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Monday, 2 July, 2001, 10:33 GMT 11:33 UK
Yugoslavia's shattered economy
Aid will be concentrated on rebuilding the infrastructure
by BBC News Online's Steve Schifferes

The Yugoslav government will face an uphill task in rebuilding its economy despite the promise of further aid from the world community.

Following the handing over of Slobodan Milosevic to the international war crimes tribunal in the Netherlands, the United States, the European Community and the World Bank pledged $1.28bn to help rebuild the war-damaged economy.

But much of the money will go to pay Yugoslavia's international creditors, who are owed $12.2bn.

Around $800m will actually reach Yugoslavia, where it will be used to rebuild roads and bridges damaged in the bombing and pay the salaries of teachers, doctors and other state workers laid off because of the restructuring of the economy.

"The promised money has to come in fast," said Milica Uvalic, minister for foreign economic cooperation.

And Serbia's Prime Minister Zoran Djindjic warned that "if we don't show the population soon things are getting better the political situation could become very critical."

Three further aid conferences will have to be organised in the coming years to speed aid to Yugoslavia.

Even more important will be attracting private investment, which totaled just $3.2bn for the entire Balkans area last year.

"The country is in total chaos, there are major problems in every aspect of the organisation of the economy," said the World Bank's Rory O'Sullivan, who will help oversee the aid process.

War damage

Years of state socialism and a devastating war and its associated economic sanctions, have left the strongest economy in the Balkans on its knees.

Oil refinery burns in Novi Sad
Nato bombing destroyed much of Serbia's infrastructure
The Yugoslav economy declined by 40% as a result of the war, and unemployed soared to nearly 30%.

With gross domestic product (GDP) of barely $8bn, Yugoslavia is struggling to finance foreign and domestic debt repayments. The budget gap in 2001 is expected to be about $300m.

Although there has been a limited recovery, much of economy is operating at only 50% capacity, while there is a huge balance-of-payments deficit amounting to 12% of social product.

Inflation is also accelerating, and is expected to reach 80% this year compared to 50% in 1999.

As a result, the Yugoslav currency, the dinar, has declined sharply in foreign exchange markets, from 11 dinars to the dollar in 1999 to 59 dinars to the dollar in 2001.

The World Bank estimates that Yugoslavia will need $4bn in foreign financial assistance over the next four years, with at least $1.2bn in 2001.

A respected group of Yugoslavian economists have estimated that the total cost of the war and Nato bombing was much higher - $29.4bn in lost output, equivalent to several years' production.

And Tomislav Milisavljevic of the IZIT Market Research Institute said that the "donations will have a small immediate effect on our industrial production."

Privatisation plans

The new government of Mr Kostunica is trying to attract foreign direct investment as well as raising money by privatising state assets.

JAT aircraft
The well-regarded national airline is also on the auction block

The government has presented the restructuring plans to donor countries in the hope that it will encourage them to lend more money.

Analysts say that social and economic reform will be more important than aid in the recovery process.

"What we really need is foreign direct investment in our industry," said Serbian economist Snezana Popovcic-Avric.

Serbia expects to raise about $150m by selling off the country's most valuable state-owned assets.

The government wants to use the cash raised to pay-off the companies' foreign debts and compensate the pre-1945 owners.

One of first companies to be privatised will be the Beocin cement factory, which was promised to French construction group Lafarge last September and negotiations are said to be in the "final phase".

But the key sale will be of Zastava, one of Eastern Europe's largest arms manufacturers and maker of the Yugo car, and the national airline JAT which has a good reputation, modern planes and well-trained pilots.

Also under review is the sale of Serbian Telecom to Telecom Italia in 1997 for $1bn, which some said was too low a price.

The new government is also changing the law to encourage majority foreign ownership, which was prohibited under Yugoslavia's system of "social ownership" under which a company's equity was split between the workers and the state.

Most companies are still controlled by employees and their management committees.

Key role in the Balkans

The revival of the Yugoslav economy is the key to the economic recovery in the Balkans, which the EU has been promoting through its the Balkans Stability Pact.

Set up after the Kosovo war in 1999, the group co-ordinates aid from the European Union and the G8 group of the world's top industrialised nations plus Russia to the countries in the region.

Rebuilding Yugoslavia's infrastructure will improve the trade prospects for other Balkan countries, who were closely linked to Serbia before the break-up of Yugoslavia and the slide into civil war.

And by giving the seal of political approval to the new regime could encourage foreign investment throughout the region - and help restore political stability and employment levels in other Balkan countries.


At The Hague

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