YUGOSLAVIA S FINANCIAL CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00857R000100210002-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 21, 2016
• Document Release Date: October 2, 2008
• Sequence Number: 2
• Publication Date: December 1, 1982
• Content Type: REPORT

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Directorate of Secret
Intelligence
Yugoslavia's
Financial Crisis
State Dept. review completed
Secret
EUR 82-10126
December 1982
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Directorate of Secret
Intelligence
Yugoslavia's
Financial Crisis
European Analysis. Comments and queries are
welcome and may be directed to the Chief, East
European Division, EURA,
Intelligence Council.
Secret
EUR 82-10126
December 1982
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Summary
Information available
as of 19 November 1982
was used in this report.
Yugoslavia's
Financial Crisis 25X1
currency imports.
Yugoslavia is fast approaching insolvency after trying unsuccessfully this
year to secure new Western credits and to roll over all short-term credit
lines. Its credit problems-combined with a higher current account deficit
than projected-have forced Belgrade to draw down reserves and augment
austerity measures in an attempt to cover this year's financing require-
ment. By the end of the year, official foreign exchange reserves could fall
to $500-600 million, the equivalent of only three weeks' worth of hard
permit Belgrade to avoid large arrearages and eventual default.
In a financially weak and vulnerable position, Yugoslavia faces heavy debt
service obligations and a seasonally low inflow of foreign exchange receipts
in the first half of 1983. The resulting financial gap will probably exceed
Belgrade's remaining official assets and the cash it can obtain from
domestic commercial banks. Our analysis of three borrowing scenarios for
1983 concludes that only substantial emergency support from Western25X1
governments and central banks or multilateral debt rescheduling would
ment but that, in their eyes, would damage national prestige.
Belgrade's recent actions to conserve hard currency and boost exports may
have some salutary effect on the balance of payments, but so far they do
not seem to have revived sufficient lender confidence to prevent a payments
crisis early next year. The imposition of the new austerity program
suggests that Yugoslav leaders are willing to pay a high price to avoid debt
rescheduling-a step that would allow some breathing space for adjust-
convince the public that it can cope with the crisis.
There is good reason to believe that the political repercussions of a 25X1
financial crisis necessitating rescheduling could be severe, and perhaps pose
the crippling blow for the post-Tito leadership. Key federal institutions-
the Communist Party and the state bureaucracy-are already being
blamed by the public for the difficulty and are under pressure to launch
economic reforms which, in turn, could lead to increased agitation for
political reforms. The divergence of interests among the republics and
already serious ethnic rivalries could worsen rapidly if Belgrade fails to
Secret
EUR 82-10126
December 1982
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Yugoslavia's
Financial Crisis
Payment Difficulties Appear
Yugoslavia's financial position deteriorated noticeably
in fourth-quarter 1981. The general cutback in West-
ern credits to Eastern Europe and Western bankers'
criticism of Belgrade's economic management pre-
vented the Yugoslavs from raising a $400 million
syndicated loan from US, British, Canadian, and
Japanese banks. The Yugoslavs then had to resort to
more expensive short-term borrowing to cover their
1981 financing needs.
Early this year Yugoslavia's financial image was
further tarnished when several regional banks were
forced to ask Western creditors for extensions on debt
repayments and for rollovers of short-term loans. The
regional banks, particularly Privredna Banka Zagreb
(PBZ), were suffering serious shortages of hard cur-
rency, partly because the large short-term borrowings
made in late 1981 were coming due. Federal Execu-
tive Council (FEC) member Janko Smole reported to
the National Assembly in July that the National
Bank and several of the stronger regional banks had
to provide nearly $500 million to cover arrearages and
other payments for the weaker banks. Despite these
outlays, some payment extensions and rollovers for
regional banks, and a new law to improve cash
management in the banking system, Western credi-
tors have continued to report to US officials and the
press missed payments by Yugoslav banks.
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These borrowing problems have put severe pressure on
Yugoslavia's reserve position. Total reserves fell by
$910 million in the first half of 1982, and the IMF
now expects that they will drop another $340 million
by the end of the year. According to a public state-
ment by the Yugoslav Deputy Premier, Yugoslavia
faces heavy debt service payments in December.
Almost $1 billion of the reserve drawdown is expected
to come out of the National Bank's foreign exchange
holdings. This would leave official reserves at $500-
600 million-equivalent to three weeks' worth of
imports. While the domestic business banks as a
group still hold a reasonably large pool of funds, many
individual banks face sizable short-term liabilities. So
far Belgrade's efforts to move funds from stronger
regional banks to cash-short institutions have proved
inadequate; moreover, the foreign assets of many
commercial banks probably cannot be drawn down
further since they represent, in large part, working
and compensating balances.
