Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3188-YU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS TO PRIVREDNA BANKA SARAJEVO - UDRUZENA BANKA STOPANSKA BANKA ZDRUZENA BANKA - SKOPJE WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A SIXTH INDUSTRIAL CREDIT PROJECT April 2, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriatlon. I CURRENCY EQUIVALENT$* Calendar 1980 November 11, 1981 Currency Unit Yugoslav Dinar US$1 Din. 24.911 Din, 38.66 Din. I US$ 0.040 US$ Q,026 Din. 1,000 US$ 40.14 US$ 25.87 Din. 1,000,000 US$ 40,142.00 US* 25,867.26 * The Yugoslav Dinar has been floating since July 13, 1973 GLOSSARY OF ABBREVIATIONS BOAL - Basic Organization of Labor ERR - Economic Rate of Return FRR - Financial Rate of Return GMP - Gross Material Product IC - Industrial Credit (refers to earlier Bank loans) ICB - International Competitive Bidding LDR - Less Developed Republics MDR - More Developed Republics PBS - Privredna Banka Sarajevo - Udruzena Banka SBS - Stopanska Banka Zdruzena Banka - Skopje SDK - Seuzba Drustvenog Knjigovodstva or Social Accounting Service FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY YUGOSLAVIA SIXTH INDUSTRIAL CREDIT PROJECT Loans and Project Summary Borrowers: Privredna Banka Sarajevo - Udruzena Banka (PBS) Stopanska Banka Zdruzena Banka-Skopje (SBS) (Each Borrower being a party to a separate Loan Agreement with the Bank). Guarantor: Socialist Federal Republic of Yugoslavia. Amounts: US$ million equivalent PBS 33.0 (both including SBS 33.0 capitalized front end) fee) 66.0 Beneficiaries: Export-oriented and energy conservation/conversion projects in the industrial sector of the Republics of Bosnia-Herzegovina and of Macedonia. Terms: The loans would bear interest at 11.6 percent per annum. Repayment would be according to schedules reflecting the composite amortization schedules of the sub-loans financed. Allowing up to three years for commitment of individual subloans and a maximum repayment period of 15 years, the two Bank loans would thus be repaid in 18 years. The technical assistance ,component ($300,000) will be repaid in 15 years including two years' grace period. On-Lending Terms: Sub-loans would be each repaid over a period not exceeding 15 years from the date the sub-loan agreements are signed, including grace periods of normally up to three years and in cases of joint ventures and energy saving sub-projects, up to five years. The banks would on-lend the proceeds at 12.85 percent per annum with the sub-borrowers carrying the foreign exchange risk. Project Description: The project is designed to assist export-oriented industries through the provision of foreign exchange and help PBS and SBS increase their role in the promotion of export-oriented sub-projects. The project also includes a "pilot" type component to support the Government program for energy savings and increased This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. use of domestic energy resources inindustry in the two Republics. This would involve a program of studies to identify energy conservation/conversion sub-projects which may be financed under this or subsequent industrial credits. Other objectives of the project are to contribute to the institution-building of the borrowing banks, i.e., PBS and SBS, and to encourage joint ventures and co-financing. The project also includes a technical assistance component of $300,000, which will be equally split between the Borrowers, to identify and develop energy conservation/conversion sub-projects in industry. The risks associated with the loans relate to meeting the export targets by a beneficiary enterprises. However, provisions included under the loans and Yugoslavia's policies to foster industrial exports should reduce the risk to within acceptable limits. Final Date for Sub-Project Submissions: December 31, 1984. Free Limit; US$2.0 million for each sub-loan up to an aggregate of 60 percent of each Borrower's loan. However, the first five export-oriented sub-loans and the first three energy saving sub-loans will be treated as above the free limit. Estimated 1982 1983 1984 1985 1986 1987 Disbursements: ($ million) PBS Loan Annual 0.5 4.8 9.7 8.1 6.5 3.4 Cumulative 0.5 5.3 15.0 23.1 29.6 33.0 SBS Loan Annual 0.5 3.4 8.1 9.7 6.5 4.8 Cumulative 0.5 3.9 12.0 21.7 28.2 33.0 Staff Appraisal Report Report Number 3780-YU, dated April 1, 1982 EMENA Projects Department INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS ONE EACH TO PRIVREDNA BANKA SARAJEVO - UDRUZENA BANKA AND STOPANSKA BANKA ZDRUZENA BANKA - SKOPJE WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A SIXTH INDUSTRIAL CREDIT PROJECT 1. I submit the following report and recommendation on two proposed loans, one each for the equivalent of $33.0 million (including capitalized front end fee) to Privredna Banka Sarajevo - Udruzena Banka (PBS) and Stopanska Banka Zdruzena Banka Skopje (SBS), both with the guarantee of the Socialist Federal Republic of Yugoslavia, to help finance the foreign exchange cost of investments in export oriented industries and industries which would use energy savings devices. The loans also include a technical assistance component for the identification of energy conservation/ conversion sub-projects. The loans would bear interest at 11.6 percent per annum. Repayment would be according to schedules reflecting the composite amortization schedules of the sub-loans financed. Allowing three years for commitment of individual sub-loans and a maximum repayment period of 15 years, the two Bank loans would thus be repaid in 18 years. The technical assistance component ($300,000) will be repaid in 15 years including two years' grace period. PART I - THE ECONOMY 2. A Basic Economic Mission visited Yugoslavia in October and November 1976. Its report entitled, "Yugoslavia: Self-Management Socialism and the Challenges of Development", 1615a-YU, was distributed to the Executive Directors on April 5, 1978. An economic mission visited Yugoslavia in November, 1979; its report entitled "Yugoslavia: Export Performance and Policies", 2972-YU, was distributed to the Executive Directors on November 5, 1980. In November 1980 an economic mission visited Yugoslavia and its report entitled "Raising Productivity in Yugoslav Industry: Some Issues", 3383a-YU was distributed to the Executive Directors on August 3, 1981. Basic data on the economy are given in Annex I. Institutional Setting 3. The social sector in Yugoslavia, which includes government, enterprises and public institutions plays the leading role in economic and social development. It accounts for 85% of GDP and employs over half the total labor force. The private sector consists predominantly of peasant farms and small enterprises, mainly engaged in handicrafts, construction, trade, transport and tourism. Decision making at all levels is governed by the principle of workers' self-management, involving a unique set of institutions and instruments of economic policy. The current system has - 2 - evolved over the years with major changes introduced through the constitution of 1974. Responsibility for important social and economic decisions has been shifted from the Federation to the Republics, autonomous provinces and Communes. Concurrently, the control of workers' collectives over the socially-owned means of production has been increased by a restructuring of all economic organizations into legally autonomous Basic Organizations of Associated Labor (BOALs) which are the smallest production units producing a marketable output. 4. In addition to this strengthening of workers' participation at the microeconomic level, the concept of workers' management has been extended to encompass macroeconomic decisions. A set of instruments called social compacts and self-management agreements have gradually become a part of the system of macroeconomic management. These measures enable the participation of all economic agents in the formulation of macroeconomic policy while maintaining decentralized responsibility for policy implementation. Beginning with the last medium-term plan (1976-80) these instruments have been used to augment more conventional monetary and fiscal policy measures, particularly in the areas of prices, incomes, and employment. 5. The 1974 Constitution also introduced a new framework for economic and social planning, designed to reconcile decentralized-decision making with consistent and coordinated action. The system of planning first seeks to establish a national consensus on the major medium-term goals for the economy. Thereafter, plan formulation is based on participation of all economic and social units, including government bodies, on a non-hierarchical basis. An exhaustive interchange of information and several iterations are required to achieve consistency among the plans of economic units concurrent with broader social objectives. Once consistency is achieved, economic units enter into legally binding medium-term agreements on supply, demand and investment intentions. In case agreements cannot be reached by the prescribed date, the state is permitted to intervene, but only on a temporary basis. Economic Trends and Development Issues 6. The economic development of Yugoslavia over the past two decades has been impressive, characterized by rapid economic growth and structural transformation. Between 1960 and 1980, GDP grew at an average annual rate of about 6% in real terms. The share of investment in GDP has been high throughout the period, above 30% in recent years. As population growth has been only 1% per annum, real per capita income has more than doubled during the period. Per capita GNP in 1980 is estimated to be US$2,620 at 1980 market prices. 1/ The social sector, in particular industry, has been the driving force of the economy between 1960 and 1980 with the share of industry in GDP increasing to around 45% while agriculture has declined to about 12%. The past two decades have also been associated with the growing integration of Yugoslavia into the world economy. Between 1960 and 1980 merchandise exports and imports grew by around 6% and 8% per annum in real 1/ According to World Bank Atlas methodology. -3- terms, respectively; much of this was with markets in the convertible currency areas. 7. While overall growth performance has been impressive, large regional income disparities persist. The Republics of Bosnia-Herzegovina, Macedonia and Montenegro, each with two-thirds of the national average per capita income, and the Autonomous Province of Kosovo, with one-third, are officially designated as less developed regions (LDR). The difference between the most developed region, Slovenia, and the least developed, Kosovo, is 6 to 1. In addition to these interregional disparities there are large intraregional disparities with differences in per capita income between communes as high as 10 to 1 . These disparities reflect several factors, notably the greater incidence of low productivity agriculture in the LDR and their higher dependency ratios and population growth rates. Since 1971 sizeable concessionary credits (with about 50% grant element), equal to about 10% of the social product of the LDR, have been transferred to the LDR through the Federal Fund for the Accelerated Development of the Less Developed Regions, whicb is financed tbrougb a tax on all social sector enterprises in the economy. 8. Linked to the issue of regional income disparities has been the problem of providing adequate employment opportunities in the modern sector. Since 1954 employment in the modern social sector bas increased by around 4% per annum, facilitating rapid outflows from the agricultural sector. Despite this impressive record, substantial productivity and income differentials remain between the modern (mainly social) and the traditional (private or individual agricultural) sectors. The persistence of these differentials has resulted in high demand for modern sector employment on the part of the rural labor force. The increase of the working age population caused by relatively bigh population growtb in the LDR has further added to employment demand. Large numbers of Yugoslavs have sought temporary employment abroad since the late 1960s. At its peak in 1973 Yugoslavia had about 1.1 million external migrants. However, since 1973, with changes in policy and the slower growth in the bost countries, this trend has been reversed, accentuating domestic imbalances and placing added pressure on the social sector to create new work places. Unemployment rates bave risen rapidly from about 7% in 1971 to over 12% in 1980. 1/ The incidence of unemployment is highly regionalized, because population and labor force growth rates, as well as the proportion of agricultural employment, are all mucb bigher in the LDR. In 1980 unemployment rates ranged from 28.0% in Kosovo to 1.4% in Slovenia. Recent Developments 9. Yugoslavia was successful in maintaining a relatively bigb growth rate over much of its recent (1976-80) economic plan. Over the first four years of the plan GDP growtb exceeded 5% per year. The pattern of growth 1/ These rates are not strictly comparable to those in other countries. They represent the ratio of registered job-seekers (including some currently employed) to social sector labor force. The ratio of registered job seekers to total resident labor force would have been about 9.0% in 1980. was, however, markedly cyclical and heavily influenced by policy responses to balance of payments difficulties and to inflation. Following slow growth in 1976, macroeconomic policy became more expansionary in 1977, whicb resulted in three years of rapid growth. This revival at a time when the world economy was relatively sluggish put pressure on Yugoslavia's balance of payments. These strains were considerably worsened by special developments in 1979 including sharp increases in the price of imported oil, poor agricultural conditions and an earthquake in Montenegro. As a consequence the deficit in the current account of the balance of payments reached $3.7 billion in 1979, or about 5.4% of GDP. Faster growth and renewed international inflation also led to significant worsening in domestic inflation. In response to these developments, the tone of macro-policy became sharply contractionary since late 1979, and economic management has been dominated by the goal of improving the balance of payments. As a result of the determined application of a stabilization program, the current account deficit was reduced to less than $0.8 billion in 1981 compared with a target level for that year of $1.8 billion largely reflecting an improvement in the trade deficit. The elements of the program (which is being supported by a standby arrangement with the IMF) included a cumulative 57% devaluation of the dinar between June 1980 and December 1981, tight monetary and fiscal policy, reductions in real personal incomes and cutbacks in investment, particularly for non-economic purposes. As a result of these measures output growth was reduced from previous years, and gross domestic product is estimated to have grown by about 2% both in 1980 and 1981. 10. The main source of Yugoslavia's economic growth in the 1976-80 plan was industry. While industrial production rose by only 4% in 1980, this followed growth of almost 7% per year in the preceding four years. The plan placed particular emphasis on production of energy, raw materials and intermediate goods to increase import substitution. These priority sectors performed well during the first three years of the plan although production fell slightly short of planned targets, while non-priority sectors, particularly consumer goods, grew at a rate faster than projected. Climatic factors have resulted in marked annual fluctuations in agricultural output, which rose between 1976 and 1980 at an average annual rate of 1.6% (compared to a target of 4%). 