue to be subject to a review of the financing of the program.

Yours sincerely,


Branko Lukovac
Minister of Foreign Economic Relations
Serbia and Montenegro

Bozidar Djelic
Minister of Finance
Republic of Serbia
Mladjan Dinkic
National Bank of Serbia
Miroslav Ivanisevic
Minister of Finance
Republic of Montenegro
Ljubisa Krgovic
Central Bank of Montenegro



April 1, 2003

I. Introduction

1. This memorandum updates the Memorandum of Economic and Financial Policies (MEFP) attached to the Letter of Intent of April 26, 2002. The memorandum (a) reports on economic performance and policy implementation under the government's three-year program of stabilization and reform supported by the IMF under an Extended Arrangement (EA) approved on May 13, 2002; (b) updates the key economic and policy objectives of the three-year program; and (c) describes policy measures adopted recently and envisaged during the remainder of 2003. Annexes A and B, attached to this memorandum, contain information on the quantitative performance criteria and indicative limits for this period under the EA. Annexes C and D contain information on the structural performance criteria and benchmarks as well as prior actions. Annex E updates a detailed list of structural policy measures envisaged to be implemented during the EA. Annex F (Technical Memorandum of Understanding) defines the performance criteria and indicative targets and describes the reporting arrangements.

2. Economic performance was generally favorable in 2002, even though a faster than programmed growth in domestic demand warrants close monitoring. Annual inflation declined by almost two-thirds to 14 percent by end-2002 compared with a program target of 20 percent. Real GDP is estimated to have grown by 3½-4 percent in 2002, driven primarily by increasing activity in services. Industrial production has recovered since April 2002 and rose by 1.7 percent in 2002. The external current account deficit (before grants) reached $2.0 billion (13 percent of GDP), compared with an original program target of $1.6 billion (12 percent of GDP), reflecting mainly a stronger-than-expected domestic demand for consumer and investment goods that was offset partly by higher private remittances. The higher deficit in dollar terms was due in part to the valuation effect of the decline in the dollar vis-à-vis the euro, the main currency for foreign transactions. The overall balance of payments registered a surplus of $0.8 billion, $0.7 billion higher than targeted, owing to buoyant private capital inflows, including FDI. The foreign exchange reserves of the NBS reached $2.3 billion (3.4 months of projected imports of goods and services) at end-2002.

3. Macroeconomic policies have been implemented firmly. All quantitative performance criteria at end-September and end-December 2002 were observed. The fiscal deficit in Serbia and Montenegro (SM) amounted to about 5.0 percent of GDP in 2002 compared with the program target of 5.3 percent (on the basis of the revised GDP), while the government reduced its net indebtedness to the banking system by the equivalent of ½ percent of GDP (the program allowed for net borrowing of ½ percent of GDP).1 Revenue/GDP was more than 2 percentage points higher than programmed in Serbia, while higher-than-expected privatization proceeds were used to offset a shortfall in foreign financing and reduce government indebtedness. In Montenegro, revenue was broadly in line with the program, while higher-than-budgeted net wage spending led to some accumulation of arrears, mainly towards the social funds. The NBS's NDA and NFA targets at end-September and end-December 2002 were comfortably observed, while the indicative target for wage bill growth in large state enterprises was exceeded by about 1 percent at end-September and end-December 2002 (Annex A). In addition, the indicative ceiling on the NDA of the banking system was exceeded at end-September and end-December 2002 owing to the more-rapid-than-envisaged remonetization of the economy and extension of bank credit to the nongovernment sector.

4. Structural reform has advanced despite delays in the observance of some benchmarks. In May 2002, SM's foreign exchange system was further liberalized with the adoption of a new foreign exchange law and implementing regulations, and the SM authorities accepted the obligations under Article VIII of the Fund's Articles of Agreement. In July, the average price of electricity was raised by 50 percent in Serbia, reducing sharply the need for budgetary subsidies to the electricity company. Work is advancing on the resolution of four large banks that were closed at the beginning of 2002 and on the privatization of 16 banks. In a major reform of the payments system, on January 1, 2003, the payments monopoly of ZOP (the domestic payments service system) was abolished, allowing commercial banks to initiate and settle interbank payments without the mandatory intermediation of any institution or agency. Privatization of large enterprises through tenders has progressed, and auction procedures were streamlined to accelerate sales through this method. In Montenegro, progress was made in improving public expenditure management, and in privatization. Out of the program's 12 structural benchmarks through end-December 2002 ten have been implemented, albeit often with some delay owing to limited implementation capacity and to political developments in Serbia and Montenegro, which disrupted the legislative activity of the federal and republican parliaments for several months (Annex C). The remaining two structural benchmarks are expected to be also met in 2003.

5. The process of debt restructuring continues, with implementation of the agreement with Paris Club creditors and regularization of other debt. Bilateral agreements have been concluded or initialed with 14 Paris Club creditors, with three remaining to be signed. Arrears of about €32 million to Eurofund, the only remaining multilateral creditor to which the SM government owed arrears at end-2001, were restructured in April 2002. Discussions with the London Club and other official bilateral creditors are ongoing, with the SM authorities continuing their efforts to obtain debt relief on terms similar to those agreed by the Paris Club creditors.

6. Relations between Serbia and Montenegro have been reformed on the basis of a new constitutional charter, which established the Union of Serbia and Montenegro. The charter, which came into force on February 4, 2003, acknowledges the status quo, including different monetary, exchange, customs, and tax regimes in the two constituent states. At the same time, it facilitates a streamlining of common administrative institutions and fosters a convergence in the economic systems of Serbia and Montenegro as they both harmonize their systems with that of the EU. The Serbian and Montenegrin authorities have agreed to resolve inter-state trade issues regarding customs, excises and VAT, and to adopt appropriate changes to institutions and policies to reflect the new constitutional charter.

II. Economic and Policy Objectives for 2003-2005

7. The economic objectives for 2003-2005 have been updated to take into account recent developments and revisions to the national accounts (Table). They are consistent with the achievement of sustainable growth, low inflation, and a viable external position.

  • Real GDP is projected to grow by 3½-4½ percent in 2003 and 5 percent in 2004-05 reflecting increased domestic and foreign investment, as well as improved incentives stemming from enterprise restructuring and progress in privatization.

  • Inflation should converge toward EU levels over the medium term, with the target for 2003 revised to reflect the favorable developments over the past year.

  • The external current account deficit in SM is expected to decline as a share of GDP, as imports decelerate and exports recover to their historical levels. While the role of FDI inflows will increase as the privatization program and structural reforms reach an advanced stage, additional financing of about $0.9 billion annually is expected from bilateral donors as well as multilateral agencies including the EBRD, and EIB, and the World Bank during 2003-2005.

