Bosnia and Hercegovina (Bih) Croatia Slovenia

COUNTRY PROFILE

Bosnia and Hercegovina (BiH) Croatia Slovenia

Our quarterly Country Reports on Bosnia and Hercegovina, Croatia and Slovenia analyse current trends. This annual Country Profile provides background political and economic information.

1996-97

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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Copyright © 1997 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN 1352-0970

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January 31, 1997 Contents

Bosnia and Hercegovina (BiH)

3 Basic data

4 Political background 16 Population and society 17 The economy 18 Currency 19 National accounts 19 Employment 20 Prices and wages 20 Agriculture and forestry 21 Mining and energy 22 Manufacturing 23 Transport and communications 23 Tourism 23 Finance 24 Foreign trade and debt

Croatia

25 Basic data

26 Political background 33 Population and society 34 The economy 36 Currency 36 National accounts 37 Employment 40 Prices and wages 41 Agriculture, forestry and fishing 42 Mining 42 Energy 43 Manufacturing 44 Construction 45 Tourism 45 Transport and communications 46 Finance 48 Foreign trade 50 External payments and debt 51 Trade, investment and other regulations

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Slovenia

53 Basic data

54 Political background 60 Population and society 60 Currency 61 The economy 63 National accounts 63 Employment 64 Prices and wages 65 Agriculture, forestry and fishing 66 Mining and energy 67 Manufacturing 67 Construction 67 Tourism 68 Transport and communications 68 Finance 69 Foreign trade 71 External payments and debt 72 Trade and investment regulations

73 Select bibliography

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Bosnia and Hercegovina (BiH)

Basic data

Land area 51,129 sq km, of which 20.9% arable, 10.4% pasture and 46% forest

Population 4,366,000 (1991 census, ie pre-war); 3 million (1996 estimate)

Main towns Population in ’000, 1991

Sarajevo 526 Banja Luka 195 Zenica 146 Tuzla 132 Mostar 126 Prijedor 112

Climate Continental

Weather in Sarajevo Hottest month, July, 18-23°; coldest month, December, 0-2°C; wettest month, June, 110-150 mm average rainfall; driest month, December, 20-70 mm average rainfall

Language Serbian, Croat and Bosnian (the last of these is a local mixture of Serbian and Croat, which are themselves very similar)

Currency Bosnian and Hercegovina dinar (BiHD), which is fixed against the D-mark at DM1: BiHD100. The supply of currency is linked to foreign reserves. However, the Yugoslav dinar (YuD) is used in the Republika Srpska and the Croatian kuna (HRK) in parts of the Federation. The D-mark is also in use throughout BiH

Time 1 hour ahead of GMT

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Political background

Introduction Bosnia and Hercegovina (BiH) is at the heart of the Balkans—a meeting place of the west European Catholic and east European Orthodox cultures. Turkish occupation also gave rise to a large Muslim population, whose interpretation of Islam has traditionally been moderate and tolerant. At the end of the l5th century some of the Jews expelled from Spain and Portugal settled in Bosnia. Since the early Middle Ages, Bosnia, and from about 1400 onwards, Bosnia and Hercegovina, has been a distinct entity whether on its own or as part of the Ottoman Empire, Austro-Hungary or Yugoslavia. For several hundred years its character has been created by its unique mix of traditions. Although, before 1992, there were episodes of tensions between the groups, they were also long periods of harmony.

Bosnia and Hercegovina was torn apart by the war which started in April 1992 and ended with a ceasefire in October 1995, followed by a peace agreement initialled in Dayton, Ohio, USA, on November 21 and signed in Paris on December 14. The agreement acknowledged the division of BiH into two entities: the Federation of Bosnia and Hercegovina, and the Republika Srpska (RS). It required the RS to cede to the Federation the suburbs of the capital, Sarajevo, and a corridor to the Gorazde enclave. The RS has a corridor through the town of Brcko which links its eastern territory with its territory in north- western Bosnia. It also holds on to areas in eastern Bosnia, including Srebrenica, which formerly had large Muslim and other non-Serb populations.

The Federation was formed from the Washington agreement of March 18, 1994, which ended a secondary war which had taken place in 1993 between Croats and Muslims; the Croats had been fighting to extend their self-declared republic of Herceg-Bosna, centred in the western part of Hercegovina into Bosnia. This agreement was successful in that it brought an end to Muslim-Croat fighting in 1994, enabled government and Bosnian Croat forces to cooperate in 1995 against RS forces, and provided the basis of the Dayton peace agreement. However, the “Croatian Republic of Herceg-Bosna”, with almost all its civilian and military functions, still de facto existed at the end of 1996, although Croatia had committed itself to ensuring that its powers were to be transferred to the Federation on August 31. The justification for its continued existence is that the transfer of competencies from Herceg-Bosna and from the former Muslim- dominated Bosnian government should be made simultaneously. Both Muslims and Croats accuse each other of not fulfilling their undertakings.

Following the forced displacement of populations, which came to be known as “ethnic cleansing” and was an integral part of the war, the RS and the Croat area which called itself Herceg-Bosna are both largely ethnically homogeneous. The Dayton agreement committed all parties to allowing the return of refugees to their homes, but with one or two isolated exceptions this aspect of the agreement was completely ignored in 1996. Indeed some population movements have continued, the largest being that of Serbs from several suburbs of Sarajevo before these became part of the Federation in March 1996. It is only in some parts of the Federation outside the self-styled Herceg-Bosna that different ethnic groups have continued to live side by side, notably in Sarajevo, Tuzla and Zenica.

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Origins and the medieval Slav tribes settled in the area of Bosnia and Hercegovina in the 7th century, period at the same time as in Croatia. Over the next two centuries it was a semi- independent state ruled by a ban (a feudal title akin to duke) and over which Hungary and Byzantium vied for control. There was a parallel rivalry between the Catholic and Orthodox Churches. In the l2th century an independent Bosnian Church emerged, which avoided a formal hierarchy and was more attuned to local customs than the Catholic or Orthodox structures.

In 1377 Ban Tvrtko Kotromanic became King Tvrtko the First. His reign until 1391 represented the apogee of the Bosnian state. After his death Bosnia was divided between rival feudal lords while the influence of the Ottoman empire gradually increased until the independent Bosnian state collapsed in 1463; the last king was Stjepan Tomasevic.

Turkish rule Under the Ottoman empire Bosnia formed a pashadom or eyalet (province). From 1580 to 1699 this covered rather more than the present-day territory of Bosnia and Hercegovina. Under the Treaty of Karlovci in 1699 it was reduced to roughly its present size. In contrast to Serbia and Croatia, where most of the population remained Christian, a substantial proportion of the population converted to Islam. One reason may have been the prior existence of the independent Bosnian church. The process became self-reinforcing, with Bosnia being seen as the focus of Islamic culture in the central Balkans.

Austrian rule and the First By the middle of the l9th century the newly independent Serbia was seeking to World War expand by taking over Bosnia and Hercegovina from the decaying Ottoman empire. However, after the Russian-Turkish war of 1877, Russia agreed at the Congress of Berlin in 1878 that Bosnia and Hercegovina should become a protectorate of Austria-Hungary; and it was fully incorporated into the empire in 1908. The ambitions of Serbia and the Bosnian Serbs were not, however, extinguished. On June 28, 1914, a Bosnian Serb, Gavrilo Princip, assassinated the heir to the Austro-Hungarian throne, Archduke Franz Ferdinand, and his wife, Duchess Sofia. This led to war between Serbia and Austro-Hungary and, indirectly, to the First World War.

The kingdom of Bosnia and Hercegovina became part of the Kingdom of Serbs, Croats and Yugoslavia Slovenes (the forerunner of Yugoslavia) in 1918. The territorial integrity of Bosnia and Hercegovina was guaranteed in the kingdom’s constitution, which was a condition for the Yugoslav Muslim Organisation’s support for the constitution in parliament. However, when King Alexander imposed a centralised dictatorship in the late 1920s, Bosnia and Hercegovina, like Croatia, was dissolved as an administrative unit.

The Second World War The Croat Ustashi regime under Ante Pavelic was allowed control of Bosnia and and Tito Hercegovina by Nazi Germany. However, Bosnia was also the scene of much of the activity of the partisan resistance, led by Josip Broz Tito, which grouped all ethnic/religious groups under a communist banner. The Socialist Federal Republic of Yugoslavia (SFRY) was inaugurated on November 29, 1943, in the town of Jajce in central Bosnia. At the same time, the borders of the six SFRY republics, including Bosnia and Hercegovina, were defined as they are at present.

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For much of the post-Second World War period Bosnians and Hercegovinans were relatively contented with their lot. The communist regime, both at the federal and the republic level, prevented ethnic/religious conflict. While political freedoms were much less than in western Europe, there was a considerable degree of cultural freedom, certainly more than in the rest of eastern Europe at the time. Nevertheless, by the early 1970s there was an increasing desire for political expression. This led to a dual response from the Tito regime: a rejection of any move to a multiparty system, but a greater devolution of power within both the bureaucracy and the League of Communists. The constitution of 1974 had many confederate elements which it was hoped would satisfy the growing tide of nationalism, but failed to do so.

The emergence of In the 1980s new political forces began to gather strength. The current president different ethnic parties of Bosnia and Hercegovina, Alija Izetbegovic, was imprisoned for the second time from 1983 to 1988 for having written the Islamic Declaration, which envisaged the development of Muslim aspirations within a democratic political framework. His first imprisonment was immediately after the end of the Second World War, for membership of the nationalistic “Young Muslims League”. In 1989-91 the political movement which he led, the Democratic Action Party (SDA), was able to work in reasonable harmony with both Croats and Serbs, especially in Sarajevo and other towns.

At the same time, however, a powerful Serb organisation aiming to unite as much of Bosnia as possible with Serbia itself was developing in the predominantly Serb town of Banja Luka in north-west Bosnia and in much of the countryside. In mid-1990, after free elections in Croatia and Slovenia had started these republics on the road to independence, the Bosnian Serbs launched the Serbian Democratic Party (SDS) led by Radovan Karadzic and began to receive arms from the Yugoslav National Army (JNA).

There was also a Bosnian branch of the Croatian Democratic Union (HDZ), the party of the president of Croatia, Franjo Tudjman. It was first under the moderate leadership of Stjepan Kljuic, who promoted a close alliance with the Muslims with the objective of building a united Bosnia. He was replaced in early 1992 by Mate Boban, who represented the hard-core Croatian nationalist movement in western Hercegovina and was at that time strongly supported by the authorities of the republic of Croatia.

The run-up to war For a period before the war the presidency (a form of collective head of state) and the government of Bosnia and Hercegovina consisted of a coalition of all three parties. The Muslim SDA did not seek independence but rather a new constitution which would define the powers of the republics and eliminate the leading role of the Communists. However, the independence declarations of Croatia and Slovenia in June 1991 put the Muslims and Croats in a difficult position, since they feared that without these republics the rest of Yugoslavia would be little different from greater Serbia. The majority of Serbs, on the other hand, feared that their interests would not be safeguarded in an independent state.

The Muslims and Croats together were in a majority, and they were also supported by most people of mixed nationality. They sought independence and international recognition. The Badinter Commission, set up by the member

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states of the European Community (EC), recommended at the end of 1991 that Bosnia and Hercegovina be recognised as an independent republic, provided the desire of the population for independence was confirmed by a referendum. A referendum was duly held on March 1, 1992. Of the two-thirds of the population that voted, 99% voted in favour. But the referendum was boycotted by the SDS and much of the Serb population.

On March 18 the leaders of the SDA, SDS and HDZ agreed to a plan proposed by a former UK foreign secretary, Lord Carrington, and the Portuguese foreign minister (then chairing the EC Council of Ministers), Jose Cutiliero, that Bosnia and Hercegovina should be divided into autonomous ethnic regions (which would be a patchwork, rather than fully self-contained blocks). The plan was not, however, accepted by the BiH parliament.

The start of the war Violence escalated after the referendum and after the official date of independence and recognition, April 6, Serb militias and the JNA quickly took control of large areas of territory. In early May all JNA troops who did not originate from Bosnia (about 20%) were sent back to Serbia. Thus the remaining army could be considered a purely Bosnian Serb army (non-Serbs having deserted).

The Muslims were then in alliance with the Croats and were also supported by heterogeneous groups and some Serbs. They were able to retain control of some larger towns but were rapidly forced to leave large areas where there were Muslim majorities. Towns and villages were attacked, in the words of the special envoy of the UN High Commissioner for Refugees (UNHCR), Jose-Maria Mendiluce, “not as military objects, but with the sole purpose of driving people away”. The term “ethnic cleansing” was coined. By mid-1992 around two- thirds of the territory of Bosnia and Hercegovina was under the control of the self-declared RS. Many of the remaining towns under government control, including Sarajevo, continued to be bombarded from artillery positions on nearby hills.

The dispatch of UN troops Sarajevo was supposed to be the headquarters of the UN peacekeeping force of to deliver aid 14,000 “blue berets”, who had arrived in contested areas of Croatia in February and March 1992 to implement the so-called Vance Plan for Croatia (not to be confused with the Vance-Owen Plan for Bosnia and Hercegovina, see below). In May the headquarters were removed but new troops arrived. They tried to negotiate ceasefires, but met with little success and their role became associated with the delivery of humanitarian aid, negotiating with great difficulty the opening of Sarajevo airport and land corridors to allow the passage of food and other humanitarian supplies provided through the UNHCR.

On August 13, 1992, Resolution 770 of the UN Security Council called upon member states to take all necessary measures to facilitate the delivery of humanitarian aid. By the end of August it had been decided to dispatch 4,500 UK, French, Spanish and Canadian troops with the specific objective of delivering supplies through the war-torn territory. These troops, the UN Protection Force (UNPROFOR), became active only in November but made a contribution to the delivery of essential supplies in the winter of 1992/93 and from then onwards

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played an important humanitarian role, although the relatively small and lightly armed force was always vulnerable to attack or being taken hostage.

Croatia’s role and Just as the Serb nationalists in Bosnia have close links with Belgrade, so the Herceg-Bosna main Bosnian Croat party has close links with Zagreb. Indeed the links between Zagreb and the Bosnian Croats are probably closer, given that the Bosnian Croat party is a branch of Croatia’s ruling HDZ. Reflecting divisions within Croatia, the policy of Franjo Tudjman, the president of Croatia, towards Bosnia has been ambiguous. He is reported to have planned the division of Bosnia with the president of Serbia, Slobodan Milosevic, before Croatia declared its own independence. When both the Muslims and Croats of Bosnia were on the defensive against the Bosnian Serbs on June 16, 1992, an alliance was declared between Croatia and Bosnia. However, in July 1992 the Bosnian Croats declared their own republic of Herceg-Bosna in western Hercegovina. For some time the Herceg-Bosna leader, Mate Boban, maintained an uneasy alliance with the authorities of the official government of Bosnia, but during the winter of 1992/93 fighting began to break out in the area known as central Bosnia around Travnik and Vitez.

The Vance-Owen peace An international conference on former Yugoslavia was held in London in plan— August 1992; it resulted in the setting up of an ongoing peace conference under the co-chairmanship of a former UK foreign secretary, David Owen, and a former US secretary of state, Cyrus Vance. Bosnia and Hercegovina was the conference’s main concern. In October 1992 Lord Owen and Mr Vance unveiled a peace plan under which Bosnia and Hercegovina would be divided into ten autonomous cantons, with UN-policed throughways to ensure free movement of people and goods between the cantons. Of the three main parties, the Croats of Herceg-Bosna seemed to have the least difficulty in accepting, perhaps because they were offered a fairly generous amount of land; the Bosnian government accepted the plan only with extreme reluctance in March 1993. On May 2 the plan was accepted by Mr Milosevic of Serbia. It would have involved the stationing of 65,000-75,000 UN troops, including 25,000 US troops.

—and its collapse— The plan failed for two reasons, first because of its rejection by the Bosnian Serb assembly on May 5-6, despite a strong, even angry, plea from Mr Milosevic and, second, because the US administration of Bill Clinton was not prepared to contribute troops to enforce it while European countries were not willing to do so without the participation of US forces. The US government considered that the plan would have been extremely difficult, if not impossible to enforce. After its rejection, Mr Vance (who represented the UN, not the US government) resigned and was replaced by a former Norwegian foreign minister, Thorvald Stoltenberg. A new plan was put forward, proposing the division of Bosnia into what would effectively have been three mini-states, one Muslim, one Serb and one Croat. Negotiations on the plan, at the same time as three-way fighting, continued until the end of 1993.

—followed by The hopes of the Vance-Owen plan coming to fruition were further undermined Muslim-Croat war by the deterioration in relations between the Croat parastate of Herceg-Bosna and the Sarajevo government. On April 15, 1993, the authorities of

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Herceg-Bosna insisted that Muslims in the territory under their control hand over their arms. At the same time, they began to expel Muslims in Croat- dominated areas. Full-scale war between Croats and Muslims erupted in May, with associated atrocities on both sides. Interventions by Mr Tudjman and the UN mediators had little impact. Fighting continued throughout 1993, by the end of which the Muslims appeared to have gained the upper hand in central Bosnia.

The safe area resolutions With the collapse of the peace strategy, it was felt that something had to be done and their follow-up to protect civilians from aggression. Resolutions 824 and 836 of May-June 1993 provided for the protection of six “safe areas”: Sarajevo, Tuzla, Gorazde, Zepa, Srebrenica and Bihac. However, Sarajevo continued to be subject to artillery bombardment, leading to increased demands in NATO countries for action. With the support of a request from the UN secretary-general, NATO issued an ultimatum, on February 9, 1994, to the effect that any heavy weapons still within 20 km of the centre of Sarajevo and not placed under UNPROFOR control would, after midnight on February 20, be attacked from the air. On the day the ultimatum was announced, the commander of UNPROFOR negotiated a ceasefire, with UN troops deployed between opposing military lines. Thus UNPROFOR became engaged in peacekeeping in addition to its humanitarian supply role. However, the ceasefire was purely local.

Attention then shifted to Gorazde, where a Serb assault was launched in April. After some hesitation, UNPROFOR agreed with NATO on an ultimatum delivered to the Serb forces on April 22, that if they did not withdraw, they would be attacked from the air. The ultimatum was broadly complied with and followed by a ceasefire.

Pressure on Croatia to In early 1994 US diplomats took a new initiative. There was a wide range of support Bosnian Croat Croat opinion in Bosnia, ranging from the wish to preserve a multi-ethnic moderates— state, to the wish for a completely separate Croat state, with Muslims and Serbs expelled, and linked to Croatia proper. A crucial factor was which elements Zagreb supported. During 1992 and 1993 the hardline separatist faction, which had set up the republic of Herceg-Bosna, was supported by Zagreb. The USA, with some help from European countries and mounting international condemnation of Croatian involvement in the Bosnian war, put increasingly strong pressure on the Croatian government to change its allegiance. As a result, the hardline leader of Herceg-Bosna, Mr Boban, was forced to step down, and was replaced by the more moderate Kresimir Zubak.

