Statement by Miroljub Labus, Deputy Prime Minister and Minister for Foreign Economic Relations, Federal Government of FR Yugoslavia

This statement is also available as audio recording (Real Audio format)

In December last year, at the Donors’ Coordination Meeting, I delivered a speech titled “Vision for the FRY: Breaking with the Past, Building a Democratic and Prosperous Country”.  It was a vision paper. Please allow me now, 6 months later, to point out to the achievements and to reiterate the commitments of all pro-European democratic forces in my country.

Vision and Achievements

The new Governments committed themselves to a peaceful and democratic resolution of all inherited problems and conflicts. Accordingly FR Yugoslavia considerably contributed to enhancing the stability in the Region. Conflict in Southern Serbia, provoked by the armed extremists, is peacefully resolved.  It is due to the so-called “Covic Plan” (launched by the Deputy Prime Minister of Serbia) that the peaceful solution to this deep crisis is brought about and that the process of integration of the Albanian minority into the economic and political system of Serbia is put on the agenda.  At the same time, the mechanism of cooperation between NATO and the Yugoslav Army is established, which in the long run paves the way to the Partnership for Peace Agreement.

We promised the clear cut-off with the past. We are on that way. After a decade of dramatic economic decline including trade isolation and sanctions, FR Yugoslavia has started radical reforms. We are in the middle of a very complicated process of changing almost completely our political and economic system, including bold changes of both legislation and its enforcement. This process is long and painful, but we are determined to win. We have demonstrated that by adopting the legal framework for cooperation with the Hague Tribunal (ICTY). However, the issue of cooperation with the ICTY is a complex one and will require considerable efforts and good will on the both sides.

The ongoing debate on the cooperation with ICTY has emphasized two fundamental issues. One is the legal procedure by which we will meet our international obligations as a full member of the UN. The other one is rather European. We are on the crossroads. Which track for Europe should the country go – fast or a slow one? We have demonstrated that the fast track is our choice.

In order to take fast track to Europe, reform forces in Yugoslavia are pursuing bold economic reform even without proper financial support to mitigated huge social costs of the transition. We have lifted the price control, liberalised trade and impose new taxes. That created additional burden to already impoverished people. They are still prepared to support us and reforms. But all of us know that their patience and resources are limited. We are appealing to the donors’ community to share with us the burden of transition.

We are aware that the first step on the fast track to Europe is through regional cooperation. My Government is fully committed to contribute further to this process. We have demonstrated that commitment by implementing the new policy and approach to the succession process of the former Yugoslavia. The agreement has already been reached and will be signed today in Vienna. The chapter of conflicts at the territory of Former Yugoslavia is closed and the conditions for future cooperation are created. Furthermore, two days ago we signed the Memorandum of Understanding on Trade Liberalisation and Facilitation in the Region. That document brought our Region closer to the European mainstream.

Of course, there are many unfinished jobs and we are together today to discuss the means and time of the accomplishment. The Donors Conference is an important framework coordinating the joint efforts on that task.

Transition and Post-conflict Problems

Allow me to now address some specific economic issues. After more than a decade of wars, dramatic political instability, economic decline, international sanctions, mismanagement and corruption, the FR Yugoslavia is embarking on a path of radical economic reforms with ambitious goals.

We are determined to catch up rapidly with other Central European transition economies, to fully integrate our country in the global World economy and to join the European Union as a full member in about seven to ten years. 

However, these ambitious yet achievable aims contrast starkly with the current difficult economic realities – legacy of Milosevic's Government and its economic mismanagement. Around 35% of the labour force are officially or effectively unemployed, 70% of population live below or close to the regional poverty line, and around 600,000 refugees and internally displaced persons lack basic necessities.

Overall, people have to cope with very low salaries even by low regional standards. Savings are very low and many segments of the society have run out of reserves. Any further shock to the standard of living would be devastating for them. The infrastructure is suffering from many years of decay, mismanagement and the consequences of the NATO 1999 bombing campaign. After being swindled several times by state and private banks in the 90s, the population has lost trust in the banking sector and the level of monetisation is exceptionally low at 3-4% of GDP. Bad debts and inter-enterprise arrears are a permanent threat to macroeconomic stability as they represent, according to available estimates, around 80% of the GDP. Finally, the level of foreign debt (12,2 billion U$) represents approximately 140% of the GDP. The problems we are coping with are thoroughly analysed in the WB Report "Breaking with the Past".

Accordingly, the FR Yugoslavia is facing both transition and post-conflict problems. After leading the transition process at the beginning of the decade, the country is now lagging behind the most advanced transition economies. Its reform path has to recognise this specific feature and to be very dynamic and ambitious. 