  • Official foreign reserves are targeted to rise steadily, ensuring a strong external position in anticipation of a peak in debt servicing obligations in the second half of the decade.

Serbia and Montenegro: Key Macroeconomic Objectives and Policies, 2002–2005
   2002 2003 2004 2005
Prel. Est. Rev. Prog. Rev. Proj. Rev. Proj.

  (Percentage change)
Real GDP Growth

3 ½-4 3 ½-4 ½    5    5

Inflation (end period)

 14 9-11    7    5

Of which: Montenegro

   8    5    4
  (In billions of US$)
Current account deficit (before grants) 2.0 2.2 2.0 1.8
In percent of GDP 12.8   11.0   9.4 7.9

Gross official reserves

2.3 2.7 3.1 3.5
In months of projected imports 3.4 3.8 4.1 4.4
  (In percent of GDP)

Fiscal deficit

5.0 4.5 4.3 3.9
Of which: Serbia 4.7 4.1 . . . . . .
  Montenegro 0.3 0.4 . . . . . .
(in percent of Montenegro's GDP) 3.6 5.6 . . . . . .
Fiscal deficit, excluding foreign-financed project spending 4.2 3.1 3.0 2.7
Government credit from the banking system -0.4   0.0 0.6 0.9

8. The policies for 2003 will be guided by the updated macroeconomic framework. Given the uncertainty surrounding macroeconomic prospects, policy targets will be kept under close review and amended, if necessary to attain the economic objectives.

  • The fiscal deficit is targeted at 4.5 percent of GDP in 2003, compared with an estimated outturn of 5.0 percent of GDP in 2002, with a view to containing the external current account deficit and supporting disinflation. The deficit will be financed largely by concessional foreign assistance and privatization proceeds, with no recourse to domestic financing except for seasonal budgetary needs.

  • Monetary and exchange rate policies will be geared to lowering inflation while supporting economic recovery by safeguarding competitiveness. Excess bank lending will be curbed by a tightening of credit policy and a strengthening of banking supervision. Developments in the foreign exchange market and in the export sector will be monitored closely and exchange rate policy will be assessed regularly.

  • Wage policy in the state sector (government and major state enterprises) will continue to serve as an inflation anchor and as a means of encouraging a streamlining of employment to raise productivity.

9. The structural reform agenda in 2003 will aim at building public institutions, streamlining the state sector, and accelerating privatization. Further fiscal reforms are planned in tax policy, notably preparations to introduce the VAT, in tax administration, and in expenditure management with the increasing role of the Treasury. The finances of the pension fund and the targeting of social services and transfers will also be improved. In the banking sector, the key objectives are a substantial strengthening of banking supervision and the timely implementation of the bank privatization program. Accelerated enterprise privatization is expected through a further streamlining of procedures to attract strategic investors.

10. The PRSP process will continue to serve as guidance for the government's economic program. An interim PRSP was completed in June 2002, and a full PRSP will be completed by mid-2003. In this connection, a recently completed household survey in Serbia will help determine the poverty line and better target social assistance. Social spending will continue to be protected to ensure a viable social safety net against restructuring costs throughout the restructuring process, while its effectiveness will be enhanced through improved targeting of benefits.

A. Fiscal Policy


11. Fiscal policy in 2003 aims to contain the external imbalance, while continuing to support restructuring and an adequate social safety net. The expenditure/GDP ratio is projected to decline by 2.4 percentage points to 45.1 percent in 2003. Noninterest current spending will be contained through structural reforms in the budgetary and enterprise sectors--involving the streamlining of the civil service as well as limiting spending on subsidies, disability pensions, and other social benefits--while capital spending will rise, reflecting increased budget allocations and accelerated implementation of foreign-financed projects. On the revenue side, the focus will be on improving tax administration and bringing an increasing share of private activity into the formal sector. As a result, the overall fiscal deficit is projected to decrease by 0.5 percentage points to 4.5 percent of GDP in 2003. To ensure transparency and accountability, all privatization proceeds will be channeled to the budget and spending will follow normal budgetary procedures. Excess privatization proceeds, after covering any shortfall in foreign budgetary financing, will be used to reduce net government indebtedness and--if consistent with achievement of economic objectives and in consultation with the Fund in the context of program reviews--to cover investment and restructuring costs.

12. Constitutional reform will have implications for institutional arrangements and trade relations. Savings will be realized through the streamlining of (formerly) federal institutions and the elimination of the duplication of functions. At the same time, the budget in Montenegro will have to cope with the planned annual transfer of over €40 million to finance joint functions such as defense and foreign diplomatic representation, proportional to Montenegro's share in union GDP. The Governments of Serbia and Montenegro have reached understandings on their trade relations that would formalize the existing customs borders between them, consistent with a free-trade area regime. Agreement has also been reached on a broad plan to harmonize the trade, customs, and indirect tax systems over the next three years. A precise timetable for these measures will be agreed by end-April 2003 (to be monitored as a structural benchmark).


13. The federal budget for 2002 is estimated to have registered a surplus of 0.2 percent of GDP. Revenue overperformance permitted a front-loaded retrenchment of about 1,900 federal employees and a settlement of arrears from previous years to suppliers and the pension fund.

14. The budget of the Union for 2003, to be financed entirely by transfers from Serbia and Montenegro, will be streamlined and in balance. The budget will involve a reduction in the expenditure/GDP ratio (relative to the federal budget)--even after allowing for a transfer of the obligation to service frozen foreign currency deposit (FFCD) bonds as well as other functions to the Serbian budget--and will be financed entirely by transfers from Serbia and Montenegro. Net savings of about 0.2 percent of GDP are expected from layoffs and other measures to eliminate the duplication of functions at the Union and Serbian levels. Defense spending (excluding transfers to the military pension fund) will decline by 0.3 percentage points to 3.4 percent of GDP in 2003.


15. The Serbian government is preliminarily estimated to have run a deficit of 4.7 percent of GDP in 2002, compared with a program target of 5.0 percent. In the republican budget, revenue was about 0.4 percent of GDP higher than programmed, while spending was higher than in the program, as lower spending due to the aforementioned delay in disbursements of project loans was offset partly by higher allocations for transfers and subsidized lending to support restructuring. Higher-than-anticipated privatization receipts helped offset a shortfall in foreign financing. Local governments had a surplus of 0.2 percent of GDP.