—led to Washington The outcome was first a ceasefire in February 1994 and then the Washington agreements on a new agreement of March 1 between Mr Zubak and the Bosnian prime minister, Haris federation Silajdzic, to create a Federation of Bosnia and Hercegovina, which would include all areas of Bosnia and Hercegovina outside Serb control, and to set up a “confederal” link between the Federation and Croatia itself. The agreement was elaborated in Washington on March 18, when the president of Bosnia, Mr Izetbegovic, and Croatia’s president, Mr Tudjman, signed an agreement on a confederation of the new Federation and Croatia, envisaging coordination in defence, foreign policy and customs. These agreements were accompanied by a virtually complete cessation of hostilities. Detailed negotiations, in which the

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US vice-president, Al Gore, and the then secretary of state, Warren Christopher, played an active role, led on May 11 to a plan to divide the Federation into eight Swiss-style cantons. On May 31 Mr Zubak was chosen by parliament as the first president of the Federation. The prime minister was Mr Silajdzic, who was also president of the Republic of Bosnia and Hercegovina, while Mr Izetbegovic remained president of the Republic, which was still recognised as representing the whole territory of the former Yugoslav republic.

Contact Group plan of The leaders of the RS were offered the chance to join the Federation, but refused. July 1994 With one of the two wars over and increased military cooperation between the Bosnian government army and the Bosnian Croat army, attention switched to attempting to negotiate a deal between the RS and the new Federation. A new plan was worked out by France, Germany, Russia, the UK and the USA, which formed the so-called Contact Group. On July 6, 1994, the Contact Group came up with a map in which 5l% of the territory was allocated to the new Federation and 49% to the RS. The Federation was to have the enclaves of Srebenica, Zepa and Gorazde, linked by a corridor. The RS would have a corridor linking its eastern and north-western territories. Both parts, from the point of view of international recognition, would stay part of the Republic of Bosnia and Hercegovina.

The plan was accepted, with some reluctance, by Mr Izetbegovic and by the Federation. It was also accepted by the Federal Republic of Yugoslavia (FRY), notably by its most powerful figure, Mr Milosevic. Nonetheless, it was rejected by the RS parliament and its president, Mr Karadzic.

Weakening of safe area The war continued. The Bosnian government forces tried in October 1994 to policy break the siege of Sarajevo and to expand the Bihac enclave. UNPROFOR per- suaded the Bosnian army to abandon the former because it infringed on the Demilitarised Zone established around the city. Initial success around Bihac was followed by a counterattack by Bosnian Serb forces in alliance with Croatian Serbs, which placed the government enclave and the civilian population under severe threat and blocked humanitarian aid. The UN safe area policy, which had been applied with partial success to Sarajevo in February 1994 and Gorazde in April 1994, was not maintained.

Although there was a ceasefire in much of Bosnia in the first four months of 1995, fighting resumed in May and the Bosnian Serbs began again to launch attacks on civilian areas. There was a gradual revision of UN and NATO strategy, although UNPROFOR troops could do nothing to prevent the fall of two of the five UN safe areas: Srebenica on July 11 and Zepa on July 25. The women, children and older men in these areas were expelled, while thousands of men aged between 16 and 65 years were executed. The accusation of war crimes against the commander of the Serbian army in BiH, General Ratko Mladic, rests mostly upon the events after the seizure of Srebrenica.

The UN reacted with a resolution that gave additional guarantees for the remaining safe areas. A more heavily armed Anglo-French Rapid Reaction Force (RRF) was deployed and there was a strengthening of the UN-NATO stance with regard to the defence of Gorazde. Meanwhile, both Bosnian Serb and Croatian Serb forces were closing in on Bihac.

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The changing of the The UN and NATO would probably have been able to do little to prevent the fall military balance of Bihac were it not for the beginning of a radical change in the balance of power in the region resulting from advances by a combination of the Bosnian government army, the Bosnian Croat army and, most importantly, the Croatian army in the Grahovo and Glamoc area of western Bosnia. This was followed in early August by the Croatian army’s seizure of the whole Krajina region in Croatia, which relieved the siege of Bihac. Croatian and Bosnian forces subsequently advanced over a considerable swathe of western Bosnia, and by mid-September Serbian-held territory was considerably reduced.

On August 28 a Serb mortar landed in the centre of Sarajevo, killing civilians. This led to substantial and prolonged NATO air attacks on Serb military positions. After two weeks of intensive bombing the Serb leaders agreed to remove their heavy arms to 20 km from Sarajevo.

Peace negotiations During mid-1995 the US government intensified its efforts to bring about peace. Basic principles were agreed in Geneva and New York in September. A two- month ceasefire was announced on October 5 and commenced on October 12. The US government invited Mr Tudjman, Mr Milosevic and Mr Izetbegovic to Dayton, Ohio. This led to an agreement which was initialled on November 21 and signed in Paris on December 14. Most of the negotiations focused on the dividing line between the Federation and the RS (see map, page 39).

The Dayton agreement The following are the main points of the Dayton agreement, which forms the basis of the policies towards Bosnia and Hercegovina on the part of what can loosely be referred to as the international community, that is the UN, NATO, the EU, the Organisation for Security and Cooperation in Europe (OSCE), and all the major countries involved in the region, including the USA, Russia, France, Germany, the UK, Italy and Spain.

• Bosnia and Hercegovina was to remain a single state, within existing international borders. Its name was to be simply Bosnia and Hercegovina, rather than the previous Republic of Bosnia and Hercegovina.

• The state was given a constitution, with a small government responsible for foreign policy, foreign trade, immigration, international and inter-entity law enforcement, inter-entity transport and communications, air-traffic control and monetary policy.

• The state was divided into two “entities”, the Federation of Bosnia and Hercegovina, and the RS.

• Elections, supervised by the OSCE, were to be held (see below). All persons listed on the 1991 census and, at the time of elections, aged over 18, were to be allowed to vote in their original place of residence unless they chose to vote elsewhere.

• All Bosnians of either entity were to have the right of free movement throughout Bosnia and Hercegovina.

• Joint commissions were to be established for human rights (including an ombudsman appointed by the OSCE), refugees and national monuments.

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These were to be transferred to the government in five years unless it is agreed that they continue to be independent.

• The October ceasefire line was to be adjusted in a number of ways, the most important being for several suburban districts of Sarajevo, and a corridor to Gorazde, to be handed over to the Federation; for certain areas west of Banja Luka, which had been taken by government and Croat forces in September, to come within the RS; and for the town of Doboj to come within the RS (this provoked the resignation of the president of the Federation, Mr Zubak, as Doboj has a large Croatian population).

• The RS was to be allocated a corridor between its eastern and western sections, but its width, and the status of the town of Brcko, was to be subject to arbitration.

• All parties, including the RS, the Federation, Croatia and the FRY, were committed to cooperate with the international investigation and prosecution of war crimes by the War Crimes Tribunal in The Hague. Those indicted for war crimes who do not comply with the tribunal’s orders were to be banned from elected office.

• Most sanctions on FRY were suspended, but made subject to reimposition in the event of lack of cooperation with the War Crimes Tribunal.

• A UN Security Council resolution was passed to lift the arms embargo on all countries of former Yugoslavia, but with limits for the Federation, the RS, and also for Croatia and the FRY, on their total stocks of armaments.

• A High Representative as chair of a Joint Civilian Commission, was to facilitate civilian aspects of the peace agreement, including a programme for the reconstruction of infrastructure. The former Swedish prime minister, Carl Bildt, was appointed on December 8, 1995, as the High Representative.

The constitution The Republic of Bosnia and Hercegovina adopted a democratic system before seeking independence. Elections were held in December 1990 for two chambers of parliament, the Chamber of Citizens and the Chamber of Municipalities.

The Dayton agreement established a new constitution for Bosnia and Hercegovina, which envisaged the following key institutions.

• A bicameral legislature, including a 15-member House of Peoples to be selected from the entity assemblies and a 42-member House of Representatives, to be directly elected; two-thirds of each house to be from the Federation.

• A three-person presidency (one member from the RS, two from the Federation).

• A council of ministers, to act with the presidency, as the executive. The minimum number of ministers required is three: a prime minister, foreign minister and a foreign trade and communications minister. All ministers are to have deputies from a different “constituent people”.

• A constitutional court, with nine judges, four selected by the House of Representatives of the Federation, two by the National Assembly of the RS and three by the Council of Europe’s European Court of Human Rights.

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• A central bank with sole responsibility for currency issue and monetary policy.

Institution building in BiH Some progress was made during 1996 in setting up these institutions, particularly after the elections held on September 14 (see tables below). The conditions under which the elections were held fell short of those stipulated at Dayton: a politically neutral environment, freedom of expression, freedom of association, freedom of movement and of refugees to return to the former homes, and the right to vote in secret without intimidation or fear. But they did play a key role in allowing the necessary institutions of Bosnia and Hercegovina to be established. The dominant parties were the main ethnic ones: the Muslim Democratic Action Party (SDA), the Serbian Democratic Party (SDS) and the Croatian Democratic Union (HDZ). The results did, however, give a significant minority of votes in both the Federation and the RS to parties which distanced themselves from the above-mentioned, such as the Joint List for BiH, the Party for BiH, and the Union for Peace and Progess (in the RS).

The three-man presidency—unsurprisingly—consists of representatives of the main ethnic parties, but it had met seven times by the end of November 1996 and, at a meeting in Paris on November 14, pledged that the council of ministers, parliament, constitutional court, military committee and central bank would all be functioning by March 1997. Also in November it was agreed that the council of ministers should consist only of the minimum required, three, as desired by the RS. The prime minister is to be a Muslim, the foreign minister a Croat, and the minister of trade and communications a Serb.

In September 1996 a central bank was established, with a Frenchman, Serge Robert, as governor for a six-year period. The central bank has acknowledged the Croatian kuna and the D-mark as legal tender alongside the BiH dinar, which is fixed at BiHD100:DM1. The RS uses its own currency, the Yugoslav dinar and the D-mark. Nevertheless, a payment transaction system between the Federation and the RS was established in September 1996.

Election results: BiH House of Representatives, Sep 14, 1996

Party Seats Democratic Action Party (SDA) 19 Serbian Democratic Party (SDS) 9 Croatian Democratic Union (HDZ) 7 Joint list (UBSD, SDP BiH, HSS, MBO, Republicans)a 3 Party for BiH 2 Union for Peace & Progress 2 Total 42

a UBSD=Union of Bosnia and Hercegovina Social Democrats; SDP BiH=Social Democratic Party of BiH; HSS=Croatian Peasant Party; MBO=Muslim Bosnian Organisation.

Source: Organisation for Security and Corporation in Europe (OSCE).

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Election results for three-man presidency of BiH, Sep 14, 1996

Candidate Party No of votes Alija Izetbegovic SDA 730,592 Momcilo Krajisnik SDS 690,646 Kresimir Zubak HDZ 330,477 Source: OSCE.

The Federation The Washington Treaty of March 18, 1994, led to the setting up of the Federation of Bosnia and Hercegovina. The Federation has its own president, bicameral assembly (House of Peoples and House of Representatives) and government. It is intended that the Federation be divided into eight cantons, on the Swiss model. Agreement on the delineation and government of the cantons was tortuous, but by the end of 1996 the majority had been established and were functioning to some degree, although there are still some obstacles to be overcome.

Election results: House of Representatives of the Federation, Sep 14, 1996

Party Seats % of votes SDA 78 54.0 HDZ 35 24.5 Joint list of BiH 11 7.9 Party for BiH 11 n/a Democratic People’s Union 3 n/a Croatian Party of Rights 2 n/a Total 140 100.0 Source: OSCE.

EU headaches in Mostar Earlier elections were held in Mostar, the main town of Hercegovina, which was under an EU administrator, after a series of disputes caused by the un- willingness of Croats who control the major part of the city to allow the Muslims an equal, or larger, share in the municipal council. The coalition of Muslim parties won 26,000 votes, while the Croatian HDZ of BiH won 24,000. As had been agreed previously, a Croat was elected mayor. However, the Croatian side refused to accept the outcome of the elections and, after issuing a decree to affirm the results on July 12, the then EU administrator, Ricardo Perez Casado, resigned. (Mr Perez had replaced Hans Koschnick earlier in the year after the latter had resigned after being attacked by Croats.) The new administrator is Sir Martin Garrod.

The Republika Srpska The RS has its own constitution with a president, Biljana Plavsic, a government and an assembly. Mrs Plavsic took over in July 1996 from the previous president, Radovan Karadzic, who had been indicted by the International War Crimes Tribunal. This was a necessary condition for the elections for the BiH and entity legislatures to be allowed to go ahead by the OSCE. However, because of pressure on Serbs to vote in certain key municipalities from which Muslims had been expelled, local authority elections were postponed.

The table below shows that, although the Serb nationalist SDS won an overall majority, the Muslim SDA and the Serb opposition Union for Peace and Progress both won a significant number of seats.

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Election results: National Assembly of the Republika Srpska, Sep 14, 1996

Party Seats % of votes SDS 45 54.2 SDA 14 16.9 Union for Peace and Progress 10 12.0 Serb Radical Party of Republika Srpska 6 n/a Democratic Patriotic Bloc of Republika Srpska 2 n/a Joint list (SDP BiH, UBSD, MBO, HSS) 2 n/a Party for BiH 2 n/a Serb Party of Krajina 1 n/a Serb Patriotic Party 1 n/a Total 83 – Source: OSCE.

International relations Widespread international recognition followed the 1992 referendum. Relations between the government and many Islamic countries, including Iran became close after the outbreak of war, during which the Organisation of the Islamic Conference (OIC) and its members gave strong international support to the government, which became Muslim-dominated. There was also, however, considerable sympathy for the government in the USA, while most European governments were detached. In the post-war situation, it is difficult to talk about the international relations of a country which, at present, exists more in theory than in practice, although the policy of most international players is to encourage the central institutions to become stronger. Foreign aid is linked to the extent to which an entity (or region within each entity) follows the Dayton agreement. Because of non-compliance with agreement, the RS received very little of the total of approximately $500m in reconstruction aid which was delivered to BiH during 1996, although UN sanctions were removed on February 27, 1996.

Defence When war broke out in Slovenia and Croatia in 1991, an international arms embargo was declared for the whole region. At the start of the war in Bosnia, the quantity and quality of military equipment in the possession of the RS forces which were linked to the Yugoslav National Army hugely exceeded those of the equipment possessed by the BiH government army and the Bosnian Croat army (HVO). Despite considerable purchases in defiance of the international arms embargo for the BiH army and the HVO, the imbalance had not been redressed by the end of the war.

According to the International Institute for Strategic Studies (IISS), the army of the BiH government then numbered some 92,000, including 40,000 reserves. It had 31 tanks, 35 armoured personnel carriers, 100 artillery pieces, 200 mortars, five helicopters and three aircraft. After advances in western and central Bosnia in July-September 1995, the BiH army acquired significant quantities of heavy arms and ammunition. During 1996 some further equipment was supplied under the US “Equip and Train” programme which foresees the provision of $400m, but conditions imposed, notably the requirement that the leading defence personnel be moderates without links with Iran, have held up the programme. By August 1996, according to the IISS, the BiH army had 75 tanks

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and ten helicopters, while numbers of other types of weapon were largely unchanged.

The HVO had some 50,000 personnel in 36 brigades in June 1995, with about 100 tanks and 200 pieces of artillery. These totals were unchanged in August 1996, according to the IISS.

The IISS estimated that the RS army had 75,000 personnel in June 1995, with about 370 tanks, 700 artillery pieces, 12 helicopters and 20 aircraft. According to the figures for August 1996, there had been no reductions in equipment and indeed the estimated number of tanks had increased to 500, although this may imply that the IISS thinks the earlier figure was an underestimate.

Limits on forces foreseen The Dayton agreement provided for the arms embargo to be lifted, for small in Dayton agreement arms after 90 days and for heavy weapons after 180 days. The Federation was supposed to confine its stocks of tanks, artillery, armoured combat vehicles, combat aircraft and attack helicopters to one-fifth of the “baseline”, this being the end-1995 holdings of the FRY (the FRY itself being obliged to reduce its holdings to three-quarters of the baseline); the RS was supposed to reduce its holdings to one-tenth of the baseline. (Croatia is permitted 30% of the baseline.)

IFOR and SFOR The Dayton agreement also provided for the stationing for one year of a mainly-NATO Implementation Force (IFOR) with about 60,000 troops. IFOR was crucial for the successful implementation of the military aspects of the agreement: the presence of IFOR troops stopped all military activity and the separation of the armed forces and of the two entities along the agreed border was successfully carried out. IFOR, however, interpreted its mandate strictly, and did not try to bring about aspects of the Peace Agreement, such as the apprehension of war criminals or the safe return of refugees, which were not specifically written into its mandate.

In November 1996 the US government ended uncertainty about its intention to continue to commit troops which enabled quick agreement to be reached on the replacement of IFOR by a new Stabilisation Force (SFOR) consisting of about 30,000 troops. As was the case with IFOR, the force is mainly a NATO one but includes some personnel from non-NATO countries, including Russia.

Population and society

The population grew by about l% per year during the 1970s and 1980s.

Population growth (mid-year estimates) 1980 1985 1990 1991 Total (’000) 4,092 4,316 4,516 4,337 % change n/a 5.5 4.6 n/aa

a The 1991 census indicates that the previous estimate was too high.

Source: Statisticki Godisnjak Jugoslavije.

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Ethnic/religious composition of population

Census 1981 Census 1991 % of % of ’000 total ’000 total Croats 758 18.4 757 17.3 Muslims 1,630 39.5 1,906 43.7 Serbs 1,321 32.0 1,369 31.4 Yugoslavs & others 415 10.1 333 7.6 Total 4,124 100.0 4,365 100.0 Source: Statisticki Godisnjak Jugoslavije.

About 1.25 million people fled Bosnia and Hercegovina as a consequence of the war in 1992-93. In mid-1995 it was estimated that 2.8 million people were living in Bosnia and Hercegovina, including 1.27 million Muslims, 892,000 Serbs, 515,000 Croats and 139,000 Yugoslavs. Of these, 1.1 million were not living in the same areas as they had been previously. The UN High Commissioner for Refugees estimates that another 350,000 were displaced during July-September 1995.

Education and health During the war such services as continued were of a very basic kind.

Pre-war. Education provision and health services expanded rapidly in the post-Second World War period, although their quality may have declined as a result of financial pressure in the 1980s.

There were eight years of obligatory education (6-14). In 1989/90 there were 2,211 schools, 22,939 teachers and 538,475 pupils. There were four universities, at Sarajevo, Banja Luka, Mostar and Tuzla, and an Academy of Arts and Sciences in Sarajevo.

There was a national health service with 636 people per doctor in 1989. There were 8,218 beds in general hospitals, 4,469 in specialised hospitals and about 7,000 in other medical institutions.

Post-war. Some of the loans by the World Bank are intended for the necessary medical equipment and for improving the position of health employees. As a result, medical services started to improve during 1996. The educational service is also benefiting from finance channelled through the World Bank loan.

The economy

The economy of Bosnia and Hercegovina (BiH0 developed rapidly after the Second World War. Although less suitable than Croatia or Serbia for agriculture, BiH has a variety of mineral resources, both coniferous and deciduous forestry and hydroelectric power. It was the location of five of the former Yugoslavia’s largest companies: Energoinvest (electrical engineering), RMK Zenica (mining and metallurgy), Sipad (wood), Unis (metalworking) and UPI (agriculture and food). These were diversified companies controlling their own international marketing arrangements.

