Public Disclosure Authorized FEDERAL REPUBLIC OF YUGOSLAVIA BREAKING WITH THE PAST: THE PATH TO STABILITY AND GROWTH Volume II: Assistance Priorities and Public Disclosure Authorized Sectoral Analyses Public Disclosure Authorized Public Disclosure Authorized ii TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS………………………………………………………...viii ACKNOWLEDGEMENT……………………………………………………………………….. ix CHAPTER 1. AN OVERVIEW OF THE ECONOMIC RECOVERY AND TRANSITION PROGRAM…………………………………………………………………………………….... 1 A. Introduction……………………………………………………………………………..... 1 B. The Government’s medium-term Challenges…………………………………………..... 3 C. Medium-term External Financing Requirements………………………………….……... 4 D. The 2001 Program………………………………………………………………………... 8 E. Implementing the Program………………………………………………………….…....13 CHAPTER 2. FISCAL POLICY AND MANAGEMENT………………….…………………..15 A. Reducing Quasi Fiscal Deficits and Hidden Risks…………………………………….. ..16 B. Transparency and Accountability of Public Spending………………….………………..27 C. Public Debt Management………………………………………………………………...34 D. Tax Policy and Administration…………………………………………….…………... ..39 CHAPTER 3. TRADE………………………………………...…………………….…………..48 A. Patterns of Trade in Goods and Services ……………………………..………..……… ..48 B. Trade Policies: Reforms to date and plans for the future………………………………...51 C. Capacity to Trade: Institutional and other constraints to implementation…………….....55 D. Market Access: The global, European and regional dimension……………………….. ..57 E. Policy recommendations………………………………………………………………....60 F. Donor Program……………………………………………………………….…………..62 CHAPTER 4. GOVERNANCE……………………………………………………….………. ..68 A. Introduction……………………………..…………………………..………….…….…..68 B. Creating an effective Public Sector……………………………………………………....70 C. Enhancing the Efficiency of the Public Sector………………………………………… ..73 D. Increasing the accountability of the Public Sector…………………………………….....76 CHAPTER 5. PRIVATE SECTOR DEVELOPMENT………………………………………. ..81 A. Introduction………………………………………………………………..……………..81 B. Socially owned enterprises: Privatization and Restructuring………………….………. ..82 C. Private small and medium new enterprises……………………………….……………...97 D. Other reforms for private sector development…………………………………….……105 CHAPTER 6. FINANCIAL SECTOR………………………………………………………... 111 A. Introduction……………………………………………………………………………..111 B. Macroeconomic environment and the Financial Sector……………………..…….……112 C. The Yugoslav Financial Sector…………………………………………………………117 D. Banking Regulation and Supervision………………………...……………….…….…..120 E. Problem banks resolution……………………………………………………………….128 F. Asset resolution strategy………………………………………………………………..136 G. Donor program………………………………………………………………………….140 iii CHAPTER 7. ENERGY……………………………………………………………………….143 A. Summary..………………………………………………………………………………143 B. Electricity……………………………………………………………………………….148 C. Coal……………………………………………………………………………………..158 D. Oil and Gas…………………………………………………………………………….. 163 E. District Heating and Energy Efficiency…………………………………….…………..170 CHAPTER 8. TRANSPORT………………………………………………...…...…….. …….181 A. Road and road transport……………………………………………………….………..182 B. Railways………………………………………………………………………………...188 C. Maritime transport……………………………………………………………………... 194 D. River transport………………………………………………………………….……… 198 E. Trade and Road transport Facilitation…………………………………………………. 201 CHAPTER 9. WATER, WASTEWATER AND SOLID WASTE………………………….. 209 A. Background on Organization and the Quality Situation……………….……………….209 B. Policy reforms needed for the success of the Donor Program…………….……………218 C. Donor Program for Water Supply and Sanitation………………………………………220 CHAPTER 10. COMMUNICATIONS…………………………..……………………..…….. 229 A. Telecommunications……………………………………………………………………229 B. Broadcasting………………………………………………………………….………... 233 C. Postal Services…………………………………………………………………………. 233 D. ICT/Information Society…………………………………………………….………….234 E. Sector Priorities for Transition and Recovery…………………………………………. 235 CHAPTER 11. AGRICULTURE…………………….………………………………………. 237 A. Introduction……………………………………………………………………………..237 B. Background……………………………………………………………………………..238 C. Sector Constraints and Challenges…………………………………………………….. 248 D. Priorities and Investments for Recovery and Transition………………………….…… 250 CHAPTER 12. ENVIRONMENT……………………………………………………………..260 A. Introduction……………………………………………………………………………..260 B. Environmental Situation…………………………………………………………….…. 261 C. Environmental Institutional Framework and the Role of Civil Society……………… 272 D. The Regional Dimension…………………………………………………………….… 274 E. Towards and Environmental Agenda………………………………………………….. 275 CHAPTER 13. SOCIAL PROTECTION………………………………………………..…… 280 A. Pensions………………………………………………………………………………... 280 B. Unemployment Benefits and Other Labor Market Programs…………………………. 292 C. Social Welfare…………………………………………………………………………. 