16. The 2003 republican budget brings Serbia closer to attaining its medium-term fiscal objectives while supporting external adjustment and growth. It lowers the share of current noninterest expenditure while creating room for additional spending on debt service, infrastructure investment, and the social costs of restructuring. In addition, the budget supports growth by lowering the tax burden, especially on labor and corporate investment, by 1.5 percentage points of GDP. In particular, the CIT rate was lowered by 6 percentage points to 14 percent, and investment and employment credits were provided against this tax. Some basic goods (cooking oil, fat, and sugar) were exempted from the sales tax to assist the poor. The extra-profit tax will be phased out, while the financial transactions tax may be lowered and streamlined during 2003. Moreover, the excise tax on gasoline, diesel-fuel, and coffee will be raised as of April 1, 2003, generating additional revenue of about 0.3 percent of GDP. In addition, administrative fees will be raised, yielding 0.3 percent of GDP, and the tax base for contributions to the Pension Fund will be widened in the context of the pension reform, yielding another 0.1 percent. To minimize the potential disruptions resulting from the elimination of ZOP, the Serbian authorities have relied on the newly created Public Payments Agency to support the treasury and have strengthened the Public Revenue Agency (PRA) by transferring additional staff from the ZOP. On the expenditure side, the budget envisages that wages will remain broadly constant as a share of GDP as real wage increases granted to the education and other sectors will be offset by containing other wages in line with targeted inflation and by reducing overstaffing and other inefficiencies; the latter will be based on a careful review of the payroll by the Ministry of Finance in cooperation with relevant line ministries. Subsidies and transfers will be reduced, notwithstanding the assumption by the government of FFCD bond repayment obligations from the federal budget, on account of the substantial reduction of subsidies to public enterprises (by almost 1 percent of GDP). Capital spending will increase, mostly driven by the availability of foreign financing.

17. The fiscal program incorporates adjustments to the 2003 budget to ensure fiscal sustainability and attainment of the fiscal deficit target. Contingency areas have been identified where expenditure commitments will be maintained below budget allocations by about 0.7 percent of GDP in the absence of revenue overperformance, in line with the provisions of the organic budget law (Article 34). These include: personnel costs, concessional lending for restructuring, subsidies to the railways and the road fund, and social transfers. On the basis of cautious revenue projections to reflect possible adverse effects from the implementation of a payments reform on January 1, 2003, discretionary budget spending in 2003 Q1 and Q2 will be maintained below the prorated annual allocation, thereby limiting total budgetary spending during the first half of the year to 45 percent of the total annual allocation. The Serbian government stands ready to adopt a supplementary budget should the deficit target or the program's macroeconomic targets be put at risk.

18. Tax reform continues. In tax administration, the Law on Tax Procedures and Administration was adopted by parliament in November 2002. The reorganization of the PRA has involved the introduction of a modern computerized system, the establishment of a Large Taxpayer Unit (LTU) in Belgrade--which is gradually becoming operational--and plans for additional LTUs for Nis, Novi Sad, and Kragujevac by end-September 2003 (to be monitored as a structural benchmark). The implementation of a single taxpayer identification number has started from January 2003 to facilitate tax and social contribution administration. Tax administration will also be improved through the introduction of fiscal cash registers, for which a subsidy is allowed for in the budget. In addition, technical preparations are underway for the introduction of the VAT in Serbia--the key remaining tax policy reform--by January 2005.

19. Further progress is also envisaged in expenditure management and policy. Building on the 2002 introduction of the new GFS classification, budget reporting and monitoring should improve substantially in 2003, facilitating the conduct of fiscal policy. In September 2002, a Treasury with cash management, debt management and central accounting divisions has been established. As of January 2003, the Treasury has begun following budget execution. Most line ministries and other direct budget users (DBUs) were brought under the treasury single account by April 1, 2003 with the remaining DBUs expected to be brought under the account by end-June 2003 (to be monitored as a structural benchmark). A centralized payroll for all DBUs will be established by end-December 2003 (also to be monitored as a structural benchmark), to streamline payroll spending and generate savings. Preparations to move towards commitment accounting have begun, with a view to its implementation by 2004. The targeting of social welfare benefits has improved substantially with the tightening of means-testing for child benefit allowances. A pension law is currently under preparation with technical assistance from the World Bank, envisaging a tighter eligibility requirement for disability pensions, and a change in the formula for pension benefits that will reduce the accrual rate, lengthen work history to strengthen the link between contributions and benefits, and incorporate recent reforms at the federal level regarding pension age and indexation into republican legislation. Costs for the health fund have been reduced by introducing new criteria for medical service contracts, and with the adoption of a positive drug list eligible for state-subsidized purchase. The ongoing reform of social welfare programs will further streamline social spending through improved targeting. The planning and policy analysis capacity of the Serbian Ministry of Finance will be strengthened, including through support from USAID.


20. The fiscal deficit was broadly in line with the program, although implementation was complicated by the accumulation of arrears, owed mostly by the government to itself. Revenue was broadly in line with the program after allowing for (a) lower non-tax revenue caused by delays in the inclusion of some spending units in the new treasury system and (b) the nonpayment of payroll taxes by the government to itself on behalf of its employees. A higher than budgeted net wage bill has led to the incurrence of arrears in contributions to the social funds and necessitated cuts in discretionary spending (including subsidies and investment). The preliminary 2002 consolidated government cash deficit (before grants) was €50 million (4 percent of Montenegro's GDP), compared with a program target of €58.5 million (4.7 percent of GDP). Privatization proceeds, which reached €70 million, were the main financing source in 2002. Of this amount, €14 million was deposited with the Central Bank of Montenegro (CBM) on February 15, 2003 with a view to repaying an outstanding liability and safeguarding the integrity of the financial system.

21. Montenegro's 2003 budget aims to underpin fiscal sustainability by containing non-interest current expenditure in relation to GDP. At the state level, a net increase in non-discretionary expenditures in 2003, amounting to around 2 percent of Montenegro's GDP (resulting mainly from the envisaged transfer to the Union budget of over €40 million, has required containment of (non-interest) current spending to prevent the build-up of excessive budget deficits now and in the future. In this context, the government has explicitly linked the implementation of the envisaged increase in public employees' wages to a reduction in their number by 3,500 (i.e., by over 10 percent) in 2003. In addition, in the absence of revenue overperformance, expenditure commitments (in the areas of contractual services, subsidies to agriculture, and lending to enterprises) will be kept below their budgeted allocations by €6 million. Consolidated revenue (excluding grants) will be higher as a share of GDP, largely because of the introduction of VAT as of April 1, 2003 as well as the harmonization of some indirect taxes and import duties with Serbia. Montenegro's consolidated general government deficit (before grants) is targeted at €79 million (5.6 percent of Montenegro's GDP) in 2003, to be financed by foreign grants (€20 million) and loans (€26 million), privatization proceeds (all of which will be channeled through the budget to enhance transparency), and borrowing from domestic commercial banks.