11. Fixed investment grew at an average rate of almost 9.5% between 1976 and 1979, exceeding the 8.0% plan target. This investment drive was successful in raising the overall share of the priority sectors in total investment; however, within the industrial sector investment in non-priority branches grew at a faster rate than planned. The share of gross fixed investment in GDP rose from 28% in 1975 to almost 32% in 1979. In 1980 and 1981, real investment is estimated to have declined by 1.6% and 4.5% respectively, as a result of increasing restrictions placed on investment activity, particularly in non-priority fields. Overall social sector employment growth in the plan has been rapid, at about 4% per annum (compared to a plan target of 3.5%) and has been even faster in the LDR where the bulk of the structural unemployment is located. Despite these achievements, the combined impact of net immigration, demographic factors and the contraction in the rural labor force increased the ratio of job-seekers to social sector labor force. -5- 12. Inflation rates have varied widely over the course of the 1976-80 plan period. Stabilization measures introduced in 1975 and 1976 reduced the inflation rate (as measured by the retail price index) from 26% in 1975 to 9% in 1976. The subsequent revival in economic activity was accompanied by a resurgence of inflation. In both 1977 and 1978 inflation was 13%; in 1979, in part due to increases in indirect taxes and fuel prices it increased to 22%. The sharp reduction in economic activity in 1980 affected the inflation rate much less than had been hoped, and the rate of inflation was 30%, in contrast to the 17% that had been projected. Part of the deterioration in price performance can be attributed to the higher prices of imported goods, resulting from both a higher rate of international inflation and the effects of the devaluation of the dinar. There has also been some dismantling of domestic price controls in order to promote efficient resource allocation in manufacturing as well as price increases administered to stimulate agricultural production and to rationalize energy use. As a result of effective incomes policies, wage pressures were muted in 1980, witb real personal income in the social sector falling by 7%. Altbougb real personal incomes declined by a further 6% in 1981, prices increased by 39%. Most of the inflationary pressure occurred in the first six months of 1981, bowever, wben the retail price index increased at an annual rate of 56%. Stricter price controls were introduced during June 1981. These togetber witb the austere stabilization program, bad a significant effect on the rate of inflation and it is estimated that the rate of inflation slowed to about 25% during the last half of the year. The Government has announced its intention to curb inflation further with an official target of 15% for 1982. 13. As noted above, Yugoslavia's balance of payments has remained an issue of concern to policymakers throughout the plan. The plan itself proposed substantial import substitution while maintaining an export growtb rate of 8%. Wbile import growth fluctuated widely between 1976 and 1980 overall it remained below the 4.5% annual rate targeted in the plan, primarily by the imposition of deep import cuts in 1976 and 1980. Export performance however was disappointing; despite a recovery in 1980, when merchandise exports grew by an estimated 11%, export growtb over the plan was about 4.6% per year instead of the 8% targeted. The consequences of this export shortfall were exacerbated by the deterioration in the terms of trade and other special factors referred to earlier. Even though workers' remittances were more buoyant than had been anticipated, the cumulative current account deficit over the plan period was 60% higher than bad been planned. The Government's program to put the balance of payments on a more secure footing was supported by a two-year standby arrangement concluded with the IMF in June 1980 in the amount of SDR 339 million per year. This standby was replaced in January 1981 by a three year program for a total amount of SDR 1662 million. The Government's annual plan for 1982 continues to stress stabilization of the economy in pursuit of balance of payments adjustment. The current account deficit for 1982 is targeted at $0.5 billion; this is to be achieved through export growth of 8.5% coupled with a 0.5% limit on the growth of overall import volume, and a reduction in imports of capital goods. Social product is expected to grow by 2.5%; this slow growth will be reconciled with the export target by further cuts in fixed capital formation. -6- Medium Term Prospects 14. The Federal Five Year Plan for 1981-85 was adopted in March 1981, but in view of the external constraints on the economic growth and the authorities' decision to limit its external borrowing the plan has been substantially revised. Although the detailed targets for production and investment have still to be finalized, the main strategic elements of the plan have already been enunciated. The revised plan projects continued slow growth in social product and even slower growth in domestic expenditure to allow resources to be released for exports; this strategy also implies continued reductions in the rate of fixed capital formation. As before, the plan projects simultaneous import substitution and export promotion. It aims to achieve a current account surplus before the end of the plan period. The priorities stressed are the development of domestic energy sources and raw materials, production of basic metals, basic chemicals and capital goods. The plan also stresses agricultural development in order to reduce food imports and to expand food exports. 15. Slower growth will make it more difficult for the social sector to generate additional employment at the pace of the past plan while the demand for new work places will remain high. Given these difficulties, more emphasis is being laid on the development of labor intensive activities including small-scale enterprises. 16. Finally, the reduction of regional disparities remains a major objective of Yugoslavia's economic planning. Financial transfers between Republics will play an important role in this process, and the transfer mechanisms for the plan lay particular stress on encouraging social sector enterprises in the more developed regions (MDR) to make direct investments in the LDR. As experience is gained, these joint ventures could make a significant contribution to the overall efficiency of production within the LDR by facilitating the transfer of technological and managerial know-how within Yugoslavia. Regional disparities, however, are expected to remain significant over the medium-term. Creditworthiness 17. Gross medium- and long-term capital inflows declined from $4.2 billion in 1980 to an estimated $3.2 billion in 1981. Total medium- and long-term debt, outstanding and disbursed, is estimated at about $16.6 billion at the end of 1981 while short-term debt at the end of September 1981 stood at about $1.8 billion. Total foreign exchange reserves at the end of 1981 stood at $3.4 billion. There was some restocking of official a foreign exchange reserves in 1981, and at the end of the year these amounted to $1.6 billion, or roughly one month of imports of goods and services from the convertible currency area. It is expected that the resources provided by the IMF will permit Yugoslavia to retire some of its sbort-term debt, and to build up official foreign exchange reserves further in 1982. 18. About three-quarters of the debt contracted by Yugoslavia in recent years has been provided in convertible currencies through commercial sources. The bulk of this commercial credit has been in the form of suppliers' credits. Nevertheless, financial credits obtained in the eurocurrency market have become increasingly important for financing the economy's foreign exchange requirements. The World Bank is the principal source of non-commercial long-term credit to Yugoslavia. Yugoslavia will continue to require a substantial inflow of foreign lending if it is to achieve its medium-term objectives. Taking account of workers' remittances the debt service ratio on aggregate medium- and long-term debt averaged 15% between 1976 and 1980, while the debt service ratio in convertible currencies averaged 18% over the same period. The aggregate debt service ratio is not expected to increase substantially during the next medium term plan (1981-85). Given Yugoslavia's past debt service record, pragmatism and its demonstrated capacity to implement firm stabilization policies when these are called for, it remains creditworthy for a substantial level of Bank lending. PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA 19. The proposed project would be the 71st operation by the Bank in Yugoslavia, which would increase total World Bank lending to Yugoslavia to $3,119.7 million. Of this, approximately 40% ($1,248.4 million) has been for 23 operations in the transportation sector -- 12 for highways, 7 for railways, and one each for a natural gas pipeline and an oil pipeline, and two for a port project. Historically, Bank lending has concentrated on infrastructure including, in addition to the transportation loans, five power loans, one telecommunications loan, three water supply and sewerage and three multipurpose loans (two of which include substantial irrigation components). In recent years, Bank lending has increasingly focussed on the agriculture sector for which 13 operations totalling $766 million have been made. Twenty loans amounting to $410 million (about 13% of the total) have also been made for industry. Two loans have been made for tourism and the first Bank loan for air pollution control was approved in 1976. 20. Yugoslavia's disbursement performance (disbursements ds a percentage of total commitments) deteriorated somewhat in 1981 largely due to a shortage of local funds arising from financial constraints. Following an implementation review of the whole loan portfolio with Borrowers in the Fall of 1981, performance has markedly improved in the first quarter of 1982. Yugoslavia's performance now, as traditionally, compares most favorably with Bank-wide and regional averages and with most other countries of a similar per capita income. Annex II contains a summary statement of Bank loans and IFC investments as of September 30, 1981, and notes on the execution of ongoing projects. 21. The interrelated objectives which the Bank has pursued in its lending to Yugoslavia remain essentially unchanged. These objectives are to: (i) to increase exports and improve the efficiency of import substitution; (ii) increase the efficiency of domestic investment with a view to increasing production with the more limited investment resources available; (iii) improve access to capital markets; and (iv) reduce unemployment, particularly in the LDR. It is obvious that not every Bank operation can address all these objectives nor be entirely oriented towards the LDR, but the basic thrust of the Bank's activities in Yugoslavia has -8- increasingly been towards the development of the LDR and the agricultural sector in particular. Reinforcing this strategy are the economic surveys of the four LDR undertaken by the Bank and intensified Bank assistance in project formulation and ongoing economic and sector analysis. 22. The Bank's emphasis on assuring the accelerated development of the LDR is fully in accord with the Federal Government's policies embodied in the 1981-85 Development Plan. As in the last plan period, the Federal Government agreed with its constituents on the level of domestic resources to be channeled to the LDR through the Federal Fund mechanism (para. 7) as well as the distribution of external resources including Bank lending. The distribution of Bank lending was determined broadly on the basis of income levels and population size of particular regions. Over the past five years, almost two-thirds of Bank lending has been to the LDR through operations for transportation, power, agricultural development and industrial credit. In the next few years significant Bank lending to the LDR through similar operations is expected to continue. 23. Decentralized management, the cornerstone of Yugoslavia's socio-economic philosophy, adds to the inherent difficulties involved in formulating coherent sector plans. One of the principal features of the 1974 Constitutional changes and subsequent legislation, however, has been to revamp the institutional framework and to introduce mechanisms for coordination. Given the complexity of the Yugoslav system (para. 5), the process of evolving acceptable solutions to problems is cumbersome. The Bank has therefore put increased emphasis on having an impact on the shaping of the policy framework and fostering coordination, particularly in the transport and energy sectors where significant progress has been achieved. Through its future operations the Bank will seek to consolidate past successes in institutional reform. Further development of the project preparation, appraisal and supervisory capabilities of the regional banks through which a large amount of Bank funds are channelled will remain a major objective. In transport, intermodal coordination will be sought through the implementation of the results of the rail costs and road user studies undertaken under the Eighth Highway Project (Loan No. 1377-YU approved March 15, 1977). The Bank will concentrate its lending operations in areas where its incremental institutional and/or policy coordination impact has most potential. 24. A persistent foreign resource gap looms as the major impediment to Yugoslavia's ability to maintain its growth momentum and to address the critical issues of unemployment and regional disparities. The Bank has helped to attract additional sources of credit through co-financing arrangements and forge banking relationships for Yugoslavia. The Bank, however, will remain the major source of long-term external capital for the foreseeable future. Its significant level of operations in Yugoslavia is regarded by foreign financiers as evidence of confidence in Yugoslavia's economic performance, policies and prospects. In its future lending to Yugoslavia, the Bank intends to put increased emphasis on co-financing. However, in view of the present commercial market constraints that Yugoslavia is facing and because of the country's complex banking and foreign exchange allocation system, the extent and form of co-financing related to Bank projects will have to be handled flexibly. - 9 - 25. Yugoslavia's debt to the Bank in 1981 amounted to about 9.0% of its total debt outstanding and disbursed and this ratio is expected to remain fairly stable. Service on Bank loans as a proportion of total debt service was 5.4% in 1981 and is projected to be about 6% by 1986. 26. IFC started its involvement in Yugoslavia in 1970; since tben, IFC has made 19 investments in the country and, as of January 31, 1982, IFC's portfolio amounted to $317 million gross and $154 million net of participation and repayments. The basic objectives of IFC in Yugoslavia are to: (a) assist priority subsectors in industry and natural resources development; (b) encourage foreign investment on a joint venture basis; (c) foster technological transfers; and (d) mobilize other financial resources in addition to IFC's own funds. Also, IFC continues to give special, although not exclusive, emphasis to the less developed regions of the country. PART III - THE INDUSTRIAL AND FINANCIAL_SECTOR A. The Industrial Sector Industry_- Characteristics and Performance 27. Industry has been one of the principal sources of Yugoslavia's impressive economic growth since 1954; it has opened up the country to the world economy, provided employment to the growing labor force and made a major contribution to development, especially in the LDR. During 1971-80, the industrial sector continued to grow very rapidly at 7.4 percent per annum, which was one percentage point higher than the average growth for the economy as a whole. In 1980, industry l/ accounted for 36 percent of GMP 2/ and generated 20 percent of employment. Industrial exports amounted to $8.5 billion or 95 percent of total merchandise exports. Industrial exports are fairly diversified, with no one branch contributing more than 9 percent to total merchandise exports. During the seventies industrial exports rose more slowly than during the sixties, rising by 5 percent per year as against 8.5 percent in the previous decade. Industry became less export-oriented and the share of exports in industrial output declined from over 11 percent in 1971 to 9 percent by 1979. The industrial structure of Yugoslavia is quite diversified; large scale basic and capital intensive industries in minerals, ferrous and non-ferrous metals, chemicals and pulp and paper play a major role but there is also a well-developed manufacturing sector which produces a wide range of capital, intermediate and consumer goods. 