Press Release No. 04/109

IMF Completes Third Review and Approves US$147 Million under Extended Arrangement with Serbia and Montenegro

June 7, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Serbia and Montenegro's economic performance under the Extended Arrangement. The decision will enable Serbia and Montenegro to draw SDR 100 million (about US$147 million) from the IMF immediately.

In its decision, the Executive Board also granted the request for a waiver for the nonobservance of the end-December 2003 performance criterion on net bank credit to government, and approved the rephasing of disbursements.

The Extended Arrangement was approved on May 14, 2002 for a total equivalent to SDR 650 million (about US$953 million) to support Serbia and Montenegro's economic program in 2002-2005 (see Press Release No. 02/25). So far, Serbia and Montenegro has drawn SDR 300 million (about US$440 million) from the IMF under the Extended Arrangement.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"Serbia and Montenegro has made good progress in lowering inflation, attracting foreign direct investment, and strengthening foreign reserves, while macroeconomic policies are broadly on track. To strengthen growth and improve the external position, which continues to be vulnerable to adverse shocks, macroeconomic policies should be geared toward restraining demand, and structural reforms expedited to enhance the economy's supply response.

"Against this background, the authorities' macroeconomic policies and structural reform agenda contained in the 2004 economic program appropriately focus on reducing the current account deficit, enhancing growth prospects, and correcting the existing fiscal and external imbalances. The authorities intend to broaden the political support to accelerate the pace of structural reforms.

"The authorities will tighten fiscal policy in 2004 and shift spending from current to investment uses. However, the fiscal tightening in Serbia relies entirely on revenue increases, leaving the expenditures at a high level in relation to GDP. Placing the fiscal accounts on a sustainable path will require streamlining of spending, particularly cuts in subsidies, and containment of growth in wages and social transfers.

"The monetary authorities intend to maintain tight credit conditions with a view to achieving the inflation objective and safeguarding official foreign reserves. Wage restraint will be key to improving external competitiveness, while containing inflationary pressures. With continued high, albeit slower, credit growth, bank supervision should be vigilant, with strict enforcement of prudential regulations to ensure that new lending is sound.

"Structural reforms need to pick up pace. In the banking sector, privatization of the nationalized banks is critical to building a healthy system. Privatization and restructuring of nonperforming state enterprises are also a priority. In addition, rapid progress is needed on the much-delayed legislative agenda, to ensure successful implementation of the VAT in 2005, set the basis for a functioning bankruptcy process, facilitate a restructuring of the energy monopolies, and establish a proper regulatory framework for that sector. These key structural reforms, as well as additional measures to improve governance and strengthen public institutions, should help promote private sector development.

"It is important that the authorities continue to negotiate in good faith with London Club and other creditors to restructure their debt on terms comparable to those granted by the Paris Club. The success will depend crucially on the authorities' credibility in forcefully implementing the policy framework," Ms. Krueger said.