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All except RMK Zenica were centred in Sarajevo. They were socially owned under Yugoslavia’s self-management system, but there were also a large number of small private companies.

Changes since the end of There has been a degree of de facto privatisation during and since the war. 1992-95 war While there were some privately owned shops and providers of retail services before the war, the majority were state-owned. However, now the private sector prevails, being made up of smaller entities and being more flexible to adapt. As yet there is no significant private manufacturing sector.

The international community is well aware that without the economic recovery, peace in BiH will not last. Humanitarian aid has continued to be provided on a substantial scale, but this does not provide for longer-term needs.

On March 15-16, 1996, an International Conference for the Reconstruction of Bosnia and Hercegovina gathered representatives of 40 countries and several international financial organisations in Sarajevo. The direct war damage was estimated at $80bn. An optimal reconstruction plan would require about $20bn in the first five years. At a follow-up conference in Brussels on April 12-13, $5.1bn was pledged for 1996-98, but it is unlikely that this will be realised. During 1996, $500m-600m is believed to have been spent through the World Bank on reconstruction, rehabilitation of key services, such as health and education, and essential repairs to infrastructure.

World Bank and BiH economists disagree on the priorities for capital for business. The World Bank wants to concentrate on building up small private companies, while BiH economists consider that the larger companies, which accounted for 50% of GDP before the war, should not be ignored.

Currency

The current situation in the government-controlled areas is that wages are paid in Bosnian dinars, which are fixed against the D-mark at BiHD100:DM1. In September 1996 a Frenchman, Serge Robert, was appointed as governor of the Central Bank of Bosnia and Hercegovina (BiH) for a six-year period. His aim will be to establish a single monetary area for BiH. At present, the Bosnian dinar, Croatian kuna and D-mark are accepted as legal tender in the Federation while in the RS, the RS dinar and D-mark are accepted. In the Federation almost all companies have their accounts in all three currencies. The everyday use of Bosnian dinars, previously very limited, increased during 1996, although reserves are still usually held in D-marks or sometimes in kuna.

Privatisation A privatisation law has been passed in the RS but not in the Federation. How- ever, as most public-sector companies are defunct or heavily loss-making, there is little prospect of substantial privatisations taking place in either entity in the near future.

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National accounts

The latest available national account figures cover the period to 1989, using the former Yugoslav system which defines national income as gross social product, a measure which excludes services other than those involved in the transport and distribution of goods. In current prices GDP in 1990 is estimated at $8bn or $1,800 per head. The World Bank estimated 1995 GDP in the Federation area, with a population of about 2 million, at $1bn in total or $500 per head. It has suggested that this low figure grew by 35% in 1996.

Gross social product

1984 1985 1986 1987 1988 1989 YuD bn at 1972 prices 4,973 5,048 5,240 5,154 5,040 5,119 % change, year on year n/a 1.5 3.8 – 1.6 – 2.2 1.6 Source: Statisticki Godisnjak Jugoslavije.

Employment

Before the 1992-95 war The labour force more than doubled between 1970 and 1985. Employment opportunities, although expanding, were unable to keep pace and there was much less work available elsewhere in former Yugoslavia or abroad, particularly for men, than in earlier decades. Thus unemployment rose sharply and became a major social problem during the 1980s, the only mitigating factor being unregistered private employment.

Labour-market trends (’000 unless otherwise indicated) 1970 1980 1985 1986 1987 1988 1989 1990 Social sector 511 821 990 1,030 1,054 1,061 1,061 1,026 Private sector 7 13 18 20 22 23 24 28 Total employment 518 833 1,008 1,050 1,076 1,084 1,085 1,054 Unemployment 38 137 241 251 243 257 277 283 Labour force 556 970 1,249 1,301 1,319 1,341 1,362 1,337 Unemployment rate (% of labour force) 6.8 14.1 19.3 19.3 18.4 19.2 20.3 21.2 Source: Statisticki Godisnjak Jugoslavije.

The present situation The World Bank estimates that civilian employment increased during 1996 by 250,000 as a result of reconstruction-related activities, but total employment at the end of 1996 was lower than unemployment, which remained at over 1 million. Unemployment is likely to become increasingly prominent as a political issue. The fact that pre-war BiH economy was characterised by large companies, the majority of which were engaged in heavy industrial activities of a type which today face a bleak future even in favourable circumstances, does not bode well.

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Prices and wages

As in the rest of former Yugoslavia, inflation accelerated rapidly during the latter half of the 1980s. An austerity programme was imposed at the end of 1989, which led to a sharp fall in real incomes. The inflation rate slowed in 1990 and 1991 but accelerated again to hyperinflation in 1992, and real incomes were reduced to a subsistence level for much of the population.

Prices and wages (% change, year on year) 1986 1987 1988 1989 1990 1991 Prices 88 119 199 1,256 588 117 Nominal net income 100 97 173 1,520 424 n/a Source: Statisticki Godisnjak Jugoslavije.

The situation in 1996 In 1995 the more successful companies paid wages of the order of only DM40-80 ($30-50) per month, and often by providing food or household items rather than cash.

In 1996 wages increased to DM100-300 ($65-200) per month, but wage earners now make regular payments for rent, electricity bills and charges for water and other communal services, while humanitarian aid, although still considerable, has fallen. Taking these factors into consideration, the average wage earner still lives at a subsistence level. Tensions, leading in some cases to strikes, have been caused by the substantial difference between civil service wages of around DM250 per month and industrial and mining wages, which are closer to DM150 per month.

Agriculture and forestry

In 1990, 1.6m ha of land were farmed, of which about one-third was under crops, one-third meadow or fallow and one-third pasture. Much of the country is forested and too mountainous to be easily farmed, so production of the main cereal crops (wheat and maize) used to be only 30-40% of that in Croatia, which had a similar area and population size. Livestock numbers for cattle, sheep and poultry were relatively higher, although still lower in absolute terms than in Croatia.

Agricultural production index (1955=100) 1985 1986 1987 1988 1989 1990 Total 219 236 226 222 235 223 Source: Statisticki Godisnjak Jugoslavije.

The situation in 1996 Agricultural production was heavily affected by the 1992-95 war. Although small-scale farming continued, the main source of food was humanitarian aid. This remained the case in 1996, although there was some improvement in output as a result of easier peacetime conditions. Machinery and equipment remained in short supply and in poor condition.

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Main agricultural products (’000 tons) 1985 1986 1987 1988 1989 1990 Wheat 367 324 373 468 424 457 Maize 717 931 691 557 798 734 Meat 136 141 145 136 131 140 Potatoes n/a n/a n/a n/a n/a 338 Hay n/a n/a n/a n/a n/a 806 Source: Statisticki Godisnjak Jugoslavije.

Forestry Nearly half (2.3m ha) of Bosnia and Hercegovina’s 5.1m ha of territory is forested. The forested area is remarkable not only for its extent, but also its rich variety. The majority (1.6m ha) is deciduous. Only a little over 100,000 ha is purely coniferous, while 600,000 ha is mixed. It was a sector of considerable economic importance, with 22,000 foresters directly employed in 1990 and substantially more engaged in the manufacture of wood products.

Fears of deforestation With peace, the sector has recovered quickly both in the Federation and the RS, as felling can be carried out with unsophisticated equipment. Indeed, there are fears that uncontrolled felling could lead to deforestation. Although the government is aware of the problem and is taking steps to control tree-felling, its ability to do so may be limited.

Production of furniture and other wood products is one sector of manufacturing in which there has been renewed activity, despite outdated machinery.

Mining and energy

There is a long tradition of mining, with substantial reserves of coal, iron ore, lead, bauxite, zinc, barytes, rock salt and ceramics.

Bosnia is rich in hydrocapacity, which was exploited to produce 18bn kwh per year before the war. There is a large artificial lake at Jablanica for this purpose, three newer hydroelectric plants on the River Neretva (Salakovac, Grabovica and Mostar), one on the River Rama, and two on the River Pliva near the town of Jajce. Most of the electric energy produced in Bosnia and Hercegovina before the war was, nevertheless, from thermal power stations, the largest being at Kakanj (central Bosnia, between Zenica and Sarajevo) and Tuzla. Two more power stations are in Serb-controlled territory at Bijeljina and Gacko. During the war the hydroelectric plants on the Neretva were in operation, and in September 1995 the plants on the Pliva were put into operation.

The potential for electricity production should help reconstruction; there might even be a surplus for export. But thermal stations at the end of 1996 still required urgent repair work: they have been producing, but at well below capacity. A World Bank loan has been authorised for this purpose. New thermal generators are planned at Tuzla and Kakanj, and a new hydroelectric installation at Salakovac. At present a limit is placed on consumption per household of 200 kwh per month, unless extra payment is made in advance.

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A total of 17.9m tons of coal were mined in 1990. The most important coal mines are in Kakanj and Tuzla, close to thermal power plants. However, the use of coal mined in Bosnia (brown and lignite) as the main energy source has caused serious environmental problems because of its high sulphur content, and may again do so. None of the existing thermal power plants has desulphur- isation systems, which are expensive to install.

Oil and gas have to be imported.

Manufacturing

The following table shows that industrial production in 1985 was almost ten times its level in the base year of the index, 1955. A substantial part of this output, however, stemmed from the inefficient heavy industry familiar in eastern Europe, which is now unlikely to be viable even with low labour costs, because of high energy and material costs. However, there were also substantial wood-working, textiles, ceramics and electronics sectors.

Industrial production index (1955=100) 1985 1986 1987 1988 1989 1990 Total 989 1,043 1,033 1,026 1,033 950 Source: Statisticki Godisnjak Jugoslavije.

Output of manufactured goods, 1990 (’000 tons unless otherwise indicated) Pig iron 1,284 Alumina 735 Crude steel 1,421 Ceramics 705 Rolled wire 580 Twisted wire products 8,588 Steel rods for reinforced concrete 467 Ball bearings 3,397 Rolled steel products 1,001 Furniture (’000 items) 5,738 Bauxite 2,952 Leather (’000 sq metres) 2,191 Asbestos fibre 3,905 Leather footwear (’000 pairs) 13,189 Source: Statisticki Godisnjak Jugoslavije.

Production during the war Most manufacturing activity ceased during the war (1992-95), but the textiles industry in the areas under government and Croatian control remained surprisingly active. Some companies, such as Borac Travnik (in Zenica as well as Travnik), continued pre-war subcontracting work, mainly for German companies. These companies are now increasing their orders and the trend is likely to continue, due in part to their extremely low wage costs.

Large electrical and mechanical plants in Sarajevo and the metallurgical company RMK, in Zenica, also continued to function but at a low level and focus- ing mainly on military products and spare parts. Most of the factories of the Sarajevo-based Energoinvest, Unis and Unioninvest were destroyed or badly damaged.

There is intense debate over the future of the former state sector of the economy, which is dominated by these large companies but for the most part their future looks bleak, as indicated in the table below, which gives cash-flow figures for

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6,700 reporting companies, of which 5,447 are private. Closing down the factories would, however, lose tens of thousands of jobs.

Company results, Jan-Jun 1996 (BiHD bn) Gross sales receipts Costs State-owned 3.5 33.2 Private 1.5 5.5 Cooperative 0.6 0.1 Mixed 2.1 3.2 Source: BiH payments agency.

Transport and communications

There are 1,000 km of railways, of which 75% were electrified before the war, and 21,268 km of roads.

In the years leading to the outbreak of war there was an independent press with no censorship. There were two main daily newspapers in Sarajevo, four state radio programmes and three state television channels, plus private radio and television.

The daily newspaper Oslobodjenje (Liberation), which started in 1943, continued publishing during the 1992-95 war, and an embryonic broadcasting service was kept going.

The central state television station in Sarajevo also continued in operation throughout the war.

There are also local, privately owned TV stations in Zenica and Tuzla, which have remained active. Numerous local radio stations also operate.

Tourism

Despite the holding of the Winter Olympics in Bosnia in 1984, the country is not a major tourist destination.

Tourist visits by origin, 1990

Former Yugoslavia 1,158 Abroad 321 Source: Statisticki Godisnjak Jugoslavije.

Finance

The Central Bank of Bosnia and Hercegovina (BiH) was set up in 1996, to replace the previous central bank, which operated only in government-controlled areas. A system of payments between the two entities has been established.

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Foreign trade and debt

In 1990 Bosnia and Hercegovina exported goods worth $2.05bn outside former Yugoslavia, equivalent to 14.4% of total exports from Yugoslavia. It also run a small trade surplus. The largest exporting company in former Yugoslavia, Energoinvest, was based in Sarajevo. The largest portion of exports was investment goods exported to the former Soviet Union and other Warsaw Pact countries.

Foreign trade by commoditya, 1990 ($ m) Exports fob Imports fob Food & live animals 25.5 102.6 Beverages & tobacco 16.6 22.4 Other raw materials 369.2 125.5 Fuels & lubricants 29.2 596.1 Vegetable oil 0.0 5.7 Chemicals 193.4 181.0 Manufacturesb 638.5 271.3 Machinery & transport equipment 427.8 433.9 Manufactures (miscellaneous) 356.2 124.1 Others 0.1 4.2 Total 2,056.1 1,866.9

a Goods classified by ITC definition. b Of which clothing and footwear are the most important subcategories.

Source: Statisticki Godisnjak Jugoslavije.

Exports during the war, at least those officially recorded, were virtually zero.

Debt Bosnia and Hercegovina’s debt is estimated at around $2.5bn. The country owes more than $1bn in debt-service payments to commercial banks, governments and multilateral organisations, including arrears of $430m with the World Bank. It is obvious that no debt-service payments are possible in the next few years, at least.

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Croatia

Basic data

Land area 56,538 sq km, of which 26.2% arable, 20.4% pasture and 36.7% forest (1990)

Population 4.76 million (1991 census, official estimate for 1996 is 4.8 million)

Main towns Population in ’000, 1991

Zagreb 931 Split 207 Rijeka 206 Osijek 165 Zadar 135

Climate Mediterranean on coast, continental inland

Weather in Zagreb Hottest month, August, 20.6°C (average daily); coldest month, January, 0°C; (altitude 135 metres) driest month, August, 24 mm average rainfall; wettest months, September and November, 97 mm average rainfall

Weather in Split (sea level) Hottest month, July, 25.8°C; coldest month, December, 7.3°C; driest month, July, 10 mm average rainfall; wettest month, October, 159 mm average rainfall

Languages Croat, Serbian (the two are very similar)

Weights & measures Metric system

Currency Croatian kuna (HRK). Average 1996 exchange rates were HRK5.43:$1; HRK3.62: DM1; HRK8.47:£1; end-1996 rates HRK5.54:$1; HRK3.55:DM1; HRK9.42:£1

Time 1 hour ahead of GMT

Fiscal year Calendar year

Public holidays January 1, 6; Easter Monday; May 1, 30; June 22; August 15; November 1; December 25, 26

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Political background

Origins The Croats moved into the former Roman provinces of Panonia and Dalmatia in the 7th century, and over the next 200 years Croatian dukes controlled much of what is now Croatia, ie Slavonia and Dalmatia, as well as the area around Zagreb (central Croatia). In 925 Tomislav was crowned as the first Croatian king. By the end of the 11th century, however, the kingdom was torn by internal disputes and in 1102, when the dynasty died out, Croatia agreed to a dynastic union with Hungary. The then Hungarian king was formally elected by Croatian tribes as king of Croatia and Dalmatia. However, Croatia was guaranteed full state rights: Hungary and Croatia were two states with the same king. The king ruled Croatia through his ban (viceroy) and each country initially governed its own internal affairs. However, over time, the Hungarian kings granted feudal rights to foreigners whose presence in representational bodies gradually reduced Croatian autonomy. In 1409 Hungary sold Dalmatia to Venice. It did not become part of Croatia again until 1918.

Austrian rule, 1526-1867 In the 15th and early 16th centuries Croatia and Hungary were subject to the expansion of the Ottoman empire, which culminated in its victory over the Hungarians at Mohacz in 1526. The Austrian duke, Ferdinand, a member of the Habsburg family, became king of Hungary and was offered the Croatian crown by the Croatian representative body (Sabor).

In the 17th century the Austrian empire pushed its frontier with the Ottoman empire outwards to include much of Croatia. However, in 1630 it established a province known as the Military Frontier. Its population, which was as large as that under the control of the Croatian ban and Sabor, was 50% Croat, 40% Serb and 10% other, the non-Croatian element consisting largely of exiles from the Ottoman empire. Further territory, ceded by the Ottomans, was added to the Military Frontier in 1699.

Under Hungary in the In 1867 the Austrian empire was reorganised as the Austro-Hungarian empire, Dual Monarchy with central Croatia and Slavonia joining the Hungarian part of the Dual Monarchy. There was considerable tension between Croatia and Hungary over the next half century; the latter, in Croatia’s view, did not abide by the 1868 constitutional settlement which provided for legislative autonomy and Croatian control over 45% of budget revenue. Political parties emerged, some calling for independence, others for a union of south Slav countries, including Serbia and Slovenia.

The first Yugoslavia The break-up of the Austro-Hungarian empire followed its defeat in the First World War. On November 24, 1918, Croatia (and Slovenia) agreed to become part of the kingdom of Serbs, Croats and Slovenes under a Serb dynasty. Within ten years, however, hopes for a harmonious state consisting of three peoples with equal rights were shattered. The popular Croatian leader of the Peasants’ Party, Stjepan Radic, who also won some support in Serbia, was seen as a threat by the regime, and was assassinated in the Belgrade parliament. Independent political movements were repressed, the title of the kingdom changed to Yugoslavia and a centralised dictatorship imposed.

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However, after the assassination of King Alexander in 1934, Croatian national and Serbian democratic forces gathered strength and won the election of 1939. Croatia attained autonomy over a territory roughly equivalent to that which it had in post-war Yugoslavia.

The Second World War Nazi Germany attacked Yugoslavia in April 1941. It created a puppet state, the Independent State of Croatia. Its leaders were known as the Ustashi, and they pursued a policy of genocide against Serbs, Jews and others. The murderous brutality of the Ustashi left its mark on the Serbs in Croatia. There was passive resistance to the Ustashi regime from much of the Croatian population and active resistance from the Croatian partisans, who came under the command of Josip Broz Tito.

Croatia in Tito’s Croatian communists were solid supporters of Tito’s break with Stalin in 1948, Yugoslavia of economic liberalisation and especially of the decollectivisation of agriculture in 1953. However, Tito, himself half-Croat (and half-Slovene), tended to take Croat compliance with his policies for granted. A gradual polarisation of interests emerged between the republics (especially Slovenia and Croatia) and the centralised bureaucracy, which was closely linked with powerful foreign trading companies. A privileged position was given to the Serbs outside Serbia, a group considered particularly loyal to the Yugoslav idea and which had contributed much to the partisan movement.

In 1971 the Croatian communist leadership called for greater autonomy within a confederal Yugoslavia. After some hesitation, Tito was prevailed upon by the army to dismiss and replace the whole leadership. His decision was partly based on the fear that the then relatively moderate communist nationalists would be replaced by pure nationalists who would reject communism.

