Press Release: IMF Completes Second Review Under the Extended Arrangement, Approves Request for Waivers and Modification of Performance Criteria, and for Extension of Repurchases for Serbia and Montenegro

July 31, 2003

The Executive Board of the International Monetary Fund (IMF) has completed the second review of Serbia and Montenegro's economic performance under the Extended Arrangement and approved waivers for non-observance of the end-June 2003 quantitative performance criteria on net foreign assets and on electricity price increases. This decision enables Serbia and Montenegro to draw the equivalent to SDR 100 million (about US$140 million) under the arrangement immediately.

The Board also approved a request by Serbia and Montenegro to extend to an obligations basis the repurchase expectations for amounts totaling SDR 18.75 million (US$26 million) arising between September and December 2003.

The Extended Arrangement was approved on May 14, 2002 for a total equivalent to SDR 650 million (about US$911 million) to support Serbia and Montenegro's economic program in 2002-2005 (see Press Release No. 02/25). So far, Serbia and Montenegro has drawn SDR 200 million (about US$280 million) from the IMF under the Extended Arrangement.

Following the Executive Board discussion on July 30, 2003, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"Serbia and Montenegro's economic outlook continues to improve, through a further decline in inflation, an improved external trade balance, and a sustained, though moderate, growth in output and exports, even in the face of unsettled domestic conditions. Although macroeconomic policy is on track, the large current account deficit leaves the external position vulnerable to shocks. The recent adoption of structural reforms, especially harmonizing member states' trade, customs and indirect tax regimes and restructuring large state enterprises in Serbia, will contribute to improved efficiency.

"The authorities' economic objectives for the remainder of 2003 are sound and aim at disinflation, sustained growth, a strengthening of the external position, and improved economic competitiveness. The attainment of these objectives will require the continued implementation of sound macroeconomic policies and acceleration in the pace of structural reforms.

"The authorities' intention to contain the overall fiscal deficit to an unchanged 4½ percent of GDP in 2003 is appropriate. Achievement of this objective will require efforts to contain expenditure commitments, especially in view of Montenegro's relaxation of expenditure restraint, and to improve tax administration.

"The authorities' monetary and exchange rate policies, which aim at protecting the external position while further lowering inflation, are appropriate, and supported by recent increased exchange rate flexibility.

"To safeguard the central bank's policy credibility, recent legislation to protect central bank independence, enhance accountability, and internal controls, and the incoming Governor's pledge to continue adhering to prudent policies are welcome.

"The authorities' intention to press ahead with structural reforms is critical to attracting foreign direct investment. The key to building a healthy banking system is attracting strategic investors in state-owned banks, ensuring proper governance in these banks pending their privatization, and enforcing prudential requirements. The pace of enterprise privatization needs to be sustained, including the envisaged large privatization sales later in 2003.

"Continued donor and creditor support and efficient use of these resources will be critical for alleviating the social burden of ongoing reforms. The authorities should continue negotiating in good faith with their London Club and other creditors to restructure their debt on terms comparable to those granted by the Paris Club," Ms. Krueger stated.


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