After more than ten years of dramatic economic decline, economic sanctions, severe regional instability, mismanagement and corruption, the FRY is embarking on a radical economic reform path with ambitious goals. We want to catch up rapidly with other Central European economies, be part of the international economy and join the European Union as a full member in about five to seven years. Our strategic mid-term goals are to create an efficient open market economy, to eradicate corruption, to protect the neediest and to increase sharply living standards. We believe that many characteristics of our economy before the 90s crisis: longstanding economic links with Western and other markets, a tradition of entrepreneurship and autonomous enterprise management, the economic potential of the Diaspora, etc., should allow us to reach those goals under responsible economic management.

We are preparing a comprehensive economic package covering five years (2001-2005), to be started in earnest at the beginning of 2001 after the installation of the new Serbian government following the December 23^rd  elections. Its main elements will be ready for the new Serbian cabinet. The Federal government will then collaborate closely with the new Serbian government and work in harmony with the Montenegrin government to implement such a program.

An economy in ruins

However, these ambitious yet achievable goals contrast starkly with the current difficult economic realities. The population experiences cuts in electricity and heating delivery, as well as basic staple shortages (cooking oil, sugar). Pensions and salaries are paid with considerable delays. Around 35% of the population are officially or effectively unemployed, 30% live below or close to the regional poverty line, and around 800,000 refugees and internally displaced persons lack basic necessities. Overall, people have to cope with steep food price increases, very low salaries by 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. Inflation will reach over 70% on an annual basis. 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 monetization is exceptionally low at 3-4% of GDP. Real fiscal revenues and expenditures are much lower than planned because of tax exemptions, rate cuts and the development of the grey economy. The consolidated budget deficit will reach in 2000 at least 8 to 10% of GDP when non-financial arrears are taken into account. Bad debts and inter enterprise arrears are a permanent threat to macro stability as they represent, according to available estimates, around 80% of the GDP. Finally, despite its willingness to honor again its international debts, the country is not in a position to do so, as the level of debt represents approximately 140% of the GDP.

In sum, the FRY 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 recognize this peculiarity and be very dynamic and ambitious. This is also why the country will require significant external support, in the form of humanitarian assistance but also technical assistance, training, budgetary support, grants and loans.

We will mobilize all our internal resources to overcome this dire starting position and 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 investment flows and international trade. We recognize the need to restructure deeply our economy. However, given the enormous weight of the past, we will require significant backing from the international community in the short term to succeed, in particular from the European Union, other governments, and international financial organizations such as the IMF, the World Bank, the EBRD, the OECD and others. This backing 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 program will attract significant support from the international community. We have benefited from the start of the democratic transformation from a quick mobilization of the international community on gas, food and electricity needs, and a few countries have also provided some budgetary support. We are extremely grateful for this help. Negotiations of a post-conflict emergency program of the IMF for the first quarter of 2001 are well under way. Agreement on this program is encapsulated in our "Statement of Economic Policies" whose economic policy measures for the first quarter of 2001 are simply restated here. We hope to conclude negotiations during the first quarter of 2001 on a one-year stand by arrangement with the IMF. In addition, as our arrears so great, breaking up with the past will be close to impossible won our own. This is why we hope to engage discussions with donors countries and European Union on budgetary support so as to cover part of these arrears, enabling us to focus on the present and future. Finally, later in 2001 we expect to negotiate of a three-year EFF program with the IMF and to agree on a Stabilization and Association Agreement with the European Union.

In order to start addressing this difficult situation while putting the country on the path of economic development, the FRY will implement until the end of the year 2005 a program in the above mentioned four phases. This document focuses on the measures to be implemented until the end of the year 2001.

Over the coming month the government will implement measures to ease shortages, provide support to the neediest while maintaining under control the economy. The needs will be financed from domestic sources and foreign contributions, both in kind and financial. Economic measures are grouped under the following ten areas (see attachment for an overview of individual measures):

1. Monetary policy and exchange rate policy. Monetary policy will remain restrictive, as has been the case since the latest political changes. This has helped in reducing the market rate level, which has been kept at 30 dinars for a DEM for the past several weeks. The foreign exchange rates were unified on December 6^th to its market level and the exchange rate will be maintained within a 5% band of the market rate following this unification. By January 1^st 2001, the dinar will become convertible on current account transactions. This key reform will be accompanied by the introduction of new dinar denominations. The NBY will avoid giving credits to the budget or enterprises. However, rapid price liberalization by the outgoing Serbian government has provoked very high inflation in October (26%) and November (18%). We will attempt to keep this rate below 10% in December.

2. Fiscal policy, wage policy, price policy. The budgetary situation is extremely difficult because of a poor execution of the 2000 budget at all levels: federal, republican, local and within social funds. In aggregate it is estimated that the consolidated cash budget deficit will be about 0.5% of the GDP, but accumulated arrears will reach at least 8-10% (pensions, child allowances, etc.). The Serbian government has already passed a set of measures to increase revenues, including hikes in excise levels and better enforcement of customs rules, which will be partly offset by a 30% wage increase for civil servants.

3. Foreign trade regime. The federal government is preparing a significant reform of the foreign trade regime with a view of suppressing excessive administrative regulations, revising import and export licenses, limiting the use of quotas and reducing excessive tariff levels. Several specific measures need to be undertaken to provide further competition in certain sectors, in particular in durable goods.

4. Inter-enterprise arrears, bad debts. A full picture of accumulated debts between enterprises and between enterprises and banks will be provided at the end of the year and a systematic approach will be prepared for discussion with the World Bank.

5. Social policy and labor policy. In addition to organizing auctions for "in kind" donations and integrating direct budgetary support of various governments and the EU, the Serbian government is preparing a social safety net program for implementation during 2001.

6. European integration. We are currently analyzing the elements of the ‘acquis communautaire’ and want to insure their inclusion in the overall reform package.

7. Banking reform, capital markets. A quick audit of all major banks has already been launched with the help of an international audit firm and will be ready by the end of the year. It will be followed by an in depth analysis of the banking sector which will yield an objective ranking of the banks, and some will receive a limited deposit guarantee to revive savings.

8. Infrastructure. Numerous projects are being discussed with the EIB and several other ones are under consideration with private sector actors.

9. Privatization. The Serbian privatization law is being reviewed so as to either amend the existing law or prepare a new one. The goal will be to speed up privatization and make the process more open and transparent, taking into account the rich lessons of experience of other transition countries.

10. External debt. The federal government is gathering data and initiating contacts with international creditors.