News Brief No. 02/2

News Brief: IMF Approves US$63 Million Tranche Under Stand-by Credit to Federal Republic of Yugoslavia

January 11, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the second review of the Federal Republic of Yugoslavia's (FRY) economic program supported by a stand-by credit. The completion of the review will enable the FRY to draw another SDR 50 million (about US$63 million) from the IMF immediately.

The stand-by credit of a total of SDR 200 million (about US$252 million) was approved on June 11, 2001, and will expire March 31, 2002 (see Press Release No. 01/31). So far, the FRY has drawn SDR 100 million (about US$126 million) from the IMF.

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

"The Fund commends the Federal Republic of Yugoslavia's impressive progress in stabilization and reform over the past year, as evidenced by a sharp decline in inflation, a strengthening of the external position, a recovery in output, and important steps in bank restructuring and enterprise privatization.

"Macroeconomic policy implementation has been excellent for Yugoslavia as a whole, with the latest information indicating that fiscal, credit, and wage policies remain firmly on track. The authorities' fiscal policy framework for 2002 is consistent with further progress in stabilization and reform, providing for critical restructuring and investment needs of the economy, while containing inflationary pressures by strictly limiting domestic borrowing. Important measures to reform the pension system—including a significant and immediate increase in the retirement age and a change in the indexation method—will help put the financing of the pensions on a more sustainable basis.

"While the current level of the exchange rate remains broadly appropriate, the Fund welcomes the National Bank of Yugoslavia's commitment to continue to monitor closely developments in the foreign exchange market and to adjust the exchange rate policy as needed to protect the external position.

"The authorities' courageous decision to close four large insolvent banks was a key element of the strategy designed to create a healthy banking system. It needs to be followed up by a strengthening of bank supervision to avoid the recurrence of problems in the banking sector. The successful sale of three large companies late last year augurs well for the success of the privatization program, and has generated significant revenue for the budget. The ultimate success of the reform effort requires that the authorities persevere with difficult decisions on bank and enterprise restructuring, underpinned by adequate measures to mitigate the social impact of restructuring.

"Continued donor and creditor support will be essential to mitigate the burden of transition and permit the authorities to maintain broad support for their reform policies. In this regard, a recent decision of the Paris Club creditors to write off a substantial portion of their claims on Yugoslavia has greatly enhanced the country's prospects for external sustainability. It will be important that Yugoslavia obtain similar terms from commercial creditors," Ms. Krueger said.