296 CHAPTER 14. HEALTH………………………………………………………...…………... 307 A. Background……………………………………………………………………………..307 B. Key Challenges……………………………………………………………………….... 314 C. Priorities for Transition and Recovery………………………………………………….316 D. Proposed Donor Program ……………...……………………………………………….320 iv CHAPTER 15. EDUCATION…………………………………………………………………322 A. Background……………………………………………………………………………..322 B. Priorities for Transition and Recovery………………………………………………….333 CHAPTER 16. POVERTY…………………………………………………………….……... 339 A. Introduction……………………………………………………………………………..339 B. Poverty and Inequality: Snapshot and Changes………………………………………...340 C. Explaining Poverty……………………………………………………………………...345 D. Conclusions and Recommendations for Policies and the Donor Community.…………347 LIST OF TABLES Table 1.1: External Financing Requirements, FRY medium term ERTP, by Sector……….….. 5 Table 1.2: External Financing Requirements, FRY medium term ERTP, by Category……….. 6 Table 1.3: External Financing Requirements for 2001, FRY medium term ERTP……………. 9 Table 2.1: Fiscal Risks – Liabilities and Expenditures………………………………………. 17 Table 2.2: Fiscal Risks – Assets and Revenues…………………………………………….… 18 Table 2.3: Donor Program: Fiscal Policy and Management………………………………… 43 Table 3.1 Trade and Services Balances…………………………………………………….. 49 Table 3.2 Main Export Markets…………………………………………………………….. 50 Table 3.3 Main Import Markets……………………………………………………………... 50 Table 3.4 Exports and Imports by Commodity……………………………………………… 51 Table 3.5 Donor Program: Trade…………………………………………………………… 64 Table 4.1 Donor Program: Governance…………………………………………………….. 80 Table 5.1 Enterprises and Workforce by type of Ownership……………………………….. 83 Table 5.2 Losses/Profits by ownership in 1999 and Jan-June 2000………………………... 85 Table 5.3 Employment and value added in small enterprises, 1998……………………….. 98 Table 5.4 Donor Program: Private Sector Development…………………………………… 110 Table 6.1 Monetary Aggregates, share of GDP……………………………………………. 114 Table 6.2 Monetary Aggregates……………………………………………………………. 116 Table 6.3 Structure of Domestic Credit……………………………………………………. 117 Table 6.4 Estimated direct costs of resolution alternatives………………………………… 133 Table 6.5 Donor Program: Financial Sector………………………………………………... 142 Table 7.1 Overall Donor Program: Energy Sector………………………………………… 147 Table 7.2 Priorities for Electricity sub-sector recovery and reform………………………... 152 Table 7.3 Donor Program: Electricity sub-sector………………………………………….. 157 Table 7.4 Coal production………………………………………………………………….. 158 Table 7.5 Donor Program: Coal sub-sector………………………………………………... 162 Table 7.6 Priorities for Oil and Gas sub-sector recovery and reform……………………….168 Table 7.7 Donor Program: Oil and Gas sub-sector…………………………………………170 Table 7.8 Donor Program: District Heating/Energy Efficiency…………………………… 180 Table 8.1 Road Expenditures (1990-2000) in US$ millions……………………………….. 183 Table 8.2 Donor Program: Transport……………………………………………………… 208 Table 9.1 Sample Cleansing Service Fees…………………………………………………. 215 Table 9.2 Solid Waste Characteristics……………………………………………………… 216 Table 9.3 Investments planned for Landfills……………………………………………….. 217 Table 9.4 Donor Program for Water, Wastewater and Sanitation………………………….. 222 Table 9.5 Rivers of FRY…………………………………………………………………….223 v Table 9.6 Water Supply Coverage in FRY…………………………………………………. 224 Table 9.7 Water Supply service levels………………………………………………………224 Table 9.8 Interruptions to water supply…………………………………………………….. 224 Table 9.9 Sewage disposal methods………………………………………………………... 225 Table 9.10 Solid Waste disposal methods…………………………………………………… 225 Table 9.11 Main data from selected utilities………………………………………………… 225 Table 9.12 Investment and employees in public water supply (1988-1997)………………… 226 Table 9.13 Quantities of wastewater generated and treated in settlements………………….. 226 Table 9.14 Water company estimates and identified pledges………………………………...227 Table 9.15 Novi Sad Water Supply and Sewerage Company data…………………………...228 Table 10.1 Structure of Telecommunications in FRY……………………………………….. 230 Table 10.2 Fixed usage tariffs – Serbia and Montenegro……………………………………. 231 Table 10.3 Donor Program: Communications Sector………………………………………...236 Table 11.1 Budget Support for Agriculture (2000)………………………………………….. 243 Table 11.2 Donor Program: Agriculture……………………………………………………..259 Table 12.1 Pressures on the Environment and Natural Resources during the 1990s…………263 Table 12.2 Air quality trends for selected cities……………………………………………... 265 Table 12.3 Donor Program: The Environment……………………………………………… 279 Table 13.1 Pensions as a proportion of GDP in FRY 1998-2000…………………………… 280 Table 13.2 Pension Fund Beneficiaries and Average Pensions………………………………282 Table 13.3 Share of old-age, disability and survivor pensions………………………………. 282 Table 13.4 Ratio of average