Vision for the Federal Republic of Yugoslavia:
Breaking with the Past, Building a Democratic and Prosperous Country

Miroljub Labus, Federal Deputy Prime Minister

Position Paper for the Donors Coordination Meeting
Brussels, December 12^th, 2000

This position paper has four objectives: first, to present the current political and economic situation in the Federal Republic of Yugoslavia (hereinafter "FRY"); secondly, to indicate our main short term goals, accomplishments and challenges; thirdly, to describe our mid term vision for the future of the FRY and, finally; to put forward possible elements of a partnership with the international community in the transformation of our society and our economy.

A detailed policy paper describing our "Economic Reform Program for 2001" accompanies this position paper. We propose that these two documents serve as a cornerstone in our future discussions with the international community, in particular on the crucial issue of international support for our democratic and economic reforms.

Let us first recap the fast journey to democracy our country has traveled over the past few weeks and which is still very much under way. Let us also recognize the extreme economic difficulties under which this journey is taking place.

Last federal elections in Yugoslavia were neither fair nor free. They were held under conditions of a typical dictatorship. Despite that, democratic forces marked a landslide victory. That is the sign that citizens of Yugoslavia are pro-democracy oriented and have confidence in the Democratic Opposition in Serbia.

The greatest political achievement of the Serbian people is a peaceful democratic revolution. Public protests usually happen before elections, when the political tensions are at their maximum. In Yugoslavia the opposite happened. Mass protests were the only means to guarantee that the popular will expressed at the polls was to be respected. Protests were peaceful and resolute and therefore short and effective. The transfer of power following the electoral victory has not been simple, primarily because of the attempt to falsify obvious electoral results. With widespread support from the citizens, particularly the young and civil society institutions, the Democratic Opposition of Serbia secured the recognition of the electoral results and Dr. Kostunica was declared head of our State on October 5^th 2000.

However, full legal transfer of power wasn’t fully accomplished by this proclamation. President Kostunica has insisted on a strict observance of the rule of law, in particular respect of our Constitution. As the Democratic Opposition of Serbia ("DOS") didn’t have an absolute majority in the Federal Parliament, it was necessary to form a coalition government. As the head of the State and the Federal Prime Minister cannot be from the same Republic, a Montenegrin, Mr. Zoran Zizic, became Prime Minister. He is part of the Socialist People’s Party of Montenegro, an opposition party in this Republic.

On the other hand, importantly, the Serbian Parliament was dissolved and early elections were called and scheduled for December 23^rd, 2000. A caretaker multi-party government is taking day-to-day decisions up until these elections and the subsequent installation of a new Serbian government, most probably in January 2001.

The immediate challenge ahead for President Kostunica and the Federal Government includes dealing in a clear and transparent way with relations in the Yugoslav federation and, in Serbia, resolving the political and security issues related to Kosovo. As much as the Federal Government is acutely aware of a need to move fast in resolving these outstanding issues, it emphasizes the need to fully observe the rule of law and all binding international agreements. This is indispensable in respecting the majority as well as minority human rights and reaching a solution in the interest of long-term prosperity and democracy.

The current relations between Serbia and Montenegro are complex. But one shouldn’t forget that one of the great achievements of the democratic changes in Serbia is that these relationships are now peaceful and will remain so. Any future solution for these relationships will be a result of a civilized and democratic process, in accordance with the constitutional procedure.

The ruling Montenegrin coalition "For a Better Life" boycotted the Federal elections. It has accepted the election of Dr. Kostunica for President of the FRY but has not formed a unified position as far as the Federal government is concerned: part of that coalition recognizes that government and part doesn’t. In practice, however, the Montenegrin and the Federal governments collaborate on a host of issues.

In a Federal State, sovereignty rests with the Federation. The reality of the Yugoslav Federation is currently somewhat different from its legal form as enshrined in its Constitution. Constitutionally, both Republics have sovereignty over a host of areas. Defense and foreign affairs are an exception, and Serbia depends on the Federal monetary and customs systems, while Montenegro has taken over these responsibilities from the Federation. Montenegro is also trying to take over foreign relationships and insists on an equal treatment alongside Yugoslavia within international forums and institutions. These evolutions are contrary to the Yugoslav Constitution and, as long as this Constitution is in force, the Federal government naturally cannot accept them.

The resolution of this constitutional issue will be democratic and there is an overall consensus that any result should be submitted to a free expression of popular will. There will be two phases.

