Press Release No. 01/31

The Executive Board of the International Monetary Fund (IMF) today approved a stand-by credit of SDR 200 million (about US$249 million) for the Federal Republic of Yugoslavia (FRY) through March 31, 2002 in support of the government's economic program. This decision will enable the Federal Republic of Yugoslavia to draw SDR 50 million (about US$62 million) immediately. Three installments of SDR 50 million could follow after the conclusion of quarterly reviews of the program.

Following the Executive Board discussion, Stanley Fischer, First Deputy Managing Director and Acting Chairman, said:

"The FRY authorities have embarked with impressive speed and commitment on the extremely difficult task of reconstructing their devastated economy. Maintaining this momentum will be key to building broad political support for the reform and securing its sustainability.

"The Fund-supported program provides for strong macroeconomic policies coupled with bold structural reforms. Adherence to the program's credit and fiscal targets will be important to reduce inflation and create an environment that is supportive of reform. Significantly, important structural reforms—including the liberalization of the foreign exchange and trade systems, and a radical reform of the fiscal system—have been implemented upfront. Moreover, the authorities have formulated and started to implement a bank resolution strategy in collaboration with the IMF and the World Bank, while a new transparent privatization framework is about to be adopted in the coming weeks.

"In Montenegro, significant institutional reforms have been introduced over the past several years, and the recent adoption of the DM (euro) as its sole legal tender has contributed to financial stability. However, the fiscal situation has worsened this year, which points to the need for strong corrective measures. There is also a need to make progress in bank restructuring and enterprise privatization.

"While the authorities' policy achievements so far have been impressive, their sustainability will critically require that the underlying causes of the macroeconomic imbalances are addressed, by restructuring the banking and enterprise sectors, improving financial discipline in the economy, and restoring fiscal sustainability. The authorities are aware of the challenges and difficult decisions ahead, and have appropriately emphasized the development of an adequate social safety net as a means of maintaining broad support for their reform policies.

"In addition to strong policy efforts by the Yugoslav authorities, progress toward sustainable growth and external viability will require strong support from creditors and donors, and external debt sustainability will not be achieved without concessional debt relief from bilateral creditors. The forthcoming Donor Conference on June 29 will provide the international community the opportunity to demonstrate its support by committing program and project assistance in line with FRY's estimated needs," Mr. Fischer said.

ANNEX

Program Summary
The program aims to achieve rapid disinflation and a moderate recovery in output. Real GDP is expected to grow by around 5 percent in 2001, owing mainly to a rebound in agricultural output after last year's drought. The rest of the economy will probably grow by 2-3 percent, with the positive effects from the removal of the economic sanctions being moderated by the effects of enterprise restructuring as well as capacity constraints. The program aims at lowering 12-month retail price inflation, by end-2001, to around 30-35 percent in Serbia and 6½ percent in Montenegro.

Macroeconomic policies in Serbia will be constrained by the severe demonetization and new burdens on the budget. Fiscal and monetary policies will impose strict limits on credit expansion to the government and the rest of the economy. Specifically, the fiscal program emphasizes reliance on foreign assistance and privatization receipts to meet the new burdens on the budget, and limits the government's recourse to the banking system to the equivalent of 0.6 percent of GDP in 2001. Montenegro is set to implement important policy measures, including on the fiscal front regarding expenditure cuts in the areas of subsidies, investment, and other discretionary spending.

Monetary policy will be geared to lowering inflation. The monetary program for Serbia cautiously assumes a gradual recovery of confidence in the dinar. Exchange rate policy will be reviewed on a quarterly basis owing to uncertainties about underlying external sector developments. In Montenegro, the reliance on the deutsche mark as the sole legal tender will contribute to financial discipline.

On the structural front, Serbia has already implemented a major budget and tax reforms to enhance fiscal efficiency and transparency; liberalized very restrictive foreign exchange and trade systems; freed most prices; generally raised public utility tariffs; and initiated a series of large increases in electricity prices. The Serbian authorities have started to carry out a bank resolution strategy and to improve legal and regulatory framework for privatization, and expect to make significant progress in both these areas during the life of the program. Montenegro intends to continue enterprise privatization, bank restructuring, and further fiscal and trade reforms.