28. Both the 1971-75 and the 1976-80 five-year plans called for changes in the structure of industrial production, in conformity with a policy of simultaneous import-substitution and export-promotion. Certain industrial sectors including energy, raw materials, intermediate products and capital 1/ Industry is defined as including manufacturing and mining which in turn includes coal, oil and gas. 2/ Gross material product (GMP) or social product excludes "non-productive" (in Yugoslav terminology) services such as education, health, administration, defense and other public services. Gross domestic product (GDP) is approximately 14 percent higher than GMP. - 10 - goods were designated as priority sectors; as such they were to receive preferential access to domestic and foreign sources of finance. Wbile certain policy measures were introduced to stimulate industrial export growth, primary emphasis was put on import substitution. In general moderate protection has been provided to industrial imports; however, such protection intensified in response to balance-of-payments difficulties, particularly during the last Plan (para. 13). Investment in industry increased at an annual rate of nearly 7 percent per year from 1971 to 1980. However, during the first four years of the last Plan the priority industrial sectors received only 49 percent of total industrial investment, compared with a target of 63 percent. The divergence between the planned and actual distribution of investment can at least partly be ascribed to the difficulties associated witb the new system of project planning and resource allocation. Also, the incremental capital output ratio in industry rose from 3.6 percent during 1971-75 to 4.6 percent in 1976-80, pointing to an increased capital intensity of industrial investment in processing industries and some decline in overall efficiency. Industrial employment increased from 1.4 million to 2.2 million between 1971 and 1980; there was, bowever, a decline in the elasticity of employment creation to industrial output. 29. The industrial sector will play a central role in the adjustment strategy of the Federal Social Plan for 1981-85. In line with the overall slowdown in growth rates, the sector is presently targeted to grow at 5 percent per year compared witb the target of 8 percent in the last Plan and 6.9 percent average growth achieved during 1976-80; revisions of the Plan currently underway are likely to reduce this target further. The sectors designated for import substitution remain similiar to those of the last Plan, although more stress is placed on import substitution in capital goods. The new Plan, bowever, puts mucb stronger stress on export-orientation as a source of growth than did the last Plan (see para. 32). There is also to be greater stress on rationalization and efficiency in investment planning and implementation, and completion of ongoing projects. Industrial investment is planned to grow at a pace substantially lower than output with a target of 2.3 percent yearly in real terms (compared witb 1.5 percent average growth for the country's total fixed capital formation), and substantially increased allocations for the designated priority activities (energy, basic metals, minerals and basic cbemicals, capital goods and export). Employment creation is to be sought through the development of labor-intensive small and medium scale industries, especially in the LDR. Proposed investment allocations for specific branches of industry in the Federal and regional plans, are generally in line with existing capacities and production targets, and the choice of the priority sectors is in general economically sound. However, in the capital goods sub-sector, specialization in specific areas wbere Yugoslavia has experience and comparative advantage would be preferable to emphasizing import substitution across a broad range of products. Industry in the LDR 30. Over the past 30 years, the sbare of industry in GMP grew faster in the LDR than in the MDR. Although the LDR started with a considerably lower sbare of industry after the Second World War, by 1980 the share of industry - 11 - in GMP was roughly the same (38 percent) in the two groups of regions. However, industrial value-added in the MDR is twice that in the LDR on a per capita basis. Because of the LDR's considerable wealth of natural resources in mining and energy, basic industries bave played a very important role in the economies of the LDR, implying a more capital intensive industrial structure than for the MDR. As regards the two LDR wbicb will be the beneficiaries of the proposed loans, Bosnia-Herzegovina has a relatively well developed industrial sector, witb large capacity in basic industries (steel, aluminium, metals, chemicals, woods) and a number of manufacturing industries. Its commodity exports are already signficant -- over $1.2 billion or 14 percent of the country's total exports, and 17 percent of the Republic's GMP in 1980 -- and include a wide range of metal products, wood products and paper, chemicals, electrical machinery, leather and textiles. The Republic Social Plan emphasizes export, based on the processing of local raw materials and specialization, productivity increases in existing industries and employment creation. In Macedonia, there are basic industries for the production of raw materials - nickel, copper, lead, zinc, iron and steel, chemicals and non-metallic minerals -- and manufacturing processing industries in a variety of sectors. Commodity exports which are quite diversified (metals, textiles, leather, footwear, tobacco, meat, transport equipment, steel structures and metal products) amounted to $420 million in 1980 representing nearly 5 percent of the country's total commodity exports and 13 percent of Macedonia's GMP. Industrial Development Issues and Objectives 31. After three decades of rapid development, Yugoslav industry currently faces several problems. The main issue is the need for external adjustment. Yugoslavia bas been successful in curbing the rate of growth of its industrial imports over the 1970s. However, the incentives favoring import substitution bave tended to generate a bias against exports resulting in sluggish export growth. The slow growtb of industrial exports in the 1970s coupled witb rapidly rising costs of imported energy and deteriorating terms of trade, caused the trade deficit to widen substantially . In view of the present balance of payments situation and the limited prospects for increasing the flow of remittances from Yugoslav workers in Western European labor markets, it is vital for Yugoslavia to reduce its trade deficit by increasing industrial exports, to optimize the processing of its natural resources and to specialize in areas where it possesses a comparative advantage. It is also essential for Yugoslavia to reduce, or at least limit the growtb of its oil imports in the long run. In addition to developing the country's own energy resources, this can be achieved by conserving energy in industry, wbicb is the largest consumer, and by converting industries to domestically-produced fuels, wbere this is economically justified. 32. Policy-makers at botb the Federal and regional levels bave recognized the need for increasing Yugoslavia's industrial exports, and this is reflected in the respective Federal and regional social plans for 1981-85. The Federal plan envisages an 8 percent annual growtb target for industrial exports and emphasizes greater export specialization. Considering long-term trends in Yugoslavia's exports, its comparative advantage, the markets available to it, and its overall industrial capacity, the plan's - 12 - export targets may be attained, although Yugoslavia will face stiff competition on overseas markets. In 1980 and 1981 Yugoslavia has taken active measures to stimulate exports by adjusting the exchange rate, dampening the level of domestic aggregate demand and increasing the availability of export credit. These moves need to be buttressed by changes in the system of foreign exchange allocation as well as in the areas of import protection, export incentives and promotion. Such measures, which are under active consideration by the authorities, would help reduce past biases towards the domestic market which have slowed Yugoslavia's export growth rate in the seventies. Given such action it should be possible for the economy to improve its export performance in line with the targets of the plan. Nevertheless, it will require a concerted effort on the part of the industrial sector to achieve sustained export growth rates of the magnitude projected. As far as energy policy is concerned, priority has been given to investment in coal and gas production and electricity generation based on domestic energy sources. In addition a new policy for encouraging energy conservation and fuel substitution in industry has been introduced. 33. Another issue which faces the industrial sector is to increase its contribution to the process of reducing the regional disparities in per capita income and employment. During the 1976-80 Plan the relative position of the LDR in terms of unemployment and per capita income did not significantly improve, despite substantial resource flows from the MDR to the LDR through the Federal Fund and budgetary transfers. Although the LDR achieved a 1.4 percent higher rate of industrial growth than the MDR and a 0.4 percent faster rate of industrial employment growth, this performance was considerably below plan objectives. The trade balance of the LDR is also much less favorable than that of the MDR because of their limited exports and relatively larger import requirements, particularly for investment. This situation, combined with the need to increase the efficiency of investment in the coming years compared to the performance in the 1960s and the 1970s in the whole of the country, but particularly in the LDR, points to a need to emphasize industrial development which is more oriented towards exporting and employment creation. Finally, there is the need to raise capital and labor productivity. Domestic joint ventures between LDR and MDR enterprises, which have been seen as a major mechanism for raising LDR productivity and adjust their industrial structure, have been slow to get off the ground. Recent policy changes have been introduced which have significantly increased the incentives to establish joint ventures and they are expected to play a more important role in the process of regional development in the current 1981-85 Plan period. The proposed project is designed to help remedy some of the above shortcomings. 34. Enterprises within industrial sectors have tended to be centered in a particular republic or province, and industrial coordination among regions bas been limited. The orientation toward regional self-sufficiency in investment decisions has resulted in a somewhat fragmented industrial sector, duplication of facilities and excess capacity in certain branches, foregone economies of scale and relatively slow growth in the productivity with which resources are used. In addition, the close links among enterprises, particularly those located in the same region, have on occasion inhibited effective competition. The export drive of Yugoslav industry may result in improvements in these areas. In order to meet the challenge of competing effectively on foreign markets, Yugoslav industry will need to pay more attention to: stimulating resource allocation according to comparative advantages; increasing capacity utilization, and exploiting economies of - 13 - scale; and improving technology and productivity. Similarly, export orientation would be greatly facilitated by equalizing export incentives among industrial branches and reducing import protection (see para. 32); this, in turn, would induce industries serving the domestic market to develop according to comparative advantages and to increase their productivity. More importantly, enterprises among regions would have added incentive to coordinate and associate themselves through domestic joint-ventures to achieve economies of scale, specialization and penetration of foreign markets. 35. The Bank has an active economic policy dialogue with Yugoslavia on matters of industrial policy. The reports on export performance and policies, raising productivity in Yugoslav industry and small scale industry (see para.2) dealt extensively with the country's industrial policy framework and paid particular attention to the need to improve the incentives for industrial exports. These reports were widely reviewed by the various competent regional and federal agencies responsible for industrial policy within Yugoslavia. In addition, under the terms of an agreement made in connection with the Fifth Industrial Credit (ICV) Project (Loans Nos. 1909-1912 YU), the two banks participating under the proposed project have prepared export studies which have helped in the identification of projects that would be eligible for financing under the proposed loans. Also, as agreed under ICV, the Bank conducts an annual review of interest rate policy with the Yugoslav authorities. The proposed project builds on the lessons drawn from the economic policy dialogue in a variety of ways. Specifically, in line with the Bank's overall policy recommendations, it focusses exclusively on export-oriented and energy conservation/conversion sub-projects. B. The Financial Sector 36. Multipurpose banks (whose founders are their depositors and borrowers), are the dominant form of financial intermediaries carrying out all commercial and investment banking functions for all sectors of the economy. The two proposed borrowers Privredna Banka Sarajevo - Udruzena Banka (PBS) and Stopanska Banka Zdruzena Banka - Skopje (SBS), together with their member basic banks, handle the bulk of investment and commercial banking in their respective regions. In addition to these banks, the financial sector includes the National Banks, which essentially perform the role of central banks at the Federal and Regional levels, post office savings institutions, investment loan funds and insurance institutions. A Federal Credit and Banking Law, effective January 1978, changed the banks to a three-tier organizational commercial banking structure consisting of internal, basic and associated banks. An internal bank is essentially a service organization established by BOALs (see para 3) within a Kombinat. A basic bank may carry out all kinds of credit and banking operations in Yugoslavia, within the framework of its own resources, and as such forms the core of the restructured banking system. It can be founded by any social legal entity. An associated bank is established as a legal entity through a self-management agreement of two or more basic banks, its main function being to concentrate resources for financing major investments and to carry on foreign business transactions on behalf of its member basic banks. It also administers the Federal Fund (see para. 7) allocations in its region. Both PBS and SBS are associated banks. - 14 - 37. Resource Mobilization and Allocation. Besides equity (founders' fund) the resources of banks are made up of intermediated funds, i.e. sight and term deposits of social and private sector enterprises, households and other organizations, borrowings from other banks in Yugoslavia, and foreign borrowing. In the case of banks in the LDR, such as PBS and SBS, non-intermediated funds such as Federal and Regional funds are another major resource. As to foreign commercial borrowings, the National Bank of Yugoslavia has recently replaced the regional banks as the principal borrower. In drawing up their Five Year Plan and allocating their funds, regional banks follow decisions reached at enterprise, regional and federal levels. This is in line with Yugoslavia's extensive planning system which culminates in the conclusion of social compacts and self-management agreements which have the force of law (see para. 4). At the stage of investment decisions the banks have a key role to play in ensuring that the projects presented by the enterprises are consistent with the plan priorities in terms of sectors, locations, markets, technology, employment effects etc., correspond to the investment proposals initially agreed in the planning process and are economically and financially viable. 