22. Fiscal reforms in 2003 will concentrate on launching the VAT, improving Treasury operations, and reforming the pension system. On the revenue side, the key reform will be the introduction of the VAT in April 2003, with the revenue impact to be ensured through the establishment of effective customs controls at Montenegro's borders. A new property tax--important in providing revenues to local governments--will also be introduced in 2003. On the expenditure side, further improvement in the functioning of the Treasury is envisaged, especially in the area of expenditure reporting, arrears monitoring, and debt management. The adoption of a new Pension Law--which may require amendments to the state budget--will be another key element of fiscal reform in 2003. It will shift the indexation of pensions from wage changes to a weighted average of price and wage changes (with the weight of wages not to exceed 50 percent) and raise the minimum retirement age by 5 years in a phased manner.

B. Wage and Pricing Policies

23. Wage bills in state enterprises will continue to be controlled strictly to contain inflation pressures, and encourage restructuring through labor shedding. The wage bill in state enterprises rose by about 27 percent in 2002, in line with the originally programmed (annual average) inflation. In 2003, the wage bill in state enterprises will be kept constant in real terms on the basis of the targeted rate of inflation, implying a maximum year-on-year increase of 13½ percent. By end-April 2003, the government of Serbia will approve restructuring strategies for the 7 large state enterprises aimed at improving their profitability through cost-cutting and streamlining measures (to be monitored as a structural benchmark), and will begin implementing these strategies from end-June 2003. Employment reductions would allow correspondingly higher average wages under the wage bill ceiling, properly adjusted for the spin-off of activities. Wage restraint in state enterprises will have a strong signaling effect for the remainder of the economy. Private companies are already facing a hard budget constraint, while new labor laws in both Serbia and Montenegro stipulate lower compulsory severance pay, as well as liberalized employment contracts and wage determination.

24. Substantial progress has been made to bring administered prices for electricity closer to full cost-recovery levels, and this objective will be attained by 2004. Electricity prices in Serbia were raised by 50 percent in mid-2002 to an average of about US¢3.1 per kWh. At the same time, generation, transmission and distribution costs were contained and the current collection rate was increased to over 80 percent of billings. With a view to fully covering operational costs as well as a portion of investment and debt servicing outlays, the average electricity price will be raised further by at least 20 percent in dinar terms by July 1, 2003 (to be monitored as a performance criterion). As a result, budgetary subsidies to the electricity company (EPS) will be reduced to well under 0.1 percent of GDP in 2003 (DIN 0.7 billion) compared with 0.4 percent of GDP in 2002. To facilitate further restructuring of the electricity sector, non-core activities in EPS will be spun off. In addition, accounting separation of key profit centers is envisaged by mid-2003 which, together with strengthened management control over core activities, would pave the way for effective cost control and a subsequent restructuring of EPS. In Montenegro, electricity prices were raised on April 1, 2003 to 4.6 € cents/kWh for all users other than the aluminum plant (KAP).

C. Monetary and Exchange Rate Policy

25. Monetary policy in Serbia will seek to curb excess bank lending and lower inflation, with reserve money growth driven entirely by increases in NFA. In particular, end-2003 NDA of the National Bank of Serbia (NBS) will remain at its end-2002 level. Reserve money will be targeted to increase by 12.8 percent. Consistent with this policy target, the reserve requirement was raised by 3 percentage points to 23 percent as of March 1, 2003 and some government deposits will be shifted to the NBS. In the event of higher-than-projected NFA, the NBS will consult with the Fund staff on the implications for credit policy and--if the NFA overperformance does not appear to reflect increased money demand--will maintain NDA below the program ceiling to avoid overshooting the reserve money growth target. The NBS will conduct auctions of its securities in quantities consistent with the NDA target, and accept the resulting interest rates. Although the rapid expansion of credit to the non-government sector after many years of stagnation represents a welcome development, it also poses potential risks for the inflation objective as well as the soundness of the banks' loan portfolios. Accordingly the NBS will follow credit developments closely and, through its supervision department, strictly enforce prudential regulations to ensure that new lending decisions are sound.

26. Exchange rate policy in Serbia will safeguard the external position while continuing to support disinflation. The stability of the nominal exchange rate of the dinar against the euro since the beginning of 2001 has contributed to the substantial reduction in inflation, while the NBS was a net purchaser in the interbank foreign exchange market (i.e., excluding autonomous net foreign exchange inflows such as cash foreign assistance and privatization receipts) in 2002. During 2003, exchange rate policy will ensure the right balance between the inflation and external objectives, while aiming at a continuation of the disinflation process. The adoption of a new foreign exchange law in May, following which the SM authorities accepted Article VIII of the Fund's Articles of Agreement, has contributed to a deepening of the foreign exchange market, which nevertheless remains relatively thin. One of the two remaining restrictions subject to approval under Article VIII (Sections 2, 3 and 4)--pertaining to the transfer of profits abroad--was eliminated through an amendment of the Law on Foreign Investment in December 2002. (This was originally envisaged by October 30, 2002.)

D. Foreign Trade System

27. The systematic removal of trade barriers will continue in both Serbia and Montenegro. Following the mid-2001 elimination of most quantitative trade restrictions and the reform of the tariff system at the federal level, all export quotas have been eliminated in Serbia and the remaining insignificant ones in Montenegro will be eliminated by end-April 2003. This will be followed by the elimination of all quantitative import restrictions in Serbia and Montenegro--other than those maintained for health, environmental and security reasons--by end-2004. Besides fully harmonizing trade relations between Serbia and Montenegro, free trade agreements will be signed with neighboring countries.

E. Bank Restructuring and Financial Sector Supervision

28. Bank reform in Serbia emphasizes restructuring and privatization. Following the acquisition of shares by the Serbian government of 16 banks under the laws on Paris and London Club debt-for-equity conversion and on frozen foreign currency savings, the authorities have formulated and begun to implement a strategy through the Bank Rehabilitation Agency (BRA) for their efficient transfer to private ownership, with technical assistance from the World Bank. The strategy was adopted by the Government of Serbia in February 2003 with a view to offering controlling stakes in most of these banks to reputable strategic investors by mid-2004. Tenders offering majority or controlling stakes for one bank will be launched by end-June 2003 and for another two banks by end-2003. In the meantime, with effect from December 15, 2002, the NBS and the government have put in place monitoring and control mechanisms (including a government-appointed management board and the obligation to undergo audit in March 2003 and submit monthly reports on cash flow and profit) to preserve the value of state-owned banks prior to their privatization. Regarding banks under the explicit control of the BRA, rehabilitation expenditures will be maintained within the fiscal envelope agreed under the program. The BRA has made significant progress in asset resolution of the four large banks closed in January 2002 and has prepared a rehabilitation plan for Niska Banka.