Despite the envisaged strong policy effort and considerable commitments of external assistance, the Federal Republic of Yugoslavia faces a sizable financing gap of about US$10.7 billion in 2001, reflecting both large import needs and external debt servicing obligations (including external debt arrears of US$9.6 billion). The current account deficit (before grants) is projected to widen to 17½ percent of GDP (about US$1.8 billion) in 2001 from 8¼ percent of GDP (about US$700 million) in 2000. The financing gap could be filled partly by program and project assistance, and partly by debt relief.

The Federal Republic of Yugoslavia joined the IMF on December 14, 1992; its quota¹ is SDR 467.7 million (about US$583 million). The Federal Republic of Yugoslavia's outstanding use of IMF credits totals SDR 117 million (about US$146 million).

Table 1. Federal Republic of Yugoslavia (Serbia/Montenegro): Selected Economic and Financial Indicators, 1996-2001 1/       1996 1997 1998 1999 2000   2001               Prel.   Prel. Proj. Real economy                 GDP, in millions of US dollars   14,455 16,556 13,889 10,155 8,071   10,231 Average net real wage, 1994=100   120 146 150 129 150   150 Average net wage in DM, at gray market exchange rates   155 206 169 109 99   149     (Percent change)   Real GDP 7.8 10.1 1.9 -15.7 5.0   5.0   Industrial production 7.6 9.5 3.6 -22.5 10.9   0.0   Retail prices (annual average) 92.7 18.5 29.8 42.4 71.8   86-89   Retail prices (end of period) ... ... ... 49.9 113.5   30-35   Unemployment rate (in percent) 2/ 25.8 25.8 25.1 26.5 27.3   ...     (Percent of GDP) General government finances 3/                   Revenue 4/ ... ... ... ... 38.8   39.9   Expenditure ... ... ... ... 39.7   45.9   Of which: Budget for reconstruction and recovery   ... ... ... ... 0.0   2.3   Cash balance ... ... ... ... -0.9   -6.1   Domestic financing   ... ... ... ... 0.1   0.6   Foreign financing   ... ... ... ... 0.0   2.9   Foreign grants   ... ... ... ... 0.8   1.2   Privatization receipts   ... ... ... ... 0.0   1.4   Commitment balance 5/ ... ... ... ... -3.0   -6.1     (Percent change) Money supply (end-of-period)                   M1 6/   ... ... ... 47.3 85.1   36.0   M2 6/ 7/   ... ... ... 67.6 61.4   20.4 Balance of payments (In billions of U.S. dollars)   Merchandise exports 8/   2.0 2.4 3.0 1.7 1.9   2.1   Merchandise imports   -4.1 -4.8 -4.8 -3.3 -3.8   -4.5   Trade balance   -2.1 -2.4 -1.9 -1.6 -1.8   -2.4   Current account balance, after grants 9/ -0.6 -1.6 -0.7 -0.8 -0.4   -1.2   (In percent of GDP)   -4.1 -9.4 -5.0 -7.5 -5.0   -11.4   Current account balance, before grants 9/   -0.6 -1.6 -0.7 -0.8 -0.7   -1.8   (In percent of GDP)   -4.1 -9.4 -5.0 -7.5 -8.3   -17.7   Foreign debt (year-end) 10/ ... ... ... ... 11.7   12.5   Gross official reserves   ... ... ... 0.3 0.5   0.7   (In months of imports of goods and services)   ... ... ... 1.1 1.5   1.7 Sources: Federal Statistical Office; National Bank of Yugoslavia; Ministry of Finance of the Federal Republic; Ministryof Finance of the Republic of Serbia; and Fund staff estimates.   1/ With the exception of money supply and foreign debt, data for 1999-2001 exclude Kosovo. GDP excludes Kosovo throughout. 2/ Excludes workers on "forced holiday" (about 20-25 percent of the labor force in recent years). 3/ Fiscal operations of all levels of government, except for Montenegro where it excludes local governments. 4/ Excludes foreign grants. 5/ Excludes arrears of local governments and most interest payments on foreign debt due but not paid. 6/ From 1999 onwards excludes Montenegro. 7/ Frozen foreign-currency deposits are excluded and other foreign-currency deposits are valued at parallel market rates until September 2000 and at YUD 30 per DM thereafter. 8/ From 1996, includes previously unrecorded exports of about US$0.2 billion. 9/ In 2000-01, includes previously unrecorded transfers of US$0.6 billion. 10/ Includes arrears on unpaid imports of fuel and gas. 1 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing , and its allocation of SDRs.