Press Release No. 00/75

Press Release: IMF Approves Membership of Federal Republic of Yugoslavia and US$151 Million in Emergency Post-Conflict Assistance

December 20, 2000

The Executive Board of the International Monetary Fund (IMF) today determined that the Federal Republic of Yugoslavia (FRY) has fulfilled the necessary conditions to succeed to the membership of the former Socialist Federal Republic of Yugoslavia (SFRY) in the IMF. The FRY's quota in the IMF will amount to SDR 467.7 million (about $604 million). With the succession of the FRY, effective December 14, 1992,¹ IMF membership now totals 183 countries.

The Board also approved a loan equivalent to SDR 116.9 million (about US$151 million) under the IMF's policy on emergency post-conflict assistance in support of a program to stabilize the FRY's economy and help rebuild administrative capacities. Of this amount, the authorities will draw SDR101.1 million (about US$130 million) to repay the bridge loans they received to eliminate arrears with the IMF.

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

"Executive Directors welcomed FRY's succession to membership in the Fund as an important step in its reintegration into the world economy and the international community, which will be of considerable help to the country in addressing its difficult problems.

"The FRY authorities face the complicated task of stabilizing and reviving a devastated economy after years of regional conflicts, international isolation, and economic mismanagement. Against the background of a sharp acceleration of inflation in recent months, the authorities have appropriately focused on the need to prevent financial instability from adding to the difficulty of this task. Accordingly, the short-term macroeconomic strategy aims, through limiting the growth of credit, to bring inflation under control.

"Directors welcomed recent measures to streamline the exchange system as well as the authorities' intention to introduce a managed float with current account convertibility by January 1, 2001, so as to allow the exchange rate to better reflect market conditions.

"Strengthening the underlying fiscal position and preventing a further accumulation of expenditure arrears will be critical in attaining and preserving financial stability. This will require prioritization of expenditures, improvements in tax administration, and a widening of the tax base by eliminating tax exemptions, as well as bringing the gray economy into the tax net.

"Directors welcomed the authorities' intention to adopt a comprehensive program of stabilization and reform that could be supported by the Fund under an upper credit tranche program. This will need to be preceded by progress in stabilizing the economy and in strengthening the institutional and administrative capacities, under the current program. Technical assistance is expected to make a significant contribution to this process.

"Achievement of a viable balance of payments position will be a challenging task. In addition to prudent macroeconomic policies and bold structural reforms, it will require a restructuring of FRY's external debt on appropriate terms, including early resolution of arrears to the World Bank, and substantial support, following the regularization of arrears, from external donors and creditors," Mr. Fischer said.

ANNEX

The year 2000 has seen only modest output recovery and high inflation. GDP is projected to expand by 10 percent in 2000, thus only partly recovering from the economic effects of the Kosovo war. Agricultural output is expected to decline by 17 percent owing to a severe drought. Following the liberalization of prices by the outgoing Serbia government this October, retail prices rose by a cumulative 48 percent in October-November, bringing the 12-month retail price inflation in November to 110 percent. This has severely eroded real wages and pensions which presently average the equivalent of DM 90 per month converted at parallel market rates.

The key source of inflationary pressures has been the monetary financing of quasi-fiscal deficits of state-owned enterprises. Cash fiscal deficits have been kept at low levels through a compression of real spending and accumulation of arrears. General government revenue has declined in real terms over the past two years by a cumulative 40 percent. In recent months, the sharp acceleration of inflation has resulted in a further decline in real revenue, and thus, in real expenditure. The fiscal deficit on an accrual basis has been higher-at least 3 percent of GDP, even excluding the servicing of government debt of over 100 percent of GDP.

The short-term stabilization program, which will focus on the period through end-March 2001, will pave the way for a comprehensive economic program to be formulated in early 2001. The stabilization program calls for tight fiscal and monetary policies and the introduction of a managed float with current account convertibility. In Montenegro, bank financing of the budget (except on a very short-term basis) is effectively ruled out by the use of the Deutsche mark as the sole legal tender.

There is an urgent need to implement wide-ranging fiscal reforms and undertake comprehensive restructuring of the enterprise and banking sectors. Both these sectors continue to be affected by former Yugoslavia's heritage of "social ownership", under which firms were owned collectively by their workers and governance was weak and highly politicized. Several privatization initiatives since 1992 have accomplished very little as they have failed to challenge the authority of managements and employees in social enterprises, and the banking system is insolvent and unable to perform its intermediation functions.