The 1990 elections gave a The 1971 repression put the lid on a simmering discontent, which boiled over majority to the HDZ when it became clear that the Cold War had ended. New parties were created, all to a greater or lesser degree with nationalist programmes. Elections were held in April 1990, in which the Croatian Democratic Union (HDZ) won an overall majority, its main opponents being a ten-party coalition, forming the People’s Accord, and the former communist Party of Democratic Change. The leader of the HDZ, Franjo Tudjman, was elected head of state (president) by the parliament (Sabor). However, the government until the next elections in August 1992 was a coalition, including representatives of smaller parties and led by an independent, Franjo Greguric.

The 1991 war In December 1990 the Sabor proclaimed a new constitution. However, it re- frained from a unilateral declaration of independence until June 25, 1991, when it was prompted to act by Slovenia’s declaration of independence. The Serbian-dominated Yugoslav National Army (JNA) first moved into Slovenia but then withdrew under a European Community (EC) peace plan under which the independence declarations of Slovenia and Croatia were to be deferred for three months.

It was during these three months that the Croatian war began. Serb para- militaries took control of territory in Krajina (the former Military Frontier).

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Eastern Slavonia, the area around the towns of Vinkovci and Vukovar which borders Serbia, was attacked by the JNA and eventually fell under Serbian control. There was also fighting in western Slavonia.

In the process of seeking Croatian independence, the Croatian leadership paid little attention to the legitimate concerns of the Serb population of Croatia, so giving substance to their fears of being deprived of their rights under Croatian rule. It was only on August 1, 1991, that Mr Tudjman offered autonomy to two Serb-majority areas in Croatia. But a referendum held a year earlier had authorised a Serb autonomous republic which was declared on April 1, 1991—before Croatia’s own declaration of independence.

The Vance Plan The war, which had lasted throughout the autumn of 1991, was halted at the end of the year with about one-third of Croatian territory effectively controlled by local Serbs (Krajina and western Slavonia) or Serbia itself (eastern Slavonia). Under proposals put forward by a former UN secretary of state, Cyrus Vance, the UN agreed to send 14,000 peacekeeping troops into four areas, known as Sectors North and South (roughly corresponding to the old Krajina), and Sectors East (eastern Slavonia) and West (western Slavonia). Collectively they are known as UN Protected Areas (UNPAs). According to the Vance Plan, the UN “blue helmets” were to ensure that these areas were demilitarised and that conditions existed for refugees to return to their homes. However, such tasks proved impossible: they would have amounted to “peacemaking” rather than “peacekeeping” and were not seriously attempted.

The Vance Plan was accepted by the Krajina Serbs, in particular their then leader, Milan Babic, with great reluctance, under pressure from Serbia’s president, Slobodan Milosevic. The end of the war coincided with mounting pressure from Germany for recognition of Croatia and, on January 15, 1992, Croatia was recognised by EU member states. It was admitted to the UN in April 1992.

Increasing Croatian While Croatia was initially pleased that the war had ended and that its inde- dissatisfaction with pendence had been established, there was growing dissatisfaction during 1994 situation in the UNPAs with the failure of the UN Protection Force (UNPROFOR) to fulfil the Vance Plan and the fact that Croatia did not have control of one-third of its nominal territory. Each time the UNPROFOR mandate came up for renewal, Croatia agreed with increasing reluctance. The UN’s reputation was further weakened by its weakness in the face of a threat in late 1994 to the Bihac enclave in Bosnia. On January 12, 1995, Mr Tudjman told the UN secretary-general that the UN force in Croatia must leave by the end of March, unless Croatian demands were met. On March 31 the UN Security Council passed Resolution 981 to replace UNPROFOR with the UN Confidence Restoration Operation (UNCRO); this had fewer troops, some of whom were supposed to monitor Croatia’s international borders.

Western Slavonia and Talks involving the USA and Russia took place in Zagreb in 1994 and seemed to Krajina were taken by make some progress, but the reality was that the position of hardliners within both Croatian forces in 1995 the Croatian government and the Krajina Serb authorities was strengthening. In early May Croatia launched a military operation to bring the western Slavonia

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area under its control. The deteriorating situation in Bosnia and Hercegovina from May to July paved the way for the Croatian seizure of Krajina in early August, a move which resulted in the expulsion of 150,000-200,000 Serbs.

The future of eastern This left eastern Slavonia as the only area of Croatia still under Serb control. Slavonia After a period in which Croatia threatened further military action, an agreement between local Serbs and Croatia on the future of eastern Slavonia was signed on November 12, 1995, in the town of Erdut. It was confirmed by Mr Tudjman and his Serbian counterpart, Mr Milosevic, who were both involved with the negotiations on the future of Bosnia and Hercegovina in Dayton, USA. The main points of the agreement were:

• a one-year transition period, extendable to two years, during which a Croatian administration will be gradually established;

• demilitarisation of Serb units during the first year under the supervision of international forces;

• local elections to be held 30 days after the end of the transition period; and

• provisions for the return of all refugees.

On January 15, 1996, the UN Security Council passed Resolution 1,037 which established the UN Transitional Authority (UNTAES) under a US general, Jaques Klein. There have been different interpretations of the agreement. The local Serbs hoped for special provisions for local autonomy, but Zagreb has refused the request, arguing that it is not justified by the pre-war balance of the population: 45% Croat and 35% Serb out of a population of 194,000. The present, mainly Serb, population is estimated by Croatia at 75,000 including about 11,000 displaced people from western Slavonia.

Elections in 1992 and 1995 The positions of Mr Tudjman and the ruling HDZ were strengthened by the gave the HDZ an overall simultaneous elections for the presidency and the lower chamber of the Sabor, majority— the house of communes (opcine), on August 2, 1992. In the elections for the house of regions (zupanije) held in February 1993 the HDZ won 37 of the 63 seats, followed by the main opposition party, the Social Liberals (HSLS), with 16 seats and the Croatian Peasants’ Party (HSS) with five seats. The regional party, the Istrian Democratic Sabor, won three seats. Following the elections the president appointed a single-party government under Hrvoje Sarinic, who was succeeded by Nikica Valentic at the end of March 1993.

The elections for the lower chamber held on October 29, 1995, confirmed the overall majority of the HDZ in the Sabor although the majority was not large enough to change the constitution and the party only won 45% of the total vote.

––but it failed in 1995 to However, elections held at the same time for the Zagreb city council gave the win a majority in Zagreb HDZ only 16 seats out of 50. Moreover, the seven opposition parties who commanded all but one of the other 34 seats agreed to cooperate and elected Goran Goric of the HSLS as mayor and Slavko Tomac of the Social Democratic Party of Croatia (SDP) as chairman of the Zagreb county council. However,

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Mr Tudjman refused to endorse either appointment, leading to a struggle with the council which continued throughout 1996.

The outlook for domestic politics in 1997 is very uncertain. Mr Tudjman is reported to be in poor health following an operation for cancer in November 1996, and new presidential elections are due by the end of 1997.

Election results (seats in lower house) Aug 1992 Oct 1995 Croatian Democratic Union (HDZ) 85 75 Croatian Social Liberal Party (HSLS) 14 12 Social Democratic Party of Croatia (SDP) 11 10 Croatian Peasants’ Party (HSS) 3 10 Croatian People’s Party (HNS) 6 2 Croatian Party of Rights (HSP) 5 4 Istrian Democratic Sabor (IDS) 0 4 Serbian People’s Party (SNS) 3 2 Others 11 8 Total 138 127 Source: Press reports.

The constitution The 1990 constitution provides for a multiparty democracy and envisages an economy based on market principles and private ownership. The latter stipul- ation requires the privatisation of the majority of the economy which is still publicly owned.

Considerable power is given to the president, who appoints the government, subject to the approval of parliament, and is supreme commander of the armed forces. The parliament (Sabor) has supreme legislative power, although it may temporarily delegate to the government the power of issuing decrees, subject to the Sabor’s eventual ratification.

The Sabor has two houses: the house of communes (opcine) and the house of regions (zupanije). The house of communes, the lower house, has 138 members: 125 are directly elected while 13 are elected separately to represent the Serbian minority. The house of regions, the upper house, has 63 deputies, three for each of the 21 zupanije.

Political parties Croatian Democratic Union (HDZ). Although it became active only a few months before the first multiparty parliamentary elections in April 1990, the HDZ is the dominant political party and has acquired the character of a national movement mobilising the support of much of the Croat diaspora as well as a substantial proportion of the domestic population. The party incorporates a wide range of opinions from liberal to extreme nationalist. The HDZ has a comfortable absolute majority in the Sabor, despite winning only 45% of the vote in the October 1995 elections to the lower house. But the opposition, although fragmented, became more effective during 1996.

The main opposition parties are as follows.

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The Croatian Social Liberal Party (HSLS) is the second largest party but won only 12 seats in October 1995 compared with the HDZ’s 75. Its then leader, Drazen Budisa, polled the most votes (21.9%), after Mr Tudjman, in the 1992 presidential election. After the election, Mr Budisa was replaced as leader by Vlado Gotovac. The HSLS is a centre-right party.

The Croatian Party of Rights (HSP) was an extreme right-wing party with unashamed Ustashi leanings under its first leader, Miroslav Paraga, who was ousted and founded a new party, HSP, 1861. The new HSP leader, Boris Kandara, has adopted a more moderate line, although the party remains on the right.

The Croatian People’s Party (HNS) was founded by Savka Dabcevic-Kucar and Mika Tripalo, former communist dissidents involved in the Croatian autonomy movement. Mrs Dabcevic-Kucar resigned as leader in 1995, being replaced by Radimir Cacic, and was nominated honorary president. Mr Tripalo had left the party and founded a new party, Action Social Democrats of Croatia (ASH), before his death in 1995.

The Social Democratic Party of Croatia (SDP) is the heir to the previous Communist Party of Croatia (SKH). Its leader is Ivica Racan.

The Croatian Peasants’ Party (HSS) is the oldest party in Croatia and represented 80-90% of the Croatian electorate during the period between the two world wars. Its leader is Zlatko Tomcic.

The Croatian Independent Democrats (HND) was created by a group of HDZ dissidents, led by Stipe Mesic and Josip Manolic, in April 1994.

The Serbian People’s Party (SNS) represents Serbs participating in the political life of Croatia. Its leader is Milan Djukic.

International relations Croatia was recognised by the EU and a large number of other countries in early 1992. In April 1992 it became a member of the UN and has since joined the IMF and World Bank.

Negotiations for a trade and cooperation agreement with the EU were suspended after the Croatian military takeover of Krajina in August 1995. On May 14, 1996, the ministerial committee of the Council of Europe rejected Croatia’s application for membership until more progress had been made on human rights issues, including facilitating the return of Serb refugees, cooper- ating with the International War Crimes Tribunal, halting actions to repress independent newspapers, allowing the elected county council of Zagreb to elect the mayor, and using its influence to promote free and fair elections in the Federation of Bosnia and Hercegovina. Although Croatia had complied with these conditions only to a very limited extent, the Council of Europe relented in late 1996 and Croatia has now been admitted. This paves the way for new negotiations on a trade and cooperation agreement with the EU, but an EU Association Agreement remains a long way off.

Relations with Bosnia and The Bosnian war started in April 1992 and by the end of May the self-declared Hercegovina Bosnian Serb republic controlled 70% of the territory, squeezing the Muslims, Croats and all those who regarded themselves as “Yugoslav”. Until March 1994

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Croatia’s policy towards the conflict was ambiguous. At the start of the Bosnian war it overtly supported the new Bosnian state, but during the previous two years it had engaged in meetings with Serbia in which the division of Bosnia was discussed. This ambiguity reflected divisions within Croatia itself and also divisions between the Croats in Bosnia and Hercegovina. Some Croats wanted to cooperate in building a multi-ethnic Bosnia, but a large faction, led by Mate Boban, wanted a separate Croatian state analogous to the Bosnian Serb state. During 1992 and early 1993 Croatia gave more support to Mr Boban. In April 1993 fierce fighting erupted between Muslim militias and the Bosnian government army on the one hand and Croatian forces loyal to the self-declared (Croat) republic of Herceg-Bosna. Croatia incurred widespread international condemnation, and was threatened with economic sanctions. Mr Tudjman then distanced himself from the leadership of Herceg-Bosna, and was said to have reached the basis of a settlement with the mainly Muslim Bosnian government in the early autumn of 1993. But fighting between Croats and Muslims continued.

The Washington The long period of ambiguity in Croatia’s policy towards Bosnia came to an agreements of March 1994 end on March 1, 1994, when agreement was reached in Washington between the leader of the Bosnia and Hercegovina Croats and the Bosnian prime minister on a federation of Bosnia and Hercegovina, with a sharing of power between Muslims and Croats. It was also agreed that there would be a confederation, involving close cooperation on customs, currency, foreign policy and other matters. Formal agreements were signed in Washington on March 18.

In one sense the 1994 agreement on the Federation of Bosnia and Hercegovina (BiH) did not work, as a divide persisted between Croatian-controlled “Herceg- Bosna” and government-controlled areas. But during 1994 and up to October 1995 military confrontation was replaced by military cooperation against the Bosnian Serb republic. Since then there has been an uneasy dichotomy characterised by very difficult relations between the Croatian Democratic Union (HDZ) of BiH, which is a branch of the Croatian ruling party of the same name, and the main Muslim party of BiH, the Democratic Action Party (SDA), and reasonably good relations between Zagreb and Sarajevo, which have allowed a major increase in Croatian exports to BiH. Good relations with Bosnia are in Croatia’s interest, not only from the point of view of regional stability but also from that of economic relations with Islamic countries, including Iran (four large ships are being built for Iran in Croatian shipyards).

Relations with the FRY For four years after the international recognition of Croatia, normal relations with the Federal Republic of Yugoslavia (FRY), which consists of Serbia and Montenegro, were made impossible by the disputed status of approximately one-third of Croatian territory, which was under local Serb control. However, the military operations to bring western Slavonia and Krajina under Croatian control in 1995 and the Erdut agreement to bring eastern Slavonia back under Croatian control brought these difficulties to an end from Croatia’s point of view. On August 23, 1996, the foreign ministers of Croatia and the FRY agreed on the establishment of full diplomatic relations, based on the following understandings:

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• recognition of the territorial integrity of each country within the former Yugoslav republic borders of Croatia, Serbia and Montenegro, with the excep- tion of the Prevlaka peninsular south of Dubrovnik;

• it was agreed that the dispute over Prevlaka, which is demilitarised under UN control, is primarily one of importance for the security of the Bay of Kotor in Montenegro and Dubrovnik in Croatia, rather than the territory as such;

• Serb refugees from Croatia, and Croat refugees from the FRY, were to be allowed free and safe return, and to receive back their possessions or compensation;

• the two sides would cooperate in ascertaining the fate of missing persons;

• issues concerning the succession to the former Socialist Federal Republic of Yugoslavia (SFRY) are to be resolved by mutual agreement, but neither Croatia nor any of the other former Yugoslav states accept the FRY’s claim to be the sole legal successor.

(For relations with Slovenia, see Slovenia section.)

Defence According to the International Institute for Strategic Studies, Croatia’s armed forces numbered around 64,700 in August 1996, including 41,400 conscripts who serve ten months. There were reserves numbering 220,000.

Population and society

No systematic effort has been made to define the population of Croatia after the 1991 war. The total would have to include about 280,000 refugees from Bosnia and Hercegovina but exclude 160,000 Serbian refugees from Croatia into Serbia proper. (Both of these figures are from the UN High Commissioner for Refugees.) Estimates would also have to be made of the present population of the Serb-occupied territories.

Population census results

1953 1961 1971 1981 1991a 1994b Total (’000) 3,936 4,160 4,426 4,601 4,784 4,777 Annual rate of growth between censuses (%) 0.81 0.69 0.62 0.39 0.39 n/a Population per sq km 69.6 73.6 78.3 81.4 84.6 –

a Before major population displacements caused by the war which began in late 1991. b Mid-year estimate.

Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information.

Until the influx of refugees from the war in Bosnia and Hercegovina in 1992 there had been a gradual decline in the rate of population growth. Between 1950 and 1990 the natural increase in the population was 250,000, while net immigration from other Yugoslav republics totalled 368,000, of whom 228,000 were from Bosnia and Hercegovina.

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The age structure of the population has followed west European trends. Between 1953 and 1991 the share of the population aged over 50 rose from 20.2% to 31.8%, while the share aged under 14 fell from 27.1% to 19.4%. The urban population rose from 30.8% of the total in 1961 to 50.8% in 1981.

Education The literacy rate rose from 62.2% in 1961 to 77.9% in 1981. Over the same period the proportion of the population with university education increased from 1.2% to 3.6%.

Ethnic composition The ethnic identity of a person is to some extent a personal choice. Of those who identified themselves as Yugoslavs in 1981, 70% identified themselves as Croats in 1991. The Serb population, which was just under 600,000 before independence, largely derives from population movements between the Ottoman and Austrian empires.

Ethnic composition of population

1981 1991a % of % of ’000 total ’000 total Total 4,601 100.0 4,784 100.0 of which: Croats 3,455 75.1 3,736 78.1 Serbs 532 11.5 582 12.2c Yugoslavsb 379 8.2 106 2.2 Muslims 24 0.5 44 0.9 Hungarians 25 0.5 22 0.5 Italians 12 0.3 21 0.4

a Before 1991 war. b More than 70% of declared Yugoslavs in 1981 identified themselves as Croats in 1991. c Corrected data.

Source: Statistical Information.

The economy

Despite continued economic crisis in former Yugoslavia during the 1980s, the economy did not emerge from four decades of experimentation in self- managed communism in as bad shape as the more severe critics of the system might have expected. The country has proved able to compete in a range of industrial sectors, including electrical engineering, pharmaceuticals and shipbuilding. In addition, it has in the past attracted subcontracting in other sectors from German and other multinationals. In the late 1980s around $2bn per year was earned from tourism.

However, there were also structural problems common to former communist countries, whose impact has been compounded by the 1991 war, the uncertainty caused by the 1992-95 war in Bosnia and Hercegovina and the inability to trade with much of former Yugoslavia. The costs of repairing direct war damage (estimated at $20bn from the 1991 war alone) proved a severe burden, as did those resulting from the 500,000 refugees and displaced persons. One consequence was an unfunded budget deficit, leading to inflation rising from

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15% per month in mid-1992 to around 27% per month during the first half of 1993.

Stabilisation programme In October 1993 the government of Nikica Valentic introduced a stabilisation programme comprising three phases: arresting inflation, restructuring and recovery. In the first of these, the programme was remarkably successful: in the year to December 1994 prices fell by 2.4%, following an increase in 1993 of 1,517%. In October 1994 a stand-by agreement for IMF credits came into operation. However, economic activity remained at a low ebb. Industrial production in 1994 was 2.8% down on 1993’s already low level. There was a marginal recovery in 1995 and in the first half of 1996.

Current policy priorities The stabilisation measures of October 1993 were intended as only the first stage of a long-term programme. The second, under way since mid-1994 but making very slow progress, focuses on restructuring the banking system and loss- making enterprises. Attempts have also been made to boost incomes while containing labour costs by the use of expenditure savings on defence.

The understanding with the IMF has opened the avenue for Croatia to obtain a range of credit lines from international financial agencies: $457m over the next few years could be provided by the International Bank for Reconstruction and Development (IBRD) and the European Bank for Reconstruction and Development (EBRD); an IMF credit line of $262m has been suggested.