29. Strengthened financial sector supervision and regulation will complement the bank restructuring measures. The NBS has moved toward enforcing its stricter prudential regulations in line with international standards. These include asset classification and provisioning, through both on-site and off-site supervision. The banking supervision department will also cooperate with the monetary and research departments with a view to compiling high-frequency data on banking system developments to enable a timely response. The NBS will increase the frequency and depth of on-site inspections, while a new recommendation will be issued regarding asset classification in general, and the treatment of loans provided in the course of privatization in particular. The supervision department will be developed to move from compliance-based toward risk-based supervision, with a view to strengthening the latter and over time making this the organizing principle for banking supervision. In this connection, the NBS will assign responsibility for supervision of each bank to an individual supervisor. A new Accounting Law has been adopted, which prescribes IAS as the permanent accounting framework for all banks, including the NBS (monitored as a benchmark); bank preparations for implementation of this measure are well advanced. A Supervisory Development Plan (SDP), prepared with the assistance of the World Bank and bilateral donors, has been adopted. The CAMEL rating system will be piloted and formally adopted. A new Supervisory Council will be established to increase management oversight of banking supervision.

30. In Montenegro, bank restructuring has been accompanied by measures to strengthen supervision. The sale of Montenegro Banka is expected to be completed by end-April 2003. The government will actively seek to collect the claims and negotiate a discount on the repayment of the €11.5 million liabilities assumed in connection with the privatization of Montenegro Banka. The bankruptcy procedure for Jugobanka Podgorica is moving forward, while Beranska Banka was merged with another bank in December 2002. After some delay, legislation was adopted in December 2002 to enable the Central Bank of Montenegro to supervise effectively offshore banks in line with the rules and regulations applicable to onshore banks (monitored as a structural benchmark). To monitor effectively existing offshore bank activities, the Ministry of Finance will transfer all the data on off-shore banks to the CBM by end-April 2003. In addition, a number of decisions have been passed that raised the minimum capital requirement, prescribed stricter standards on assets classification and provision, tightened risk assessment regulation, established consolidated bank supervision, and required reporting by banks of suspicious transactions. Preparations for introduction of IAS in banks are well underway, and risk-based supervision is being enhanced. Laws on anti-money laundering and public debt are expected to be adopted by end-April 2003.

F. Enterprise Restructuring and Privatization

31. The pace of privatization and public enterprise restructuring has picked up in Serbia. Twelve contracts totaling €173 million for the sale through international tenders of large socially owned companies had been signed by end-2002, sales of minority state shares in 48 companies yielded €82 million, and the pace of auctioning enterprises has accelerated since September, with several hundred sales in the last four months compared with about 20 in the preceding eight months. Total privatization receipts amounted to €332 million in 2002. In 2003, Serbia will offer for sale through international tenders a further 20 viable large socially-owned enterprises, 1,000 smaller ones through auctions, and continue the sale of its minority shareholding stakes. Total privatization revenue is expected to amount to at least €550 million in 2003. In addition, some three dozen socially sensitive conglomerates are being restructured prior to privatization to ensure an orderly transfer of ownership and retrenchment of employment. With a view to facilitating the privatization of less profitable firms through international tenders, with technical assistance from the World Bank, the length of guaranteed post-privatization employment has been reduced from 5 years to one year (as in the case of enterprises offered for privatization through auctions) and the overall cost of redundancies will be contained. The contribution of the budget (including privatization proceeds) to retrenchment costs will be limited to the amounts allocated in the budget for this purpose. To ensure transparency in the privatization and restructuring process, all privatization proceeds will be channeled to the budget and spending will follow normal budgetary procedures.

32. Montenegro has moved on from Mass Voucher Privatization of minority stakes in enterprises to attracting strategic investors through tenders and auctions for majority stakes in selected enterprises. In October 2002, Yugopetrol Kotor was sold to a foreign investor for €65 million, in addition to undertakings to invest in the company and provide severance payments to workers laid off, and total privatization proceeds amounted to €71 million in 2002. Privatization sales are expected to yield €70 million in 2003; however, for caution, one-third of this amount has been budgeted.

33. Further improvements will be made in the provision of statistical data. The implementation of the recommendations of the July 2002 multisector statistics mission from the IMF will help prioritize statistical activities, facilitating early conversion to the SNA 1993 methodology for compiling national accounts, and improving timeliness. The envisaged implementation of international standards (BPM5) for the compilation of the balance of payment statistics--which has already begun in Montenegro--should improve the coverage and quality of the external sector data. In addition, efforts to bring the budgetary reporting system in line with the GFS methodology have continued, and a consistent monetary survey for Montenegro will be developed shortly.

III. Program Monitoring

34. Macroeconomic policy performance under the EA will continue to be monitored on the basis of quarterly quantitative performance criteria and indicative targets (Annex B). Progress in structural reform will be monitored through structural performance criteria and benchmarks on key policy measures (Annex D).

1The projection of nominal GDP in 2002 has been raised by 2.8 percent since the adoption of the program in early 2002, reflecting the net effect of new higher official estimates of nominal GDP in 2000 and lower-than-projected inflation in 2002. The fiscal deficit target in the original program was 5.7 percent of GDP.

Union of Serbia and Montenegro:
Technical Memorandum of Understanding

I. Introduction

1. This memorandum replaces the Technical Memorandum of Understanding attached to the Memorandum of Economic and Financial Policies of April 26, 2002. It sets out the understandings regarding the definitions of quantitative and structural performance criteria and benchmarks, as well as indicative targets, for the program supported by the Fund under an Extended Arrangement (EA), as well as the related reporting requirements. The key changes in this updated memorandum include a revised adjustor on net credit to government, and the incorporation of changes implied by the new Constitutional Charter.

2. To monitor developments under the program, the authorities will provide the data listed in each section below to the European 1 Department of the Fund, in accordance with the indicated timing. The quantitative performance criteria and indicative targets will be monitored on the basis of the methodological classification of monetary and financial data that was in place on October 31, 2002, except as noted below. Quantitative performance criteria and indicative targets for end-December 2002 as well as end-April, end-June, end-September and end-December 2003 are specified in Annexes A and B of the Memorandum of Economic and Financial Policies (MEFP).

3. For program purposes, the public sector consists of the consolidated general government (comprising union operations, Serbian state and local governments, the Montenegrin state government, the Serbian and Montenegrin social security funds, and the Serbian special budgetary programs), the National Bank of Serbia (NBS), and the Central Bank of Montenegro (CBM). The authorities will inform the Fund staff of any new funds or special extrabudgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF's 2001 Manual on Government Financial Statistics, and will ensure that these will be incorporated within the definition of consolidated general government.

