The new government of the Federal Republic of Yugoslavia has formulated and started to implement an ambitious program of stabilization and reform with impressive speed and commitment. The program provides for macroeconomic policies designed to reduce inflation and support reconstruction coupled with bold reforms. The policy achievements so far have been impressive. Prudent policies alone cannot ensure progress toward sustainable growth and external viability. The program sets the basis for the country in achieving sustainable output growth and a viable external position.

Abstract

The new government of the Federal Republic of Yugoslavia has formulated and started to implement an ambitious program of stabilization and reform with impressive speed and commitment. The program provides for macroeconomic policies designed to reduce inflation and support reconstruction coupled with bold reforms. The policy achievements so far have been impressive. Prudent policies alone cannot ensure progress toward sustainable growth and external viability. The program sets the basis for the country in achieving sustainable output growth and a viable external position.

1. This statement updates the information presented in EBS/01/81 (5/25/01) as regards (a) the fulfillment of preconditions for Board consideration of the Federal Republic of Yugoslavia’s (FRY) request for a stand-by arrangement, including the implications for the program of recently adopted trade measures, and (b) a recently reached agreement among former republics of the Socialist Federal Republic of Yugoslavia (SFRY) on succession issues.

Preconditions for Board Consideration

2. FRY has met the remaining two preconditions for Board consideration of the proposed standby arrangement. Specifically, the Serbian authorities raised the price of electricity by 40 percent on June 1, 2001, as envisaged under the program. As a result of this measure and a 60 percent increase implemented on April 15, the average price of electricity in Serbia is now estimated at slightly over 2 U.S. cents per Kwh; this is broadly sufficient to cover most operational costs (¶29 of EBS/01/81). In addition, on June 5, 2001, the EU Council of Ministers (ECOFIN) approved in principle a plan for the clearance of FRY’s arrears to the European Investment Bank (EIB) amounting to about US$220 million, as well as balance of payments assistance to FRY of up to €300 million. The balance of payments assistance would have a 40 percent grant component and be disbursed in three tranches. The first two tranches would become available during 2001 and, jointly, slightly exceed the amount of debt service payments (including arrears clearance) to the EIB during the year, in line with the external financing assumptions of the program (¶20 of EBS/01/81).

3. As envisaged under the program, the authorities adopted in May, as a prior action, a far-reaching trade system reform, including a revised tariff schedule (H33 of EBS/01/81). The maximum import duty recorded in the tariff schedule was reduced to 30 percent and the simple average of import duties to under 10 percent. Since then, a provision in the law that allows for seasonal duties has been invoked, temporarily raising tariffs on 4 tariff lines to 30 percent, on 31 tariff lines covering agricultural goods to 40 percent, and on one tariff line (tomatoes) to 50 percent (there are about 8,500 tariff lines in total). After these duties, the simple average import duty remains below 10 percent. The authorities consider this measure to be in line with their commitments under the program, as seasonal duties have been traditionally applied during the crop season. They have reiterated their commitment to promoting liberal trading environment and they committed not to introduce further increases in tariff duties. Since the increases in tariff duties were limited to a small number of tariff lines on a seasonal basis and the authorities have committed to not raise tariff duties further, staff is satisfied with the measures taken by the authorities to introduce a revised tariff schedule.

Agreement on Succession Issues

4. At a meeting in Vienna on May 25, 2001, representatives of the five successor states to the former SFRY initialed a framework agreement on succession issues. The agreement is expected to be approved by the governments of the successor states by June 15, 2001; to be ratified subsequently by the respective parliaments; and to come into effect 30 days after ratification by all parties. According to information provided by the FRY authorities, the agreement has seven annexes covering, in particular, movable and immovable property (including diplomatic and consular property), financial assets and liabilities, archives, and pensions. The agreement is generally guided by the principles of dividing (a) property abroad and remaining financial assets, on a proportional basis, and (b) property in the territory of the former SFRY, on the basis of its location. Special negotiations, possibly under the auspices of the BIS, will be conducted to resolve outstanding differences relating to citizens’ frozen foreign exchange accounts. The agreement confirms the effective division of liabilities on the basis of earlier agreements by four of the five successor states with Paris Club and London Club creditors and excludes any financial claims against each other related to Paris Club and London Club obligations.

5. Under the agreement, FRY will be entitled to 38 percent of available SFRY financial assets. About US$1,024 million of financial assets are reported to be in the form of gold, foreign exchange deposits and securities.1 However, according to the FRY authorities, the bulk of claims on SFRY joint venture banks abroad (which are largely insolvent or have been liquidated) is not available, implying that FRY’s share in these financial assets will be about US$144 million (equivalent to 38 percent of the monetary gold and foreign exchange held in foreign banks, totaling US$378 million, see footnote 1), plus 38 percent of whatever assets are eventually recovered from the joint venture banks. (This would be in addition to the equivalent of about US$144 million of gold held with the BIS, which is to be allocated to FRY in the coming weeks on the basis of an agreement reached in Brussels on April 10, 2001.) Data on assets and liabilities under outstanding clearing arrangements still need to be reconciled before being divided among the successor states; the most important item within this category is an unreconciled claim on Russia of approximately USS 1.4—1.5 billion. Under the proposed stand-by arrangement, distribution of foreign financial assets to FRY, as a result of the succession process or unfreezing, leads to a corresponding upward adjustment of the NFA floor (monitored as a performance criterion under the program) with a view to preventing a relaxation of the financial policy targets.

1

The financial assets of the SFRY and its National Bank of Yugoslavia (NBY) to be allocated under the agreement include: (a) monetary gold and foreign exchange held in foreign banks, totaling US$378 million, and (b) foreign exchange accounts held with SFRY joint-venture banks abroad, with a nominal value of some US$646 million.