Privatisation A large part of the Croatian economy is in the process of privatisation, the main exceptions being banking, energy, utilities and defence industries. The procedure was first set out in a law of April 1991, which has since been amended, with a view in particular to attracting more foreign investment. The Croatian Privatisation Fund (CPF), established in 1993, has responsibility for restructuring companies in the process of privatisation as well as selling shares. The standard method is for about half the shares in each company to be sold at a discount to employees. They are paid for on an instalment basis, and some latitude is given when employees, most of whom currently have to struggle to cover normal household expenditure on their wages, fall behind in payments.

It was estimated in late 1995 that, of estimated total assets of “socially owned” companies of $12bn, half had been privatised in principle. However, many shares are bought by employees on long-term loans. The amount actually paid up in mid-1995 was still only $220m, of which $70m was foreign capital. The management of these companies is largely in the hands of people who are members of or have close contacts with the ruling HDZ. The present number of shareholders is 580,000 and that number is to be increased by 300,000 through the distribution of vouchers. Of the 50% not privatised at end-1995, 29% was still held by the Privatisation Fund, 15% was held by two state pension funds and 5% was set aside for restitution to the former owners. The minister for privatisat, Ivan Penic, has said that the privatisation programme should be completed during 1997, and that another 250 state enterprises, not previously part of the programme and valued at about DM1bn, are being added to the original list.

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 36 Croatia

Currency

Croatia introduced the Croatian dinar (CRD) as a replacement for the Yugoslav dinar on December 23, 1991, initially at parity with the Yugoslav dinar. The Croatian dinar maintained its December 1991 value of CRD55:DM1 until March 1992, when it was devalued to CRD67:DM1. It was devalued again to CRD94:DM1 in April and was subject to a controlled downward float until October 1993, when the stabilisation programme was introduced. Thereafter, the Croatian currency first strengthened, and then stabilised, against the D-mark. At end-May 1994 a new currency, the kuna (officially denoted HRK), was introduced, with HRK1:CRD1,000. The kuna is subdivided into 100 lipa.

Since the introduction of the kuna there have been only minor changes in the exchange rates. The rate against the D-mark as at end-December 1996 (HRK3.55:DM1) was indeed slightly stronger than that of HRK3.69:DM1 at the time of the kuna’s introduction. Despite discontent over the maintenance of the strong kuna, the government is committed to the continuation of the tight monetary policies agreed with the IMF.

Exchange rates (CRD; HRK since May 1994; per unit of currency; annual averages) 1992 1993 1994 1995 1996 DM 165 2,149 3.69 3.58 3.62 $ 257 3,577 6.00 5.19 5.43 £ 455 5,369 9.18 8.20 8.47 Sources: Ekonomska Kretanja i Ekonomska Politika; Financial Times; National Bank of Croatia.

National accounts

The old system of national accounts, which defined national income as social product, was replaced by the standard international system in 1994. According to the old system, national income almost quadrupled between 1961 and 1987. It then started to decline and fell sharply in 1990-92. There was a further decline in 1993, a small recovery in 1994, but a further small fall in 1995. A moderate recovery is estimated to have taken place in 1996, led by reconstruction activity.

Gross domestic product

1990 1991 1992 1993 1994 1995 At constant 1990 prices (YuD m; CRD m from Dec 1991 to May 1994; HRK m since May 1994) 276,158 221,495 196,878 195,199 196,383 199,656 % change –6.9 –19.8 –11.1 –0.8 0.6 1.7 Sources: Mjesecno Statisticko Izvjesce; Statistical Information.

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Gross domestic product by sectoral origina (constant 1990 prices) 1991 1995 % of % of CRD m total HRK ’000 total Agriculture, forestry & fishing 25,770 9.4 20,623 10.3 Manufacturing & mining 71,779 26.0 40,224 20.1 Construction 14,888 5.4 5,167 2.6 Trade, tourism & catering 54,246 19.6 38,435 19.2 Transport & communications 18,761 6.8 12,447 6.2 Other 90,714 32.8 82,760 41.5 GDP 276,158 100.0 199,656 100.0

a Official estimates.

Sources: Mjesecno Statisticko Izvjesce; Statistical Information.

Employment

The official figures do not adequately incorporate the smaller private companies, which in mid-1994 were estimated to employ some 300,000 workers. Unemployment rose rapidly in the late 1980s and reached 284,000 in 1991, but by 1993 unemployment had fallen a little to 251,000 (17% of the workforce), around which level it stabilised in 1994 and 1995.

Official full-time employment (’000) 1991 1992 1993 1994 1995a Public sector 1,304 1,137 1,108 1,062 995 Manufacturing & mining 462 398 384 368 338 Agriculture & fishing 48 43 42 40 33 Forestry 13 12 11 11 11 Water 6 5 4 4 4 Construction 99 75 66 59 56 Transport & communications 110 96 90 85 83 Trade 142 124 125 117 102 Catering & tourism 61 52 51 49 42 Artisans 28 24 24 22 19 Housing & commercial activities 28 24 23 24 24 Financial & other services 56 50 52 50 50 Culture & education 94 88 89 89 88 Health & social services 101 97 99 97 96 Social-political organisations, self- government & social-political communities 55 49 48 48 51 Private sector Non-agriculturalb 129 123 130 143c 157c Total domestic employmentd 1,433 1,260 1,238 1,205 1,152 Registered unemployed 284 267 251 243 246 Labour force 1,716 1,527 1,489 1,448 1,398 a December. b Including self-employed since 1991. c Estimate. d Excluding agriculture and Croat citizens employed abroad.

Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information; Mjesecno Statisticko Izvjesce.

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Comparative economic indicators, 1995

Gross domestic product (a) Gross domestic product per $ bn head (a) $ Russia 626.1 Poland 213.9 Slovenia Ukraine Czech Republic Romania Hungary Czech Republic Slovakia Hungary Poland Uzbekistan Bulgaria Kazakstan Croatia Bulgaria Romania Slovakia Russia Belarus Estonia Serbia-Montenegro Lithuania Croatia Belarus Slovenia Latvia Lithuania Serbia-Montenegro Kazakstan Latvia Macedonia Armenia Ukraine Azerbaijan Armenia Moldova Uzbekistan Turkmenistan Albania Albania Moldova Estonia Turkmenistan Kyrgyz Republic Kyrgyz Republic Georgia Georgia Macedonia Azerbaijan Tajikistan Tajikistan 0 20 40 60 80 100 120 140 160 180 0 2,000 4,000 6,000 8,000 10,000 12,000 (a) At purchasing power parities. (a) At purchasing power parities. Sources: EIU estimates; national sources. Sources: EIU estimates; national sources.

Consumer prices Consumer prices % change, year on year % change

Georgia Georgia Armenia Armenia Turkmenistan Turkmenistan Ukraine Ukraine Belarus Belarus Kazakstan Kazakstan Azerbaijan Azerbaijan Tajikistan Tajikistan Uzbekistan Uzbekistan Russia Russia Moldova Moldova Kyrgyz Republic Kyrgyz Republic Croatia Croatia Lithuania Lithuania Macedonia Macedonia Serbia-Montenegro Serbia-Montenegro Estonia Estonia Romania Romania Latvia Latvia Bulgaria Bulgaria Slovenia Slovenia Albania Albania Poland Poland Hungary Hungary Slovakia Slovakia Czech Republic Czech Republic 0 200 400 600 800 1,000 0 200 400 600 800 1,000 Sources: EIU estimates; national sources. Sources: EIU estimates; national sources.

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40 Croatia

Figures are not produced for those specifically employed or self-employed in farming. The total agricultural population, including the families of farmers, is available only from census figures.

Agricultural populationa

1971 1981 1991 Total (’000) 1,212 668 410 % of total population 29.1 15.2 9.1

a Census figures.

Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information.

Prices and wages

The former Yugoslavia went through a phase of hyperinflation in the late 1980s. Anti-inflationary policies brought the inflation rate down in 1990 but the war in late 1991 led to a renewed acceleration, with the rate at year-end estimated at 250%, more than double the rate in the early part of the year. At the end of 1991 the Croatian dinar was established and decoupled from the Yugoslav dinar. However, price rises in Croatia continued to accelerate, although less rapidly than in Serbia, and inflation at the end of 1992 was 1,250%.

After 1989 real wages declined steeply and in 1992 were less than one-third of their level in 1989.

The government of Nikica Valentic, appointed in March 1993, gave priority to the fight against inflation. Initially it merely succeeded in preventing the rate of inflation from increasing above 30% per month, but in October 1993 it sharply tightened monetary policy and cut back on the inflation indexation of wages. The monthly rate of inflation fell from 38.7% in October to 1.4% in November and to a negative 0.5% in December.

Negative inflation continued in 1994: between December 1993 and December 1994 prices fell by 2.4%, although because of the change during 1993 the average level of prices in 1994 was still 98% above that in 1993. Inflation turned positive in 1995 and 1996 but remained low.

Prices and wages (% change year on year unless otherwise indicated) 1991 1992 1993 1994 1995 Retail prices 123 665 1,517 98 2.0 Producer prices, industry 126 825 1,512 78 0.7 Real personal incomes –25.0 –43.5 –0.5 14.4 40.2 Wages, industry & mining (average net monthly income per worker; CRD/HRK) 170 431 539 1,216 1,743 Sources: Mjesecno Statisticko Izvjesce; Statisticki Ljetopis Republike Hrvtske.

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Agriculture, forestry and fishing

Agriculture Agriculture represents about 12% of GDP. Overall, Croatia is self-sufficient in agricultural products despite the loss of fertile land in Slavonia and the influx of refugees. However, in bad years it has required substantial imports of feedstuffs.

Agricultural land use (’000 ha) 1991 1995 Cultivated land 2,020 1,555 Arable & horticulture 1,466 1,117 Orchards 70 61 Vineyards 71 55 Meadows 413 322 Pastures 1,155 777 Wetlands 33 25 Total agricultural land 3,208 2,357 Source: Statistical Information.

Agricultural production

Annual average 1980-90 1990 1992 1993 1994 1995 Crop production (’000 tons) Wheat 1,241 1,602 658 887 750 877 Barley 166 197 107 126 108 103 Maize 2,334 1,950 1,538 1,672 1,685 1,736 Sugarbeet 1,188 1,206 525 539 592 691 Rapeseed 43 33 24 29 28 24 Soybean 36 56 46 49 44 34 Sunflower 40 53 40 43 26 38 Tobacco 16 12 12 10 9 9 Fruit & vegetables production (’000 tons) Potatoes 669 610 480 508 563 692 Beans 24 18 16 18 21 22 Apples 81 70 62 65 47 51 Pears 15 14 9 12 9 11 Olives 12 4 20 9 17 34 Plums 74 31 62 60 36 38 Morello cherries 14 14 9 8 8 7 Grapes 426 398 380 396 363 359 Livestock numbers (’000 head) Cattle 911 830 590 589 519 494 Pigs 1,806 1,573 1,182 1,262 1,347 1,175 Horses 66 39 26 22 21 21 Sheep 731 751 539 525 444 453 Poultry 16,205 16,512 13,142 12,697 12,503 12,024 Livestock production Milk (m litres) 996 907 705 618 600 588 Eggs (m) 1,023 1,020 832 843 882 871 Wool, unwashed (tons) 730 719 484 460 409 351 Honey (tons) 891 917 771 782 844 1,014 Sources: Statistical Information; Statisticki Ljetopis Republike Hrvatske.

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 42 Croatia

Forestry Croatia contributed between one-quarter and one-third of Yugoslav timber production. The bulk of its production is hardwood.

Production of forestry goods (’000 cu metres) 1990 1991 1992 1993 1994 1995 Total 3,566 2,781 2,521 2,329 2,620 2,422 Sources: Statistical Information; Statisticki Ljetopis Republike Hrvatske.

Fishing Sea fishing was affected by the 1991 war but recovered to some extent in 1992. The freshwater fish catch was also badly affected and has not yet recovered.

Fish catch and fleet (’000 tons unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Saltwater catch 34.9 18.8 26.5 25.8 16.6 15.3 Freshwater catch & aquaculture 11.8 6.2 7.3 5.3 5.5 4.5 Sea fishing fleet (no of boats) 369 315 336 314 272 305 Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information.

Mining

Croatia has discovered few mineral resources except oil and gas (see below). Prior to independence, bauxite and silicon sand were the most important minerals produced. By 1994, however, the production of these minerals had fallen to insignificant amounts.

Energy

Croatia is heavily dependent on imported energy. Fuel imports cost $860m in 1990. During 1991-94 they fluctuated around $500m per year, partly because of lower economic activity. In 1995, however, fuel imports rose to $700m.

Electricity generating capacity by type, Jan 1995 (mw) Thermal 1,434 Hydro 2,060 Total 3,494 Source: Energetski Institut, Zagreb.

Energy production (m tons unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Hard coal 0.2 0.2 0.1 0.1 0.1 0.1 Coke 0.6 0.4 0.4 0.4 0.3 0.0 Crude oil 2.1 1.9 1.7 1.7 1.6 1.5 Petroleum fuels 0.2 0.1 0.1 1.1 1.2 1.8 continued

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1990 1991 1992 1993 1994 1995 Bitumen 0.2 0.2 0.2 0.1 0.2 0.2 Natural gas (bn cu metres) 2.0 1.8 1.8 2.1 1.8 2.0 Electricity (gwha) 8.7 8.8 8.9 9.4 8.7 9.2 of which: hydroelectric 3.8 5.8 4.4 4.5 5.4 5.6 thermal 4.9 3.0 4.5 5.0 3.3 3.6

a Gigawatt hours=1 bn kilowatt hours.

Sources: Statisticki Ljetopis Republike Hrvatske; Mjesecno Statisticko Izvjesce.

National energy balance, 1995 (m tons of oil equivalent) Elec- Oil Gas Coal tricity Other Total Primary production 1.50 1.75 0.05 1.24 0.27 4.80 Imports 4.47 0.22 0.16 0.38 0.00 5.23 Exports –2.26 0.00 –0.03 –0.08 0.00 –2.37 Stock change –0.06 0.10 0.00 0.00 0.00 0.05 Primary supply 3.65 2.08 0.18 1.54 0.27 7.71 Net transformation losses –1.23 –0.72 –0.06 –0.69 –0.01 –2.70 Final consumption 2.42 1.35 0.12 0.85 0.26 5.01 Source: Energy Data Associates.

Manufacturing

Manufacturing has accounted for about one-third of GDP in recent years. The largest subsectors are: non-electrical machinery, textiles, foodstuffs, chemicals, electrical engineering, wood processing and shipbuilding.

Recent difficulties Industrial output fell by 11% in 1990, with the decline deepening to 29% in 1991 and then easing to 15% in 1992 and 5.9% in 1993. Initially the reason for this was the collapse of trade between former communist east European countries, a phenomenon which has had a similar effect in all such countries. The war in the autumn of 1991, which caused direct damage to manufacturing plant estimated at $2.5bn, and the cessation of trade with much of the rest of the former Yugoslavia made the situation much worse and also hampered efforts to reorient exports to Western markets. There was a further decline in industrial production in 1994 of 2.8% year on year. The slight improvement in 1995 was mainly due to an increase in the production of capital goods. Prod- uction continued to increase, but at a modest rate only, in 1996.

Indices of industrial production (1990=100) 1990 1991 1992 1993 1994 1995 Capital goods 100.0 64.9 51.0 45.0 43.1 47.3 Raw & basic materials 100.0 72.2 62.3 59.2 58.9 59.0 Consumer goods 100.0 74.0 64.1 61.0 60.8 60.7 General 100.0 71.5 61.1 57.4 55.9 56.2 Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information.

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Production of selected goods (’000 tons unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Welded pipes 213 96 68 77 65 45 Ferro-alloys 130 124 82 37 54 26 Cast iron & steel semi-finished & finished products & formed parts 81 41 31 33 30 26 Metal structures & parts 36 26 23 16 11 16 Tankers (’000 gwt) 389 228 173 145 124 121 Cargo ships (’000 gwt) 119 100 120 80 45 37 Manufacture of electromotors, generators & transformers 18 11 8 8 9 9 Telephone & telegraph exchanges (’000 receivers) 2,505 1,869 1,876 2,065 1,563 1,662 Compound fertilisers 557 532 717 483 555 548 Commercial medicines (tons) 4,305 2,588 1,750 1,519 1,753 1,721 Detergent 110 65 51 43 31 31 Cement 2,653 1,706 1,768 1,683 2,055 1,708 Corrugated & cardboard & paper & cardboard packaging 284 157 117 106 122 128 Cotton textile fibres (tons) 20,372 12,448 12,132 10,301 10,587 8,867 Cotton fabrics, blankets (’000 sq metres) 39,762 30,125 28,881 28,759 22,573 22,200 Wool fabrics, blankets (’000 sq metres) 16,402 8,449 5,756 7,018 7,249 6,678 Ready-to-wear clothing (’000 sq metres) 49,510 41,296 35,696 36,393 34,327 32,353 Heavy leather footwear (’000 pairs) 1,126 535 408 265 210 137 Men’s, women’s, children’s leather shoes & boots (’000 pairs) 16,711 8,127 7,156 8,176 8,106 6,542 Other footwear (’000 pairs) 5,357 2,898 2,670 2,495 1,523 1,515 Canned vegetables (tons) 44,429 23,043 25,574 21,763 23,843 22,709 Sausage products (tons) 39,839 32,748 28,810 30,624 31,073 30,687 Sugar 201 100 95 79 115 175 Beer (m hl) 2,801 2,249 2,720 2,481 3,122 3,166 Sources: Statistical Information; Mjesecno Statisticko Izvjesce.

Construction

It is estimated that 27,000 houses and 210,000 flats were destroyed in the 1991 war. Construction activity and employment has recently increased strongly, spurred both by the need for rebuilding and by migration to big cities.

Construction activity

1990 1991 1992 1993 1994a 1995a Value of work done (CRD m) n/a n/a n/a 2,520 6,556 7,393 Housing completionsb 5,211 4,489 2,317 1,941 9,710 7,359 Employment 61,353 48,125 33,285 28,407 58,951 59,022

a Local activity including individual. b During all years twice as many unfinished houses should be added.

Source: Mjesecno Statisticko Izvjesce.

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Tourism

Before 1991 tourism was Croatia’s most important source of foreign currency, although some revenue from foreign tourists in Croatia went to the federal authorities. It is reckoned that 80% of total Yugoslav tourism earnings came from holidays spent in Croatia. The peak year was 1990, when registered revenue from Yugoslav tourism was $2.8bn. Actual revenue was considerably higher, since much was not registered.

Foreign tourism (m unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Tourist arrivals 7.0 1.3 1.3 2.4 3.4 1.3 of which: Germany 1.5 0.15 0.2 0.2 0.4 0.2 Italy 1.0 0.15 0.2 0.3 0.4 0.2 Austria 0.4 0.05 0.2 0.3 0.4 0.2 UK 0.5 0.07 0.0 0.0 0.0 0.0 Netherlands 0.3 0.02 0.0 0.0 0.0 0.0 France 0.2 0.04 0.0 0.0 0.0 0.0 Czechoslovakia 0.2 0.01 0.0 0.2 0.4 0.1 Tourist nights 45.8 6.8 7.6 9.8 15.6 13.0 Tourism earnings ($ m) 2,200 300 550 832 1,300 800 Sources: Statisticki Ljetopis Republike Hrvatske; Statistical Information.

