Yugoslavia - Current economic position and prospects

RESTRICTED Report No. EA - 17 3a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF YUGOSLAVIA July 29, 1968 Europe Department CURRENCY EQUIVALENTS U.S. $1.00 = 12.5 dinars I dinar = U.S. $0.08 TABE OF CONTENTS Page No. BASIC DATA i-ii SUMMARY AND CONCLUSIONS i-V I. INTRODUCTION 1 II. THE GROWTH OF OUTPUT 3 The Use of Resources 4 Fixed Investment and its Financing 4 Savings 6 Prices 7 Uages 9 Employment 10 III. AGRICULTURE 12 Introduction 12 Growth of Output 13 Prices 15 Marketing 16 Investment and Credit 17 Social and Private Sectors 17 The 1966-70 Development Plan for Agriculture 18 Future Prospects 21 IV. FORESTRY 23 V. MANUFACTURING AND MINING 25 GroTth of Output 25 Industry and Foreign Trade 25 Industry and the Economic Reform 26 The Economic Reform and Structural Changes 28 Industry and the 1966-70 Development Plan 29 VI. TOURISM 32 VII. BANKING AND CREDIT 34 VITIL PUBLIC FINANCE 38 IX. EXTRNAL TRADE AND THE BALTANCE OF PAMENTS i1 External Trade i] 1alance of Paymento [2 Forein Debt Table of Contents (cont'd.) Page No. X. GROWTH PROSPECTS AND CREDITWORTHINESS 48 Prospects 51 Creditworthiness 53 STATISTICAL APPENDIX: Tables 1 - 23. MAP This report is based on the findings of a mission to Yugoslavia in March/April 1968, composed of Messrs. J. A. Simmons, A. Villela and D. G. Reese. (i) BASIC DATA Area: 100,000 square miles Population: 20 million Rate of growth (1960-67): 1.0% p.a. Density per square mile: 200 Gross Material Social Product Total (1967) : D 103.3 billion Rate of growth (1962-66): 7.1% p.a. (1967 ): 0.9% Per capita G.N.P. (1967 ): U.S. $550 (approx.)- Per cont of Gross Material Product (1967) Agriculture and forestry 26 Mining and manufacturing 35 Construction 8 Transport and communications 8 Trade and catering 17 Other 6 Per cent of Gross Material Product 1967 1964-67 Gross investment 39 Gross savings 35 38 Current account deficit on goods and services 1 Investment income payments 1 1 Government current revenues 20 20.5 Money and Credit 1967 Rate of Change (p. a.) (D billion) 196-67 Total money supply 23.5 2.3% Time and savings deposits 26.0 26.7% Short-term credit to enterprises 30.9 12.8% Rate of change in prices (retail) 6.4% 19.2% Public Sector Operations 1967 Rate of Change (p.a.) (D billion) 1964-67 Government current receipts 20.2 11.2% Government current expenditures 18.7 11.7% urplus - Government capital expenditures 1.0 1/ - Figure adjusted to OECD National Accounts concept. 2/ Pr:limninary data derived fror: different sources. The apparent savinli,s over investment was not reflected in the provisional jftatrL of the balance of payments, which showed a small deficit on curreit accC, 1- (ii) Balance of Payments (U.S. $ million) 1967 Rate of Change(p.a.) 1964-67 Total exports (f.o.b.) 1253 12% Total imports (c.i.f.) 1708 9% Net invisibles Cwhich 362 30% investment Income - 79 18% Net current balance - 61 Gross foreign exchange reserves: 1967 1964-67 (Decembeir) (Average) gold and convertible currencies 137 116 bilateral balances 183 89 (or 10 weeks (or 7 weeks imports) imports) I.M.F. Position (U.S. $ million) 1968 1964-67 (Jue) (Average) Quota 150 135 Drawings outstanding 140 108 Total External Debt (U.S. $ million) 1967 1964-67 (Average) Total debt outstanding 2,200 1,925 Total annual debt service 280 227 Ratio of debt service to foreign exchange earnings 15% 15% SUMARY AWD CONCLUSIONS 1. Yugoslavia is a socialist state but one in which more than half of the active population is engaged in the private sector. The private sector comprises mainly peasant farmers who account for about half the working population. In the socialist sector the means of production are socially owned and managed in trust for society by those who work in them. This concept of "workera' self-managament" is unique to Yugoslavia. 2. The country is a federal state where regional loyalties, inherited from earlier divisions of the country, are strong. There are six republic3 in the federation, three official languages and three religious traditions which nontribate to Zeelings of separateness. Re-giorFl ties have lir-Lted the mobility of labor and capital and have contributed to narked differences in the levels of development and of income between the several republics. 3. Yugoslavia has good natural resources. Though the greater part of the comntry is mountainous, approximately a quarter consists of valley lands and the southeni part oZ the great Hungarian plain. In these areas lies some of the richest agricultural land in Europe. The country has iron, copper, lead and zinc, extensive bauxite and lignite deposits, oil and natural gas and a large hydroelectric pcwer potential still to be developed. Yugoslavia alsc has great natural beauty which supports a rapidly expanding tourist industry, and it lies across important trade routes frcm the Adriatic into Central and &stern Europe and from countries bordering the Black Sea into Central Europe along the Danute. 