Belgrade's Actions To Deal With the Crisis
While scrambling to arrange new credits, Belgrade
has responded to the financial squeeze by implement-
ing new foreign exchange controls and imposing aus-
terity measures. In May 1982 a regulation was adopt-
ed to help make foreign exchange available where it
was needed most. It required that:
? Republics and provinces project their 1982 balance-
of-payments and foreign exchange needs by quarter
and coordinate balance-of-payments targets.
? The FEC and republic authorities agree on the
amount of foreign credit to be obtained for imported
equipment and raw materials in 1982.
? No other new foreign debts be incurred except for
short-term credits to meet seasonal foreign ex-
change shortages, and that these be approved by the
FEC on an individual basis.
? Export earnings be repatriated to Yugoslavia within
60 days instead of the previous 90 days.
? Banks and enterprises turn over a stipulated amount
of their hard currency revenues to the National
Bank. 25X1
This law failed to produce a major improvement in
Yugoslavia's payments record due, in part, to the
National Bank's difficulty in getting the regional
banks to comply. In fact, arrearages by a key Zagreb
bank have been a sticking point in the negotiations
this fall for the $200 million US-Japanese syndica-
tion. 25X1
By October it was clear that the Yugoslavs were 25X1
running out of reserves and would miss their current
account target. The FEC responded with a package of
measures designed to promote exports, slow the out-
flow of foreign exchange, and provide inducements to
increase the flow of hard currency into the banking
system. The measures provided:
? New foreign exchange credits for raw material 25X1
imports for export industries.
? Disincentives to foreign travel-for example, man-
datory dinar deposits prior to each trip abroad.
? An end to duty-free imports and to full payment of
Yugoslav diplomats' salaries in hard currencies.
? Limitations on imports by private citizens to about
$24 a year.
? Fines ranging from $100 to $400 for the use of
foreign exchange in domestic transactions.
? Informal restrictions on withdrawals of foreign ex-
change deposits to $250 a month.
On 22 October Belgrade strengthened the stabiliza-
tion program by devaluing the dinar 20 percent. This
step was needed because the gradual depreciation of
the dinar during 1982 only offset the relative rise in
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Yugoslav prices and did little to lower export prices.
Nonetheless, Yugoslavia will not gain a competitive
edge in Western markets unless authorities can keep a
lid on wages and prices and are willing to permit
further devaluations.
Although the Yugoslav program may lead to some
short-term improvement in the balance of payments-
just as restrictions on imports did-we believe that it
will not solve Yugoslavia's financial problems. Some
measures indeed could backfire since restrictions on
the use of foreign exchange, for example, are likely to
discourage the inflow of worker remittances. Getting
to the root of the financial problem would require
fundamental policy changes aimed at restraining do-
mestic demand, improving productivity, and control-
ling inflation.
The actions taken in October apparently have done
little to bolster lagging banker confidence in Yugosla-
via.
believe that, even if Belgrade decides to implement
systemic reforms, commercial banks may well hold
back on major new lending until an international
rescue effort is mounted for Belgrade. As systemic
measures are unlikely to produce good results in the
short run, Yugoslavia probably will be unable to
restore banker confidence soon without outside help.
While Belgrade's efforts to cope with balance-of-
payments difficulties have not successfully curbed
domestic demand this year, they nevertheless have
had a serious impact on growth. Industrial production
has ground to a standstill, rising only 0.7 percent in
the first eight months of 1982, and consumers are
complaining about an erosion in living standards.
Several sources report there is fear on the part of
some leaders (especially in Croatia) that more import
cuts and diversion of domestic supplies to exports
could lead to serious disruptions in economic activity.
Nonetheless, Yugoslavia's rapidly deterioriating fi-
nancial outlook has prompted the leadership to press
ahead with new austerity plans and reform proposals
for next year. Deputy Premier Dragan announced to
the Federal Assembly on 10 November plans for
wide-ranging reform of the banking system. Dragan
did not provide details on these plans but some of the
provisions reportedly place greater responsibility on
individual republics, banks, and enterprises for man-
aging their own debts. Arguing that foreign credits
will be radically reduced in 1983, the Deputy Premier
called for 15- to 20-percent growth in exports and 13-
percent reduction in imports. To restrain domestic
demand, Dragan said Belgrade plans to cut personal
consumption by 6 to 7 percent, federal spending by
10 to 12 percent and investment by 20 percent. He
warned that failure to adopt the proposed policies will
force a debt rescheduling.