The war in 1991 led to a collapse in tourism earnings (see table), but there has been a recovery in northern areas since. Revenue rose from $300m in 1991 to $832m in 1993 and reached $1.3bn in 1994. Following a decline in 1995, net tourist earnings in 1996 are expected to be $1.3bn.

Transport and communications

The length of the railway track in 1995 at 2,726 km was little changed on 1981, although there has been a slight increase in electrified track from 31% to 36.1% of the total. The length of the road network was increased from 27,822 km in 1981 to 32,796 km in 1990 but there has been a sharp downward revision in recent years (see table). Further adjustments are likely.

Transport statistics

1990 1993 1994 1995 Railway (km) 2,698 2,699 2,699 2,726 Electrified (%) 34.5 39.4 39.4 36.1 Roads (km) 32,796 26,928a 26,928 26,928 Paved 23,633 21,736a 21,798 21,958 Motorways (km) 291 302 302 302 Passenger shipsb (units) 59 64 64 74 Volume (cu metres) 129,091 116,922 n/a 87,700 continued

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 46 Croatia

1990 1993 1994 1995 Cargo ships (units) 217 153 n/a 170 Volume (cu metres) 6,838 5,388 n/a 6,535 Air transport (’000 passengers) n/a 507 661 679

a No explanation is given for the decline compared with 1990. Presumably roads not under Croatian control are excluded, but no change has been made to the length of railway indicated. b Including ferries.

Sources: Statistical Information; Statisticki Ljetopis Republike Hrvatske.

The number of telephone subscribers increased from 396,000 to 1.26 million and of telephones from 567,000 to 1.49 million between 1981 and 1993.

Finance

The budget With the declaration of independence in June 1991, the budget of Croatia was separated from the federal finances. It went deeply into deficit as a result of the cost of the war in the autumn of 1991, which made expenditure hard to plan. It was clearly understood that the budget deficit was the main generator of inflation and the 1993 budget cut expenditure in real terms. A further tighten- ing of fiscal policy in 1994 was a key element in the stabilisation plan.

The expenditure outturn was virtually balanced by revenue in 1994, with a deficit of a mere 0.3% of GDP. As a result of the military operations in western Slovenia and Krajina, the original expenditure estimates for 1995 were raised from HRK26.6bn to HRK31.1bn ($6bn), but the gap was largely covered by higher excise duties on tobacco and gambling.

The 1996 budget kept revenue at the 1995 level but foresaw a deficit of HRK2bn or 2% of GDP, mainly funded by foreign borrowing. The structure of expenditure changed in favour of reconstruction and social needs, with defence spending cut by 15%.

Including the health and pension funds public expenditure is expected to have equalled about half of GDP in 1996.

The tax system There is a turnover tax on goods and services. It was intended to introduce value-added tax from January 1, 1997, but this has been postponed. The tax system gives equal status to domestic and foreign companies and persons. Croatia currently honours all double-tax agreements made between former Yugoslavia and other countries, although new agreements are being negotiated.

The current tax system comprises the following principal taxes:

• income tax, with a lower rate of 25% and a higher rate of 35%;

• corporation profit tax, at a uniform rate of 25%;

• a turnover tax on goods and services (this was to be replaced by value-added tax at a single rate of 22% from January 1997, but the change has been postponed, probably until 1998);

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 Croatia 47

• excise taxes on certain products (oil and oil products, tobacco goods, alco- hol, soft drinks, beer, coffee and new vehicles); and

• real-estate sales tax.

Central government budget (HRK m unless otherwise indicated) 1994 1995 1996 Outturn Budget Budget Total revenue 23,143 27,881 31,085 Current revenue 22,789 27,287 30,147 tax 22,377 26,505 29,076 non-tax 411 782 1,072 Capital revenue 354 594 938 Total expenditure 22,283 28,476 31,622 Current expenditure 20,361 25,495 26,409 Capital expenditure 1,922 2,980 5,213 Lending minus repayments 316 221 1,647 Overall balance 544 715 –2,183 Source: Ministry of Finance.

The central bank On the occasion of the introduction of the Croatian dinar on December 25, 1991, the National Bank of Croatia (NBC) became the de facto central monetary institution. Its role was defined by the Law on the National Bank of Croatia on November 4, 1992, which made the bank an independent institution responsible to the Sabor (parliament) rather than to the government. The Sabor defines the limits on state borrowing by the NBC.

Banking The Banking Law enacted in 1993 established an open banking market and established rules on capital adequacy and banking supervision. However, the banking system has continued to be characterised by close relations between banks and indebted companies and to be burdened by non-performing debt. A slow and difficult process of rehabilitation is in process.

The Croatian Bank for Reconstruction and Development (HBOR) was established in 1992 as a 100% government-owned institution, with the tasks of financing reconstruction and development and promoting exports through credits and credit guarantees.

Pension funds (divided between employees, self-employed and independent farmers) control substantial financial assets in Croatia.

The stock exchange The Zagreb stock exchange started operations in 1991. However, out of the entire portfolio of the Croatian Privatisation Fund only 2% was privatised through the exchange. The introduction of the new Privatisation Act in 1996 is expected to increase the role of the stock exchange, as is the adoption of an Investment Funds Act and a Securities Act.

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 48 Croatia

Foreign trade

In 1990 Croatia exported to markets outside the former Yugoslavia goods worth $4bn, of which $2.8bn went to OECD countries. Imports amounted to $5.2bn ($3.4bn from the OECD area). There was a sharp fall in foreign trade in 1991 because of the war. The 1992 figures show an apparent rise because they include the trade with former Yugoslav republics, notably Slovenia.

As a result of lost markets in central and eastern Europe and the war in Bosnia and Hercegovina, Croatian exports have been even more focused on developed countries, particularly those of the EU. Exports increased by 8.7% in 1995 but were far outpaced by imports, which jumped by 43.6%, leading to a near tripling of the trade deficit to $2.9bn. With exports falling by 2.6% and imports rising by 3.7%, there was a more modest further widening of the deficit in 1996 to $3.3bn.

Germany remained the leading source of imports, accounting for 20.6% of the total, followed closely by Italy, with 18.2% and then Slovenia, with 9.9% and Austria, with 7.7%. On the export side, Italy has supplanted Germany as Croatia’s leading market, taking 21% of total exports; apart from Germany, with 18.6%, and Slovenia, with 13.5%, the only other country taking more than 5% was Bosnia and Hercegovina, with 12.2%.

Trend of foreign trade ($ m) 1991a 1992b 1993b 1994b 1995b 1996b Merchandise exports fob 3,292 4,597 3,903 4,260 4,633 4,512 Merchandise imports cif –3,828 –4,461 –4,666 –5,229 –7,510 7,788 Trade balance –536 136 –763 –969 –2,877 3,276 a Excluding trade with former Yugoslavia. b Including trade with former Yugoslav republics.

Sources: Statisticki Ljetopis Republike Hrvatske; Mjesecno Statisticko Izvjesce.

Foreign trade by sector ($ m) Exports Imports 1994 1995 1994 1995 Textiles 702 694 429 478 Basic chemicals 359 563 198 250 Chemical products 279 290 181 262 Petroleum products 335 379 686 883 Foodstuffs 273 288 293 439 Leather products 302 227 176 186 Electrical equipment 246 296 226 339 Final timber products 159 175 47 67 Shipbuilding 311 250 32 108 Metal wire 107 116 101 140 continued

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Exports Imports 1994 1995 1994 1995 Processed wood 101 85 20 22 Agriculture & fish 101 86 96 128 Engineering 80 105 54 78 Iron & steel 61 43 43 41 Tobacco products 53 21 37 62 Beverages 40 67 82 98 Paper & products 98 117 62 100 Total incl others 4,260 4,633 5,229 7,510 Source: Mjesecno Statisticko Izvjesce.

Merchandise trade ($ m) 1994 1995 1996 Exports 4,260 4,633 4,512 of which: EU 2,531 2,672 2,303 countries of former Yugoslavia 968 1,061 1,219 of which: Slovenia 556 608 611 Bosnia 338 383 549 Imports 5,229 7,510 7,788 of which: EU 3,096 4,664 4,625 countries of former Yugoslavia 572 850 866 of which: Slovenia 541 805 769 Trade balance –969 –2,877 –3,276 Source: Priopcenja.

Main trading partners, 1996 (% of total) Exports Imports Italy 21.0 18.2 Germany 18.6 20.6 Slovenia 13.5 9.9 Bosnia & Hercegovina 12.2 0.8 Austria 4.4 7.7 France 1.9 2.6 Russia 2.9 2.7 USA 2.0 2.7 UK 1.6 2.9 Czech Republic 0.9 2.7 Hungary 1.2 2.5 Source: Priopcenja.

There was a significant increase in 1995 in the export of chemicals, and a moderate increase in textiles and textile products. Imports of machinery and transport equipment both increased strongly and imports of food outstripped exports.

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997 50 Croatia

External payments and debt

Situation before Traditionally, Croatia’s trade deficits were compensated for, wholly or partly, independence by a strong surplus on invisibles (tourism and emigrants’ remittances). Croatia, like Yugoslavia as a whole, was able to achieve current-account surpluses during the second half of the 1980s—made necessary by the need to repay debt.

Developments since The conflict following Croatian independence virtually eliminated tourism in independence 1991. There was a significant recovery during 1992-94 which, together with private transfer inflows, enabled Croatia to achieve modest current-account surpluses. In 1995, however, there was a sharp swing into a deficit of $1.71bn, about 10% of GDP, as a result of the trebled trade deficit which could not be remedied by invisibles as tourist earnings, affected by conflict, dropped to $813m and transfers amounted to $646m. Some improvement is expected for 1996, as a result of higher tourism earnings. However, the foreign reserves of the central bank increased from $1.4bn at the end of 1994 to $1.9bn at the end of 1995, while commercial bank reserves increased from $902m to $1.4bn in the corresponding period. In November 1996 central bank reserves were $2bn.

Balance of payments ($ m) 1991a 1992a 1993b 1994b 1995 Trade balance –536 –303 –763 –969 –2,877 Services: credit 1,275 1,432 1,807 2,293 2,569 Services: debit –1,238 –1,068 –1,175 –1,555 –1,957 Investment & other income: credit 65 49 112 101 173 Investment & other income: debitc –166 –216 –253 –225 –267 Official transfers: net 18 44 250 235 280 Private transfers: net –7 391 126 224 366 Current-account balance –589 329 104 103 –1,712 Direct investment in Croatia n/a 16 74 98 81 Other investment, net n/a –236 195 486 821 Capital-account balance –457 –220 269 584 902 Net errors & omissions 1,046 58 76 102 1,300 Change in foreign reserves (– indicates increase) 0 –167 –450 –789 –490

a Excluding former Yugoslav republics. b Including former Yugoslav republics. c Interest arrears included.

Sources: National Bank of Croatia, Bulletin; Mjssecno Statisticko Izvjesce.

Debt On March 21, 1995, Croatia agreed with the Paris Club of creditor governments that, of the $1.54bn owing to governments, $261m should be paid by the end of 1995 and the remainder over 14 years. On July 31, 1996, Croatia agreed a commercial debt deal with the London Club of commercial creditors, assuming responsibility for 29.5% of the foreign commercial bank debt of former Yugoslavia. Zagreb issued new bonds totalling $1.46bn in exchange for its share of the debt. In return, all Croatian entities were released from their obligations for “joint and several liability” for the whole of the $4.4bn debt of former Yugoslavia contained in the New Financing Agreement of 1988, the last debt

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restructuring deal with the London Club before the break-up of Yugoslavia in 1991.

External debta ($ m; end-period) 1991 1992 1993 1994 1995 Oct 1996 Official medium- & long-term creditors International financial organisations 423 404 320 404 494 644 Governments & government agencies 754 707 722 784 824 1,277 Other medium- & long-term creditors Foreign banks 1,375 1,275 1,266 1,393 1,509 2,042 Foreign non-banks 111 91 123 190 285 300 Short-term credit n/a n/a 55 51 225 429 Interest arrears n/a n/a 152 245 325 67 Total debt 2,771 2,627 2,638 3,067 3,661 4,759 a Excluding Croatia’s share of former Yugoslavia’s previously non-allocated debt to commercial banks, on which agreement was reached in 1996.

Sources: National Bank of Croatia, Bulletin; Main Statistical Indicators.

Trade, investment and other regulations

General The constitution envisages a market economy based on private ownership. The government of Hrvoje Sarinic (August 1992-March 1993) embarked on an ambitious plan to put into place comprehensive legislation to establish a new legal and regulatory system for such an economy, with a deadline set for the spring of 1993. The deadline was missed, but a series of laws were passed by the end of 1994 including ones on accounting and auditing, and a framework law on mining concessions.

Investment The Company Law enacted on January 1, 1995, contributed significantly to the transparency of foreign investment in Croatia. Foreign investors have the same rights, obligations and status as local business, subject to reciprocity. The law provides for the repatriation of profits and capital, once obligations in Croatia have been met, as regulated by the Law on the Foreign Exchange System, Foreign Exchange Transactions and Trade in Gold of 1991.

In 1996 a government agency was formed to promote foreign investment and help foreign investors with local regulations and other problems.

Conduct of foreign trade A Law on Trade, consistent with international agreements, has been in force since the beginning of 1996. Restrictions on imports are supposed to be in harmony with World Trade Organization (WTO) rules.

Import quotas are being gradually phased out. At the beginning of June 1996 a new Law on Customs Tariffs and Customs Rates was enacted, introducing tariff rates ranging between 0% and 25% from July 1. Special tariff protection was introduced for domestically produced agricultural and food products. There are further sales taxes or excise duties on specific products which are entirely or mainly imported, such as cars, soft drinks and coffee.

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Under certain conditions, equipment imported as a component of a foreign investment project may be exempt from customs duties.

Foreign exchange The Foreign Exchange Act (enacted in October 1993) established a market for the buying and selling of foreign exchange between authorised commercial banks and other persons, between the commercial banks themselves, and between the National Bank of Croatia (the central bank) and commercial banks. Households have been allowed to hold foreign exchange savings accounts since the mid-1960s, and the Foreign Exchange Act also enables other legal persons to hold foreign exchange accounts. But there are still some restrictions on capital-account convertibility.

Restitution The long-debated law on restitution or “denationalisation”, entitled the Law on Compensation for Property taken during the Yugoslav Communist Regime, was accepted by the Sabor on October 11, and takes effect on January 1, 1997. In many cases it is likely that former owners will be compensated financially rather than having their former property restored.

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Slovenia

Basic data

Land area 20,251 sq km, of which 15.3% arable, 17% pasture and 50% forest (1994)

Population 1,989,447 (end-1994 estimate)

Main towns Population in ’000, end-1994

Ljubljana 270 Maribor 103

Climate Mediterranean on coast, continental inland

Weather in Ljubljana Hottest month, July, 21°C (average daily); coldest month, January, -1°C; driest (altitude 298 metres) months, January and February, 75 mm average rainfall; wettest month, June, 183 mm average rainfall

Language Slovene

Weights and measures Metric system

Currency Slovenian tolar (SIT), floating rate, fully convertible. Annual average rates in December 1996, were SIT135.4:$1; SIT90.3:DM1; SIT211.2:£1; end-1996 exchange rates were SIT141.5:$1; SIT91:DM1; SIT240.5:£1

Time 1 hour ahead of GMT

Fiscal year Calendar year

Public holidays January 1, 2; February 8; Ash Wednesday; March 19, 25; Easter Thursday, Friday, Saturday, Monday; April 27; Ascension Day (May); June 25; August 15; September 8; October 31; November 1; December 25, 26

Political background

Early history Slovenes are southern Slavs and settled in their present region in the 6th century. Early independence was soon lost, and from the early 9th century Slovene-inhabited provinces were firmly integrated in German-dominated state structures, and became hereditary possessions of the house of Habsburg in 1335. Thus for centuries the institutions governing the lives of Slovenian people were identical with those of Austria, and Germanic influence left an indelible mark on Slovenian life. Yet the Slovenes maintained their Slavic identity and language.

Under the Habsburgs From the early 19th century politically aware Slovenes were striving to achieve an administrative unification of the provinces mainly populated by Slovenes, but this aim could never be realised under the Habsburgs. In the late 19th century the Slovenes increasingly sought cooperation and partnership with other Slavs in the Habsburg empire, although few then contemplated a break- away from Habsburg rule.

The first Yugoslavia After the collapse and disintegration of Austria-Hungary in 1918 the Slovenes joined with the neighbouring Croats and the victorious Serbs to form the Kingdom of Serbs, Croats and Slovenes, which became the Kingdom of Yugoslavia in 1929.

The Slovenes entered the new state with a much smaller territory than that to which they aspired. In the west, coastland was lost to Italy, and in the north, Carinthia voted in a plebiscite to remain in Austria. In Yugoslavia the Slovene area comprised a single administrative unit, the province of Drava, where they enjoyed cultural and linguistic autonomy. But Slovene aspirations for political autonomy, let alone federal status, were frustrated as the Serbian establishment dominated the country and retained decision-making powers. The violent death of King Alexander in 1934 was followed by a relaxation of political dictatorship and a quest for new forms of partnership between the constituent nationalities of Yugoslavia. These efforts were, however, brought to an end by the German-led invasion in April 1941 when Slovenia was divided between Germany, Italy and Hungary.

The second Yugoslavia Slovene communists, a much underestimated force before the war, were a close-knit and well-organised grouping as part of the Yugoslav Communist Party under the leadership of Josip Broz Tito and operating under the instruc- tions of Comintern, and they developed a vigorous armed resistance as soon as the USSR was invaded in June 1941. They played a leading role in the post-war federal government, on an equal footing with party members from other Yugoslav nationalities, and were in the forefront of the liberal reforms that were introduced after the break with Moscow in 1948. A particularly important gain for Slovenia as a result of liberalisation was virtually free movement across its frontiers with both Italy and Austria.

The run-up to As a result of rapid economic and social development in the 1950s and 1960s, independence Slovenes came to think of themselves as an Alpine and west European nation. As a consequence, a desire for independence from Yugoslavia gathered

momentum during the 1970s and 1980s. Slovene communist politicians saw Serbia’s move in 1987 to bring the autonomous provinces of Vojvodina and Kosovo under direct Serbian control as a threat to Slovenia. In order to counter this threat the Slovene communists needed to win wider political support and thus opened the door to a multiparty democracy. In September 1989 the communist-dominated Slovenian parliament “reaffirmed” sovereignty of the republic and its right to secede from Yugoslavia. (Nominally this right was enshrined in the constitution of former Yugoslavia.) In December Serbia declared a boycott of Slovene-produced goods because of Slovenia’s critical stance towards its policies in Kosovo.

