YUGOSLAVIA: FINANCIAL OUTLOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000501450001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: August 25, 2010
• Sequence Number: 1
• Publication Date: May 27, 1983
• Content Type: MEMO

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DIRECTORATE OF INTELLIGENCE
27 May 1983
Yugoslavia: Financial Outlook
Summary
The Western financial rescue package was assembled to
provide Yugoslavia enough time and money to make needed
adjustments that would restore financial solvency. Our
projections of this year's balance of payments indicate
that:
o The Yugoslavs will be unable to earn enough through
exports and invisibles to meet the IMF projection of
a $500 million current account deficit. We estimate
that even with a $1 billion cut in imports the
deficit would run $725 million, down from last
year's $1.4 billion.
o The package will cover this year's financing needs
and increase reserves by $280-$520 million depending
upon the level of imports and the useability of the
Western credits provided. This will not yield
enough reserve build-up, however, to put Yugoslavia
on a solvent footing for next year.
This memorandum is for the exclusive use of Under Secretary
of State, Lawrence Ea lebur er. This orandum was
prepared by East European
Division, 0 is ot European Analysis. Comments and
questions are welcome and should be addressed t
Chi ropean Division
0 ice of
,
European Analysis, 25X1
EURM 83-10154
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We do not believe that the improvement in the balance
of payments during 1983 will persuade private lenders to
provide a sufficient amount of new loans to cover a
financing requirement of $2 to $2.3 billion in the first
half of 1984. Given the difficulties in arranging this
year's rescue package, we see little enthusiasm among
private banks as well as some foreign governments to
undertake a similar effort in 1984. This reluctance is
likely to be strengthened by Yugoslav failure to meet fully
its IMF-mandated targets and the current account projections
for 1983. In late 1983 or early 1984, therefore, Western
creditors may decide to press Belgrade to b--in a formal
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Lower Earnings
We believe that the YNB current account projection is too
optimistic. Export growth will be no more than the IMF
projection, and we estimate it could be as low as 5 percent.
Although hard currency sales are up 17 percent through April over
the first four months-of 1982, we believe that growth will slow
sharply over the rest of the year because:
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o the first months of 1982 are an exceptionally low base
from which to calculate the increase in exports;
o a downward trend in the rate of growth of exports has
already appeared since February, when exports were
reported up 28 percent. The increase in March and April
over the same months last year slowed to 11 percent; and
o industrial output reportedly is down 0.9 percent through
April and we believe it will continue to slide as sharp
import cuts and austere economic policies have their
impact. 25X1
In our judgment, Belgrade is too optimistic about earnings
from tourism as well since recovery from last year's low levels
is unlikely. The success of the tourist season depends on the
second half of the year when three-fourths of revenues accrue.
Advanced bookings for tour packages--35 percent of Yugoslavia's
foreign visitors--reportedly were down 25 to 30 percent, as of the
end of February compared to the same period last year. We also
expect net workers' remittances to decline by 30 percent in 1983
as Yugoslavs react to the limits placed on hard currency deposit
withdrawals last year and anticipate new restrictions on the use
of foreign exchange. 25X1
Our estimate thus assumes that Yugoslavia's current earnings
could fall as much as $900 million below the YNB forecast. This
would confront the Yugoslavs with a difficult choice.
o Maintain a tight lid on imports over the rest of the year
to meet the IMF forecast for the current account deficit
and buildup of reserves; or
o Permit hiaher, vel of imports and abandon the IMF
goals. 25X1
We believe the Yugoslavs will have to import less than the
NBY projects if only out of concern over future liquidity and for
the effect of a large current account deficit on lender
attitudes. Hard currency shortages already have held imports
through mid-April to 18 percent below last year's level. An
import reduction on the order of 10 percent for the year as a
while would yield a current account deficit of $725 million and a
financing requirement of $5.8 billion. The pace of imports
should pick up,._however, over the balance of the year as the
financial rescue package is disbursed. Because current import
reductions are hitting very hard at the less solvent republics,
Yugoslav officials fear that the incipient slide in industrial
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the year without some revival of imports.
production could accelerate disastrously in the second half of
Financing Sources
Completion of the US-sponsored international rescue package-
-calling for over $6 billion in debt relief and new loans from _
private and official creditors--is proving difficult. Some
Western governments have yet to provide credits pledged under the
"Friends of Yugoslavia" program. Commercial bankers have been
concerned that governments have not shouldered an equitable share
of the burden. 25X1
Although more delays are possible, we believe that the
rescue package will fall into place during the third quarter of
this year. A key uncertainty is how much of the government-
backed trade credits Yugoslavia can use. The Yugoslavs insist
that they probably cannot use all the loans because some of the
credits are tied to purchases of capital goods which Yugoslavia
does not plan to buy. The YNB now plans on using only $750
million of the $1.0 to $1.1 billion in government trade credits,
thereby reducing financing sources to $6.1 billion. If
Yugoslavia can in fact use all the credits, we estimate total
accounts earmarked for specific purposes).
