Memorandum by the Foreign and Commonwealth
Office on Federal Republic of Yugoslavia: Economy
ECONOMIC POSITION
1. The economy of the Federal Republic of
Yugoslavia has shrunk dramatically as a result of ten years of
economic mismanagement and international isolation (see Annex
B). According to official statistics, the economy is now less
than half the size it was in 1990. On some estimates almost half
the work force are unemployed. Capital and infrastructure are
in very poor condition after a decade of underinvestment. Inflation
is running at close to 100 per cent: the hyperinflation of 1993
wiped out the savings of most ordinary citizens.
2. The burden of poor economic performance
has fallen heavily on the Yugoslav people. Income per person in
the FRY is now ten times lower than in neighbouring Slovenia in
dollar terms, and poorer than in Romania (estimates from the Economist
Intelligence Unit suggest GDP per head may have fallen as low
as $650 per head in 2000, compared to $9000 in Slovenia and $1600
in Romania). Even adjusting for cheaper local prices and taking
account of the very large black economy, this implies a substantial
fall in living standards in what was once one of the Eastern Europe's
richest economies. Real wages in Serbia fell to only $55 per month
by November 2000, and average wages buy fewer staple goods than
in 1999.
3. At the same time, the FRY has not been
in a position to follow the path of reform taken by other transition
economies in Central and Eastern Europe, taking advantage of enhanced
trade and investment links with the EU. Its neighbour, Slovenia,
has grown from being an economy half the size of the FRY economy
in 1990, to twice its size today, with income per head close to
EU levels.
PROSPECTS
4. The Government believes that the recent
political changes in the FRY can pave the way for a successful
transition to a prosperous market economy. Experience in other
transition economies shows that transformation can be rapid if
governments adopt appropriate policies, in particular building
basic market institutions, creating sound legal and business structures,
and attracting foreign investment. 5. But transition is still
only beginning. Price controls remain on most basic foodstuffs
(bread, milk, oil, and sugar), housing, public transport, energy
and petroleum products. The financial sector remains weak and
plagued by bad loans. Administrative systems are poor, which will
hamper the implementation of new laws. The social safety-net is
poorly financed, making the necessary effort to reform unprofitable
industry more difficult. The FRY government estimates that external
debt stands at over $12bn, more than 140% of GDP; other estimates
put it even higher. 6. However, the FRY does have strengths on
which to draw. The old Yugoslavia was a relative sophisticated
economy, with a tradition of small business entrepreneurship.
The population is well-educated: the diaspora extensive: The FRY
also remains at the centre of trade and transport links in South
East Europe. Peace, and the end of sanctions, should bring new
opportunities quickly.
5. The international community also stands
ready to help the people of the FRY build a prosperous, peaceful
and democratic market economy. The Government welcomes the purposeful
approach to economic reform of the new Federal and state governments.
The Federal Government's outline economic policy for 2001 (copy
attached) sets out sound and credible parameters for monetary
and fiscal policy. They have moved rapidly to rejoin the International
Financial Institutions, securing membership of the IMF and the
EBRD in December. Negotiations are currently underway on an IMF
stabilisation programme (see IMF paper, FRY-membership & request
for emergency post conflict assistance, www.imf.org/external/country/yug/index.htm).
The authorities are also making strenuous efforts to create the
right legislative frameworks allow new business to prosper, including
bringing forward legislation on privatisation, regulation of utilities,
and bankruptcy.
Foreign and Commonwealth Office
20 February 2001
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