Serbia: Political Instability Threatens Economy

Tuesday, 6 September, 2005

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Stojan Stamenkovic

Political intrigues in Yugoslavia's unstable coalition government threaten to wreck the country's economic transition programme, which has won praise from international financial institutions for beginning to pave the way for much needed foreign investment.

This investment is crucial to its recovery. Yugoslavia needs an influx of about 3 billion US dollars each year over the next five years.

But trouble has arisen from two separate quarters: pro-Milosevic opposition parties trying to delay the passage of new reform laws through parliament; and internal disputes within the ruling DOS coalition, which have been become so acute that early elections may have to be held, deterring vital foreign investment.

If the warring factions in DOS fail to reach a ceasefire and expedite the passage of reform laws, the international goodwill that followed Milosevic's downfall will fade and the country may drift back into political extremism, if not total anarchy.

Recent economic trends are depressing. The annual GDP for this year was about 10 billion dollars - around 1,000 dollars per capita - a third of the 1989 figure, when the Yugoslav economy began to slump under Milosevic's control.

Since then, little has been invested in repairing and renewing factory machinery, electrical plants or transport infrastructure. The real value of industrial equipment is only 10 to 15 per cent of its 1989 value. With few exceptions, Yugoslavia's industrial plant is old-fashioned and incompatible with modern markets.

Employment statistics are equally grim - the jobless rate stands at almost 40 per cent.

There are other worrying factors. The foreign debt has risen to 12 billion dollars, a figure 20 per cent larger than this year's GDP and far more than the country can repay. Sociologists estimate about 30 to 40 per cent of the population live below the poverty line.

The experts in the new government have tried to transform this bleak situation. According to an IMF report in September, the tax system has been successfully adjusted to European norms. Budget discipline has been sustained. The central bank has been placed in control of the currency and the government no longer prints money to cover the budget deficit or bail out bankrupt state companies.

There are other plus points. The foreign currency exchange has been stable for a year, meaning Yugoslav dinars can buy German marks, pounds or dollars in all banks. Foreign currency reserves are rising.

The government has also liberalised exports and scrapped price controls on fuel, foodstuff and other staples, which simply created shortages. In spite of criticism, they also passed a key privatisation law, which was a precondition for foreign capital investment.

The government's budget discipline and stricter monetary politics is paying dividends. The public has regained confidence in the local currency. For the first time in more than a decade, people are opening savings accounts.

The rate of price rises is slowing. Prices are still expected to leap by 40 per cent this year, which is steep but a marked improvement on last year's inflation rate of 113 per cent.

All these changes have generated international goodwill and secured Yugoslavia fast-track entry into the IMF, the World Bank and other Western institutions. Investors are showing greater interest in Yugoslavia, while international donations got Yugoslavia through the winter and alleviated some of the consequences of its poverty.

The role of foreign donations has been crucial and is expected to become more so in the coming year. A donors' conference in June pledged Yugoslavia 1.3 billion dollars, two-thirds in direct funds and one-third in credits for various energy, transport and other projects.

Unfortunately, there have been delays in receiving the funds. Part of the problem lies at the donors' end, but Belgrade is also at fault. The uncertain future of the Yugoslav federation, given the unresolved question of Montenegro's continued membership, has not helped to instil confidence in countries willing to provide funds. Some want to know whether money they have earmarked will end up in Yugoslavia, or in Serbia alone, before they pay up.

But donations alone will not solve the country's economic crisis. Only substantial foreign investment will stimulate a lasting revival. The second crucial factor is an agreement to reschedule the foreign debt and write off about 40 per cent of the sum.

Negotiations are under way with the Paris Club of creditor states and the London club of commercial banks, which are expected to conclude by Christmas. Without a deal on writing off part of the foreign debt, Yugoslavia will simply hit another debt crisis within five to eight years and default on repayments.

But if the country wants its debts written off, parliament will have to speed up the passage of legislation to regulate the security of proprietors and creditors, root out corruption and prepare Yugoslavia further for foreign investment.

Most of the laws the country needs have been drafted and submitted to parliament. The need to adopt them is urgent, as manufacturing output, except in agriculture, is falling, threatening a new set of social problems.

Constant political infighting hardly constitutes a favourable environment for this radical transformation to take place. But the country still has a unique chance to revive, if common sense prevails in the ranks of DOS and hatchets are buried for the next nine months.

If not, the country will go to the polls before the transformation is complete. Serbs may then have the luxury of deciding who is their favourite politician. However, the chances are that Yugoslavia's economic recovery would be postponed for another 10 years.

Stojan Stamenkovic is Editor-in-Chief of the bulletin MAP (Monthly Analyses and Prognoses), at the Institute of Economic Sciences, Belgrade.