First multiparty elections Matters came to a head at the Congress of the League of Communists of Yugo- in 1990 slavia (LCY) in January 1990, when the Slovene delegation walked out after its proposal for restructuring the party was rejected. In the following month the Slovene party severed its links with the LCY and changed its name to the Party of Democratic Renewal. In March the Slovene parliament removed “Socialist” from the republic’s title. In April the first multiparty parliamentary elections since the Second World War were held: a right-of-centre non-communist bloc, Democratic Opposition of Slovenia (DEMOS), won 45% of the seats and formed a government under Lojze Peterle, the leader of the Christian Democrat Party (SKD). But the former leader of the Slovene Communist Party, Milan Kucan, was convincingly elected as president of the republic. Increasingly public opinion in Slovenia was moving towards early independence, although the government, along with many Slovenes, wished to preserve a form of partnership with the rest of Yugoslavia, possibly as a confederation of sovereign republics. The idea of sovereign statehood was massively endorsed by a referendum held in December 1990.

1991: the year of full On June 25, 1991, Slovenia formally declared independence from Yugoslavia, independence an act that was immediately followed by an assault by federal armed forces on Slovene territory and frontier posts. In a short but bitter war the Slovene territorial army, which numbered 21,000 and had armed itself well for this contingency, caused significant casualties among the Yugoslav forces. At a meeting sponsored by the European Community (EC) on the island of Brioni, the federal army agreed to withdraw from Slovenia while the Ljubljana government pledged to freeze the implementation of independence, until October. Both commitments were duly observed.

In October 1991 the Slovene parliament voted to end all official involvement in Yugoslavia. Slovenia introduced its own currency, the Slovenian tolar (SIT), and it recalled all its nationals from federal institutions and implemented other measures to establish its independent status. Widespread international recognition came in January 1992. The Slovene government continued to take part in international talks to resolve problems of succession, particularly financial problems, which remained.

Return of the former The return of former communists to a share in power came much more quickly communists in 1992 than in other transition countries like Poland and Hungary. But members of the Slovene section of the communists had themselves played a significant role

in the move to independence and had established a competitive market economy, albeit with only small-scale private ownership.

After independence had been achieved, the solidarity amongst the DEMOS coalition, which had been engendered by the run-up to independence, quickly evaporated and DEMOS split in December 1991 and dissolved in February 1992, while the standing of the non-communist government became more and more precarious. Finally, in May 1992 Mr Peterle resigned to make room for Janez Drnovsek, a former communist (although more in name than belief) who had also been president of the defunct Yugoslavia.

Mr Drnovsek’s coalition Mr Drnovsek regarded his administration as a transitional one of experts rather than politicians in the run-up to general elections held on December 6, 1992. His own spell in office proved more durable as he was reappointed to the post of prime minister after the elections. His Liberal Democratic Party was the clear winner, taking a quarter of the seats in the National Assembly, and so became the leading coalition party for the formation of the new broad-based government. The SKD, the United List of Social Democrats (ZLSD), the Greens and the small Social Democrat Party (SDS) also joined the coalition.

In the presidential election, held on the same day as the legislative poll, Mr Kucan was returned to office as well. His re-election, with 63.9% of the vote, testified to his widespread popularity following the key role he had played in the winning of Slovenia’s independence.

1994: Mr Jansa moves to In 1993 political stability seemed to have been established and, based on the opposition good foundations put in place by the Peterle government, the economy made considerable progress in adapting to the new Western orientation of trade relations and beginning the process of privatisation. However, 1994 proved a much more tumultuous year in domestic politics, while Slovenia also became involved in disputes with two of its neighbours, Italy and Croatia.

The first upset to the stability of the coalition government occurred in March 1994 when the popular leader of the SDS, Janez Jansa, was dismissed from his post as minister of defence and replaced by Jelko Kacin, a member of the Liberal Democrats. In the same month the Liberal Democrats merged with a group of smaller parties to form Liberal Democracy of Slovenia (LDS), increasing its representation in the National Assembly from 22 to 30 seats.

Tensions over foreign These events gave the LDS a dominant position in government and resulted in policy increasing tensions with the SKD. In protest at the appointment of a member of the LDS as speaker of the National Assembly, Mr Peterle resigned as foreign minister in October 1994 and was immediately replaced as foreign minister by Mr Drnovsek himself. Other SKD ministers continued to participate in the coalition, but in January 1995 Zoran Thaler, from the LDS, was appointed as foreign minister, and relations between the SKD and LDS deteriorated further. After a vote of no confidence in the National Assembly in May 1996, Mr Thaler resigned, to be replaced in July by Davorin Kracun, an economist. Although Mr Kracun was a member of the LDS, the SKD had no objection to the new appointment and the coalition government survived in the run-up to the new parliamentary election set for November 10. Meanwhile, the ZLSD (former

communists) had left the coalition, which was now supported by just half the total membership of 90 in the National Assembly.

The November election The November 10, 1996, general election left the political situation highly fluid proved indecisive and no government had been agreed by the end of the year. Centre-right parties, including the SKD, which together have exactly half the number of seats in the National Assembly, could just form a government but it would be an uneasy alliance, beset by personal rivalries. The LDS remains in a strong position as the largest single party.

Party representation in parliament (no of seats) Before 1992 Results, Results, Parties electionsa Dec 1992 Nov 1996 Liberal Democracy of Slovenia (LDS)b 38 22 25 Slovene Christian Democrats (SKD) 26 15 10 United List of Social Democratsc (ZLSD) 32 14 9 Slovene People’s Party (SLS) 37 10 19 Social Democrat Party (SDS) 19 4 16 Slovene National Party (SNS) 0 12 4 Democratic Party of Slovenia’s Pensioners (DeSuS) – – 5 Others 88 13 2d Total 240 90 90

a Between the April 1990 and December 1992 elections many parties split, merged or changed their names. b Derived from the merger with a number of smaller groupings in 1994 of the Liberal Democratic Party, which was in turn a derivation of the Union of Socialist Youth of Slovenia which won 14.5% of the votes in the 1990 election. c Derived from the Party of Democratic Renewal (former communists who won 17.3% of the vote in 1990) and smaller groups. d One of these represents the Hungarian minority, the other the Italian minority.

Sources: Press reports; Ministry of Information.

The constitution A new constitution was approved in December 1991, replacing the Yugoslav constitution. It came fully into force only after the December 1992 general election.

The legislature is bicameral. The National Assembly, with 90 members, is directly elected for a four-year term. The upper house, the Council of State, has powers only to initiate or to delay legislation. It has 40 members: 22 representing local interests, 12 divided between representatives of employers, employees and the self-employed, and six representing other (non-economic) interests.

The president is directly elected to serve a five-year term. Thus the current president, Milan Kucan, comes up for re-election in December 1997, a year after the parliamentary election, although in 1992 the presidential and parliamentary elections took place simultaneously. The president is responsible for nominating the prime minister after consulting the political parties. The prime minister and his cabinet must then be approved by parliament.

Political parties Political parties are of recent date and tend to be distinguished by personalities and, in the case of the Christian Democrats, religious affiliation rather than programmes or ideologies. The leading parties are as follows.

Liberal Democracy of Slovenia (LDS). The party of the prime minister during 1992-96, Janez Drnovsek, stands for personal liberties and a social market economy. It traces its origins to the libertarian and reformist Union of Socialist Youth under the communist regime.

United List of Social Democrats (ZLSD). Originating via the Party of Democratic Renewal, from the former League of Communists of Slovenia, this left-wing party alliance stands for political democracy and a market economy but favours a degree of state-intervention in pursuit of employment security and social justice.

Slovene People’s Party (SLS). This centre-right party represents the farming community. It is ideologically close to the Christian Democrats, but out- performed them in November 1996, led by its ambitious new leader, Majan Podobnik.

Slovene Christian Democrats (SKD). Right-of-centre and led by the prime minister at the time of independence, Lojze Peterle, this used to be the most influential among the parties without antecedents in the communist regime, but since 1994 it has lost support to the SLS and SDS. It lays stress on Christian and family values as well as social justice. Together with the SLS, it claims descent from the pre-war leading Slovene political grouping, the Catholic People’s Party.

Social Democrat Party (SDS). Headed by Janez Jansa, a former minister of defence, this party favours a free-market economy tempered by social justice. In the run-up to the November 1996 elections, Mr Jansa accused the LDS and ZLSD of favouring the interests of former communist enterprise managers in the process of privatisation.

Slovene National Party (SNS). This party is on the extreme right and openly racist, calling for the expulsion of Slovenia’s 100,000 refugees from elsewhere in former Yugoslavia and other non-Slovene South Slavs.

International relations The government’s first priority after its own final declaration of independence in October 1991 was to secure world recognition, by governments and international institutions. On January 15, 1992, the 12 members of the then European Community (EC) recognised Slovenia and by May 1992 a total of 76 countries had done so. Slovenia was also admitted to the UN and the Conference on Security and Cooperation in Europe (CSCE), now the Organisation for Security and Cooperation in Europe (OSCE), in 1992. Member- ship of the Council of Europe as well as membership of the IMF and the World Bank came in 1993.

In June 1995 Slovenia ratified its participation in the World Trade Organization (WTO) and on July 1, 1995, it also ratified a free-trade agreement with the European Free Trade Area (EFTA). The terms for an Association (or Europe) Agreement with the EU, which had absorbed the EC in 1993, were initialled in June 1995 but signing did not take place until June 1996, after Italy had lifted

its objections (see below). The Association Agreement’s initial provisions take effect from the start of 1997, although it has not yet been ratified as this requires an amendment to Slovenia’s constitution to allow foreigners to purchase real estate.

Slovenia became a member of the Central European Free Trade Area (CEFTA) on January 1, 1996.

Difficulties in relations Europe Agreement negotiations were held up in 1994 by a dispute with the with Italy then Italian government of Silvio Berlusconi. Overtly, the Italian government wanted Italians who had been expelled after the Second World War (of whom there were about 150,000-200,000 from Slovenia; 350,000 including those from Croatia) to have a chance to buy back property when it came up for sale. A treaty regulating relations between Italy and the former Yugoslavia had been agreed at Osimo in 1975, and in 1983 Italy and Yugoslavia agreed on a sum of $110m to be paid by Yugoslavia in settlement of all property and other claims by Italians who had been forced to leave former Italian territory. By an exchange of diplomatic notes in 1992, Italy recognised Slovenia as the heir to all relevant treaties and agreements. While the Italian authorities argued that they were concerned with the interpretation of the agreements, the Slovenes felt that they were trying to reopen matters which had already been settled. Follow- ing an agreement initialled by the two foreign ministers on October 10, 1994, an overt split emerged within Slovenia, after the prime minister, Mr Drnovsek, denounced this agreement.

A new Italian government, composed of non-politicians under Lamberto Dini, was appointed in January 1995. Mr Dini’s foreign secretary, Susanna Agnelli, lifted Italian objections to the negotiation of a Europe Agreement in March 1995 and in June the agreement was initialled by the Slovene government and the EU. However, differences between the two sides remained. A compromise was proposed in December 1995 during Spain’s presidency of the EU. This would open Slovenia’s real-estate market to other EU country nationals within four years of the ratification of the Association Agreement, and Italians formerly living in what is now Slovenia would have the opportunity to purchase property in advance. However, it was not until the advent of the new left-of- centre Italian government of Romano Prodi in May 1996 that Rome finally agreed to the signing of the Europe Agreement with Slovenia, which followed in June. Slovenia has thus joined the other nine associated members in the “structural dialogue” with the EU in preparation for full membership. How- ever, the matter will only finally be resolved once the new Slovene parliament has amended the constitution as required by the Spanish compromise.

Slovenia has also applied for full membership of NATO, with which it has entered into a “Partnership for Peace” arrangement.

Relations with Croatia There have also been difficulties in relations with Croatia. Of particular concern to Slovenia is a dispute related to sovereignty over the waters in the Bay of Piran, which provide Slovenia’s access to the high seas. Another important issue concerns Slovenia’s refusal at present to recognise the deposits of Croatian citizens with the former Ljubljana Banka pending a settlement of reciprocal claims over

Croatian debts to Slovene companies and a wider settlement of assets and liabilities in the former Yugoslavia.

Defence Slovenia’s armed forces totalled 56,000 in 1996, of whom 46,000 were combat troops. The Slovene army had 110 tanks and 90 armoured vehicles in 1996. The air force consisted of 11 helicopters and ten training aircraft. There were no combat planes. The navy comprised one patrol speedboat and there were 480 coastal defence personnel. Slovenia’s defence budget in 1995 accounted for 1.4% of GDP.

Population and society

There was a small increase in population from 1,980,718 at the end of 1986 to 1,994,840 at the end of 1992, followed by a decrease to 1,989,447 at the end of 1994.

Slovenia is ethnically homogeneous, with Slovenes making up 90% of the population. Small Italian and Hungarian communities constitute officially recognised minorities. About 75% of the population is Roman Catholic.

In 1994/95, 209,947 children were at primary schools. There were 102,745 students in secondary schools and 43,249 at universities and other institutions of higher education.

Trend of population

1990 1991 1992 1993 1994 1995 Million 2.00 2.00 1.99 1.99 1.99 1.99 Source: Statistical Office of the Republic of Slovenia.

Population of main towns, Dec 1994 (’000) Ljubljana 269.9 Maribor 103.1 Celje 39.8 Kranj 36.8 Velenje 27.1 Koper-Capodistria 24.6 Novo Mesto 22.6 Nova Gorica 14.4 Murska Sobota 13.8 Source: Statistical Office of the Republic of Slovenia.

Currency

The Slovenian tolar (SIT) was introduced on October 8, 1991, at par with the Yugoslav dinar, and pegged at SIT16:DM1. As early as December 1991, however, the currency was devalued to SIT41:DM1 and allowed to float. Given the high rate of inflation then prevailing in Slovenia, the tolar depreciated quite

sharply in 1992 and 1993. In 1994, however, the real value of Slovenian wages rose by considerably more than those in other European countries, and the depreciation of the tolar was not sufficient to compensate. During the first three quarters of 1995 the exchange rate policy hardened further, with the tolar being kept almost constant against the D-mark. By mid-1995 exports had slack- ened while imports continued to boom, suggesting that the exchange rate was making Slovenian industry uncompetitive. Consequently, a much sharper depreciation was allowed in the last four months of 1995, from SIT81.7:DM1 at the end of August to SIT87.9:DM1 at the end of December. During 1996 the tolar depreciated at a rate broadly sufficient to compensate for inflation differ- entials with major trading partners.

Exchange rates (SIT per unit of currency; annual averages) 1991 1992 1993 1994 1995 1996 $ 27.6 81.3 113.2 128.8 118.5 135.4 DM 16.6 52.1 68.6 79.5 82.7 90.3 £ 48.9 143.5 169.8 197.1 187.2 211.2 Source: Bank of Slovenia, Monthly Bulletin.

The economy

Post-war development Under communism Slovenia underwent rapid economic and social development. While in the 1930s the region was predominantly agricultural, by the 1980s agriculture and fishing accounted for only 4.5% of social product, with manufacturing responsible for about 50%. Only farming and very small-scale artisan and other enterprises were privately owned under communism, but open borders with Austria and Italy, a degree of enterprise autonomy and permission for market forces to operate allowed Slovenia to become remarkably prosperous by the early 1970s. However, the Yugoslav communist system proved less adaptable to the difficulties posed by the oil crises of the 1970s. High inflation and the consequent dislocations caused production to decline after 1987.

Situation before The Slovene economy was the most highly industrialised and advanced of independence those of the six republics of Yugoslavia. While accounting for less than 8% of the country’s population, Slovenia was in 1990 responsible for 20% of gross social product, 29% of exports and 25% of imports. Productivity was on average twice as high as in Yugoslavia as a whole. Nevertheless, productivity in manufacturing was one-third of that in Italy and Austria in 1989. The primary cause was the low level of investment in modern plant. In 1987 investment per employee amounted to the equivalent of DM2,400, compared with DM66,500 in Austria, and the situation deteriorated in subsequent years.

One of the main problems facing the Slovene economy at the time of independence was how to raise the rate of new investment, given the lack of local resources.

Economic reform Already before the formal end of communism, most agricultural and small- scale trade and service activities were conducted by private businesses. Even the larger “socially” owned enterprises often acted in a similar way to Western companies, partly because of market reforms (albeit far from perfect) introduced in former Yugoslavia in the 1950s and partly because they were compet- ing directly in Western markets. Slovenia was thus closer to a Western-style market economy than other former communist countries at the time of its independence and introduction of democracy. It has, however, proved difficult to introduce rapid economic restructuring to reduce overmanning because of the impact on unemployment and strong resistance from trade unions and large sections of the population. But progress has been made, and as a result unemployment nearly trebled to 14.4% of the workforce in 1994. On the other hand, the private sector has received a considerable boost since independence. The number of privately owned companies (with fewer than 50 employees) rose by 40% in 1993 alone, although the bulk of these companies were in the services sector.

Privatisation Under the terms of the Enterprise Ownership Transformation Act, which came into force in December 1992, about 1,500 socially owned companies were scheduled for privatisation. Under the law 40% of the capital must be allocated to three funds: 10% each for the Compensation Fund (for former owners) and the Pension Fund, and 20% for the Development Fund. The intention is that the latter should in due course offer its shares to Special Investment Funds. The Development Fund is also responsible for restructuring companies in difficulty.

The method of privatising the rest of the enterprise is left to the decision of management and workers’ councils, but the law favours employee buyouts, which look like accounting for about 95% of all privatisations of socially owned companies: 20% of shares are distributed free and the other 40% at a 50% discount, with right of first refusal to present and former employees. The option does exist, however, for direct sale to a domestic or foreign buyer, as well as public tender or auctions.

Privatisation was initially quite slow, with only 320 companies sold by mid- 1995, but it accelerated in 1996 and the programme of selling 1,500 companies and was expected to be completed by mid-1997.

All Slovene citizens have received vouchers which can be used both to participate in employee buyouts and to buy into the investment funds.

According to the 1992 law, some sectors were to remain in public ownership, including banking, transport and utilities. However, it appears that most of these sectors also will eventually be privatised, including the Nova Ljubljanska Banka, shorn of pre-independence liabilities to Croatian citizens belonging to the old Ljubljanska Banka.

National accounts

Slovenia has adopted the Western system of gross domestic product (GDP) as the measure of national income, in place of the former Yugoslav system whose measure was gross social product (GSP), which gave greater emphasis to phys- ical production at the expense of services.

The Slovene economy contracted sharply at the time of and immediately after, independence in 1991. It recovered strongly in 1994 and early 1995. There was a slowdown in late 1995 and early 1996, but there are indications that strong investment growth and a moderate export recovery were boosting the economy by the second half of 1996. The structure of GDP was similar to developed Western economies already in 1991 and had become more so by 1995.

Gross domestic product (at current prices) 1990 1991 1992 1993 1994 1995 $ m 17,326 12,673 12,365 12,672 14,321 18,550 SIT bn n/a 349.4 1,005.3 1,435.0 1,844.7 2,198.5 Real rate of change (%) –4.7 –8.1 –5.4 1.9 4.9 3.5 Sources: Statistical Office of the Republic of Slovenia; Bank of Slovenia, Monthly Bulletin.

Gross domestic product by sectoral origin (current prices) 1991 1995 SIT m % of total SIT m % of total Agriculture, forestry & fishing 17,223 4.9 95,674 4.3 Mining 4,081 1.2 23,119 1.0 Manufacturing 110,511 31.6 538,351 24.4 Electricity, gas & water 14,778 4.2 52,803 2.4 Construction 13,015 3.7 97,368 4.4 Others 189,800 54.3 1,394,706 63.3 Total 349,408 100.0 2,202,021 100.0 Source: Statistical Office of the Republic of Slovenia.