II. Quantitative Criteria: Definitions and Reporting Standards

A. Floor for Net Foreign Assets of the NBS and Program Exchange Rates

4. Definition. Net foreign assets (NFA) of the NBS consist of foreign reserve assets minus foreign reserve liabilities.

  • For purposes of the program, foreign reserve assets shall be defined as monetary gold, holdings of SDRs, the reserve position in the IMF, and NBS holdings of foreign exchange in convertible currencies. Any such assets shall only be included as foreign reserve assets if they are under the effective control of, and readily available to, the NBS. In particular, excluded from foreign reserve assets are: frozen assets of the Union of Serbia and Montenegro (SM), undivided assets of the former Socialist Federal Republic of Yugoslavia (SFRY), long-term assets, NBS claims on resident banks and nonbanks, as well as subsidiaries or branches of SM commercial banks located abroad, any assets in nonconvertible currencies, encumbered reserve assets (e.g., pledged as collateral for foreign loans or through forward contracts), and precious metals other than gold. For program purposes, all euro and foreign currency-related assets will be evaluated at program exchange rates; for 2003, the program exchange rates are those that prevailed on December 31, 2002. In particular, US$1 = DIN 58.9848, €1 = DIN 61.5152, and SDR1 = US$1.3595. Monetary gold shall be valued at an accounting price of US$349.25 per ounce. On December 31, 2002 the NBS's foreign reserve assets as defined above amounted to US$2,280 million, including gold valued at US$114.2 million.

  • For purposes of the program, foreign reserve liabilities shall be defined as any foreign currency-denominated short-term loan or deposit (with a maturity of up to and including one year), swaps (including any portion of the NBS gold that is collateralized), and forward liabilities of the NBS--to residents and nonresidents; IMF purchases; and loans contracted by the NBS from international capital markets, banks or other financial institutions located abroad, and foreign governments, irrespective of their maturity. Undivided foreign exchange liabilities of SFRY are excluded. On December 31, 2002, the NBS's foreign reserve liabilities, as defined above, to nonresidents were US$667 million and to residents were US$544 million.

  • All assets and liabilities denominated in convertible currencies other than the U.S. dollar shall be converted at their respective exchange rates against the U.S. dollar prevailing on December 31, 2002. All changes in definition or in valuation of assets or liabilities, as well as details of operations concerning sales, purchases or swap operations with respect to gold shall be communicated to the Fund staff within one week of the operation.

5. Reporting. Data on foreign reserve assets and foreign reserve liabilities of the NBS shall be transmitted to the European 1 Department of the Fund on a weekly basis within four business days of the end of each business week. To facilitate program monitoring, the NBS will provide the data at the indicated constant prices and exchange rates, as well as at current exchange rates. The NBS will report if any of the reported foreign reserve assets are illiquid or pledged, swapped, or encumbered.

6. Adjustors. For program purposes, the floor for net foreign assets will be adjusted upward pari passu to the extent that: (i) after December 31, 2002, the NBS has recovered frozen assets of the FRY, assets of the SFRY, long-term assets, and foreign-exchange-denominated claims on resident banks and nonbanks, as well as SM commercial banks abroad; and (ii) the restructuring of the banking sector by the Bank Restructuring Agency (BRA) involves a write-off of NBS foreign-exchange-denominated liabilities to resident banks. These performance criteria will be adjusted by the amount that revised estimates differ from the preliminary estimates of the end-2002 outcome.

B. Ceiling on Net Domestic Assets of the NBS

7. Definition. For purposes of the program, net domestic assets (NDA) of the NBS are defined as the difference between reserve money (as defined in section E) and net foreign assets (as defined in section A), with the latter being converted from U.S. dollars into dinars at the program accounting exchange as specified above. The ceiling is established as the monthly average of each month with an end-month test date (i.e., the averages of April, June, September, and December, 2003, respectively). As of December 31, 2002, NDA of the NBS so defined were valued at DIN 1,185 million (Annex A). The monthly average of NDA for program purposes will be calculated as the difference of the monthly average of reserve money and monthly average of NFA. The monthly average of NFA will be adjusted so that the disbursements of World Bank program loans and EU macro-financial assistance are counted as if they occurred on the first day of the month in which they were effected.

8. Adjustors. The NBS's NDA ceiling is subject to the same adjustor for excess or shortfall in combined budgetary external financing and privatization proceeds for the consolidated Serbian government as defined in Section C, except that the limit for upward adjustment is DIN 2.5 billion.

9. Reporting. The ceilings will be monitored on the basis of daily data on the accounts of the NBS, reported foreign reserves assets and liabilities as defined under section A, and reserve money (as defined under section E), supplied to the European 1 Department of the Fund by the NBS within four business days of the end of each business week. To facilitate program monitoring, the NBS will provide daily its foreign reserves liabilities, as well as the amounts and dates of World Bank and EU macro-financial assistance disbursements at the current and the agreed constant exchange rates.

C. Ceiling on the Net Credit of the Banking System to the
Consolidated General Government

10. Definition. The banking system comprises the NBS, commercial banks in Serbia, the CBM, and commercial banks in Montenegro. The consolidated general government was defined above.

  • For program purposes, net credit of the banking system to the consolidated general government is defined as all claims other than frozen foreign currency deposit (FFCD) bonds (i.e., credits, securities, and other claims in both dinar and foreign currencies) of the banking system on the consolidated general government less all deposits of the consolidated general government with the banking system, including foreign currency deposits. Foreign currency deposits and foreign-currency-denominated credits to the general government will be reported at the December 31, 2002 exchange rates. Net bank credit to the consolidated general government in Montenegro will be monitored on the basis of data supplied by the Montenegrin authorities; at end-December 2002, net credit of the banking system in Montenegro to the consolidated general government in Montenegro amounted to €-33.8 million (equivalent to DIN -2,067 million). At end-December 2002, net credit of the banking system to the consolidated general government so defined was DIN -7,438 million.

11. Reporting. The ceilings will be monitored using end-month data on the accounts of the banking system supplied to the European 1 Department of the Fund with a lag not to exceed three weeks.