Reform and Regional Stability

There are a few additional specific features of our transition to market economy. 

The transition in FR Yugoslavia is fast, perhaps faster than in any other CEE country, not because some one is pushing us to that, but because we do believe in the reform. We strongly believe in free market economy, private property, democracy and the rule of the law. Accordingly there is no need for any kind of outside pressure on the Government to be on the reform path or to respect its international obligations.

We have already mobilised all our internal resources to overcome our dire starting position and to reform rapidly. The FRY certainly does not want to become dependent on foreign assistance. We want to be a self-sustaining country, benefiting mostly from foreign private direct investment flows and international trade. We recognise the need to restructure deeply our economy. However, given the enormous weight of the past, we will require significant support from the international community in the short term to succeed, in particular from the European Union, other governments, and International Financial Institutions such as the World Bank, the IMF, the EBRD, the OECD and others. This support would be squarely aimed at “breaking with the past” by relieving the country from the effects of accumulated arrears and debts, so as to be able to focus above all on building a new, democratic and prosperous, Yugoslavia.

We expect that our reform program will attract significant support from the international community. We have benefited from the start of the democratic transformation from a quick mobilisation of humanitarian aid of the international community. We are extremely grateful for this help. We expect that now the international community will support us for our move towards the future.

Economic Stability

Our achievements in the recent nine months are the following. On the macroeconomic front, we have achieved stabilisation based on the exchange rate unification and stabilisation, curbing down inflation (although substantial utilities' price adjustments took place) and increasing our foreign exchange reserves to 700 million USD. We deregulated and liberalised our foreign trade, abolishing non-tariff barriers, decreasing tariff rates and simplifying the rate structure. That cleared the way for our accession to the WTO, which we expect to take place in next few years. Furthermore we have started the reform of our Customs administration, fighting corruption and cronyism, and establishing simple and transparent procedures.

The National Bank of Yugoslavia become an independent institution and no daily and partisan politics have any influence of decision making in the institution. The National bank of Yugoslavia has prepared a commercial bank reconstruction program, distinguishing four categories of banks and the strategy for dealing with these banks. Insolvent banks with no overall importance are already in the process of liquidation. Furthermore, we have started to service the debt on frozen foreign currency savings of the households.

On the international front, we have resumed or established membership in the IMF, the World Bank and the EBRD and concluded the Stand-By Arrangement with the IMF. We expect that FR Yugoslavia will soon become a country of the European Investment Bank operations. We are about to start the process of Stabilisation and Accessions to the EU.

Challenges and Priorities

There are two big challenges. Both of them are short-term issues, but the outcome of both will have long term political effects. The first one is the recession of the Yugoslav economy. There is virtually no economic growth, export is lagging, foreign trade balance is negative, etc. There must be a dramatic overturn of these tendencies. The Government must demonstrate the ability to provide an impetus for economic growth and increased wellbeing of the population.

As to the foreign debt, substantial debt relief must be accomplished. Even the Naples terms of the debt relief will drive the country on the very fringe of debt sustainability. Anything less favourable to the country will severely endanger future economic growth and macroeconomic stability.

As to the donors' investments, there are a few priorities for FR Yugoslavia. First of all, our energy and transportation infrastructure, which is in vary bad shape and that is a major bottleneck for dynamic economic growths and regional integration. Second, establishment of the Transition fund aimed at mitigating social problems created by transition and economic restructuring. Furthermore, there is a daire need for immediate budgetary support for social benefits of the most vulnerable segments of our population. Finally, institutional reform, i.e. building institutional capacity of the country is a prerequisite for further reform and economic restructuring. Additionally, that will allow investments in our human capital.

Acknowledgement

We would not be here today sharing our views on the future of FR Yugoslavia and the Region without the true commitment and vigorous effort of the World Bank and the European Commission. We are grateful for their support and technical preparation of the Conference. We are also grateful to all donors who are participating at the Conference and who will make their pledges. I would like to stress that the two republican governments and their agencies have also done an excellent job in preparing this Conference.

Investing in the Future

It is evident that FR Yugoslavia is a key factor of stability in Southeast Europe. Without a stable FR Yugoslavia, the Region is in jeopardy. A politically stable, economically fast growing and prosperous Yugoslavia is essential for regional stability. A stable FR Yugoslavia can be achieved only by a strong, stable and reform oriented Government. 

We are aware that this Donors conference and the contributions of all donors are based on taxpayers’ money and we are gratefully for that. But let us consider all the donations pledged as investments to the future of the Region. These investments will create the framework for the peace and stability of FRY as well as all other countries in the region. Investing in the future is definitely much better option than bearing the costs of conceivable future instabilities and havoc.

This statement is also available as audio recording (Real Audio format)