38. Total deposits have increased substantially over the past few years. Most have short-term maturities and, although they use part of their short term funds for long term investment, the banks have to rely heavily on the Federal and Regional funds to meet the medium-and long-term domestic investment requirements. The banks' other efforts in mobilizing foreign resources are directed at attracting deposits of Yugoslav workers abroad and obtaining foreign loans. They also issue guarantees in favor of machinery suppliers. Foreign currency loans of banks such as PBS and SBS have increased rapidly during the last few years to finance development projects. Past Bank Industrial Credit Lending 39. The Bank has thus far made five loans to associated banks in the LDR, totalling $310 million. All these loans were aimed primarily at (i) providing foreign currency resources mainly for the development of small and medium sized industries and supporting Yugoslavia's industrial development; (ii) supporting rapid development and employment creation in the LDR, particularly by encouraging labor intensive projects; (iii) promoting greater inter-regional cooperation and coordination through joint-ventures between enterprises in the LDR and MDR; (iv) helping access to external commercial sources of finance for Yugoslav enterprises by encouraging co-financing; and (v) contributing to rational allocation of investment resources and institution-building of participating banks in the industrial sector. 40. Out of the past five loans, commitments and disbursements under the first and second industrial credit lines (IC I and II), (Loans Nos. 1012 - 1013 and 1277 YU), totalling $100 million, have been completed and a completion report on the first loan is under preparation. IC III and IV (Loans 1611 - 1614 YU) of $40 million and $60 million respectively are also fully committed and expected to be disbursed by their respective closing dates. In line with their partial objective, the first four loans have contributed to employment creation at a reasonable cost per job. Also, the estimated financial rate of return (FRR) and economic rate of return (ERR) of the sub-projects financed was in most cases well above the agreed minimum of 11 percent. Finally, sub-projects have attracted substantial foreign currency co-financing. Thus, in the case of the IC IV 27 Bank-financed -15 - sub-projects received foreign currency co-financing totalling $28 million. IC V (Loans Nos. 1909 - 1912 YU) which became effective on August 17, 1981 allocated $30 million to PBS and $10 million to SBS. Funds are expected to be fully committed by mid-1982, i.e. well ahead of the February 1984 target date. To date, twelve Bank approved sub-projects have attracted co-financing in the amount of $17.0 million. 41. At the Bank's request, PBS and SBS have reviewed the status of all previous Bank financed sub-projects. The results indicate that 50 out of 53 sub-projects covered by PBS's survey were operating satisfactorily at the time of the review, while 3 faced problems requiring intensive supervision. SBS's survey also shows that the status of the Bank assisted industrial projects is generally good. In the two banks, problem projects are mostly those facing difficulties in the import of raw materials due to foreign exchange constraints. Efforts are being made by concerned enterprises to obtain foreign exchange from other enterprises with a surplus of such funds. 42. In addition to partly filling the foreign currency resource gap of the recipient banks, the Bank's industrial credit projects have also been instrumental in the institution-building of these banks. Under the previous industrial credits, the banks have improved the quality of their sub-project appraisal and initiated an annual portfolio analysis which is covered by Social Accounting Service (SDK) in its audit reports. The proposed project will emphasize further improvement in appraisal and an intensive supervision of sub-projects (see paras. 46 and 67). PART IV - THE PROJECT 43. The proposed loans and project are summarized in the Loans and Project Summary at the beginning of this report and described in detail in the "Staff Appraisal Report on a Sixth Industrial Credit Project" No. 3780-YU dated April 1, 1982. This report is being distributed separately to the Executive Directors. The project was appraised by a mission which visited Yugoslavia in September/October 1981. Negotiations were held in Washington from March 1-5, 1982. The Yugoslav Government delegation was led by Mr. A. Slapernik, Deputy Federal Secretary for Finance; PBS was represented by Mr. M. Husseinbegovic, Assistant Manager, and SBS by Mr. J. Milosevski, Executive Vice President. Objectives of the Proposed Loans 44. While building on the objectives of the previous five industrial credits, the proposed loans represent a new orientation to respond more effectively to the different industrial conditions and prospects of the two LDR, Macedonia and Bosnia-Herzegovina. Specifically, the proposed loans are designed to (i) assist export-oriented industries through the provision of foreign exchange and help PBS and SBS increase their role in the promotion of export-oriented projects; (ii) support the Government program for energy savings and increased use of domestic energy resources in industry; (iii) further strengthen institutional aspects of PBS and SBS in particular with respect to project evaluation and supervision; and (iv) encourage joint ventures between different regions of Yugoslavia. The loans would also - 16 - encourage co-financing by attracting foreign investment in sub-projects financed under them. The above objectives are in line with the Federal and Regional Republican plans and the Bank's lending strategy vis-a-vis Yugoslavia as elaborated in Part II above. The Borrowing Banks 45. The two borrowers, PBS and SBS, are associated banks (see para 36). Each bank has its own self-management agreement and statutes; its operations are regulated by the National Bank at the Federal level and various Federal directives, and supervised by SDK. The assembly of a bank is its highest governing body; in the case of an associated bank it is made up of delegates elected by the members of the basic banks. Each assembly approves the Five Year Plan, Annual Plan and Business Policy (including interest rates) of its bank, and these plans are harmonized with the plans of the basic banks and their members, as well as with the National and Regional Plans. The assembly appoints, for a four-year term, each bank's President who is the chief executive. Appointments are made on the basis of professional competence, changes are infrequent and the quality of senior management is generally good. At the end of 1980, the number of employees was 462 at PBS and 515 at SBS. Both banks have similar organizations, divided into functional departments. Policies and Procedures 46. PBS and SBS do not have formal financial policies per se concerning their operations such as exposure limits and maximum debt to equity ratio. Nevertheless, they generally follow prudent practices (see para 49). Any substantial allocation of funds to a particular project has to be in accordance with the Regional Plan. The banks use similar procedures for project appraisal. All projects are first examined and approved by member basic banks, and projects which exceed their resources, and/or involve Federal or Regional Funds, or foreign exchange, are forwarded to the associated banks for further detailed appraisal and approval; these include all Bank-financed sub-projects. Both banks have qualified project appraisal and supervision staff. The quality of appraisal reports received from the banks is generally acceptable and has shown a general overall improvement. Further improvement is aimed at, particularly in economic and marketing aspects. Supervision work is in general satisfactory, as are procurement and disbursement procedures. However, in recognition of the need for a better organized and more intensive project supervision system covering management, technical, financial and marketing aspects, PBS decided to establish a new division with 15 professional staff for supervision work; in the case of SBS, the appraisal staff will also be responsible for project supervision and the respective unit is being staffed with six additional professionals. The employment of additional staff and the implementation of intensified supervision system for all Bank-financed projects will be fully operational within 1982. In addition, PBS and SBS will endeavor to apply a similar supervision system for all other industrial projects financed by them. Financial Position 47. The banks plan their operations on a disbursement rather than a commitment basis. As a result, each bank has substantial overcommitments - 17 - vis-a-vis available resources at any point in time which it expects to cover by transfers from the Federal and Regional Funds for priority projects and other sources. The banks maintain a tight liquidity position wbicb is regulated by the National Bank of Yugoslavia together with regional National banks and supervised by SDK. Debt/equity ratios, although seemingly high reaching 15.5:1 in 1980 in the case of SBS and 14.1:1 in the case of PBS, are not to be conventionally interpreted in the Yugoslav context. The largest source of the banks' liabilities comes from Federal and Regional Funds, which have the character of managed funds with banks acting essentially as a conduit for disbursing them in accordance with the provisions of regional plans and agreements. The solvency of Yugoslav banks is a function of the solvency of their basic member banks and, in turn, their founder members (each assuming unlimited liability for the bank's debts) and, ultimately, the economy as a whole. The fact that the banks are not profit-oriented is reflected in their income statements. The banks are expected to earn an income wbicb is adequate to cover their expenses and to make required allocations to various reserves. Against this background, the net income of the two banks has been more than adequate. The overall loan recovery position of the banks is considered satisfactory. None of the banks bave experienced significant write-offs in the past and reschedulings bave been few. However, during 1975 - 1980, PBS and SBS, like other commercial banks in Yugoslavia, suffered foreign exchange losses on foreign currency savings accounts due to currency fluctuations. While these losses are manageable and will be amortized against future annual income, PBS and SBS agreed to make appopriate arrangements to protect themselves in the future against the foreign exchange risk in their lending and borrowing operations (Loan Agreements, Section 4.05). 48. Botb banks are audited by SDK following generally accepted international accounting standards, to the extent consistent witb Yugoslav law. Over the past several years, SDK has expanded the scope of its international standard audits and, in 1979, as part of its annual audit, it started a detailed portfolio analysis of all four banks having been recipients of previous Bank lines of credit. This steady progress in extending audits is one tangible result of a Bank supported training program for SDK whicb began in 1974. 49. Both banks are considered credit-worthy for Bank lending. This assessment is based on the fact that: (a) there have been no significant loan losses in the past and the arrears situation is manageable 1/; (b) management of resources and appraisal and supervision of projects are generally 1/ In the case of PBS arrears over three months reached 2.3% of the long-term debt portfolio on December 31, 1980 (1.3% at the end of 1979); SBS' arrears over the same period amounted to 4.3% (3.9% at the end of 1979). In the case of both banks, arrears were mostly for less than 12 months and were mainly the result of delays in construction faced by a number of projects which are expected to commence loan repayments after their completion. The arrears situation of PBS and SBS can therefore be considered acceptable, but both banks need to pay more attention to improving the quality of their portfolio and maintaining arrears within reasonable levels (about 2% of outstanding long-term debt portfolio). Adherence to the systematic supervision program agreed with the banks (see para. 46) should help achieve this objective. - 18 - satisfactory; and (c) each bank is such an integral part of the economy as a whole that failure is conceivable only with the concurrent failure of the entire economic system. operations 50. The main areas of operation of the two banks are loans and guarantees. Long-term loan commitments have increased over the past several years, reflecting the increase in investment in the regions the banks serve. In 1980, long-term loan commitments of PBS amounted to $634 million, with manufacturing (primarily metallurgy, wood products and metal products) accounting for the bulk (52 percent) and mining and energy (24 percent) and agriculture and forestry (8 percent) being other important recipient sectors. SBS's long-term commitments amounted to $767 million; manufacturing (primarily textiles, metal products, chemicals and food processing and tobacco) also being the most important sector (50 percent), followed by mining and energy (30 percent) and agriculture and forestry (7 percent). Guarantees in favor of enterprises, primarily in the industrial sector, have also shown an increasing trend, amounting to about $1.2 billion for PBS and about $0.8 billion for SBS in 1980. Forecast of Operations 51. PBS and SBS have prepared their operational and financial projections which are largely based on their medium-term plans for the 1981-85 period and linked to the regional plans for Bosnia-Herzegovina and Macedonia. The banks' forecast of operations indicate that each expects long-term loan commitments to continue to expand. Their long-term resource mobilization plans appear reasonable, with Federal and Regional funds allocations expected to be an important source. The proposed loans are estimated to cover only 2.0 percent of PBS' and SBS' industrial lending program for mid-1982 to end 1984 on a commitment basis. The loans would meet about 10 percent of the banks' total foreign currency requirements for industrial lending during that period. The final date of sub-project submission under the loan would be December 31, 1984 and the Closing Date December 31, 1987 (Loan Agreements, Sections 2.03 (c) and 2.04). Features of the Proposed Loan 52. Allocation: The loans will be allocated equally between PBS and SBS, i.e. $33.0 million for each bank. Sub-loans can only be provided for export-oriented or energy conservation/conversion sub-projects. 