Employment

During the communist period in the former Yugoslavia, Slovenia enjoyed high levels of employment, although this was to a considerable extent due to social policies and, as noted above, overmanning was common. There was a moderate rise in unemployment in the late 1980s and, after independence, the loss of markets and problems of financial liquidity led to a sharp rise. The rate rose from 6.5% in January 1991 to 15.1% by January 1994 but fell to 13.8% by August 1995 and to 13.3% by June 1996. However, according to International Labour Organisation (ILO) criteria, commonly used in Western countries, the rate would have been 7.3% in mid-1996. Many of those registered as unemployed are in fact working in the “parallel” or “grey” economy.

Labour-market trends (’000 unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Labour force 954.4 914.1 886.0 895.5 879.4 871.7 Employeda 909.7 839.0 783.4 766.1 752.3 750.2 Registered unemployed 44.6 75.1 102.6 129.1 127.1 121.5 Unemployment (% of labour force) 4.7 8.2 11.6 14.4 14.5 13.9

a Including self-employed.

Source: Bank of Slovenia, Monthly Bulletin.

Employment by sector (% of total) 1991 1992 1993 1994 1995 Manufacturing, mining & electricity 38.2 36.7 41.6 41.6 40.9 Agriculture & fishing 7.9 8.4 1.6a 1.6a 1.5a Forestry 0.6 0.5 0.6 0.5 0.4 Construction 5.1 5.1 4.9 5.0 5.0 Services 48.2 49.3 51.3 51.3 52.2 Total 100.0 100.0 100.0 100.0 100.0

a Agricultural employment has been defined in a much more restrictive way, in line with normal OECD practice, since 1993.

Source: Statistical Office of the Republic of Slovenia.

Trade unions Democracy has led to a proliferation of trade union organisations. Two federa- tions predominate: the Association of Free Trade Unions (ZSSS), a successor of the former, communist-led organisation, and the Confederation of New Trade Unions of Slovenia—Independence (KNSS). Strikes have been a frequent occur- rence since independence, although a general stoppage of work has been avoided.

Prices and wages

Like the rest of Yugoslavia, Slovenia recorded high rates of inflation in the 1970s and 1980s, with a sharp acceleration in the mid-1980s as a result of price liberation. A climax was reached in 1989, when retail prices rose by over 1,300%. The rate eased down in 1990-91 as a result of the shock-therapy programme introduced by the federal authorities in late 1989. Restrictive policies continued after independence and there was a sharp fall in real incomes from 1990 to 1992. Initially these policies were only partially successful: inflation remained high in early 1992, despite the introduction of the Slovenian tolar in late 1991. However, tight monetary and credit policy followed by the Bank of Slovenia (the central bank) brought a sharp fall in Slovenia’s monthly inflation rate during the second half of 1992, from 5.9% in June to 1.1% in December. In 1993 the monthly increase in retail prices averaged 1.7%. The year-on-year increase was down to 9.3% in October 1995, but rose to 10.3% by August 1996. Real wages recovered strongly in 1993, rising by 17.4% year on

year, but increases moderated, to 6% in 1994, 5% in 1995 and 2.7% in the first half of 1996.

Prices and incomes (% average change, year on year) 1990 1991 1992 1993 1994 1995 Retail prices 549.7 117.7 201.3 32.3 19.8 12.6 Real incomes –25.9 –10.9 –8.9 16.4 6.0 4.6 Source: Bank of Slovenia, Monthly Bulletin.

Agriculture, forestry and fishing

Farming in Slovenia is mainly based on smallholdings, most of them not exceeding 25 acres and worked by families with little outside assistance. But there are also some well-run “socially” owned estates responsible for a large proportion of marketed food supply and exports. In the early 1990s there was nearly seven times more land under crop farming and gardening in the private than in the public sector, and there were more than five times more cattle in the former than in the latter. But productivity and incomes on private farms are very low and cultivators have been demanding state support.

Agricultural production (’000 tons unless otherwise indicated) 1990 1991 1992 1993 1994 1995 Maize 337.5 336.5 207.5 248.8 324.4 305.3 Wheat 199.5 180.6 178.4 181.7 181.7 177.5 Potatoes 411.9 429.0 368.0 367.2 401.0 448.7 Apples 93.9 72.8 85.2 91.3 95.8 113.3 Wine (m hl) 521.1 567.3 553.8 710.6 807.2 636.0 Source: Statistical Office of the Republic of Slovenia.

Livestock numbers (’000 head) 1990 1991 1992 1993 1994 1995 Cattle 546 533 484 504 477 477 Pigs 558 588 529 602 591 571 Sheep 23 20 13 21 19 18 Chickensa 2,340 12,800 13,100 11,400 10,600 10,194

a All fowl in 1991-95.

Source: Statistical Office of the Republic of Slovenia.

Maize and wheat are the most important crops, followed by potatoes and vines; fruit and vegetable growing are important subsectors.

Forests cover over 1m ha, or more than half the republic’s total land, and are almost equally divided between coniferous and deciduous species. A considerable proportion of forest is still publicly owned. Much of it was owned by the Church before being taken into public ownership under communism.

Fishing off the coast of Istria provides significant local employment, with annual catches exceeding 6,000 tons in normal times. Freshwater catches are around 900 tons/year.

Mining and energy

Slovenia is poor in mineral resources. Brown coal and lignite are mined, but the main establishments at Zagorje, Trbovlje and Hrastnik are among Slovenia’s major loss-makers, the coal being difficult to dig and of poor quality. The future of these mines is therefore in doubt. The bulk of output is used for power generation.

Exploitation of the uranium deposit at Zirovski Vrh has been discontinued because of low productivity and ecological considerations.

Mining output (’000 tons) 1990 1991 1992 1993 1994 1995 Brown coal 1,373 1,253 1,323 1,200 1,079 967 Lignite 4,210 3,906 4,233 3,921 3,775 3,917 Source: Statistical Office of the Republic of Slovenia.

The country’s electricity requirements are met by four thermal stations, 13 hydroelectric plants and the nuclear power plant at Krsko, near the Croatian border. The latter accounted for 34% of Slovenia’s electricity production in 1993, but there has been pressure, both domestic and from environmentalists in Austria, to close the plant. Surplus electricity is exported to western Europe. Until the war about 11% of electricity was supplied by Slovene-built power plants in Bosnia and Hercegovina.

Only 0.1% of local demand for oil and gas is met by domestic sources. A refinery covers about 30% of Slovenia’s requirements of petroleum products.

Energy consumption

1985 1991 1992 1993 1994 1995 Coal & fuel wood (’000 tons) 8,660 6,508 6,798 6,556 6,052 6,213 Liquid fuel (’000 tons) 1,691 1,587 1,514 1,821 2,261 2,241 Natural gas (m cu metres) 873 880 720 740 723 878 Nuclear power (m kwh) 2,026 2,354 1,879 1,873 2,196 2,279 Hydropower (m kwh) 3,146 3,608 3,410 2,975 3,348 3,187 Source: Statistical Office of the Republic of Slovenia.

Electricity production (m kwh) 1991 1992 1993 1994 1995 Hydro 3,571 3,374 2,974 3,287 3,237 Thermal 4,147 4,681 4,209 4,603 4,668 Nuclear 4,951 3,971 3,750 4,609 4,779 Total 12,669 12,026 10,933 12,499 12,684 Source: Statistical Office of the Republic of Slovenia.

Manufacturing

Manufacturing is the most important contributor to GDP, accounting for 29.4% in 1995. Some manufacturing activities go back to the 18th century, including textiles and garment-making as well as ironworks which developed into m- achine-building and metalworking. The latter is the most important sector, employing over 80,000 and accounting for around a quarter of manufacturing value-added. Other large sectors include chemicals and pharmaceuticals, footwear, and woodworking and furniture. Among the new branches, electrical and electronics industries have been particularly dynamic, with a high proportion of output exported, of which 90% has gone to hard-currency markets. There was severe underinvestment in the 1980s and early 1990s, but a strong recovery took place in 1994 and 1995.

Construction

Accounting now for around 4% of Slovenia’s GDP, construction was a priority industry in communist Slovenia. With years of experience the industry grew in scope and sophistication, covering residential housing to nuclear and thermal power stations, as well as all manner of civil engineering, which brought in substantial foreign earnings of over $300m per year. Foreign earnings from construction and domestic construction activity both fell in the early 1990s. However, there was a strong revival in private and public activity in 1996 which is likely to continue into 1997.

Tourism

In communist Yugoslavia foreign tourism was appreciated as a valuable source of foreign exchange and the industry prospered as many new hotels and facili- ties were built. Slovenia, which offers alpine and seaside resorts as well as spas, participated in this boom, with the number of nights spent there by foreign tourists more than trebling between 1964 and the peak year of 1989, when they reached 3.89 million.

The unrest in the former Yugoslav republics caused a sharp fall in arrivals in 1991, but there has since been a partial recovery. In the past, tourism was mainly based on package tours but more recently the Slovenes have been endeavouring to arouse the interest of foreign visitors in higher value-added specialist holidays, from bird watching to archaeology. “Peasant tourism” developed by private enterprise and based on farmhouses and village life is gain- ing in popularity.

Tourist arrivals and bednightsa (’000) 1991 1992 1993 1994 1995 1996b Arrivals 298.7 422.8 624.3 748.3 732 448 Total bednights 970 1,356 2,012 2,481 2,935 1,393 of which: Italy 250 441 409 372 388 191 Austria 139 335 403 383 441 243 Germanyc 166 243 374 449 572 326 UK 143 50 58 59 66 55

a Excluding former Yugoslavia in 1990-92. b January-July. c West Germany only in 1990-91.

Source: Statistical Office of the Republic of Slovenia.

Transport and communications

Slovenia is situated at some of Europe’s most important crossroads. Through it runs the only rail connection between Greece and the rest of the EU as well as the southern link between western and eastern Europe. However, these links were closed during sanctions against Serbia-Montenegro and remain underutilised.

Maritime transport is centred on the Slovene port of Koper-Capodistria which handles 5m tons/year and is also an important maritime outlet for Austria.

There were 11,840 km of paved roads at the end of 1995, at which point there were 698,211 passenger cars, 37,739 lorries and 2,467 buses.

Adria Airways is the national air transport company. Slovenia has three international airports.

In 1996 there were 614,796 telephone subscribers.

There are seven leading daily newspapers with a combined circulation of 300,000-400,000. The main daily paper, Delo, dates from the communist era, but now expresses liberal and secular views, while Slovenec supports Christian traditions. There are 42 weeklies and nearly 1,000 other periodicals. Most of the 23 TV and 40 radio stations are independent and privately owned. The number of radio licences held at the end of 1995 was 530,305 and there were 454,881 television licence-holders.

Finance

Public finance Slovenia is gradually adopting a Western system of taxation. Personal and corporation taxes were introduced in January 1991, and a value-added tax (VAT) is expected to follow. The main source of government revenue continues to be social insurance contributions, which account for more than half total revenue. There was a negligible deficit, equal to 0.03% of GDP, in 1995. The deficit is likely to have remained small in 1996.

General government account (SIT m at current prices unless otherwise indicated) 1993 1994 1995 Total revenue 674,825 849,756 1,015,350 of which: tax revenue 315,494 443,624 531,419 social security contributions 300,560 346,632 407,977 non-tax revenue 58,771 59,499 67,399 Total expenditure 670,169 853,998 1,016,006 of which: central government expenditure 300,686 373,998 453,000 local government expenditure 74,092 98,007 102,368 pension fund 186,053 247,989 302,531 healthcare 107,253 131,911 153,232 solidarity fund expenditure 2,085 2,092 0 Balance 4,656 –4,242 –655 % of GDP 0.3 –0.2 –0.03 Source: Ministry of Finance.

Money and banking The Bank of Slovenia is the central bank and it is independent of the government. It has pursued a tight monetary and credit policy, aimed at the gradual reduction of inflation, since the introduction of the Slovenian tolar (SIT) in October 1991. A rediscount rate of 25% in addition to compensation for inflation was initially introduced. The discount rate was reduced to 18% in May 1993, to 16% in February 1994 and to 10% in April 1995. In 1996 interest rates were still calculated monthly in real terms, on the basis of the previous three months’ inflation.

The bank has ended some of the worst abuses of the banking system under the Yugoslavian federation, such as enterprises setting up their own banks from which they borrowed freely. Further restructuring of the sector and its eventual privatisation, including the Ljubljanska Banka (now renamed Nova Ljubljanska Banka), remains one of Slovenia’s priorities.

Active in its specialised field is the Post Office Savings Bank and there are a number of smaller financial institutions, insurance houses and investment companies.

A small stock exchange operates in Ljubljana.

Foreign trade

A high proportion of Slovenia’s foreign trade has been with developed market economy countries over the past few decades. The proportion has increased since independence, despite the fact that trade with other former Yugoslav republics has become foreign trade. The breakdown of foreign trade in 1995, including trade with the other former republics of Yugoslavia, shows that the EU took 67% of Slovenia’s exports and supplied 68% of its imports, with Germany, Italy and France, in particular, being important trading partners.

Trend of foreign trade ($ m) 1990a 1991a 1992 1993 1994 1995 Merchandise exports fob 4,118 3,874 6,681 6,083 6,828 8,286 Merchandise imports cif –4,727 –4,131 –6,141 –6,501 –7,304 –9,451 Trade balance –609 –257 540 –418 –476 –1,165

a Excluding other republics of former Yugoslavia and processing trade.

Source: Bank of Slovenia, Monthly Bulletin.

Foreign trade by region and country, 1995 (% of total) Exports to: Imports from: EU 67.0 EU 68.5 Germany 30.1 Germany 23.0 Italy 14.6 Italy 16.9 Croatia 10.5 Austria 9.6 France 8.2 France 8.4 Austria 6.4 Croatia 6.1 Former Soviet Union 4.5 USA 3.0 USA 3.1 Former Soviet Union 2.8 Macedonia 2.3 Hungary 2.8 Source: Statistical Office of the Republic of Slovenia.

Manufactured goods, particularly electrical appliances, transport equipment, machinery, chemicals, metal goods, and furniture and other wood products, are the main exports. An important subsector is that of automotive compo- nents, particularly for the German and French motor industries.

Foreign trade by main categories (% of total) 1990 1992 1993 1994 1995 Exports fob Machinery & transport equipment 38.0 29.4 27.4 30.2 31.5 Manufactures classified by material 28.0 27.1 26.1 27.4 28.6 Miscellaneous manufactures 16.4 23.2 25.6 24.0 22.2 Chemicals 8.9 9.1 9.1 10.3 10.4 Food & live animals 4.6 5.1 3.9 4.0 3.2 Crude materials, excl fuel 3.0 2.1 1.8 1.9 2.0 Imports cif Machinery & transport equipment 30.2 26.4 30.3 31.8 33.8 Manufactures classified by material 17.4 19.6 17.6 19.4 19.8 Miscellaneous manufactures 8.5 10.5 12.0 10.9 10.6 Chemicals 18.9 12.4 11.5 12.2 12.1 Mineral fuels & lubricants 7.2 10.8 10.8 7.1 6.4 Crude materials, excl fuel 9.4 6.8 5.3 6.5 6.6 Source: Statistical Office of the Republic of Slovenia.

Much of Slovenia’s trade with the rest of former Yugoslavia and the former communist countries of eastern Europe has been lost, but Slovenia’s long-term aim is to strengthen its position as a link between the technologically advanced West and markets in eastern Europe.

External payments and debt

Current account Slovenia’s balance on the current account has traditionally been positive, helped by the surplus on services, particularly tourism and transport. In 1992, the first full year of independence, there was a current-account surplus of $759m. Deterioration of the trade balance in 1993 led to a weakening in the current-account position which, however, saw a marked improvement in 1994 with a surplus of $540m. In 1995, however, there was a deficit of $36m. A further deterioration is likely to have taken place in 1996 but the position remains acceptable in view of Slovenia’s need for imports of investment equipment.

Foreign investment Balance-of-payments statistics show foreign direct investment in Slovenia to have risen since independence. In 1989 and 1990 the net inflow—ie taking into account disinvestments—had been $3m and $4m respectively. But in 1991 the net total was $65m, in 1992 it rose to $113m and by 1995 it had risen to $170m.

At the end of 1995 Slovenia was second only to Hungary among former communist countries in terms of cumulative foreign direct investment per head.

Balance of payments ($ m) 1992 1993 1994 1995 Merchandise trade fob-fob 791 –154 –338 –954 Non-factor services 180 375 723 725 Income –91 –51 108 147 Transfers 46 22 47 45 Current-account balance 926 192 540 –36 Direct investment 113 111 131 170 Portfolio investment –9 3 –32 –10 Other investment –117 –209 3 231 Capital-account balance 9 4 –4 –14 Errors & omissions –289 10 5 –120 Change in net external position of Bank of Slovenia (– indicates increase) –633 –111 –642 –220 Source: Bank of Slovenia, Monthly Bulletin.

Reserves When Slovenia began to exercise monetary autonomy in October 1991 the Bank of Slovenia’s foreign exchange reserves stood at virtually zero, while the hard- currency holdings of Slovene commercial banks amounted to about $200m. Since then, the reserves of Bank of Slovenia rose steadily to $2.4bn at the end of November 1996, at which time commercial bank reserves were $1.9bn.

Debt At the end of November 1996 total debt was $4.09bn, according to the central bank. Of this, $40m was short-term debt, and of the $4.05bn in long-term debt, $1.85bn was private debt. The private component had risen rapidly from $538m at the end of 1993.

In June 1995, after protracted negotiations, Slovenia and representatives of commercial banks agreed on Slovenia’s share of previously unallocated former Yugoslav debt. Slovenia agreed to take responsibility for 18% of a total which then stood at about $4.6bn. The agreement was signed in early 1996 and the debt was added to the official total later in that year. As a result public medium and long term debt increased from $1.44bn at the end of 1995 to $2.20bn at the end of November 1996.

External debt and reserves ($ m; end-period) 1992 1993 1994 1995 Nov 1996 Long-term debt 1,659 1,744 2,172 2,916 4,049 Public & publicly guaranteed 1,203 1,206 1,331 1,437 2,200 Private non-guaranteed 456 538 841 1,479 1,850 Use of IMF credit 0 12 7 4 1 Short-term debt 82 117 79 50 40 Total foreign exchange reserves 1,164 1,566 2,764 3,426 4,268 Bank of Slovenia 716 770 1,480 1,802 2,391 Commercial banks 448 796 1,284 1,624 1,877 Source: Bank of Slovenia, Monthly Bulletin.

Trade and investment regulations

Slovenia’s foreign trade regulations have been steadily relaxed and liberalised, particularly since 1989. By 1993 almost 98% of imports were free of restrictions, with the rest being subject to quotas and, in rare cases such as arms and precious metals, to special licence. Specific provisions apply to the six free- trade and customs zones, the duty-free shops and bonded warehouses and depots. The government is committed to further liberalisation and adjustment to EU rules, including abolition of all non-tariff barriers and freedom for foreign nationals to acquire real estate.

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Editor: Charles Jenkins All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023