Bleak Prospects for 1983
Even if Yugoslavia remains solvent through the end of
this year, it almost certainly will need debt relief or
emergency aid from Western governments or central
banks in the first half of 1983. Without a major
reversal in bankers' attitudes, likely sources of credit
will fall far short of Yugoslavia's needs to cover its
current account deficit and debt repayments. The
alternative to Western government support or debt
rescheduling would require exhausting official re-
serves and slashing imports in order to avert default.
Even a short-term loan from the BIS would not help
Yugoslavia's financial position substantially unless
the credit was linked to a package of credits with
longer repayment terms. We believe that medium-
term Western assistance or rescheduling of most debt
service payments are the only means by which Yugo-
slavia could rebuild its reserves and obtain breathing
space to implement the adjustment measures to re-
duce its payments deficit. Belgrade's success in find-
ing a solution to its financial problems depends ulti-
mately, however, on the strength of its political will to
implement systemic reforms and essential, but unpop-
ular, stabilization measures.
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Financial Requirement
For 1983 as a whole Yugoslavia faces a financing
requirement of $4.7 billion, down from $6.7 billion in
1981 and $5.5 billion this year. Since seasonal factors
push Yugoslavia's current account deeply into deficit
in January-June, Belgrade will be looking for $3.8
billion to cover its current account and debt repay-
ments in the first half of the year. A projected surplus
on current. account and a decline in short-term debt
repayments in the second half of 1983 should reduce
financing needs to $970 million in July-December.F-
Current Account. We estimate that Yugoslavia's cur-
rent account deficit will total nearly $1.3 billion in the
first six months of 1983, compared with $1.5 billion in
the same period of this year. A surplus in July-
December should reduce the deficit for the year as a
whole to under $300 million. Our estimate is based on
the premise that Belgrade will continue to implement
an effective stabilization program while allowing a
sufficient inflow of imports to keep output growth,
from slowing further and export performance from
being hurt. We assume that the IMF will insist that
Belgrade take effective steps to restrain the growth of
domestic demand and the rise of wages and prices,
while permitting further depreciation of the dinar.F_
With these assumptions we project that hard currency
exports will rise by about 5 percent in 1983 (a 5.6-
percent annual rate in the first half of the year
combined with a 4.8-percent rate in the second half),
compared with 2.2 percent in 1982. We expect this
improvement in export performance to result from:
? The 20-percent devaluation of the dinar on
22 October and further devaluations to offset
domestic inflation.
? Priority allocation of foreign exchange for imported
raw materials used in production of exports.
? Priority access to domestic resources for export
industries.
? No slowdown of growth in Yugoslavia's Western
markets.
We do not believe, however, that growth of domestic
industrial production or of Western markets will be
strong enough to permit Yugoslavia to attain its
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hard currency exports.
We also project that the Yugoslavs will be able to cut
imports by only 5 percent instead of the planned 13
percent. Most of the improvement in the current
account in recent years has been the result of reduced
imports: hard currency imports were held constant in
1980 and fell by 6 percent in 1981 and 15 percent in
1982. This year's cuts helped to bring industrial
production to a standstill, and we do not believe that
the Yugoslavs can continue to reduce imports at the
current rate without seriously damaging industrial 25X1
output and export performance and aggravating con-
sumer supply problems.
Following the pattern of last year, we expect imports
to be some $500 million higher in the first half of the
year than in the second, given the need to import 25X1
energy and agricultural products during the winter25X1
months. Lack of data on stocks of imported goods
limits our ability to forecast requirements, but after
three years of import austerity, inventories have prob-
ably been drawn down. 25X1
After a rise in tourist earnings of only 5.5 percent in
1982, we forecast a rise next year of 13 percent, partly
as a result of the October devaluation. While tourism
could be deterred by reports of Yugoslavia's economic
difficulties, Belgrade is trying to minimize this danger
with special provisions to reduce the impact of short-
ages on foreign tourists. Receipts from tourism are
highly seasonal, with three-fourths of the total coming
in the second half of the year.
We expect that the unofficial limits on hard currency
deposit withdrawals and growing unease about Yugo-
slav financial problems will lead to a sharp reduction
in worker remittances in 1983, to $3.5 billion from
$4.3 billion in 1982. Remittances also follow a season-
al pattern, with roughly 60 percent arriving in the
second half of the year. On the other hand, we expect
that informal restrictions on foreign exchange deposit
withdrawals will cause outflows to decline in 1983.