53. Export-Oriented Industries: In line with the prime objective of the project, export oriented industries in Bosnia-Herzegovina and Macedonia will be the main beneficiaries of the project. In order to be eligible, enterprises would have to submit sub-projects which Ci) will export directly or indirectly at least 50 percent of production, if new, and at least 60 percent of incremental production if balancing, modernization, and/or expansion of existing facilities (as an exception, above export targets will be reduced to 40 percent and 50 percent respectively for sub-projects manufacturing non-metallic mineral products and metal and mechanical industry projects which generally have to face severe competition with producers from developed and newly industrialized countries having a more sophisticated international marketing network and a well developed internal institutional - 19 - infrastructure to support exports); and (ii) will meet a net foreign exchange earning criterion whereby such sub-projects would recover their foreign capital cost through their net foreign exchange earnings (export earnings minus imported inputs and interest payments on foreign currency loans) within a four year period, starting six months after completion of the project. This period would be extended to five years in the case of sub-projects falling under the exception mentioned in (i) above (Loan Agreements, Schedule 3, Section (A)(l)). In order to be considered eligible as an export oriented project, all sub-loan applications will bave to provide sufficient justification for the foreign exchange earning capability and export market viability of the proposed sub-project in question. The borrowing banks will closely supervise and review the export performance of sub-borrowers to ensure compliance with export targets and periodically report their findings to the Bank. In case sub-borrowers fail to comply with the export targets and the banks should conclude that such failure is due to negligence or lack of sufficient effort by the enterprises, the borrowing banks would take any of the following measures against the enterprises: (i) a penalty interest of up to 4 percent per annum; (ii) restrictions on future credits (both long-term and short-term) to the enterprise; and/or (iii) call back of sub-loan or shortening of sub-loan maturity (Loan Agreements, Section 3.02 (a)(vii)). 54. The two banks have completed export studies, partly based on a survey of export-oriented enterprises in their respective regions. The studies have helped in the identification of a large number of projects--35 with total foreign currency requirements of about $80 million--which would be eligible for financing under the proposed loans. During the project preparatory work, the Bank staff visited some of the concerned enterprises and found their management generally knowledgeable of foreign markets and well aware of export prospects of their products. The enterprises had a varied export experience both with respect to products and markets and had established marketing channels abroad, including Western Europe, Northern America, Asia and Africa. They had already initiated preparatory work on the development of their proposed export-oriented projects and the preliminary data indicate that, prima facie, these projects should be viable on the basis of competitiveness of their products in international markets. Furthermore, the requirement that enterprises export at least 50% of production (40% in exceptional cases) would ensure that eligible projects are competitive and viable in export markets on the basis of their comparative advantages, and that their exports are not of a "spill over" nature. 55. Energy Conservation/Conversion Sub-Projects and Related Technical Assistance: Given the need to decrease Yugoslavia's dependence on oil imports and thus to help ease its balance of payments position, energy conservation /conversion sub-projects in industry would also be eligible for financing under the proposed project. However, before such sub-projects can be considered, PBS and SBS will launch a program of studies to identify and develop energy conservation/conversion projects in industry. The foreign cost of the program, estimated at $150,000 for each bank (based on a cost of $11,000 per man/month), will be covered under the proposed loans, while the banks would meet the local cost (estimated at $40,000 for each bank) from its own resources. The program will consist of, first, a preliminary study by local consultants to assess the potential for energy conservation/conversion in the energy intensive industry sectors in Bosnia-Herzegovina and Macedonia - 20 - and to prepare an energy audit of a selected number of factories which are large consumers of energy and seem to have significant potential for energy savings. The terms of reference of the energy audit will be prepared and agreed upon with the Bank following completion of the preliminary study. The audit will be carried out by foreign consultants who will be appointed by the banks following the Bank's guidelines on use of consultants. The second step will be the energy audit of these factories wbich the banks agreed to complete by June 30, 1983. The audit should result in the identification of possible sub-projects for energy conservation/conversion and a preliminary assessment of their viability. The banks agreed to furnish draft reports of the preliminary study and energy audit to the Bank upon completion, and finalize these reports and take subsequent actions, keeping in mind the Bank's comments, if any. Finally, the banks will no later than July 1, 1983 initiate action, in consultation with concerned enterprises, for the preparation of detailed feasibility studies and appraisal of the identified sub-projects (Loan Agreements, Section 3.06). 56. Sub-projects thus identified and prepared are likely to fall into three main categories: (i) modification and retrofitting of boilers and other primary energy producers to increase fuel efficiency and/or to switch to domestically produced fuels other than oil (coal, lignite and gas) and hydro-produced electricity; (ii) change in production process, either to reduce energy consumption or both to reduce energy consumption and to increase capacity; and (iii) production of equipment and devices for energy conservation (Loan Agreements, Schedule 3, Section A(2)). The criteria for eligibility of energy sub-projects will be (i) for straight energy conservation/conversion sub-projects, a maximum pay back period of 3.5 years in the case of small sub-projects (below $300,000) and only a satisfactory financial rate of return in the case of larger sub-projects; and (ii) for sub-projects combining modernization and expansion and sub-projects for the production of equipment for energy conservation, satisfactory economic and financial rates of return as for regular industrial projects (Loan Agreements, Schedule 3, Section A(3)). Sub-Projects and Sub-Loan Size 57. The maximum sub-loan amount to be financed by the Bank will be $5 million (Loan Agreements, Schedule 3, Section B(1)); this compares with a limit of $4 million under IC V and takes into account the expected increases in equipment costs in dollar terms due to inflation. There will be no limit on the maximum size of sub-projects because the proposed loan would largely finance export-oriented sub-projects and in order to be competitive in the international market, they should be sufficiently large to benefit from economies of scale, if needed. However, a review of the banks' preliminary pipeline of sub-projects indicates that almost all sub-projects would be ~within the maximum limit allowed under IC V 1/ and adjusted by the inflation factor. 1/ IC V had a maximum cost limit of $15 million for regular sub-projects, $20 million for joint ventures and no limit for labor intensive sub-projects. - 21 - 58. Free Limit. The free limit for sub-loans under the proposed loan will remain the same as under IC V, i.e. $2 million for a sub-loan and 60 percent of the loan amount for each bank as aggregate free limit. In addition, the first five export-oriented sub-loans and the first three energy saving sub-loans will be treated as above the free limit (Loan Agreements, Section 2.02 (b)). As the sub-projects will be of a specialized nature, it will give an opportunity to the Bank to make an in depth review of all appraisal reports on the first few sub-projects prepared by the banks and to provide them advice and guidance at an early stage, if necessary. It is expected that the above arrangement would ensure the Bank's review of about 60 percent of the loan amount and about 40 percent of sub-projects. Terms of Sub-Loans 59. Sub-loans would be repaid over a period not exceeding 15 years from the date of signing of the proposed loans. Grace periods would normally be up to three years. A longer grace period of up to five years would be allowed for domestic joint venture projects or energy saving sub-projects (Loan Agreements, Schedule 3, Section B (2) and (3)). The $300,000 technical assistance component will be repayable by the banks over 15 years including two years of grace. Economic and Financial Evaluation 60. As under previous industrial credits, the borrowing banks will prepare a satisfactory economic and financial evaluation of all sub-projects, including the economic rate of return (ERR) and financial rate of return (FRR) calculations; these calculations will not be necessary for some of the energy saving sub-projects as mentioned in para. 56 above. Sub-projects will have to meet an ERR of at least 12 percent as agreed under IC V. However, given higher interest rates (see below) and the need for encouraging sub-projects which are financially viable even without subsidized interest rates applicable to loans from specially earmarked funds, sub-projects will have to have a minimum FRR of 15 percent in line with the banks' interest rates for domestic resources (Loan Agreements, Schedule 3, Section A (3)). Interest Rates and On-lending Rates 61. The interest rate structure in Yugoslavia is characterized by highly differentiated interest rates among the Republics and Provinces, by purposes and by sources of funds. Interest rates are low compared to inflation rates, but the gap between rates on intermediated funds and inflation rates is expected to narrow as domestic inflation subsides and deposit rates are increased. Until recently (see para. 64), medium and long-term loans made from the banks' domestic sources carried interest rates ranging from 3 percent to 10 percent. The rates at the upper end of the range applied to intermediated funds and were based on the banks' borrowing costs. The lower rates applied to non-intermediated funds mobilized through the Federal and regional Funds. Term enterprise deposits of up to two years earned between 6 and 7 percent, while there were no ceilings on term deposits above two years. Saving sight deposits by households received 7.5 percent while time deposits by households over two years as well as deposits in foreign exchange from individuals abroad received 10 percent. Deposit rates are regulated by - 22 - the Yugoslav Banks Association. Lending rates are not regulated, except for onlending of Federal and Regional Funds and for lending to priority sectors. Each bank's lending rates are established by its founder-members on an annual basis through self-management agreements. There is, however, de facto coordination among banks within and across regions for establishing the structure of lending rates. 62. Annual rates of inflation (retail prices) bave varied considerably over the last few years. Between 1976 and 1979 the rate of inflation averaged about 14 percent, prices increased sharply during 1980 (by 39 percent) and in the first half of 1981 (56 percent, on an annual basis). Since then, due to Government anti-inflationary measures (see para. 12) inflation has slowed to an annual rate of 25 percent during the last 6 months of 1981. The Government expects inflation to drop to 15 percent in 1982. In line with the Government's counter-inflationary objectives the rate of inflation in Yugoslavia for the next three years is to be in the range 13-15 percent. If, as expected, domestic inflation remains at the level of 13 percent beyond 1985, the on-lending rates charged by the banks' on their own resources (see para. 65(b)) will be marginally positive in real terms over the life of the loan. 63. Interest rates have been the subject of extensive discussions between the Government and the Bank for the past few years. In the context of the Second Agricultural Credit Project (Ln. No. 1477) the National Bank carried out a study of the role of interest rates in the Yugoslav economy. The study, submitted to the Bank in early 1980, concluded that if interest rates were to become a binding constraint on investment planning, this would preempt the dominant role of social planning and group consensus in determining investment allocation in the priority sectors. It finds that in the Yugoslav context, interest rates could become a significant factor only in resource allocation for non-priority investments where income maximization as opposed to social objectives is the criterion. However, views that interest rates could play an economic role, even in the system of social planning, have recently begun to gain increasing acceptance in Yugoslavia. The new Federal Social Plan and the resolutions of the National Assembly have prescribed that interest rates should play a more important role in resource mobilization and allocation. 64. In February 1982, the Government and the Yugoslav Banks Association, which had conducted a review of the interest rate structure, decided as follows; deposit rates on sight and term deposits of households were increased by 1 to 5 points above the present maxima while the general rediscount rate of the National Banks was increased from 6 to 12 percent and its rates on selective credits from 1-4 percent to 4-8 percent. It is expected that commercial banks will raise their lending rates to reflect the increased cost trends. The medium-term objective is to introduce over time a structure of positive real interest rates by gradually adjusting interest rates and, concurrently, reducing inflation. The priority sectors would continue to benefit from more favorable, although probably somewhat increased, rates. 