The Paris Club Gives Reforms a Chance

Yugoslav Debt Written Off, Burden Remains

Yugoslavia no longer has to dish out US$9.5 billion in debt payments for 2002, but solely US$30 million in interest. "Only when 50 big international companies invest in Yugoslavia will we be in the saddle", explains Miroljub Labus.

AIM Belgrade, November 21, 2001

Cake and champagne were waiting for Yugoslavia's negotiating team on its return from Paris, following difficult negotiations with the Paris Club of creditors. With open joy and smiles on the their tired faces, the negotiators brought a moment of optimism to the bleakness of Serbia's everyday life. Synchronized statements by highest politicians followed, saying that the Paris visit had been the greatest thing achieved by the new government so far. Thanks to this, nobody bothered to ask who deserved to get the credit -- Yugoslav President Vojislav Kostunica, Serbian Premier Zoran Djindjic, or the negotiating team led by Yugoslav Deputy Prime Minister Miroljub Labus. Labus himself briefly touched on that by saying that "everybody has their share of merit, because we all did our part of the job to the best of our ability".

Thanks to this approach Yugoslavia has managed to secure the most favorable conditions for writing off the debt and rescheduling its remainder, among the relatively well-developed countries it belongs to. Only a year after initiating reforms, it ensured the following conditions: a writeoff of 66 percent of the debt (US$4.5 billion), a six-year grace period in which it will pay only 40 percent interest, and the paying off the principal over a period of 22 years at a 6 percent annual interest. The Yugoslav delegation has every reason to be content with such results. The people who made the mess in the first place -- the per capita debt was US$1,200 -- cannot destroy this with their stories that this is nothing much because "the countries that have written off our debts were responsible for it in the first place, because they kept us under an embargo and we could neither produce nor pay our dues".

According to one story Yugoslavia's former negotiators said the following when asked what they would do if the debt was not written off: "Nothing, the question is what are you going to do given that we aren't paying you anything". But for a country seriously bent on development and joining the world, the fact that US$9.5 billion of over US$12.3 billion in debts was due for repayment, was a rope around its neck threatening to strangle it any moment. Labus picturesquely described this by saying that "it meant that we would have to live all of next year without spending a single coin, and without eating a single mouthful".

The reduction of the debt to US$900 per capita -- or even US$700 per capita if negotiations with the London Club are successful – might not mean much for ordinary people, but for those in charge of economic policy this means that next year they will not have to set aside US$9.5 billion, but only US$30 million to cover interest. This means that one-fifth of what is earned from exports per month will be used to service the debt, instead of entire annual revenues. The US$30 million is itself a big enough burden for Yugoslavia's ruined economy and its destitute people, because it will be collected through taxes. But when one owes money to the international community, one has to pay off that debt. The creditors represented by the Paris Club, the governments of 19 Western countries, have agreed that Yugoslavia should be given another chance to finish ongoing reforms and thereby create conditions for returning the debt. They are ready, they say, to help unselfishly by approving money under the most favorable possible conditions through the World Bank and EU financial institutions. Next year there will also be donations, amounting to a total of US$1 billion, not including donations for the reconstruction of roads and the overhaul of the power system.

But what the world now expects from Yugoslavia is to stay in step with economic reforms. The conditions specified in the agreement with the Paris Club confirm this. Namely, 51 percent of the debt will officially be written off next spring, after a mid-term agreement with the International Monetary Fund, and the remaining 15 percent in three years, when the results of reforms pledged to be carried out by the Yugoslav side, will be clear.

In short, international financial institutions have shown a willingness to help Yugoslavia, and it is now up to Yugoslavia to back up its promises with actions: to carry out reforms. This is what members of Yugoslavia's negotiating team in Paris -- Miroljub Labus and Serbian Finance Minister Bozidar Djelic -- keep reiterating, adding that no one should think that now, after the debt had been reduced, extra money should be used for salaries. "After being relieved of a great burden, we now have a chance to create money, instead of bickering over how to divide up something we do not have", Labus warns. He also stressed that regulating the debt with the London and Paris clubs is a clear signal to foreign businesspeople that they can start investing in Serbia, first through privatization, which is underway and which is expected to bring in five times more than this year, and then in other ways. "Only when 50 big international companies begin investing in Yugoslavia, will we be in the saddle", Labus explains.

But even before that reformers will have to do their utmost to make real changes and not ones that will only make things appear to be better, and that is a painful and politically sensitive process. The debt writeoff and rescheduling has created room for sorting things out in the banking sector, either by bailing some of them out or by liquidating those which are beyond salvation. Similar developments can be expected in other parts of the economy as well, especially in approximately 30 public companies with the most foreign debts. Although their debts will remain high, some of them could be relieved of their burdened and began seeking strategic partners and potential creditors.

There is, of course, the difficult and painful task of negotiating the fate of debts created in Kosovo. Namely, in the remaining Yugoslav debt, legal entities in Kosovo account for about US$0.5 billion. Negotiations with UNMIK on servicing this debt will have to begin soon, and, according to Labus, the negotiations could result in the following: it will either be agreed that a part of Kosovo's tax revenues will be deposited in a special bank account in Serbia for these payments, or UNMIK will itself take care of the matter.

The most developed countries of the West have decided to give a boost to Yugoslav reforms, but the success of these reforms depends exclusively on those in charge of them. According to international experts, last year showed that the course taken by Yugoslav officials is a good one and that they have a historic chance to demonstrate their ability to solve the economic crisis. They have about four years' time to do that. Continued bickering over the course of reforms, or obstacles to passing the necessary legislation, primarily in the sectors of foreign investment and financial markets, for the sole purpose of promoting individual parties and politicians, could mean that this opportunity will be lost for ever.

Tatjana Stankovic

(AIM)