Federal Republic of Yugoslavia—Supplement Letter

January 4, 2002

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street
Washington DC 20431

Dear Mr. Köhler:

Further to our letter of December 26, 2001, and the accompanying Revised Memorandum of Economic and Financial Policies, attached please find a memorandum describing recently adopted measures with regard to the resolution of four large insolvent banks and the associated fiscal costs. As noted in the attachment, these banks were put into bankruptcy on January 3, 2002, as an important step toward building a sound financial system in Yugoslavia. The related costs—mainly in the form of deposit payouts and severance payments to redundant workers—are estimated to be about 1.2 percent of annual GDP. Of this amount, about one half will be incurred in the 2002 budget, consistent with the fiscal framework for this year under the Fund-supported program.

Yours sincerely,

Federal Republic of Yugoslavia: Resolution of the Four Large Insolvent Banks And Expenditures on Financial Sector Restructuring

1. The federal and Serbian authorities are convinced that closure of the four large insolvent banks (Beobanka, Beogradska banka, Investbanka, and Jugobanka Belgrade) is an important step toward rebuilding the financial system in Yugoslavia. Orders to initiate bankruptcy proceedings against these four banks were issued on January 3, 2002, while resolution of Jugobanka Bor has been deferred, pending the formulation of a comprehensive plan to address the economic and social problems of the Bor region.

2. The budgetary expenditures associated with bank restructuring in Serbia will be limited to about DM 324 million (equivalent to 1.2 percent of GDP in 2002) in net present value (NPV) terms, including (a) liquidation costs of about DM 271 million in the form of redundancy payments to workers and payments to depositors and (b) rehabilitation costs of about DM 53 million. The flow (or recorded budgetary) cost of bank restructuring in 2002 will be lower than the stock (NPV) cost, as some of the costs will be covered through the issuance of bonds rather than cash payments. Specifically, the flow cost—in the form of cash payments of redundancy payments to workers, cash payouts of deposits to depositors or banks receiving these deposits, and interest on bonds issued to recipient banks—will be limited to DM 168 million (equivalent to 0.6 percent of GDP) in 2002, compared with less than 0.1 percent of GDP in 2001.

3. Redundancy payments to the workers of the four large banks are expected to amount to about DM 40 million in 2002. Redundancy payments of about DM 10 million have been made for other banks already in liquidation.

4. The total NPV payout of deposits for the four large banks is expected to amount to about DM 191 million. In light of the limit on recorded budgetary costs in 2002 (DM 168 million or 0.6 percent of GDP in 2002) and the likely cash cost of the redundancy payments (DM 40 million), the cash cost of payouts in 2002 will be limited to about DM 128 million, through reliance in part on bonds issued to the banks receiving the deposits. In general, the payout of the deposits will vary by category of depositor as follows:

• Individual depositors, public sector entities (federal and Serbian governments, NBY, and municipalities), budget-supported institutions (schools, hospitals, etc.) will be paid upon bank closure.
  
  
• Public and non-public enterprises will generally be paid only a fraction of their deposits, and the Ministry of Finance will have the discretion to exclude enterprises from this payout on a case-by-case basis. In the event that a company can certify that it is a net creditor vis-à-vis the four banks and the government (particularly as regards outstanding taxes, social contributions, etc.), the payout could be raised to the amount of the net credit position.
  
  
• Banks, bank-owned financial institutions, and nonresidents will receive no compensation, with the exception of the deposit insurance limit of YUD 5,000 (equivalent to DM 165) for individual depositors.

5. The Bank Restructuring Agency (BRA), as liquidator of the banks and with the support of the World Bank and donors (notably the U.S. Treasury and DFID), will sell the assets of the 4 banks, including real estate, and use the proceeds of these sales to repay creditors. With a view to facilitating enterprise privatization, a Memorandum of Understanding has been signed by the BRA and the Privatization Agency regulating their financial relationship in the processes of bank liquidation and enterprise privatization.

Liquidation Costs for Other, Smaller Banks

6. The liquidation costs for banks already in liquidation are estimated at DM 10 million in 2002 in the form of redundancy payments. The liquidation costs for other small banks not yet in liquidation are preliminarily estimated at about DM 20 million.

Rehabilitation Costs

The stock (NPV) cost of rehabilitating Niska, Prokupacka, and Valjevska banks is estimated at DM 53 million, while the flow (recorded budgetary cost) in 2002 is estimated at DM 13 million.