65. As regards interest rates applicable under Bank financed industrial credit projects, understandings were reached in 1980 under IC V to increase - 23 - the lending rate to sub-projects on loans from the participating banks' own local currency resources from a minimum of 7 percent to 10 percent in order to gradually correct the fact that nominal interest rates have been negative in real terms. A further increase in the lending rate is warranted given the inflation forecast for the coming years as described in para. 62 above. Interest and on-lending rates under the project would therefore be as follows: (a) For Bank funds, the on-lending rate to be charged by the banks would be 12.85 percent which would include a minimum spread of 1.25 percent considered adequate to cover administrative expenses and other related costs/provisions of the borrowing banks (Loan Agreements, Schedule 3, Section B (5)). As sub-borrowers will carry the foreign exchange risk on the proposed loans, the real cost of the Bank's funds to sub-borrowers would be competitive with international commercial sources taking into account the mix of currencies in the currency pooling system and current international lending rates. Also, the on-lending rate would be positive in real terms taking into account the ultimate cost to the sub-borrowers wbich includes the foreign excbange risk. (b) For the portion of domestic funds which are provided from the banks' own resources (tbe mobilization and allocation of which are interest elastic) floor rates would be increased to 15 percent whicb would be 5 percentage points more than the current minimum level of 10 percent charged by the banks on their own resources (Loan Agreements, Section 3.05). (c) For the portion of domestic funds provided from specially earmarked Federal and Regional Funds (the mobilization and allocation of which are not interest elastic) no floor rates would apply and the rates currently applicable to such funds would continue. Finally, efforts to pursue an objective of increasing interest rates will continue through project-related activities and the continuing dialogue through country economic and sector work on this and related matters. Procurement and Disbursement 66. As agreed under the last three industrial credit projects, international competitive bidding (ICB) would also apply for the proposed sixth project. ICB procedures will normally be required for contracts estimated to exceed $2 million equivalent. The Bank will undertake a full review, prior to contract award, of all procurement documents and procedures for contracts expected to cost $5 million equivalent, or more. For contracts of $2 - $5 million equivalent responsibility for ICB will be delegated to PBS and SBS; however, the Bank would review the bid evaluation report, award and final contract prior to the first disbursement. Procurement for contracts below $2 million will continue to be in accordance with appropriate commercial practices (Loan Agreements, Schedule 3, Section C (2)). Disbursements of funds by the Bank will be done against standard evidence of expenditures with supporting documents. Institution Building 67. The proposed project will help to strengthen the fundamental role of borrowing banks tbrougb the identification and development of export-oriented and energy conservation/conversion projects. As regards the project appraisal and supervision work, the borrowing banks bave made significant - 24 - progress but there is a need for further improvement, particularly in the marketing and economic evaluation of sub-projects. Also, the sub-project supervision work of the two banks needs to be more intensive and better planned. The proposed project will assist the banks in this respect through the review of and advice on the appraisal of individual sub-projects to be financed under the Bank loan. The visit of the Bank's regular supervision missions and monitoring on the performance of sub-projects would help to strengthen the sub-project supervision work of the banks. Project Benefits and Risks 68. The main justification for the proposed loans is their emphasis on supporting export-oriented projects thus helping the efficient implementation of major Plan targets. Promotion of export-oriented industrial sub-projects will result in improved use of domestic resources, including labor, better utilization of existing capacities, productivity increases and creation of economies of scale and, in turn, will contribute to improve the industrial structure in the two regions concerned, and, in Yugoslavia as a whole, by stimulating joint ventures. 69. The project's tecbnical assistance component would belp in the identification and development of energy conservation/conversion sub-projects, some of which may be financed under the proposed loans. Although the number of these sub-projects is expected to be initially small and their impact limited, they would constitute a pilot project which may lead to a more extensive program of energy saving in the industrial sector in Bosnia-Herzegovina and Macedonia and other regions of Yugoslavia. This would help to reduce oil imports which are causing a major constraint on the balance of payments situation of Yugoslavia. 70. The risks under the proposed project mainly relate to meeting the export targets by beneficiary enterprises. The actual exports of sub-projects may fall short of targets for two main reasons. First, the conditions in export markets may change to the disadvantage of Yugoslav producers due to development of more economical substitutes, enhanced competition from other developing countries, or creation of production capacity within the importing countries. Second, beneficiary enterprises may shift to the domestic market, which has been generally more profitable due to protection policies, and make only "spill-over" exports in line with their past practice. Provisions have been made to minimize these risks through (i) a careful and indepth evaluation of marketing viability and prospects of all export-oriented sub-projects by the borrowing banks and their subsequent review by the Bank staff before the sub-project approval even in free limit cases; (ii) close supervision and monitoring of export performance of assisted enterprises by borrowing banks and submission of periodical information to the Bank in this regard; and (iii) levy of remedies on beneficiary enterprises which fail to meet the export target due to negligence or insufficient efforts (see para 53). It is expected that the above arrangements, as well as the new policy framework to encourage exports, would help to keep the risk within acceptable limits. - 25 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 71. Each of the draft Loan Agreements between the Bank on the one hand and Privredna Banka Sarajevo - Udruzena Banka and Stopanska Banka Zdruzena Banka - Skopje respectively on the other hand, the draft Guarantee Agreement between the Socialist Federal Republic of Yugoslavia and the Bank and the reports of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 72. Special conditions of the loans are listed in Section III of Annex III. 73. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 74. I recommend that the Executive Directors approve the proposed loans. A. W. Clausen President April 2, 1982 Washington, D.C. - 26 - ANNEX I TABLE JA Page 1 of 6 YUGOSLAVIA - SOCIAL INDICATORS DATA SHEET YUGOSLAVIA REFERENCE GROUPS (WEIGHTED AVERAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 255.8 MOST RECENT MIDDLE INCOME INDUSTRIALIZED AGRICULTURAL 142.8 1960 lb 1970 lb ESTIMATE /b EUROPE MARKET ECONOMIES GSP PER CAPITA (US$) 370.0 830.0 2430.0 2609.1 9444.0 USERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 875.1 1554.3 2440.3 2368.4 7896.6 PUPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 18402.0 20371.0 22139.0 URBAN POPULATION (PERCENT OF TOTAL) 27.9 34.8 41.5 53.2 76.4 PUPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 25.8 STATIONARY POPULATION (MILLIONS) 29.0 YEAR STATIONARY POPULATION IS REACHED 2065 POPULATION DENSITY PEE SQ. KM. 71.9 79.6 86.5 80.6 142.7 PER Sq. KM. AGRICULTURAL LAND 124.0 139.0 153.7 133.9 523.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 30.5 27.4 24.8 30.1 22.8 15-b4 YitS. 63.2 64.8 66.3 61.5 65.6 65 YRS. AND ABOVE 6.3 7.8 8.8 8.3 11.6 POPULATION GROWTH RATE (PERCENT) TOTAL 1.2 1.0 0.9 1.5 0.8 URBAN 3.6 3.2 2.9 3.1 1.3 CRIDE BIRTH RATE (PER THOUSAND) 23.2 18.8 17.5 22.9 14.5 CRUDE DEATH RATE (PER THOUSAND) 9.8 9.0 8.5 9.1 9. 5 GROSS REPRODUCTION RATE 1.4 1.3 1.1 1.6 0.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. 59.0 1O005 AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 85.0 93.0 117.0 119.8 112.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF RtEQUIREIENTS) 125.0 130.0 136.0 125.7 131.4 PROTEINS (GRAUtS PEK DAY) 93.0 93.0 101.0 92.5 98.1 OF WHICH ANIMIAL AND PULSE 28.0 32.0 39.0 39.7 62.2 UBILD (AGES 1-4) MORTALITY RATE 5.0 2.6 1.5 3.4 0.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 63.2 66.9 70.3 68.9 73.8 INFANT MORTALITY KATE (PER THOUSAND) 87.7 55.5 33.6 25.2 12.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 33.6 URBAN 42.4 62.0 RURAL .. 12.3 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. POPULA1ION PER PHYSICIAN 1616.0 1000.0 762.4 973.3 621.2 POPULATION PLR NURSING PERSON 1350.0/c 410.0 409.0 896.6 217.4 POPULATION PER HOSPITAL BED TOTAL 200.0 179.0 166.0 262.3 119.4 URBAN .. 70.0 101.6 191.8 120.9 RURAL .. 1610.0 1836.9 ADMISSIUNS PER HOSPITAL AED . . 17.0 18.2 18.2 17.9 ItOUS ING AVERAGE SIZE OF HOUSEIIOLD TOTAL 4.0 3.8 3.8 URBAN 3.3 3.2 3.3 RURAL 4.4 4.3 4.1 AVEKAGE NUrlBER OF PERSONS PER ROOM TUTAL 1.6 1.4 URBAN 1.7 1.3 RURAL 1.5 1.5 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 54.5 87.9 URLMBAN 92.7 98.4 RURAL 36.1 80.1 - 27 - ANNEX I TALE 3A Page 2 of 6 YUGOSLAVIA - SOCIAL INDICATORS DATA SHEET YUGOSLAVIA REFERENCE GROUPS (WEIGHTED AV §AGES - MOST RECENT ESTIMATES- MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 111.0 106.0 99.0 105.9 99.6 MALE 113.0 108.0 100.0 109.6 102.1 FEMALE 108.0 103.0 98.0 102.2 101.8 SECONDARY: TOTAL 58.0 69.0 82.0 66.3 89.3 MALE 63.0 78.0 86.0 73.2 83.3 FEMALE 53.0 58.0 78.0 59.5 85.0 VOCATIONAL ENROL. (X OF SECONDARY) .. 26.0 21.0 28.4 18.1 PUPIL-TEACHER RATIO PRIMARY 33.0 27.0 25.0 26.8 21.2 SECONDARY 13.0 22.0 19.0 23.6 16.4 ADULT LITERACY RATE (PERCENT) 77.0 83.5 85.0 75.4 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 3.0 35.4 88.5 83.9 349.7 RADIO RECEIVERS PER THOUSAND POPULATION 84.9 165.5 209.1 181.6 1018.0 TV RECEIVERS PER THOUSAND POPULATION 1.4 88.2 170.2 131.1 400.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 69.0 85.3 95.9 123.8 336.7 CINEMA ANNUAL ATTENDANCE PER CAPITA 7.0 4.0 3.4 5.7 4.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 8302.0 8837.6/d 9381.7/d FEMALE (PERCENT) 35.0 35.9 36.0 32.9 36.6 AGRICULTURE (PERCENT) 63.0 51.0 30.9 34.0 6.1 INDUSTRY (PERCENT) 18.0 23.0 32.9 28.7 37.7 PARTICIPATION RATE (PERCENT) TOTAL 45.1 43.4 42.4 42.3 45.7 MALE 60.0 56.6 55.0 56.5 58.9 FEMALE 30.9 30.6 30.1 28.5 33.0 ECONOMIC DEPENDENCY RATIO 0.8 0.8 0.8 0.9 0.8 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 16.4/e 15.1/f 13.1 HIGHEST 20 PERCENT OF HOUSEHOLDS 41.57 41.47? 38.7 LOWEST 20 PERCENT OF HOUSEHOLDS 6.9/e 6.6/f 6.6 LOWEST 40 PERCENT OF HOUSEHOLDS 19.0/e 18.4/f 18.7 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. RURAL .. ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. RURAL .. .. 430.0 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1962; /d Including migrants workers abroad; /e 1963; /f 1968. May, 1981 -28 - ANNEX I rage 3i f 6 DLFISITIP5S IF SOCIAL JOliScArI," Thacafece..c...rc...cr. (lIhe a cr rofocs Ibjecsoc I'd 12lIac....r.c .rc. rcsra .sbnaaegicracac--spe LASt 005 tccoscsis.i c lrdr.c ...hr o.r.ri-fr.irurici T- sli cstsric-tec-prno.indcIs rorar-so- uba9nroal ucdei:oL-rroc rrrcdorf-fpcee- SPfEblirpiT (S - 5? e cpc os1rhirre us osrc ace rce,ci Is crro.rosd oa hoapiras coh ro- . r-dd helc iNli. sri 19'S dec acs'a-sec on sOud, f h, escIbob f fe rr h iar ch or rac -loct fosro sad i-os I,i icr Ftoocs crcRCd CONSiltSTiOO PEt CaPIIlA-cte osopico orrceera ca ,wcr-o re ocri PIc±ue"OnO "!" pI,geri oari r,Idcipt orkigac fcs qosarprcpc; IN. gIlr, o l_ corssd pI o---th ea hoopIoco or cr ie r1 rdo nst deco.. O . Pds96is9stnra 97 . ...Ip cl red-h cal roIer I dI ae-I, -0- hcr- iebo cchh- -oL-dd bytcrrs-icc of beds POP StATION MD1 atTI STATS SlO ~pppPooceca~~sid.YoetrrotodeP A.O of 3.100I 1960h. 1910. sod 1079 0009 5;di9di,-sOIL,de-d 1979 doon-- d o Odesiarcoc Froiecrtors Aons0~rruacsoud erreros ear roo - 1,a -oh- anId rerol - So-rg, oe Faaictacnesiii-or0 o -ooslcrja-ricr... ... ssio..td Scf rrosprroraiohr crric fdrcrcoa srrel ppolscio hr ae sod er ecd heir rrslttcand dociticyrase -18 doeliors rerrociosr....iloI....usr illece .o.sr .c.oraeI iog lcfr especracor er ric-h coccoalogooc -ounoc- ctccscllIoice -co poasrlcrsokrs. idslos_ oc,ubn r oe lool,rdfseoiirrortetrsebccrtca 7.5pess.Th eas-Coracioehde..r.ocb I icricon iricig q...r-rrtaa tech cooccoy Is t1,- -ssg-rd or of chess oill co-ho-nsi-cf aao1oilry tDUloTO aridroiii0rr-da do- orIoctpross 45scEcolroOr assi cardocsehst fsa iod boorosr scc o rcpoclrscstresospopois are .iror or nOons the cr c thso-ol ge sacs cs-a. adocsicr.. rao l,aatsII ..ofr psars Ifapp poipersay snaro,illo tsarare toer00000 tacocro s--orr - The rear oh,c ---iyeo roue5o osoercs-.ott os, or . sahar rricir jgosorcos bo frpe si-o hoe bar-oecobad. ....atlrrll 4ercsc;ocaaraccsrasagrIIcli PdayrI....kn--rr-rPcoocro Ioraqoar icitoo- rltl0Shr-rr-csPr Vosio..eIIroceci cc f sactdarrl V:: --oetosI .ra.iurot r -ore ara;190 1970 sod -979 aeo. hrotlda reobhroet.1cocrilIto otbac progres ahbt rpa-- trepaci- Psrs.to.actoluosd - C--c.,c aebocaId fcgcicut-rcrdnltel derr ..radeosoaa..srorfa-croicrytisftitsrbill Illyc 1960 I90sd17 h5 trlathrrto-ora a ssdac T-fors stadarra -oc11la er PrcatrAss erraes rec-e ) - Cbildca- p0-cc yaces, so-ks-a-sa (d- priearcysi s odd crt d!innd Srmb sey f rsatfahs c r~ba o .raa. ) Ird reiradIt hars sod orace cecraa f oid-yar .... - parerodiog lar1.. taccon; 196'0, 1970 . sd 119f isdMts_rronesPera - ,itarra aI ateslaIbia to see soI cir.i Porotarror Srorb acts Ipeeerr - roost ...esI grooth cae o I f t-r1 asd- lsprsog f toss1 doir rpe -ica- ..rad 15 yas ra soard Pane pspoItai... for 1905-60, i9tO-70t..sd 1970i-9. Ponstarso Oroab tressteoccori - orbo-Arrac arosereras of -obsr papo- COflSUirPTIONdf lescoos forcoso-o 190-70 ..ri tOII-79 pbi-oea Cas par bosaot dootaridt-yrss.ssc arscomet I Ood Ppnpolac-; i9ch, 19071..ad 1979 dare rircar..y datth as:.h loa-ds DeathOas osthdart Orot hasS Par shonseos of _c-as edoRcareste ibo--sd opsiscrr - Oil e,ppa. fccaoc a re to" rorelcacor; 1960. tif970 dr, do ..d17 .. II.tsssssrtpbr prhoso o ooa s sottdssst rttirp rats u.u. ity piir-pecc a-e-g-sedirg it 1960, 1970, sri tO71. sas not ee bhrtishd 1itoacsis.l soso ofcild-baseSog9tre 100-ct yasc.. Ib oss - biect-coorcol deoresc tsserrCcatstoLhroactrrirOo cbsesP,she -o-cgs ott sit sorsodotoocir sas eg gru- -utrtrr of 'daily gse Illrro...oaaps... def ted Iape ldioc. pobli-arco deo-ra pr-riIy so r_crtilog gooses dana. t" Osroada POOD NDg NUtTRITION so i 'dattly" if it appea.rs at issa IdnfriosesaIae..k. Ienoend Prod-orcr c Capita 1tt70il -Ides of -a cc pJir aron1 Ioss kos t -tos o oar Cort.irs Y- peefeo-lss 00 rbro-beer ordoto fal od -ds Iistta Prodooriteo to dss seed sci fIed sri stokers sari id.io the Ysso. i-otodtcrsdsfser..rsrde is-cr crosses is orcaeIced peer basis. lorendirie 000. pr isop gods. s.. .. g. .....cr0 soienta. - -y:era esoldei. Agesss pOdoSorf ah oru..rtr is basad or LASORFOR5CE esrioraseoga p-odo-- price -eigh-s lb-6t, 1970, sod 1979 dars. TsEtLassPooit-1esry - S rotapeci-e p5 t00 rsoIllr Ilelg sqtroIare of ca food au -lo ieottbte Is oor ..pl Pee ospiro oor llr pocsc of a1 ages. Oetcttoaf oro onrte c par tap c-ocleIa -cpptio- cosprise doosacic . prodocio. ispo-r tee ens lonPareble; itO 1970 sod 1979 dess. sapre r0hboe osok fa op n a lode o.ce1 fad, seeds, PatFtsosrI - Peste lbs srsa rosrg fttl labre focro1. qa Itotesss io food prcsieg sod loas tod cro o R. Oqoire- Alri-uhtora -`rc Lot -fbocfseIcfrcafo rp bucgan asoas iara ass tastedby ... b Isedo obyctotogicet oasis tar r...a sort. - fiahtcg as pree-osge of totac Iabar foros; itO,t970 sod 1,979 tars. oity asd freetbhcoiderirgsoir- stsarasers- re SId -eights, Iaeioueo roo Labor fo-- ic nlitiog. orcoso.ssfecrortig dosbi oa;iNtl-ti, 1970. co1977 dsre. I97O std 19719 dacs. Per car its a solo of Ororto tgosss Se tadt - Prooso concoct ofpesospisa Pseco Oscroco Sra (paroes.--totat, sets,soddfsaele-P1sicspstrss I ...a . offodpe..p tatopt f fond ia desired as cbr.I fe cracssaanprda c cs mod .oast febo oees qsososforfsit courorcs asoaS dasba US DI5 prortisd aId tat.pa.r.t.ga of .oral, sale ard feam prisio f sit... .ga .r...clsiy.1y slionasts of .. grass oftice p..r... Per.dc sod it genes of sIse so1 d 1960. 1970, ned t5tN dare h. Obs se Sa...d or 11,0.0sper sa ca pelsa roerof sihio ii gesas shautId _a s P_ Iroste fhesasnd-es .e.t..raas .rusr f the pooose,ad toeg oti,asad. aofsat pruesce a cc sneosge foe beooold, proposd bp rat cc rhe Third, .. f idof Se-sder,co Ii Rato-Piio or popolsacoonote 17 sed f5 sod roa Wci Poot.. Scroe; 1961-6i, 1970 crd 1977 dsc.to the rose1 lboc tao. PortscIaeosesuprtn -ois1 sod p,Isa - Procon .,PpIy o food do- ori"d Pros corset art polses to gras par tsp; i96P5-t9, 1970 cci idfl data, INCOMEfDS licm Tutio 1thild sititorbioat tear t.....sdl - A-oc1 destho Per thonead is COEtd. etnofos Ss t ehsdSrP-rtca ytba sties dared isesnd fros ifit caStes; 1960. 