12. Adjustors. For program purposes, the ceilings on net credit of the banking system to the consolidated general governments will be adjusted downward by the cumulative increase in the stock of government debt held by the nonbank public (other than that related to the frozen foreign currency deposits), starting from January 1, 2003, and upward for any decrease. These performance criteria will be adjusted by the amount that revised estimates differ from the preliminary estimates of the end-2002 outcome. In addition, in the event of a shortfall in the sum of net foreign budgetary financing and privatization proceeds, the ceilings will be adjusted upward by 75 percent of the shortfall subject to the total adjustment limit of DIN 5 billion for Serbia's and €10 million for Montenegro's consolidated government. The ceilings will be adjusted downward for the excess of combined net external budgetary financing and privatization proceeds relative to budgeted levels that are not used (1) to reduce the government's external indebtedness by more than envisaged under the program, or (2) to cover investment and restructuring costs in consultation with the Fund in the context of reviews under the EA. Privatization receipts are defined to include all receipts, including those accruing to extrabudgetary funds. Net external budgetary financing is defined to include all budgetary grants and loans, less amortization (on a cash basis). The estimation of the shortfalls (excesses) in the sum of net foreign budgetary financing and privatization receipts will be based on the following projections (cumulative from the beginning of 2003):

Serbia (In billions of dinars)
  end-April end-June end-Sep. end-Dec.
Foreign financing 0.2 7.6 14.8 16.6
Privatization proceeds 5.8 9.0 14.1 20.3

Montenegro (In € million)
  end-April end-June end-Sep. end-Dec.
Foreign financing 15.0 35.0 37.8 40.7
Privatization proceeds   0.7   1.1 15.5 23.2

D. Ceiling on Change in Domestic Arrears

13. For program purposes, indicative targets will be set on the change in domestic arrears. Separate indicative targets will be set for the budget of the Union of Serbia and Montenegro, the consolidated general government of Serbia, and the consolidated general government of Montenegro.

14. Definition

  • For the purpose of establishing compliance with this indicative target, the union budget is defined to comprise all budgetary activities specified in the Constitutional Charter, including the SM army and the SM pension fund for retired military personnel. The consolidated general government of Serbia is defined to comprise all budgetary institutions financed from the Serbian state budget, the Republican Pension and Invalidity Insurance Fund for Employees, the Republican Pension and Invalidity Insurance Fund for Self-employed, the Republican Pension and Invalidity Insurance Fund for Agricultural Workers, the Republican Health Insurance Fund, the Republican Labor Market Agency, all republican special directorates, and all other budgetary and extrabudgetary funds created by the government of Serbia existing before or created during the period of the program. The consolidated general government of Montenegro is defined to comprise all budgetary institutions financed from the state budget, the Republican Pension and Invalidity Insurance Fund, the Republican Health Insurance Fund, the Republican Labor Market Fund, and all other budgetary and extrabudgetary funds created by the government of Montenegro existing before or created during the period of the program.

  • The outstanding stock of domestic arrears comprises wage and pension arrears; arrears with respect to accrued tax and social security contribution obligations, including personal income tax and social security contributions of employees withheld at source; arrears on social entitlement benefits (apart from pensions) to households; arrears incurred with respect to the purchases of goods and services from suppliers; and arrears related to the servicing of domestic debt.

  • The outstanding stock of wage arrears at a particular date are defined as total accumulated unpaid wages of all employees on the regular payroll of all units belonging to the parts of the general government as defined above, up to the latest preceding regular pay date, which have not been settled by the test date. The total stocks of wage arrears, thus defined, are on a gross basis and are calculated by summing the wage arrears of all units of government with regard to their own employees; transfers between different levels of government for making wage or other payments are excluded from the estimates of these wage arrears.

  • Pension arrears are defined as total accumulated pensions due but not disbursed by the pension funds concerned to all pensioners in the pension rolls up to the latest preceding pension disbursement date.

  • The outstanding stocks of tax and social contribution arrears at a particular date comprise total accumulated accrued tax obligations of the parts of the general government as defined above that have not been paid by the test date. The total stocks of such arrears are on a gross basis.

  • Social entitlement payments, apart from pensions, are defined as all cash payments due directly to, or on behalf of, the population in accordance with stipulations in the law and which are not contingent upon the provision of any services or sale of any goods or assets to the general government by such members of the population in return for these payments. The stock of such entitlement arrears are defined as total accumulated payments due but not disbursed by all units of government up to the test date. Thus defined, these arrears are also on a gross basis and do not include the netting out of any transfers made between different units of the general government for the payment of such entitlements.

  • Arrears to suppliers comprise payments delayed beyond what was explicitly specified in relevant contracts, or in the absence of such specification, for two months from the date of submission of bills, for already-effected purchases of goods or services by the government concerned. These include, inter alia, arrears to utility companies, arrears incurred with respect to service and maintenance contracts, and payments not made for the purchase of goods and supplies such as equipment and furniture. These arrears are also defined on a gross basis and overdue tax and other obligations to the government of the relevant enterprises are not included in the calculation of the arrears of the government unless there is mutual agreement on the cancellation of debts. Netting out of any transfers made between different units of the general government for the payment of such arrears and obligations are also not taken into consideration.

  • Arrears to domestic banks and nonbank lenders comprise all overdue payments related to financial contracts between the government and domestic banks, nonbank financial institutions, nonfinancial institutions, and private lenders.

  • At end-December 2002, the stock of arrears at the union level was estimated at DIN 0 billion; and the stock of arrears of the consolidated general government in Serbia was estimated at DIN 44.3 billion.

  • € denominated claims on government will be converted at the program exchange rate; claims denominated in currencies other than the € will first be converted at their respective program exchange rates against the € . The change in arrears is defined as the change in the end-period stock of arrears. Changes in wage and pension arrears will be adjusted for the changes in the average wage and average pension in the economy relative to their respective values in December 2002.

15. Reporting. Before the last business day of each month, data on end-period stocks of arrears for the previous month will be supplied to the European 1 Department of the Fund by the reporting agency at the union level, the Ministry of Finance of Serbia, and the Ministry of Finance of Montenegro.

E. Definition of Reserve Money

16. Definition. Reserve money is defined as the sum of currency in circulation (NBY Bulletin, September 2000, Table 3A, column 8) and dinar reserves banks are required to hold, plus excess reserves of the commercial banks at the NBS. Shortfalls in reserves that banks are required to hold will be included in required reserves (and therefore in reserve money), as well as in bank borrowing from the NBS. Reserves that banks are required to hold were set at 20 percent effective on April 11, 2002 of the base as defined in NBS Decision of March 28, 2002. As of March 1, 2003 the required reserve ratio was raised to 23 percent. Subsequent changes in the reserve requirement will be reflected in program definitions. The amounts that banks are permitted to hold in securities to satisfy the statutory reserve requirement will be limited to the amount that banks were holding as of December 31, 2000 (DIN 174.1 million). Excess reserves include commercial bank's (1) balances in Giro accounts 620, 621, 623, and 625, (2) overnight deposit in account 205 at the NBS, (3) excess balances (with the shortfall in required reserves counted as negative excess) above required reserves on account 201 at the NBS, and (4) cash in vaults.