The first phase focuses on rebuilding trust. This has begun, and can be seen at work in the harmonization of the relationships between the Federation and the Republic. The Federal government is doing everything possible to reduce tensions and create conditions for a normal democratic dialogue. There is no risk of violence, nor there is a risk of economic tensions. So as to carry through economic and business decisions, work is being done to overcome existing economic differences (monetary, customs, fiscal and others).

The second phase will start after the elections in Serbia. One can expect that all politically relevant factors will be included in the negotiations, i.e. the Federal and republican factors, and that a referendum will be held on the future constitutional make up of the country. Ultimately, it will be the popular vote that will decide whether a Federation will remain, and if so, what its role will be.

President Kostunica and the Federal government have firmly stood and continue to stand behind a strict implementation of the Resolution 1244 of the United Nations Security Council as well as the Kumanovo military-technical agreement. Within this framework, the resolution of the Kosovo situation will require continuous political efforts of the parties concerned and a fair and unbiased support of the international community. Regardless of the time it may take, the Federal government of Yugoslavia is convinced that a solution can be found which respects the rights of both the majority and the minority citizens, helps improve the wellbeing of the population and enhances democratic values in the region.

The recent developments around the administrative frontier between Kosovo and the rest of Serbia and in the Presevo region are of particular concern. That is why our Government has requested from KFOR to take its prescribed share of responsibilities in securing the safety in line with the UN resolution and international agreements.

Despite the complexity of the current constitutional situation and the many challenges in Kosovo, non-commercial risks in our country have been dramatically reduced after October 5^th.

The achievements so far are already sufficient for the government to initiate work under the economic reconstruction of the country and call for the public and private support and cooperation of the EU in that effort. As the economic revival takes hold, the Government will have political capacity and credibility to further reduce remaining non-commercial risk that could, otherwise, overshadow the efforts in economic and institutional reform.

This journey to democracy is, unfortunately, taking place under extremely difficult economic conditions. The attached policy paper provides some details on this. Over a decade of authoritarian rule, economic mismanagement, corruption, economic sanctions, regional instability, the 1999 NATO bombing campaign have all taken a terrible toll on our society and our economy.

Consider that the per capita GDP is below half of its 1989 level, unemployment is around 35%, one third of the population are either below or very close to the poverty line, the country has to cope with 800,000 refugees or internally displaced persons (10% of the population in Serbia and Montenegro). Annual Inflation will exceed 70% this year and the economy has entered recession before the elections. Current estimates of the consolidated fiscal gap are at least 8-9% of the GDP and quasi-fiscal deficits are enormous. The State will have to secure 6.8 bn DEM to serve frozen hard currency accounts to the population. Inter-enterprise arrears are probably around 80% of the GDP, whilst external debt is 140-150% of the GDP, putting Yugoslavia in the group of the most indebted nations in the world. Our military and police forces need to be downsized, and we need to put in place a social safety net so as to be able to restructure the economy in an orderly and peaceful manner.

New Federal authorities, Montenegrin authorities and, soon, new Serbian authorities will have to cope with this heavy legacy. Unless this legacy is dealt with, in partnership with the international community, our reform program will have much lower chances of success.

Yugoslavia has already shown in not so distant past that it can be a reliable and productive investment and production partner of the European Community. As market reforms are revived and strengthened, the potential for reintegration will be much greater. Therefore, the Federal Government is convinced that the country is capable of implementing an ambitious reform agenda in the near future. We will need your help in the initial stages of this effort and we will do our best to mobilize our internal resources to make the best use of your assistance and reach a sustainable reform path as soon as possible. We have already initiated the task of building the critical political and market institutions that will serve as the basis for this cooperation. Then Yugoslavia will become an important bulwark for stability and democracy in the Balkans.

Our short-term objectives are to stabilize the country and the economy and lay the basis for an all-encompassing reform program, both political and economic. We have already made some progress but challenges lying ahead are very significant.

Political stability depends significantly on economic conditions. It is of the outmost importance to meet basic needs for energy, food and medicine. This is a key goal for us in the next six months.

Maintaining monetary stability will be very important to increase the confidence of the population in the new regime. However, this will be impossible without eliminating fiscal and non-fiscal deficits. The FRY has a fiscal federalism system whereby the fiscal policies of the Republics, chiefly Serbia, have a more important role than the fiscal position of the Federation. Despite expected improvements in revenue administration and collection that new Serbian government will likely achieve, reducing fiscal deficits will remain a central and tough objective to meet. Full accounting of the fiscal imbalance will require dealing deep-seated structural fiscal issues inherited from the past. Given the nature of the fiscal problem, the country will need short-term budgetary support in order to comply with the conditions of the forthcoming agreement with the IMF on an Emergency Post Conflict Program for the first quarter of 2001.