1970 sri 1979 tars, ofPbseaIldP OESTSi P0055 TAORG" GOUOPS Lifa Esprocancret Brtch toarp -rsgI ensha at sears of Side -ocltg heftiog -strrsc0Oorspoiaasosrao ost Ieosts atSrih; 1960, t9TS sod 1919 dccc. cod shooi dbe~ ioserpeee hiSoIItebe aete IrfeorSorsahac iis tee fbooaodt ...oel deahs of trf ....es odar one yf.. Esrinred Astr osi co ae (16$ prc et-rbesastrccsl1 Sac f pepletantt, bso sod rosit irt reasho-- tbl rcesscssais rtoriorblpdqrt disp easee o-food reqaicasasr is sot safr suppyip (tdnlutrserdarst s_te- or sotseted bar uEsNatttd tsioard Ro1tei-a Poreo- cos Loe-Stprrna -saa so.eesd Ssf sgoirbsoco_sooebteacIss of abgs Snse Ro-etrs la _ascr aifoetoar fr bighor cost of ti'Ehrie is nbs aras cosaidessi isriocrad Poroisecor fatno Absotare Porart . booms Lanaib tIrHiderosost - afbse cesaosbfeocssaootdsetcrarrt b00555f5055a5050555b055b0t aodrrsl-PocoscoPpPII ero 1-1hs isssdeitsdnasneIoic1 doso -o tc sped I disp---ort...t oar ol f the d.y Is fsc-hitg ebe..l" o.d f rbhiraseoroepools Ios. crac disposalaspinoIrI th stols a dispsal,als or slab ..... s rser. of -So IscasEor..s btoic cet Srira1 Dar t orto a :,.eeaar.bsy erbo yeafress or the ass of Pit peciss. aod slbtooc aZieeed ricie iarrao Pooslttossao brairc P P.p.isrior daridet by osobse of psacticiog physi- M, class q-stifiet fteosImetita1 sobo t as c ..srietscIt. Poposrir er Naate Pesor Pootaios dinidad Op -ubar of peaceloig Nasedfs tsgadi soosalessrP ..e.. essaeoest -29 - ANNEX I Population: 22.3 million (mid-1980) Page 4 of 6 GNP Per Capita: US$2,620 (1980) YUGOSLAVIA - ECONOMIC INDICATORS Amount Annual Growth Rates (7) (million US5 at (at constant 1972 prices) Indicator current prices) Actual c/ Projected 1980 c/ 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 NATIONAL ACCOUNTS Gross domestic product a/ 69,232 0.9 5.2 8.4 8.5 4.2 2.2 2.2 2.5 3.6 3.6 3.6 Agriculture 86516 -2.6 6.4 5.7 -5.4 5.4 0.0 1.0 3.2 3.2 3.2 3.1 Industry 28,801 7.4 4.1 9.5 9.3 8.5 3.6 1.4 2.3 4.0 4.2 4.2 Services 24,993 1.4 5.3 7.1 13.1 -2.0 -2.2 3.4 2.5 3.3 3.1 3.1 . Consumption 48,760 -3.3 0.0 9.8 13.0 3.8 0.6 -1.1 2.8 3.5 2.7 2.8 Gross investment 23,218 10.1 3.6 17.4 -3.2 12.0 -3.2 -1.2 -2.5 1.3 4.2 4.6 Exports of GNFS 14,053 1.1 10.4 -2.0 4.8 2.6 12.6 9.3 7.0 6.6 6.6 6.6 Imports of GNFS 16,799 -1.3 -8.6 16.1 2.5 12.0 -9.7 -2.6 2.6 4.3 5.2 5.7 Gross national savings 19,619 14.7 20.6 5.6 -3.1 3.4 5.8 - - - - - PRICES GDP deflator (1972 -100) 411 170 204 232 260 313 411 - Exchange rate 24.9 17.4 18.2 18.3 18.6 19.0 24.9 - Share of GDP at Market Prices (x) Average AnnuaL Increase (7) (at current prices) b/ (at constant 1972 prices) 1960 1970 1975 1980 1985 1960-70 1970-75 1975-80 1980-85 Gross Domestic Product a/ 100.0 100.0 100.0 100.0 100.0 5.9 6.5 5.7 3.1 Agriculture 22.5 16.1 13.8 12.3 12.1 3.3 2.9 2.4 2.7 Industry 42.2 37.4 44.3 41.6 41.8 6.3 8.3 7.0 -3.2 Services 29.0 38.1 33.1 36.1 36.1 6.9 4.7 4.3 3.1 Consumption 67.2 72.8 74.3 70.4 69.8 6.5 6.9 5.4 2.1 Gross investment 36.5 32.3 33.5 30.5 27.8 4.7 5.5 5.3 1.3 Exports GNFS 13.9 16.5 20.2 27.7 33.7 10.2 6.7 5.7 7.2 Imports GNFS 17.5 23.5 28.0 31.4 31.3 9.8 6.7 2.5 3.1 Gross national savings 32.6 29.6 25.6 28.3 28.4 5.3 6.2 6.5 - As % of GDP 1960 1970 1975 1980 PUBLIC FINANCE 'ot-l revenues 27.9 33.1 36.8 37.6 Total expenditures 24.1 33.2 37.2 38.2 Surplus (5) or deficit (-) 3.3 0.1 -0.4 0.6 Foreign financing 0.0 0.0 -0.4 0.0 1960-70 1970-75 1975-80 1980-85 OT'HER INDICATORS GNP growth rate (X) 6.1 6.7. 5.7 2.8 GNP per capita growth rate 5.0 6.6 4.7 1.9 ICOR 5.4 4.6 5.8 9.1 Import elasticity 1.6 1.0 0.5 1.0 a/ At market prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies. b/ Projected years at constant 1972 prices. c/ Estimate. EMENA IC March 19, 1982 - 30 - ANN5EX I Population: 22.3 million (1980) 6ANE o GNP Per Capita: US$2,620 (1980) YUGOSLAVIA - EXTERNAL TRADE Amount Annual Growth Rates (X) (million US$ at (at constant 1972 prices) Indicator current prices) Actual e/ Projected (1980) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 EXTERNAL TRADE Merchandise exports 8,978 0.0 14.5 -5.3 1.0 4.4 11.2 10.6 7.0 6.4 6.4 6.4 Primary a/ 1,940 -3.1 16.6 3.9 1.5 5.6 2.5 -10.7 5.0 5.0 5.0 5.0 Manufacture. b/ 7,038 0.4 13.9 -8.8 0.8 4.0 14.1 16.4 7.4 6.7 6.7 6.7 Merchandise Imports 15,065 -2.8 -6.5 18.5 3.8 18.8 -13.9 -4.9 2.5 4.3 5.4 6.0 Food 1,087 -40.9 45.8 4.3 -24.2 51.9 -3.1 -5.5 1.0 1.0 3.5 4.0 Petroleum c/ 3,549 -5.0 10.1 12.0 11.6 10.6 -8.2 0.0 3.0 5.0 5.0 5.0 Machinery and equipment 4,216 22.3 -8.8 17.8 7.1 22.4 -23.1 -19.8 -5.0 3.0 3.0 5.0 Others 6,213 -11.9 -12.7 22.1 4.4 12.8 -9.3 4.3 6.5 5.4 6.9 6.9 PRICES (1972 = 100) Export price index 172 180 202 220 253 301 331 364 393 423 453 Import price index 184 189 216 226 269 319 351 385 419 452 486 Terms of trade index 93.5 95.2 93.5 97.3 94.0 94.4 94.4 94.7 94.0 93.5 93.1 Composition of Merchandise rrade (Z) Average Annual Increase (X) (at current prices) d/_____ (at constant 1972 prices) 1960 1970 1975 1980 1985 1960-70 1970-75 1975-80 1980-85 Exports 100.0 100.0 100.0 100.0 100.0 8.1 5.7 5.1 7.4 Primary a/ 49.6 29.4 19.5 22.0 16.0 - -1.3 6.0 1.9 Manufactures b/ 50.4 70.6 80.5 78.0 84.0 - 8.1 4.7 8.8 Imports 100.0 100.0 100.0 100.0 100.0 9.0 7.4 4.1 2.7 Food 9.1 7.2 5.5 7.2 8.6 - 5.0 14.9 0.8 Petroleum c/ 5.4 4.8 12.3 23.6 7.9 - 8.2 7.2 3.6 Machinery and equipment 36.8 33.2 33.9 28.0 24.6 - 9.4 3.1 -2.8 Others 48.7 54.8 48.3 41.2 58.8 - 6.0 3.5 6.0 Share of Trade with Share of Trade with Share of Trade with Capital Share of Trade with Industrial Countries (Z) Developing Countries (X) Surplus Oil Exporters (X) Centrally Planned Economies (Z) 1965 1970 1975 1979 1965 1970 1975 1979 1965 1970 1975 1979 1965 1970 1975 1979 DIRECTION OF TRADE Exports 40.1 53.3 34.0 40.5 17.4 13.6 16.8 19.3 0.4 0.7 2.1 11.5 42.1 32.4 47.1 40.3 Primary 61.0 70.2 54.0 55.0 9.1 8.2 8.9 14.2 0.2 0.2 1.9 5.8 29.7 21.4 35.2 30.7 Manufactures 24.0 41.9 26.0 33.5 23.8 17.2 20.0 21.6 0.6 1.0 2.1 14.2 51.6 39.9 51.9 44.9 Imports 55.3 66.1 59.1 60.8 16.0 12.7 15.7 n.a. 0.1 0.1 0.6 ..a. 28.6 21.1 24.6 25.3 a/ SITC 0-4 b/ SITC 5-8 C/ SITC 3; includes lubricants, coal and electricity. d/ Projected years at constant 1972 prices. e/ Estimates. Owing to changes in the valuation of trade, components do not add up to totals, nor do aggregate price and volume indices equal value growth between 1978 and 1979 shown in next table. EMENA IC March 19, 1982 -31. - YUGOSLAVIA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT EX I (UsS millions) PAE6f 6 Population: 22.3 million (mid-1980) GNP Per Capita: US$2,620 (19f0) Indicator Actual Projected 1970 1975 1976 1977 1978 1979 1980 1981 a/ 1982 1983 1994 1985 BALANCE OP PAYMENTS Exporta of goods and services 3,037 8,012 9,142 10,586 12,069 14,276 18,300 22,207 25,325 28,492 32,023 35,921 of which: Merchandise f.o.b. 1,679 4,073 4,893 5,191 5,809 6,794 8,978 10,939 12,860 14,779 16,905 19,248 Importo of goods and services 3,385 9,013 8,977 11,932 13,352 17,937 20,592 22,957 25,862 28,828 32,221 35,972 of which: Merchandise c.i.f. 2,874 7,697 7,367 9,789 10,439 14,019 15,065 15,758 17,709 20,114 22,915 26,122 Net trasofern - - - - - - - - - - - - Current account balance -348 -1,001 165 -1,346 -1,283 -3,661 -2,292 -750 -537 -346 -198 -51 Private direct inveotment - - - - - - - - - - - MLT loana (net) 196 951 1,094 1,432 1,394 1,009 2,410 762 662 241 865 1,010 Official 18 246 213 61 128 131 59 1,097 1,280 451 654 642 Private 178 705 881 1,371 1,266 878 2,351 -335 -618 -210 211 368 Other capital b/ 38 135 119 45 541 1,487 657 143 360 600 -100 -333 Chang.em reserven 114 85 -1,378 -131 -652 1,165 -775 -155 -485 1495 -567 -626 International reserves ci 276 1,502 2,880 3,011 3,663 2,498 3,273 3,428 3,913 4,408 4,975 5,601 Of which: Cold (official valnation) 51 62 62 64 69 73 78 78 78 78 78 78 Reserven as months imports 1.0 2.0 3.8 3.0 3.3 1.7 1.9 1.8 1.8 1.8 1.9 1.9 EXTERNAL CAPITAL AND DEBT Grasn dinburnements 611 1,647 2,096 2,665 2,800 2,438 4,156 3,223 3,282 2,660 3,642 4,423 Official grants - - - - - - - - - - - - Concen.i.nal loamo 67 134 134 159 29 13 20 12 - DAC 0 71 62 66 11 11 15 8 - - - - OPEC - - - - - - - - - IDA - - - - - - - - - - - - Other 675 b3 72 93 18 2 5 4 - Non-co.cen.ional loans 573 2,037 1,962 2,506 2,671 2,425 4,136 3,211 3,282 2,660 3,642 4,423 Official nxpart credita d/ 39 203 283 75 74 60 85 1,375 1,534 723 931 1,145 IBRD 37 154 119 133 180 294 258 240 285 341 330 337 Other multilateral - - - - a 24 36 18 - - - - Private 497 1,680 1,560 2,298 2,409 2,047 3,757 1,578 1,463 1,623 2,381 - 2,941 Yugonlav export credit (net) (-37) (-82) (-100) (-183) (-106) (-125) (-300) (-250) (-230) (-220) (-240) (-156) E.ternal debt Debt octstanding and disbursed e/ 2,053 5,820 7,172 8,956 11,117 13,608 15,446 16,458 17,350 17,811 18,916 20,081 Official 854 2,327 2,792 3,085 3,410 3,662 4,552 4,982 6,492 7,163 8,057 8,855 Private 1,199 3,493 4,380 5,871 7,707 9,946 10,894 11,476 10,858 10,648 10,859 11,226 Undinbhrned debt 948 2,971 2,525 4,438 3,713 3,817 2,542 3,666 4,705 5,627 6,247 6,747 Debt aervice fl Total service paymento 503 1,441 1,440 1,595 1,886 2,125 2,441 3,961 4,456 4,320 4,720 5,483 Interest A/ 128 289 302 367 578 821 995 1,750 2,066 2,121 2,183 2,225 Payments as X exports 16.6 18.0 15.8 15.6 14.9 14.9 13.3 17.8 17.6 15.2 14.7 15.3 Average inctrest rate on new Io.n (X) 7.1 8.1 7.1 7.4 7.7 8.0 8.4 9.2 9.1 8.2 8.5 8.6 Official 7.0 8.3 7.0 7.3 7.7 - - - - - - - Private 7.5 7.5 8.6 9.3 8.7 9.5 - - - - - - Average maturity of new loans (years) 16.5 15.2 18.3 15.4 15.1 10.8 10.1 10.2 10.3 10.7 10.5 10.3 official 18.5 16.5 10.0 15.9 15.1 - - Private 10.9 10.9 5.7 7.5 - a/ Eutimates. hI includes net one Of IMF credit (drawings le.. rep-rthases), met use of ahort-term credit and changes in bilateral balances . c/ IScluding gross foreign annats of conmercial banks. d/ After 1980, includea borrowings guaranteed by National Bank of Yugoslavia. EMENA IC e/ Eaternal borrowing reported in the historical balance of payments is not consistent with external debt dtat. March 19, 1982 f/ Debt service excludes amortization and interest on export credit extended by Yugoslavia. After 1981, includes internat payments on use of IMF resources. 32 - ANNEX II Page 1 of 12 THE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA A. STATEMENT OF BANK LOANS (as of September 30, 1981) US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed Twenty-nine Loans fully disbursed 830.3 777 1971 SFRY Multipurpose Water 45.0 1.3 894 1973 Stopanska Bank Skopje Agricultural Industries 31.0 0.1 916 1973 Naftagas Gas Pipeline 59.4 19.3 1026 1974 Community of Yugoslav Railways Railways 93.0 0.3 1060 1974 Port of Bar Harbor Expansion 44.0 3.6 1066 1974 Vodovod Dubrovnik Water Supply and Wastewater 6.0 1.6 1262 1976 Republicki Fond Voda Water Supply, Sewerage & Water Resources 20.0 3.9 1263 1976 Sarajevo Water Supply & Water Supply & Sewerage Enterprise Sewerage 45.0 10.6 1264 1976 Sarajevo Gas Enterprise Air Pollution & Naftagas Gas Unit Control 38.0 6.8 1277 1976 Privredna Banka Sarajevo, Stopanska Banka Skopje, Investiciona Banka Titograd, Kosovska Banka Second Industrial Pristina Credit 50.0 3.0 1360 1977 Management Organization Multipurpose "Metohija" Water 54.0 42.4 1370 1977 Investiciona Banka Agriculture Titograd Industries 26.0 7.2 1371 1977 Stopanska Banka Skopje Agriculture Industries 24.0 13.2 1377 1977 Road Organizations in Bosnia-Herzegovina, Serbia, Macedonia, and Kosovo Roads 56.0 0.1 - 33 - ANNEX II Page 2 of 12 US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed 1469 1977 JUGEL and six Electric Power Organizations in Second Power each Republic Transmission 80.0 27.8 1477 1977 Vojvodjanska Banka Second Agricul- tural Credit 75.0 49.0 1534 1978 Community of Yugoslav Railways Railways 100.0 11.6 1535 1978 Road Organizations of Slovenia, Croatia and Serbia Roads 80.0 11.8 1561 1978 Elektroprivreda Bosne i Hercegovine Hydro Power 73.0 33.8 1611 1978 Kosovska Banka Pristina Third Industrial Credit 40.0 11.3 1612 1978 Privredna Banka Sarajevo Fourth Industrial Credit 20.0 4.1 1613 1978 Stopanska Banka Skopje Fourth Industrial Credit 20.0 10.4 1614 1978 Investiciona Banka Fourth Industrial Titograd Credit 20.0 2.4 1616 1978 Stopanska Banka Skopje Macedonia Strezevo Irrigation 82.0 46.8 1621 1978 Privredna Banka Bosanska Krajina Sarajevo Agriculture and Agro-Industries 55.0 49.4 1678 1979 Roads Organizations of Kosovo, Montenegro, Vojvodina and Herci- govina and Macedonia Roads 148.0 67.5 1756 1979 Zagrebacka Banka Croatia Sava Drainage 51.0 50.1 1759 1979 Road Organization of Earthquake Rehab- Montenegro ilitation- Highways 21.0 12.9 1768 1979 Port of Bar Earthquake Rehab- ilitation-Port of Bar 50.0 47.7 1769 1979 Railway Organization Earthquake Rehab- of Montenegro ilitation- Railways 14.0 11.6 - 34 - ANNEX II Page 3 of 12 US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed 1801 1980 Vojvodjanska Banka Third Agricultural Credit 86.0 83.7 1819 1980 Road Organizations of Slovenia, Croatia, Serbia and Vojvodina Roads 125.0 125.0 1909 1980 Kosovska Banka Pristina Fifth Industrial Credit 50.0 50.0 1910 1980 Privredna Banka Sarajevo Fifth Industrial Credit 30.0 30.0 1911 1980 Investiciona Banka Fifth Industrial Titograd Credit 20.0 20.0 1912 1980 Stopanska Banka Fifth Industrial Skopje Credit 10.0 10.0 1951 1980 Investbanka Agriculture & Agro-Industries 87.0 87.0 1977a/ 1980 Pristina Railway Transport Organization Railways 34.0 34.0 1993b/ 1980 Kosovska Banka Pristina Agriculture & Agro-Industries 90.0 90.0 2039c/ 1981 Stopanska Banka Skopje Agriculture 80.0 80.0 d/ Total (less cancellation) 3,012.7 967.25 of which has been repaid 397.4 Total now outstanding 2,615.5 Amount sold 9.2 of which: Amount repaid 9.0 0.2 Total now held by Bank 2,615.1 Total undisbursed 967.25 a/ Declared effective on November 16, 1981 b/ Declared effective on December 23, 1981. c/ Declared effective on January 6, 1982. d/ The Kosovo Water Supply Project (Loan amount $41 million) was approved on November 10, 1981, and signed on December 14, 1981. -35 - ANNEX II Page 4 of 12 B. STATEMENT OF IFC INVESTMENTS (as at September 30, 1981) Fiscal Type of Amount in US$ million Year Obligor Business Loan Equity Total 1970 International Investment Investment Corporation for Yugoslavia Corporation - 2.0 2.0 1970/ Zavodi Crvena Zastava Fiat S.p.A. Automotive 1972/ Industry 12.4 0.6 13.0 1980 1971/ Tovarna Automobilov in Motoriev Automotive 1980 Maribor (TAM)/Klockner-Humboldt Industry 9.2 0.9 10.1 Deutz A.G. (KHD) 1972/ FAP-FAMOS Belgrade/Daimler- Automotive 1980 Benz A.G. Industry 16.3 0.8 17.1 1972/ Sava Semperit Tires 12.5 2.5 15.0 1978/ 1980 1973 Belisce-Bel Tvornica Papira Pulp and Paper 70.9 - 70.9 1974 Zelezarna Jesenice/ARMCO Special Steel 10.0 - 10.0 1974 Salonit Anhovo Cement Plant 10.0 - 10.0 1975 RMK Zenica Steel 50.0 - 50.0 1977 Frikom RO Industrija Smrznute Food and Food Hrane/Unilever Processing 4.0 2.4 6.4 1977 Tvornica Kartona i Ambalaze Cazin Pulp and Paper Products 15.6 2.6 18.2 1978 Soko-Mostar Hermetic Compressors 7.0 - 7.0 1980 Investiciona Banka Titograd- Udruzena Banka Tourism 21.0 - 21.0 1980 Radoje Dakic Machinery 18.7 - 18.7 1980 Eight Republican/Provincial Small-Scale Banks Enterprises 30.4 - 30.4 Total Gross Commitments 288.0 11.8 299.8 less cancellations, terminations, exchange adjustment, repayment and sales 154.3 5.2 159.5 Total commitments held by IFC 133.7 6.6 140.3 Total Undisbursed 81.9 0.8 82.7 - 36 - ANNEX II Page 5 of 12 C. PROJECTS IN EXECUTION I/ Loan 777 Ibar Multipurpose Water: US$45.0 million Loan of June 30, 1971; Effective Date: May 31, 1972; Closing Date: December 31, 1981. The main dam is completed and the reservoir is filled. About one-third of the irrigation network has been completed with the remainder expected to be completed by end-1982. Project costs have been substantially above appraisal estimates, but the overrun financing is being provided by the Province of Kosovo and from Federal sources. After a delay of about five years, a law has been enacted by the Kosovo Government which is assisting in the provision of agricultural extension services to the individual sector. In the absence of land consolidation, on farm development and use of sprinkler irrigation have been very slow. Recently, organizational arrangements and revised schedule of implementation were agreed upon to expedite utilization of water by industry and agriculture. Loan 916 Naftagas Pipeline: US$59.4 million Loan of June 25, 1973; Effective Date: March 22, 1974; Closing Date: June 30, 1983. For a variety of reasons substantial delays occurred during the implementation of this project (cost overruns, administrative hurdles, poor management, etc.). In December 1979, the Government requested and the Bank eventually agreed to entrust implementation of the pipeline in Serbia to a different borrower. The loan was divided into two tranches, Naftagas Gas Unit (NGU) being in charge of the pipeline in Vojvodina, and Butangas of the pipeline in Serbia. The amendment of the loan was approved by the Bank in November 1980, and became effective in May 1981. The pipelines in Serbia are now under construction. Practically all the bid evaluation reports for Butangas have been approved by the Bank and contracts have been awarded. The main component of the project left to be implemented by NGU is telemetry and control equipment for both loans 916-YU and 1264-YU. