Economy

16 December 2002

The economy of Yugoslavia entered a prolonged decline in 1998. Exacerbated by international sanctions imposed in response to President Slobodan Milosevic's actions in Kosovo, the F.R.Y. economy's downward spiral showed no real sign of recovery until 2001. A vigorous team of economic reformers has worked to tame inflation (non-energy inflation is less than 9% in 2002, down from over 45% 3 years earlier) and rationalize the Serbia and Montenegro economy. GDP, although only half of its 1997 level, is projected to increase steadily in the near future.

The F.R.Y.'s monetary unit, the dinar, remained volatile throughout the Milosevic regime. Alarmed F.R.Y. officials took several steps to tighten monetary policy in 1998, including ruling out a devaluation in the near term, increasing reserve requirements, and issuing bonds. During this period, Montenegro rejected the dinar and adopted the German mark (now the Euro) as its official currency. As 1999 began, the damage control operations had succeeded in returning the exchange rate to reasonable levels. However, it was not until 2002, after intense macroeconomic reform measures, that the dinar became convertible--a first since the Bretton Woods agreements laid out the post-World War II international exchange rate regime.

Privatization efforts have not succeeded as well as macroeconomic reform. The process of privatization is not popular among workers of large socially owned companies, and many citizens appear to believe the tendering process is overly centralized and controlled from Belgrade. Furthermore, international investment is still lagging in Serbia and Montenegro, as a result of both domestic and international investment climates. Managers tend to blame the dearth of interest on the current negative business climate in Serbia and Montenegro. The Kragujevac-based automobile plant--heavily damaged during the 1999 NATO bombing--remains the most publicly discussed large privatization candidate, but efforts to sell the plant for as little as $1 have failed.

FOREIGN RELATIONS

From the breakup of the Socialist Republic of Yugoslavia in 1989, the foreign policy of the F.R.Y. was characterized primarily by a desire to secure its political and geopolitical position and the solidarity of ethic Serbs in the Balkan region through a strong nationalist campaign. The F.R.Y. supported and exploited the expansion of violent conflicts--in Bosnia and Herzegovina, Croatia, and its own province, Kosovo--in order to advance its policies. Since October 2000, the F.R.Y./Serbia and Montenegro has all but eliminated its nationalist rhetoric and has worked to stabilize and strengthen its bilateral relationships with neighboring countries. In spring and summer 2002, F.R.Y. resolved its longstanding border dispute with Macedonia and established full diplomatic relations with its neighbor and former adversary Croatia. Although a difficult political issue domestically, Serbia and Montenegro has established a solid working relationship with UNMIK and has released all disputed ethnic Albanian prisoners from Kosovo to the competent UN bodies.

In 2002, the F.R.Y. Government established a commission to coordinate cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) and began serving warrants for the arrest of indicted war criminals who have sought refuge in the country. The crackdown on organized crime following the assassination of Serbian Prime Minister Djindjic also resulted in the apprehension and transfer to The Hague of several persons indicted for war crimes.

Immediately preceding the NATO bombing campaign of the F.R.Y. in spring 1999, the U.S. and most European countries severed relations with the F.R.Y., and the U.S. Embassy was closed. Since October 5, 2000, foreign embassies, including that of the U.S., have reopened, and the F.R.Y./Serbia and Montenegro has regained its seat in such international organizations as the Organization for Security and Cooperation in Europe (OSCE) and the UN and is actively participating in International Monetary Fund (IMF) and World Bank projects. As of summer 2003, Serbia and Montenegro has been admitted to the Council of Europe and has indicated that it wishes to join NATO's Partnership for Peace.

Foreign Aid
Subsequent to the outbreak of hostilities between NATO and the F.R.Y. in 1999, Belgrade received no foreign aid from the United States and other west European countries. Since October 2000, however, European Union aid has steadily increased, and U.S. restrictions on aid have fallen away as the F.R.Y./Serbia and Montenegro stepped forward to meet its international obligations. In June 2003, U.S. Secretary of State Colin Powell was able to certify that Serbia and Montenegro's relationship with the Republika Srpska was consistent with the Dayton Accords, had released all political prisoners, and was cooperating with ICTY. As a result, the United States is now free to release aid money and support Serbia and Montenegro in international financial institutions, such as the IMF and World Bank. Total U.S. aid to Serbia and Montenegro, including debt forgiveness, exceeded $180 million in fiscal year 2002. The U.S. is the single largest donor of aid to Serbia and Montenegro.

Economy
GDP (2002 est.): $12.84 billion.
GDP growth rate (2002 est.): 4%.
Per capita income (2002 est.): $1,200.
Inflation rate (2002 est.): 20%.
Natural resources: Oil, gas, coal, antimony, copper, lead, zinc, nickel, gold, pyrite, chrome, navigable rivers.
Agriculture: 25% of GDP.
Industry: 50% of GDP.
The growth of the standards of living in 2004 was estimated between 8 and 10%, which is equal to the growth of the gross domestic products. 2004 was one of the rare years in Serbia in which the salaries followed the rising productivity rates.