Reserves. The Yugoslav National Bank's reserve holdings
will be the critical indicator of the country's liquidity
situation. The lack of a foreign exchange market and the
tendency of the better managed banks to hoard their reserves will
force illiquid banks to depend on the National Bank for hard
currency. By the end of the year the National Bank's effective
reserves, those reserves that are available to meet liquidity
needs, probably will range between $400 and $800 million
(depending on Yugoslavia's abi-lity to use the Western government
trade credits and on how much the National Bank replenishes other
financing sources will rise to $6.4 billion.
First Half 1984 Balance of Payments Outlook
Assuming Western bankers maintain their short-term exposure
as pledged in the 1983 bank refinancing package, Yugoslavia
probably will have a financing requirement of $2 to $2.3 billion
in the first half of 1984. The IMF projects $1.2 billion in long
and medium-term capital repayments and the extension of $100
million in net long-term loans by Yugoslavia during this
period. The IMF estimates the current account deficit to be $77
million, while we believe it could run as high as $1 billion.
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Even if the Yugoslav National Bank exhausts its holdings of
uncommitted foreign exchange to meet the financing requirement
during the first half of the year, external financing of some
$1.2 to $1.9 billion will be re uired to prevent major
arrearages.
remain cautious about new lending because of:
Bankers will
o Yugoslavia's likely failure to meet the 1983 IMF current
account target of a $500 million deficit;
o Belgrade's inability to curb inflation and deal with
other domestic economic problems;
o uncertainties about a new IMF stabilization program and
lending facilities; and
o widespread belief that the country needs more debt
relief. 25X1
We believe some Western creditors may be inclined to force
Belgrade into a formal rescheduling in 1984. Because of the
problems in this year's rescue effort, commerical bankers seem
increasingly convinced that rescheduling is the only way to
ensure equitable burdensharing among all creditors. Western
governments that reluctantly accepted the "Friends of Yugoslavia"
package--particularly the West Germans and the British--may
insist that Yugoslavia's problems be addressed in the Paris
Club.
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Yugoslavia: Hard Currency Financing Needs
(in million of dollars)
TABLE 1
1983
1982
IMF
Projection
Yugoslav
Projection
late March
CIA
Projection
Financing requirement
5585
5,700
5,572
5,850
Current account balance
-1420
-500
-564
-725
Trade balance
-3779
-2,300
-2,979
-2,525
Exports
5858
.6,300
6,471
6,150
Imports
9637
8,600
9,450
.8,6752
Net invisibles
2359
1,800
2,415
1,800
Net invisibles, excluding
4,319
3,800
4,365
3,750
interest
Net interest
-1,960
-2,000
-1,950
1,950
Repayment of short-term credit
-2300
-2,000
-1,800
-1,800
Repayment of medium and long-
-1690
-2,500
-2,898
-2,625
term debt
Credits Extended (net)
-175
-200
-150
-200
Arrearages as of Jan 1, 1983
NA
-500
NA1
-500
Errors and Omissions
-
-
-160
-
Financing Sources
4,573
6,328
6,130
6,370
1983 Western rescue package
5,941
6,170
IMF
604
620
IBRD
450
400
Governments loans
1,087
1,350
Financial credits
333
300
Export credits
754
1,050
Banks
3,800
3,800
New loans
600
600
Short-term rollover
1,800
1,800
Medium and long-term
rollover
1,400
1,400
Other
189
200
Change in reserves
-1,012
628
558
520
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1 Most recent Yugoslav projection does not show repayment of arrears explicitly.
They seem to be included in repayments of medium and long-term debt and possibly in
errors and omissions.
Because of our lower projection for current account earnings, this is the maximum
level Yugoslavia can import and still achieve a $500 million buildup of reserves.
Imports may be even lower if Yugoslavia cannot use all the government export credits
provided in the rescue package. 25X1
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