17. Data on reserve money will be monitored from the daily indicators data of the NBS, which shall be supplied to the European 1 Department of the Fund weekly by the NBS with a three-day lag. The end-month data is based on the NBS balance sheet, which is provided to the Fund with a lag of less than three weeks. On December 31, 2002, currency in circulation amounted to DIN 43,651 million, while required reserves amounted to DIN 15,843 million, and excess reserves to DIN 9,824 million. For program and projection purposes, monthly averages of reserve money and its components were used. On the assumption that the increase in required reserves would be met through a corresponding decline in excess reserves, the hypothetical December 2002 average required reserves associated with a 23 percent reserve requirement would have been DIN 17,690 million, while excess reserves would have been DIN 5,719 million. Data on effective reserve requirements and the deposit base used in reserve requirement calculations will be supplied to the European 1 Department on a ten-day basis with a lag of less than a week.

18. Adjustors. For program monitoring purposes, reserve money will be adjusted as follows. Should the standard reserve requirement increase (decrease) from the level prevailing on March 1, 2003, the ceiling on net domestic assets would be increased (decreased) by an amount equivalent to the change in the standard reserve requirement ratio multiplied by the programmed deposit base used in the calculation of required reserves. Before making any such changes, the NBS will consult with Fund staff. Required reserves of banks placed under BRA administration or liquidation will remain part of reserve money for program purposes.

F. Ceiling on External Debt-Service Arrears

19. Definition. External debt-service arrears are defined as overdue debt service arising in respect of obligations incurred directly or guaranteed by the public sector, except on debt subject to rescheduling or restructuring. The program requires that no new external arrears be accumulated at any time under the arrangement on public sector or public sector guaranteed debts.

20. Reporting. The accounting of nonreschedulable external arrears by creditor (if any), with detailed explanations, will be transmitted on a monthly basis, within two weeks of the end of each month. This accounting will include, separately, arrears owed at the union level, by the Serbian and Montenegrin governments, and other public sector entities; arrears owed by Yugoslav Airlines; and arrears owed to Paris Club creditors, non-Paris Club creditors, and other creditors. Data on other arrears, which are reschedulable, will be provided separately.

G. Ceilings on External Debt

21. Definitions. The ceiling on contracting or guaranteeing of new nonconcessional external debt by the public sector with original maturity of more than one year applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85), see attachment to this Annex) but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are loans from, or other indebtedness to, the EBRD, the EIB and EU, the IBRD, the IMF, and the IFC. Concessionality will be based on a currency-specific discount rate based on the ten-year average of the OECD's commercial interest reference rate (CIRR) for loans or leases with maturities greater than 15 years and on the six-month average CIRR for loans and leases maturing in less than 15 years. Under this definition of concessionality, only debt with a grant element equivalent to 35 percent or more will be excluded from the debt limit. Second, with regard to the ceiling on new external debt with original maturity of up to and including one year owed by the consolidated general government or guaranteed by the public sector, the term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85). Excluded from this performance criterion are normal short-term import credits.

22. Reporting. A debt-by-debt accounting of all new concessional and nonconcessional debt contracted or guaranteed by the public sector, including the original debt documentation, details on debt service obligations, as well as all relevant supporting materials, will be transmitted on a quarterly basis within four weeks of the end of each quarter.

III. Other Reporting Requirement for Program Monitoring

A. Macroeconomic Monitoring Committee

23. A macroeconomic monitoring committee, composed of senior officials from the Union Government, Serbian and Montenegrin Ministries of Finance, the NBS, and other relevant agencies, shall be responsible for monitoring the performance of the program, informing the Fund regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of performance criteria and benchmarks.

B. Developments on Structural Performance Criteria and Benchmarks

24. The authorities will notify the European 1 Department of the Fund of developments on structural performance criteria and benchmarks as soon as they occur. The authorities will provide the documentation, according to the dates in Annex B, elaborating on policy implementation. The authorities will also notify the European 1 Department of the Fund of any economic developments or policy measures that could have a significant impact on the implementation of this program.

C. Data Reporting

Production and prices

25. The following information will be transmitted at the time of their publication:

  • The retail price index, the industrial price index, the industrial production index, wages and employment, and exports and imports.

26. Any revision to the national accounts data will be transmitted within three weeks of the date of the revision.

Public finance

27. Monthly data on public finance will require a consolidated budget report of the state governments and union level operations, transmitted within four weeks of the end of each month comprising:

  • The revenue data by each major item, including that collected by the state and local governments, as well as the social funds;

  • Details of the recurrent and capital expenditure of the union, state, and local governments, as well as the social funds; and

  • Details of budget financing, both from domestic, and external sources, including total privatization receipts.

In addition, Montenegro will begin quarterly reporting of the stock of arrears of the consolidated general government in Montenegro from end-May 2003.

Monetary sector data

28. The following data will be transmitted on a daily/weekly/biweekly basis within one/five working days of the end of each day/week.

  • Daily movements in gross foreign reserves of the NBS at current and program exchange rates and gold prices, indicating amounts sold/bought at the auction, in foreign exchange offices and on the interbank market, inflows of foreign grants, inflows of foreign loans, and repayments of frozen foreign currency deposits.

  • Daily movements in foreign exchange-denominated liabilities of the NBS to (i) non-residents; (ii) SM banks; and (iii) other SM residents.

  • Daily movements in liquid foreign exchange assets of SM banks as reported by these banks to the NBS.

  • Daily movements in reserve money, indicating currency in circulation, the basis upon which required reserves are calculated, required reserves, reserves held, and excess reserves.

  • Outstanding stocks of Treasury bills, and auction details (rates, amounts per maturity and number of banks participating in the auction per maturity).

  • Interbank foreign exchange rates and volume of transactions, including rates and volume of trading outside the fixing session.

  • Ten-day report on public sector borrowing and lending from commercial banks and the NBS.

  • Ten-day report on required reserves and the reserve base.

29. The balance sheet of the NBS and the consolidated balance sheets of the commercial banks, including all banks in Montenegro, will be transmitted on a monthly basis within three weeks of the end of each month. The stocks of government and mandatory and voluntary NBS securities held by banks and by non-banks, as available to the NBS, detailed information on interbank money market transactions (terms, duration, and participating institutions), and interest rate developments will be transmitted on a monthly basis within two weeks of the end of each month. Credit to government by the banking system is provided with detailed breakdowns on the union, state, and local governments.

30. The following data will be transmitted on a monthly basis:

  • NBS foreign exchange reserves held in accounts abroad, foreign banknotes, and foreign securities as well as interest income on foreign assets.

  • Individuals' foreign exchange savings in top ten banks.

  • Grants and loans disbursement as well as debt amortization and interest payments.

External data

31. The data below will be transmitted as follows:

  • The interbank market exchange rate, as the simple average of the daily-weighted average buying and selling rates, will be transmitted on a weekly basis within five business days of the end of the week;

  • Balance of payments data on services, private transfers, and capital account transactions will be transmitted on a quarterly basis within four weeks of the end of each quarter; and

  • Detailed monthly data on the volume and prices of exports and imports, separating out imported petroleum products.