Press Release: IMF Approves US$137 Million Credit Disbursement Under Extended Arrangement with Serbia and Montenegro

April 16, 2003

The Executive Board of the International Monetary Fund (IMF) today completed its first review of Serbia and Montenegro's economic performance under the Extended Arrangement. This will enable Serbia and Montenegro to draw SDR 100 million (about US$137 million) under the arrangement immediately.

The Extended Arrangement was approved on May 14, 2002 for a total of SDR 650 million (about US$889 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 100 million (about US$137 million) from the IMF.

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

"The IMF commends the authorities of Serbia and Montenegro for the impressive further progress in stabilization and reform achieved in 2002. Firm macroeconomic policy implementation contributed to rapid disinflation, a strengthening of foreign reserves, and a continued recovery in output and exports. Significant advances were also made in structural reform. Equally welcome is the renewed commitment to reform of the new government formed following Premier Djindjic's tragic assassination.

"Looking ahead, continued prudence and vigilance in policy implementation will remain essential to safeguard the authorities' inflation and external objectives, especially in light of macroeconomic uncertainties and the challenges remaining in the area of structural reform. On the macroeconomic front, there is a need for a tightening of monetary policy and further fiscal consolidation. On the structural front, continued progress will require strong resolve as reforms move to a more difficult phase. The authorities' demonstrated commitment to reform augurs well for achieving these objectives and laying the basis for durable growth, and merits continued support from the international community.

"Fiscal policy in 2003 will aim not only at containing the external imbalance, but will also continue to support restructuring and an appropriate social safety net. Owing to the unusual risks to the macroeconomic outlook and tax collections, the authorities intend to contain discretionary spending commitments below the program level until revenue prospects become clearer. Revenue efforts will focus on improving tax administration and broadening the tax base. Fiscal transparency and management should improve with the channeling of all privatization proceeds through the budget and the planned use of any excess privatization proceeds to reduce the government's net indebtedness.

"The planned tightening of monetary policy will help lower inflation further and safeguard foreign reserves. Exchange rate policy should be kept under close review in light of trade, price, and wage developments and conditions in the interbank foreign exchange market. In light of the rapid increase in bank credit to enterprises since mid-2002, prudential regulations should be enforced strictly to ensure that new lending remains sound. The IMF welcomes the further liberalization of the country's foreign exchange system and the authorities' acceptance of the obligations under Article VIII, Sections 2, 3, and 4 in 2002.

"The authorities intend to press ahead with structural reform. Attracting strategic investors for the envisaged privatization of the 16 nationalized banks, while ensuring their proper governance, will be key to building a healthy banking system. The recent streamlining of enterprise privatization procedures should help attract investor interest in financially weaker enterprises and maintain the pace of privatization.

"The formation of the state union of Serbia and Montenegro in early 2003 will enhance political stability and provide a unique window of opportunity for carrying forward the reform process. The envisaged normalization of economic relations between Serbia and Montenegro under the new constitutional framework—notably by harmonizing the trade, customs, and indirect tax regimes as they converge toward EU directives—should help improve economic efficiency in both states," Ms. Krueger said.


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