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Debt Repayment Schedule. Repayments on Yugosla-
via's medium- and long-term debt including a small
amount of payments due to the IMF are projected at
$2.4 billion for 1983, with approximately $1.2 billion
falling due in each half of the year. The IMF
estimates that short-term debt repayments will total
$1.2 billion in the first six months of 1983 and $600
million in the last half of the year.
Financing Scenarios for 1983
We have considered three borrowing scenarios in the
attempt to judge Yugoslavia's ability to cover its 1983
financing requirement:
? The Yugoslavs rely entirely on financing from sup-
pliers, private banks, the IMF, and the World Bank;
they receive no BIS support nor any debt relief from
creditors.
? In addition to the financing obtained under scenario
1, the Yugoslavs receive a short-term $750 million
BIS credit in the first half of 1983 that must be
repaid by yearend.
? In addition to the credits obtained in scenario 2, the
Yugoslavs reschedule 90 percent of maturing medi-
um- and long-term loans from both private and
official creditors and 90 percent of interest on
official debt. These rescheduling terms are broadly
similar to those obtained by Poland in 1981.
We have made the following assumptions regarding
financing provided by suppliers, private banks, the
IMF, and the World Bank in 1983:
? Western banks do not provide any new medium-
term financial credits. At this time Western banks
seem unlikely to raise any major new loans for
Yugoslavia, but early next year Belgrade may suc-
ceed in obtaining $200-300 million from Kuwaiti
banks.
? The Yugoslavs roll over $900 million of the $ 1.2
billion short-term debt coming due in the first half
of 1983 and $400 million of the $600 million
maturing in the last half of the year. This projection
reflects the IMF forecast of a $500 million net
decline in short-term debt in 1983. Unease among
Western lenders about Yugoslavia's creditworthi-
ness could lead to a more rapid withdrawal of short-
term deposits placed with Yugoslav banks and
termination of short-term credit lines.
? Suppliers continue to extend medium-term credits
at the rate of approximately 10 percent of imports.
? The Yugoslavs remain eligible for the last tranche
of the IMF standby; committed IMF and World
Bank credits are assumed to equal $400 million in
each half of the year.
Scenario 1. Under scenario 1 Yugoslavia would suffer
a financing gap during the first half of 1983 that
would far exceed its official foreign exchange reserves
and the cash that it probably could mobilize from
domestic commercial banks. (The Yugoslavs could sell
from their gold stock but more likely would pledge
this as collateral for the BIS loan discussed in scenar-
io 2.) Even if Belgrade could narrow the gap with a
$200-300 million medium-term loan from Kuwait or
other sources and draw down reserves by $500 mil-
lion, it would have to cut imports by more than 25
percent from the $4.6 billion we project to eliminate
the financing gap. This would likely put severe strains
on industry and disrupt export performance, thus
undermining efforts to achieve payments equilibrium.
Even if these drastic measures enabled Yugoslavia to
remain solvent through the first half of the year, the
small financing surplus projected for the last half
would permit only a slight rebuilding of reserves. The
Yugoslavs would then be in an even weaker position
entering the first months of 1984.
Scenario 2. Extension of a BIS loan would reduce the
first half-year financing gap but probably would not
improve Yugoslavia's financial position over the year
as a whole. Belgrade possibly could cover the $1.3
billion projected gap for the first half of the year
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Table 2
Yugoslavia: 1983 Financing Scenarios
Scenario 1
IMF Projection of Financing
(No BIS Loan or Rescheduling)
Scenario 2
$750 Million BIS Loan
Scenario 3
Western Government and Bank
Rescheduling Plus BIS Loan
1983
Full
Year
1983
First
Half
1983
Second
Half
1983
Full
Year
1983
First
Half
1983
Second
Half
1983
Full
Year
1983
First
Half
1983
Second
Half
Financing requirement
-4,745
-3,775
-970
-5,495
-3,775
-1,720 a
-5,495
-3,775
-1,720 a
Borrowing sources
3,000
1,750
1,250
3,750
2,500
1,250
6,135
3,535
2,600
Medium-term credits
1,700
850
850
1,700
850
850
1,700
850
850
IMF/IBRD
850
400
450
850
400
450
850
400
450
Supplier credits b
850
450
400
850
450
400
850
450
400
Short-term credits c
1,300
900
400
1,300
900
400
1,300
900
400
Rescheduling d
NA
NA
NA
NA
NA
NA
2,385
1,035
1,350
Financing gap
-1,745
-2,025
280
-1,745
-1,275
-470
640
-240
880
a In scenarios 2 and 3, repayment of the $750 million BIS credit
drawn in the first half of 1983 is added to the financing requirement
for the second half of the year.