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 37 - ANNEX II Page 6 of 12 Loan 1026 Fourth Railway: US$93.0 million Loan of July 10, 1974: Effective Date: February 12, 1975; Closing Date: June 30, 1981. The loan has been closed and the small residual balance is being cancelled. Loan 1060 Port of Bar: US$44.0 million Loan of December 11, 1974; Effective Date: June 13, 1975; Closing Date: December 31, 1981 All major port civil works are completed except the grain silo facility, edible oil reservoirs and the railway marshalling yard. Final completion of these items had been expected by end 1979. However, the earthquakes of April/May 1979 in Montenegro resulted in severe damage to port installations, particularly in the older parts of the port, caused further delays but works are now proceeding. Closing date has been extended to December 31, 1981 to permit completion of works. Loan 1066 Dubrovnik Water Supply and Wastewater: US$6.0 million Loan of December 24, 1974; Effective Date: June 26, 1975; Closing Date: December 31, 1981. Delays in preparation of final designs and tender documents have put construction about two years behind schedule. However, project now progressing satisfactorily. All funds are expected to be committed by closing date. Loan 1262 Morava Regional Development Project - Water Supply, Sewerage and Water Resources: US$20.0 million Loan of June 14, 1976; Effective Date: November 3, 1976; Closing Date: December 31, 1981. The regional development study undertaken under this project provided the basis for the preparation of the Second Morava Regional Development Project (Loan No. 1951-YU). The flood control and water quality studies are progressing satisfactorily after initial delays in selecting consultants. Construction of the Vrutci Dam is about 2 years behind schedule due to foundation, design and construction problems which, however, are being overcome by intensified efforts of the borrower in the supervision of the contractor and consultation with the panel of experts. Construction is completed on the principal parts of the Cacak and Titovo Uzice components, the remainder are well advanced. Feasibility studies on sewage treatment plants in Cacak and Titovo Uzice have been completed. The pilot irrigation components which were delayed pending the establishment of suitable monitoring arrangements, are underway. The creation of the Republic Water Community of Interest was delayed due to the longer than anticipated process of seeking agreement among all the Yugoslav parties concerned on the structure of the organization. Staffing has been strengthened in the water authorities in Cacak and Titovo Uzice and in the Republic Water Community of Interest. - 38 - ANNEX II Page 7 of 12 Loan 1263 Sarajevo Water Supply and Sewerage: US$45.0 million Loan of June 8, 1976; Effective Date: November 9, 1976; Closing Date: June 30, 1982. Construction of the water distribution system and sewage collection is progressing satisfactorily and should be completed by mid 1981. Construction of the sewerage treatment plan is underway and expected to be completed by early 1982. Loan 1264 Sarajevo Air Pollution Control: US$38.0 million Loan of June 8, 1976; Effective Date: May 31, 1977; Closing Date: June 30, 1982. The gas transmission line has been completed and initital deliveries of gas began in December 1979, one year later than originally planned. Difficulties in finalizing contracts for the supply of gas were the major cause of delay. Construction of the gas distribution network and high presssure loop-line around the city of Sarajevo is proceeding satisfactorily. Naftagas still has to conclude contract for telemetry and control equipment. Loan 1277 Second Industrial Credit: US$50.0 millioni Loan of June 14, 1976; Effective Date: October 29, 1976; Closing Date: December 31, 1981. Progress has been satisfactory. The loan is fully committed. Disbursements are, however, somewhat behind appraisal estimates. Closing Date was extended by one year to December 31, 1981 to meet payments under existing orders and letters of credit. Loan 1360 Metohija Multipurpose Water: US$54.0 million Loan of February 3, 1977; Effective Date: July 27, 1977; Closing Date: December 31, 1982. Construction of the dam, intake weir and feeder canal are progressing satisfactorily and overall project progress is about one year behind schedule. Awards of other procurement contracts are underway and it is expected that by mid-1981 all major contracts would have been awarded. A demonstration irrigation farm of 32 ha involving 28 farmers has been highly successful. Loan 1370 Montenegro Agriculture and Agro-Industries: US$26.0 million Loan of March 10, 1977; Effective Date: July 27, 1977; Closing Date: June 30, 1983. Progress of all major works is satisfactory. The winery has been completed and the cold store equipment has been procured but construction of civil works is slightly behind schedule. Plantations of vineyards and orchards are on schedule. Irrigation works are nearly completed. The loan is about 95% committed and about 70% disbursed. - 39 - ANNEX II Page 8 of 12 Loan 1371 Macedonia Agriculture and Second Agro-Industries: US$24.0 million Loan of March 10,-1977; Effective Date: July 27, 1977; Closing Date June 30, 1982. Sub-loans for all seven agro-industrial sub-projects have been approved by the Borrower and loan proceeds for the individual sector have also been fully committed. Progress in project implementation is slower than expected due primarily to slow processing of bids and contract finalization. Loan 1377 Eighth Highway: US$56.0 million Loan of April 13, 1977; Effective Date: September 7, 1977; Closing Date: March 31, 1981. The loan has been closed and the small residual balance is being cancelled. Loan 1469 Second Power Transmission: US$80.0 million Loan of July 11, 1977; Effective Date: January 31, 1978; Closing Date; December 31, 1982. Contracts totalling about 90% of the loan amount have been let and physical execution, while slower than expected at appraisal, is underway on the most critical sub-stations and lines. The tariff study and most of the least cost development study have been submitted to the Bank. Delays continue to be experienced regarding management studies, revised interrepublc agreement on joint operations, remaining portion of least cost development study and securing of foreign financing for balance of items to be imported. Loan 1477 Second Agricultural Credit: US$75.0 million Loan of July 29, 1977; Effective Date: January 30, 1978; Closing Date: December 31, 1982. All participating banks have identified the main investors. The loan is fully committed. All agroindustry investments are in the procurement or implementation phase. The project is about one and a half years behind appraisal estimates. Closing date has been postponed to December 1982. Measures to speed-up disbursements and overall project implementation are being discussed with the participating banks. The project monitoring and evaluation system is working satisfactorily. Loan 1534 Fifth Railway: US$100 million Loan of April 13, 1978; Effective Date: September 28, 1978; Closing Date: June 30, 1982. Bank financed investments are progressing well. The level of compensation payments is however increasing and substantial tariff increases have failed to keep pace with inflation. Disbursements are on schedule. - 40 - ANNEX II Page 9 of 12 Loan 1535 Ninth Highway: US$80 million Loan of April 13, 1978; Effective Date: August 10, 1978; Closing Date: December 31, 1981. Croatia section opened to traffic ahead of schedule. Slovenia and Serbia sections expected to be completed by fall 1981. Loan 1561 Middle Neretva Hydro Power: US$73 million Loan of May 31, 1978; Effective Date: November 15, 1978; Closing Date: June 30, 1982. Contracts for equipment totalling about 80% of the loan amount have been let. Physical progress is satisfactory and relatively problem free. However, Part B of the project (Mostar power plant), which is not Bank financed, has been delayed primarily due to additional studies needed concerning site geology and additional time needed to complete financing. Loan 1611 Third Industrial Credit: $40.0 million Loan of July 26, 1978; Effective Date: November 16, 1978; Closing Date; December 31, 1982. The loan is almost fully committed. Disbursements are slightly behind appraisal estimates mainly because of the delay in the approval of a special project (lead smelter). Loans 1612, 1613 and 1614 Fourth Industrial Credit; $20.0 million each Loans of July 26, 1978; Effective Date: November 16, 1978; Closing Dates: December 31, 1982. The loans are almost fully committed. Disbursements for Loans 1612 and 1614 are well ahead of the disbursements expected at appraisal, while Loan 1613 is behind appraisal estimate. However, disbursements for Loan 1613 is expected to accelerate as a result of recent changes in the Borrower's procedures. Loan 1616 Macedonia Strezevo Irrigation: US$82 million Loan of August 23, 1978; Effective Date; February 14, 1979; Closing Date; September 30, 1982. Construction of the dam, alimentation canal, main canal and irrigation network are underway. Thermal pipeline, diversion tunnel and coffer dam construction have been completed. The project is proceeding almost on schedule with completion of the dam scheduled for December 1981, and that of the net work by June 1982. _ 41 _ ANNEX II Page 10 of 12 Loan 1621 Bosanska-Krajina Agriculture and Agro-Industries: US$55 million Loan of November 6, 1978; Effective Date: March 28, 1979; Closing Date; June 30, 1983. Sub-project approval and processing of tender documents have been proceeding more slowly than expected at appraisal. About 80% of loan has been committed but disbursements are behind schedule. Cost overruns may necessitate a reduction in scope of the project which is under construction. Loan 1678 Tenth Highway; US$148 million Loan of April 9, 1979; Effective Date: August 14, 1979; Closing Date: June 30, 1983. The five participating Republics/Provinces have awarded 63 construction contracts, 40 of which have Bank financing. Disbursements are somewhat ahead of schedule, except that for the Autonomous Province of Kosovo. Loan 1756 Croatia Sava Drainage: US$51 million Loan of October 11, 1979; Effective Date: April 17, 1980; Closing Date: June 30, 1985. Action for award of contracts for equipment and construction of civil works is in an advanced stage. Studies on subsurface drainage in experimental plots are in progress. Progress on civil works, although somewhat behind schedule, is satisfactory. Disbursements are were behind appraisal estimates but are expected to improve when supply of equipment and goods can begin against the constracts awarded. Loan 1759 Montenegro Earthquake Rehabilitation - Highways: US$21 million Loan of September 21, 1979; Effective Date: December 19, 1979; Closing Date: December 31, 1982. Project close to schedule, emergency works completed and contracting for restoration works completed with some works in progress. -J Loan 1768 Montenegro Earthquake Rehabilitation - Port of Bar: US$50 million Loan of November 30, 1979; Effective Date: April 29, 1980; Closing Date: December 31, 1982. Project implementation about nine months behind schedule due to delays in preparation of final designs and bidding documents. - 42 - ANNEX II Page 11 of 12 Loan 1769 Montenegro Earthquake Rehabilitation - Railways: US$14 million loan of November 30, 1979; Effective Date: April 29, 1980; Closing Date: June 30, 1983. Disbursements of about $2.3 million for urgent reconstruction works have been made. Contracting procedures for remaining works have been slower than expected largely as result of complicated engineering design for repairs to badly damaged tunnel. Loan 1801 Third Agricultural Credit: US$86 million Loan of February 29, 1980 Effective Date: August 25, 1980; Closing Date: March 31, 1985. About 50% of the loan has been committed. Several agroindustries sub-projects have been identified in various republics. Some agroindustries in Serbia and Kosovo are being implemented. The agroindustries study is in progress. Loan 1819 Eleventh Highway: US$125 million Loan of April 23, 1980; Effective Date: August 7, 1980; Closing Date; June 30, 1983. Slovenia and Serbia have completed pre-qualification of contractors, called for bids and completed analysis. Serbia is ready to award contracts, Croatia and Vojvodina contracts have been approved by Bank. Consultant for toll study has been selected. CRO and ITE co-sponsoring Highway Safety Conference in Yugoslavia October, 1981. Co-financing was obtained for an amount of US$110 million in October, 1980. Loans 1909, 1910, 1911 and 1912 Fifth Industrial Credit: $50.0, $30.0, $20.0 and $10.0 million, respectively, Loans of February 9, 1981; Effective Date: August 17, 1981; Closing Dates: October 31, 1984 Sub-project identification and preparation is at an advanced stage and a number of sub-loans have already been approved. Loan 1951 Morava Regional Development II: $87 million loan of April 13, 1981; Effective Date: August 28, 1981; Closing Date: December 31,_1986 Out of 12 agroindustry sub-projects for which bids were invited, bids have been opened for 11, and award of contract made for 6. Loan 1977 Kosovo Railway: $34.0 Million loan of May 15, 1981; Effective Date: November 16, 1981; Closing Date: December 31, 1984 The loan became effective on November 16, 1981. - 43 - ANNEX II Page 12 of 12 Loan 1993 Kosovo Agricultural Development; $90 million loan of June 15, 1981; Effective Date; December 31, 1981; Closing Date: June 30, 1987 The loan became effective December 31, 1981. Loan 2039 Macedonia III Agricultural Development; $80 million of July 23, 1981; Effective Date. January 6, 1982; Closing Date; June 30, 1987 The loan became effective January 6, 1982. Loan 2055 Kosovo Water Supply: $41 million of December 14, 1982; Effective Date; not yet effective; Closing Date: June 30, 1985 The terminal date for declaring the loan effective is May 17, 1982. J - 44 - ANNEX III Page 1 of 2 YUGOSLAVIA: INDUSTRIAL CREDIT PROJECT VI Supplemental Project Data Sheet Section I: Timetables of Key Events (a) Time taken by Country to prepare the project: October 1980 - September 1981. (b) Project Preparation agencies: Privredna Banka Sarajevo Stopanska Banka Skopje (c) First Bank mission to consider Project: April 1981 (d) Appraisal Mission Departure: September 21, 1981 (e) Negotations Completed: March 5, 1982 (f) Loan Effectiveness Planned: September, 1982 Section II: Special Bank Implementation Action None. Section III: Special Conditions A. Effectiveness None. B. Otber (a) Protection against foreign excbange risk on the banks' savings accounts (para. 47); (b) Eligibility criteria for export oriented (para. 53) and energy conservation/conversion sub-projects (para. 55); (c) Remedies for non-compliance with export orientation targets para. 53); - 45 - ANNEX III Page 2 of 2 (d) Maximum sub-loan size will be $5 million (para. 57) and free limit $2 million for individual sub-loans and 60 percent of aggregate loan amount for each bank; first five sub-loans for export-oriented and first three energy saving sub-projects will be treated as above the free limit (para. 58); (e) Bank funds lent to sub-borrowers will bear interest of at least 12.85 percent; domestic funds lent to sub-borrowers from the banks' own resources will carry an interest rate of at least 15 percent (para 65);