Press Release: IMF Executive Board Completes Fourth Program Review and Eighth Financing Assurances Review Under an Extended Arrangement with Serbia and Montenegro, and Approves US$95.6 Million Disbursement

December 15, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fourth program review and the eighth financing assurances review of Serbia and Montenegro's economic performance under an Extended Arrangement. Completion of the reviews will enable a disbursement in an amount equivalent to SDR 62.5 million (about US$95.6 million) from the IMF immediately.

In completing the reviews, the Executive Board granted waivers for the nonobservance of an end-June 2004 structural performance criterion on adoption of a bankruptcy law and two end-September 2004 quantitative performance criteria on, respectively, contracting or guaranteeing new non-concessional external debt, and on the issuance of new guarantees and the assumption of enterprise debt to banks. The Board also approved a rephasing of future purchases under the arrangement, added to the arrangement a new quantitative performance criterion on the wage bill of monitored public enterprises, and three new structural performance criteria, as well as modified the ceilings and floors to be applied to certain quantitative performance criteria as of December 31, 2004.

The Extended Arrangement was approved in May 2002 for a total amount equivalent to SDR 650 million (about US$994.6 million) to support Serbia and Montenegro's 2002-2005 economic program (see Press Release No. 02/25). So far, Serbia and Montenegro has received disbursements amounting to the equivalent of SDR 400 million (about US$612 million).

Following the Executive Board's discussion on Serbia and Montenegro, Ms. Anne Krueger, Deputy Managing Director and Acting Chair, stated:

"Serbia and Montenegro's economic growth has been strong and the level of international reserves is comfortable, but inflation and the already large external current account deficit have been rising. These developments reflect rapid growth in domestic demand fuelled by large wage awards, rapid credit expansion, a weak export performance, and high international oil prices. Progress in structural reforms, in particular on enterprise restructuring, has been mixed contributing to the low levels of exports. The London Club deal is expected to affect favorably the country's debt dynamics.

"Against this background, since mid-2004 the authorities have been tightening fiscal and monetary policies to reduce the external imbalance and achieve further disinflation, and they are committed to reinvigorating implementation of structural reforms to establish the conditions for sustained strong growth.

"On fiscal policy, the program envisages a lowering of the tax burden and a shift to indirect taxes that should help improve incentives to work and to invest. On the expenditure side, the rationalization of the budget will contribute to reducing the size of government and increasing the scope for higher capital spending and servicing the debt over the medium term.

"Credit expansion, particularly consumer lending, accelerated in the course of 2004 contributing to the rising external current account deficit. The Serbian monetary authorities' decision to contain credit expansion and address prudential risks is thus welcome. It is important to stand ready to tighten bank credit further should the recent measures fail to slow credit growth. Banking supervision needs to be further strengthened and prudential regulations strictly enforced.

"The program envisages an acceleration of structural reforms, including privatization, to sustain strong economic growth and to increase productivity. Perseverance with the reform agenda, including the implementation of the new bankruptcy legislation, will be crucial for reallocating resources towards viable and more export-oriented enterprises and thereby boosting export growth.

"The Executive Board reviewed two non-complying purchases made in 2004 and a breach of obligations under Article VIII, Section 5 of the Fund's Articles of Agreement, which arose as a result of misreporting on the observance of the end-December 2003 performance criterion on net credit of the banking system to the consolidated general government.

"The Executive Board regretted the authorities' failure to provide accurate information relating to the end-December 2003 performance criterion on the net credit of the banking system to the consolidated general government in Serbia.

"In view of the prompt corrective actions taken by the authorities, the Executive Board decided to grant a waiver of nonobservance of the performance criterion that gave rise to the noncomplying purchases. The Executive Board also decided to take no action on the breach of obligations under Article VIII, Section 5," Ms. Krueger said.


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