Statement by the International Monetary Fund (IMF) Staff Representative

1. Mr. Chairman, it is a pleasure to be here for the first Donors’ Conference for the Federal Republic of Yugoslavia (FRY). The IMF staff would like to thank the sponsoring institutions, the European Commission and the World Bank, for the organization of this meeting. I will concentrate my remarks on the authorities’ economic accomplishments so far; the daunting policy agenda facing them; and the role of creditor and donor support.

2. The new FRY authorities have moved ahead on the economic front with impressive speed and commitment. Already last October, they put in place a short-term stabilization program covering the period through end-March 2001 that succeeded in bringing inflation under control. This program was supported by the Fund through a post-conflict emergency purchase of US$150 million. Immediately following the formation of a new government in Serbia in late January, the authorities formulated and started to implement a comprehensive program of stabilization and reform for 2001. Two weeks ago, the IMF’s Executive Board approved a 10-month stand-by arrangement of US$250 million in support of this program.¹ The progress so far augurs well for the future because the achievement of good early results is the best way to build support for reform and ensure its sustainability.

3. The economic program for 2001 provides for prudent macroeconomic policies and bold structural reforms; moreover, its implementation has been excellent so far. Based on the latest information (through end-May, 2001), fiscal and monetary policies have been on track for FRY as a whole, entirely on account of account of developments in Serbia. On the structural front, some key policy measures have been implemented upfront. A major fiscal reform has been put in place in Serbia, involving the streamlining of an extremely complex tax system, the integration of a large number of extrabudgetary programs into the budget, and the bringing of military spending under civilian control. The foreign exchange and trade systems in Serbia, which used to be extremely restrictive, have been almost completely liberalized. In addition, a bank resolution strategy has been formulated and its implementation has begun, with support from the Fund, the World Bank, and bilateral donors. A new privatization framework is also now being adopted in Serbia, in cooperation with the World Bank. Montenegro, which adopted significant institutional reforms over the past several years, will need to press ahead with important policy measures in the fiscal area—primarily expenditure cuts to alleviate severe budgetary pressures—as well as in bank restructuring and privatization.

4. While the authorities’ policy achievements so far have been impressive, they have only prepared the ground for addressing an extremely difficult restructuring agenda. As the failure of several initially successful stabilization attempts—both in FRY and other transition countries in the region—has demonstrated, it is imperative to address the underlying causes of the macroeconomic imbalances by restructuring the banking and enterprise sectors, improving financial discipline in the economy, and restoring fiscal sustainability. This in turn requires hard decisions on economic restructuring, including layoffs in insolvent banks and enterprises. In FRY’s economic and social environment, this will be undoubtedly difficult. The authorities nevertheless appear to be aware of these challenges, and have appropriately emphasized the development of a proper social safety net as a means of maintaining broad support for their reform policies. Foreign donors can also facilitate the reform process, by offering budgetary assistance aimed at alleviating social hardship resulting from economic restructuring. Of course, such assistance should be backed by reforms to the existing social protection system.

5. In FRY’s exceptionally difficult circumstances, strong support from foreign creditors and donors—not only good policies—is needed to ensure progress toward external viability and sustainable growth. Owing to ten years of conflicts, international isolation, and underinvestment, FRY’s productive and export capacities have been seriously impaired, while the ratio of external debt to GDP has climbed to over 140 percent in the absence of debt servicing. The international community has already come to the support of FRY, especially in the form of humanitarian aid. However, more support from creditors and donors will be required, to alleviate FRY’s debt burden and help with the reconstruction effort over the medium term. In this regard, it is clear—on the basis of a debt sustainability analysis prepared by the IMF staff—that, even if FRY secures debt relief on concessional terms (e.g., similar to those granted to Bosnia), there would still be large external financing needs over the medium term associated with the reconstruction of the economy.

6. FRY’s external financing requirements are described in considerable detail in the documents prepared for this Conference by the World Bank, in close cooperation with the European Commission and the IMF. 

• The World Bank-estimated external financing requirements, on a commitment basis, of US$1.25 billion in 2001 and a total of US$3.9 billion in the period 2001-04 are consistent with the external financing requirements, on a disbursement basis, estimated in the context of the recently approved stand-by arrangement.

• For 2001, the IMF-supported program envisages a total financing gap of about US$10.7 billion, including arrears of US$9.6 billion. After taking into account possible debt relief (including rescheduling of arrears other than those to the European Investment Bank), the financing gap that needs to covered by program and project assistance amounts to about US$821 million. (This amount is equivalent to the World Bank-estimated external financing gap of US$1031 million in 2001, since it is defined to exclude US$210 million of foreign assistance announced after the Donor Coordination Meeting of December 2000.) Of this, about US$290 million is expected to be covered by IFIs (IMF, World Bank, and EBRD) and the remaining US$530 million by the EU/G﷓24. There are good indications that the EU will be providing macrofinancial assistance of about e300 million, of which more than two thirds could be disbursed in 2001. Other donors have also provided preliminary indications of support, expected to be confirmed at this conference.

7. Let me conclude by emphasizing that, in the IMF’s view, the policy efforts and accomplishments of the FRY authorities deserve the support of the international community. Considering the initial conditions, the medium-term economic outlook will inevitably remain difficult. Nevertheless, FRY is a country with considerable potential and, with continued support for the reforms at home and abroad, it could again, before too long, integrate into Europe and become an important contributor to regional welfare.

¹ The Staff Report on FRY’s request for a Stand-By Arrangement and related documents, including the FRY authorities’ Letter of Intent and Memorandum of Economic and Financial Policies, can be found at the IMF’s website (http://www.imf.org/external/).