Finally, the country needs to restart economic activity forcefully and on a sound basis. The challenge is to find the mechanisms and the partnerships to best use the existing human and physical capital already available in the country and supplement it with FDI and strategic partnerships. As a complement, it will be necessary to create conditions that will allow new entrepreneurial effort to emerge through technical assistance and, possibly, micro financing targeting export oriented SMEs. The EBRD, other EU institutions, bilateral agreements with EU governments, and, most importantly, the private sector from the EC under proper incentive schemes can have a very positive role in this process.

Over the past two months, despite limitations both on the Federal and on the Serbian level, dynamic political and economic reform processes have been launched.

Internationally, the FRY has become a full member of the UN, the OSCE, and the Stability Pact for Europe, soon we should obtain an observer status in the Council of Europe and we have joined the Southern Europe Cooperation Initiative (SECI). During December, we hope to renew membership in the IMF and join the EBRD. These would be important signals that will build the credibility of the Government with the domestic polity and the international community. Negotiations on the renewal of a country of operation status in the EIB are progressing as well. It has been decided to solve the issue of succession on the basis of an equal treatment of all former Yugoslavia successor States, and to share assets in the Bank for International Settlements in Basle according to the IMF formula.

Economically, the exchange rate has been stable at 30 dinars for one DEM and we have unified the exchange rates on December 5^th under a floating regime. We have also eliminated administrative impediments to foreign currency purchases and sales. Furthermore, we will introduce in the weeks to come a set of measures deregulating and liberalizing foreign trade. Finally, the provisional Serbian government voted a set of measures to increase fiscal revenues. Importantly, there was a set of actions to combat corruption and smuggling around the country. This will be a key action item for the months to come.

The overall economic policy program will be adopted by the Federal government and presented to the Federal Parliament before the end of the year. It will cover the budget for the Federation as well as monetary policy and exchange rate policy.

The population, according to various polls is still lending substantial credit to the Democratic Opposition of Serbia. However, this early stage of democratization is facing serious challenges:

1. Deliver on the high expectations of the Serbian/Yugoslav polity. Unless democracy at work proves that it does not only give more freedom, but also provides a better standard of living, we could rapidly move to a general disappointment, reemergence of populism and chauvinism, as well as mass social movements.

2. Get economic growth going. As noted, the economy is at its lowest in Yugoslavia’s and Serbia’s recent history. For instance, a traditional food exporter, Yugoslavia has now to import basic foodstuffs due to a severe drought and mismanagement of state commodity reserves during the last election campaign.

3. Liberalize prices without triggering inflation. Even though current price increases can largely be attributed to sudden price liberalization by the outgoing Serbian government, as well as the decline in industrial activity, the rising inflationary pressures are already seen as a weakness of the new regime.

4. Assure availability of critical goods: electricity, heating and basic foods. Persistent heating and electricity problems are fundamentally due to longstanding poor management, and the lack of investment and proper maintenance in the sector. This year’s drought further exacerbated the problem by limiting the HE power generation. With winter coming, the problems population has in this area are a major lingering political concern.

5. Build effective social safety nets to secure acceptance of reforms. There is both expectations and fear of reform. The population knows that important institutional and economic policy reforms are needed. But a further drop in already very low real incomes (the average wage is around 90 DEM) and living standards, combined with an increase in unemployment would be unacceptable unless it is combined with a proper poverty alleviation program and a social safety net.

6. Assure macro-stability while new institutions and markets come into place. The exit from the winter will be difficult, and we are very concerned with the first semester of 2001. Important investments will not be forthcoming before the second half of the year. In order to restart the economy and bring the gray economy within legal boundaries, taxes must be reduced from present very high levels. At the same time, scope for reducing public expenditures in the short run remains quite limited. The resulting fiscal deficits are likely to create short-run inflationary pressures unless means are not found to finance the resulting gap through budgetary support in the second quarter of 2001.

7. Secure transparent procurement and financial management of public funds, including donor resources and foreign loans. The Government is resolved to sharply depart from the past and show probity in the use of all public resources, and especially donor funds and foreign loan proceeds. An exceptional effort will be made to secure integrity and restore accountability rules following international fiscal, accounting, and audit standards.

Attachment: "Federal Republic of Yugoslavia: Economic reform program for 2001"