b Supplier credits are estimated to be approximately 10 percent of
imports.
c Short-term credit drawings are shown in accordance with IMF
projection.
d Assumes 90-percent rescheduling of principal payments due on
medium- and long-term debt to both official and private creditors
plus 90-percent rescheduling of interest due official creditors
(estimated to equal $300 million).
through reserve drawdowns, import cuts, and a possi-
ble $200-300 million Kuwaiti loan. However, if the
BIS credit were not linked to a medium-term financ-
ing package and if the Yugoslavs had to repay the
$750 million by yearend, they would have to make
further reserve drawdowns and import cuts in the
latter part of the year. The net impact would be only
marginally different from that of scenario 1 unless
central bank help promoted substantially more lend-
ing by Western commercial banks. The banks, howev-
er, would likely remain wary about new lending to
Yugoslavia if their credits were in effect merely
paying off the BIS.
Scenario 3. Rescheduling 90 percent of principal
repayments due in 1983 and 90 percent of interest on
official debt (in addition to receiving the new loans
included under scenarios 1 and 2) would eliminate the
financing gap for next year and enable Yugoslavia to
rebuild about half of the reserves drawn down this
year. Belgrade would have some breathing space to
take measures to reduce the balance-of-payments
deficit. Such Yugoslav actions, of course, would be
required for a BIS credit/debt rescheduling package.
If Yugoslavia rebuilt reserves next year and brought
its current account at least into balance by 1984, it
might be able to weather the crisis without further
rescheduling. With a balanced current account, the
1984 financing requirement would fall to $3.5 bil-
lion-$2.3 billion medium- and long-term debt repay-
ments and $1.2 billion short-term repayments.
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The Political Dimension
As Yugoslavia's financial position has continued to
deteriorate, the leadership has reiterated its determi-
nation not to reschedule. Federal-level officials have
repeatedly indicated that they are prepared to take
draconian measures to avoid a rescheduling. These
leaders behave as if they presume, however, that
Yugoslavia will have enough Western financial sup-
port to see it through its lean years. In the absence of
such help, popular confidence would decline and we
believe that there would be a reasonable chance of a
political crisis in Belgrade which could undermine
national stability and further erode lender confidence.
Republic-level officials, however, may not share the
federal regime's resolve to avoid a rescheduling. A
senior Croatian party official told the US Ambassa-
dor in September that the Croatian leadership now
believes that a rescheduling is necessary; it fears that
more import cuts and diversion of domestic supplies to
exports could lead to some sort of economic collapse.
Nonetheless, the Croat acknowledged that these argu-
ments have fallen on deaf ears in Belgrade, which he
says still regards a debt rescheduling as too humiliat-
ing.
We believe that at least some federal leaders fear a
rescheduling would lead to stronger demands for
systemic economic reforms. The Communist Party
leadership is deeply divided on the reform issue and
has rejected all such proposals. Even moderate efforts
since Tito's death to alter the decentralized system by
shifting more authority to Belgrade have loosed seri-
ous squabbling. And we suspect that the weakened
federal regime, now having more difficulty in assert-
ing its authority, will become increasingly more fear-
ful that it could not control the political currents that
would flow from major reforms.
Although the political risks of rescheduling are sub-
stantial, the alternative of a Western bailout assist-
ance package is not a clear-cut panacea. There is no
certainty, for example, that the federal authorities
would have the ability-much less the will-to impose
the political and economic reforms necessary to modi-
fy the economic system. The political and economic
systems are highly resistant to change, largely be-
cause more than 15 years of decentralization have
allowed republics and provinces to become nearly
autonomous on economic issues. In the absence of a
dominant figure such as Tito, the required consensus
decisionmaking has proven unimaginative, reactive,
and capable of only ad hoc adjustments. In these
circumstances, the federal leadership might see the
offer of Western aid merely as a way of easing up on
its austerity program and of coasting along without
having to take politically difficult measures.
Neither rescheduling nor a 'Western bailout by itself,
therefore, can promise an end to Yugoslavia's descent
into instability. Clearly, on the other hand, there is
little hope for the party hierarchy to arrest the decline
in its authority while under the growing pressure of
financial problems.
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