4. Yugoslavia has achieved an iMressive growth of output sirce 1952 with gross material social product 1/ rising on average by 9-10% annually. This fast growth was largely due to the raintenance of rates of investment of the order of 40% of the social product. Development was, however, on a rather autarkic basis with severe restrictions on foreign trade, and by the early 1960's certain weaknesses in the structure and organization of the economy had emerged. The great emphasis given to the expansion of manufacturing had resulted in a distortion in the pattern of production, reflected in lagging output of agricultural products and raw materials and deficiencies in power and transport. The authorities had 1/ Gross material social product is the value of output of goods and services, but excludes certain servi:os included in grCss national product such as public acminIstration and defense, education, healh and welfare, insurance, and scientific, cultural and professional services. - ii - pressed industrial diversification to a point where in some sectors too great a range of products was produced in too small a quantity to be economic. Roreover, the diversity of production and the emphasis given to developing the capital goods industries required large investments if industry were to keep pace with advances in technology and be competitive. It had become clear also that given the limited internal market the con- tinued growth of the economy would in future require a greater emphasis on production for export. 5. By the mid-1960's the Yugoslav authorities had concluded that a major reform in the organization and orientation of the Yugoslav economy was required, and over the period from 1964 to January 1967 they took a number of measures designed to achieve three major objectives: (a) to give still greater responsibility to enterprises and further limit the role of government in the economy by reducing the taxation of enterprises and leaving to then decisions on investment; (b) to correct by major price adjustments the long-standing distortions in the pattern of output;and (c) by devaluing the dinar, approximately halving customs tariff rates and liberal- izing imports and the foreign exchange regime, to bring pressure on Yugoslav enterprises to increase their efficiency, and to integrate more closely the Yugoslav with the world economy. 6. In relation to the third of these objectives the intention of the authorities was to enable Yugoslavia to participate more fully in trade with the non-coimmuist world. Though Russia and Eastern European countries have provided attractive markets for Yugoslav exports, particularly of manufactures, goods offered in exchange have not in many cases been com- petitive in price and quality with those available in the West. To benefit from advances in technology and to modernize her industry, Yugoslavia is anxious to increase her contacts with the West and to orient her trade increasingly to convertible currency countries. In recent years about half of Yugoslavia's exports and 60-65% of imports have been exchanged with the convertible area. 7. The Economic Reform involved a far-reaching reorientation of the economy, and its implementation could not be expected to be accomplished easily and quickly. Nevertheless, considerable progress has been made. The increased prices of agricultural products and basic materials have already contributed to greatly increased output in the first case and large investments in the expansion of capacity in the second. Under the new market conditions, some industrial enterprises have eliminated unprofit- able product lines, concentrating their resources on producing more effi- ciently a narrower range of products. The greater availability of imports has stimulated improvements in the quality of products as well as greater efficiency in production. 8. In some branches of industry, however, the import liberalization combined with the reduction in customs tariffs and restrictive credit policies have brought difficult problems of adjustment and a marked slow- dcun in the growth of output. Industrial production as a whole did not - iii - rise in 1967 and the social product increased by only 1%. The response of many enterprises to changing market conditions was to continue pro- duction in the face of declining sales. In consequence inventories rose to very high levels, absorbing resources which would otherwise have been available for financing fixed investment. Fixed investment in real terms probably declined by 15-20% between 1964 and 1967. 9. In the past three years, the monetary authorities have enforced a restrictive credit policy. This succeeded in halting price inflation and in maintaining near-equilibrium on the current account of the balance of payments since 1965. However, the current balance reflected sizeable deficits with the convertible area and surpluses with bilateral trading partners. Moreover, a continuation of the wage increases of the past two years would not be consistent with price stability or the maintenance of the existing exchange rate. Yugoslav fiscal policies have been conserva- tive. Revenues of all budgets have been sufficient to cover current and capital expenditures and there has been a succession of small overall surpluses in recent years. 10. The immediate outlook for the Yugoslav economy is rather unfavor- able. The problems already referred to resulting from the difficulties many enterprises have experienced in adjusting to the new conditions brought about by the Economic Reform could result in a slow growth in out- put and greater unemployment (unemployment has risen to about 10., of the labor force in the socialized sector, though it must be recalled that about half the population is engaged in private agriculture). leasures need to be devised to free resources fr&zen in inventory accumulation for invest- ment in modernization without at the same time creating inflationary pres- sures which would threaten the balance of payments. The difficult problems of domestic readjustment are at present compounded by a serious threat to Yugoslaviats exports to the EC. Yugoslavia's principal western markets have been Italy and Federal German Republic and her major export has been neat. The application of the Common Marketts agricultural policy ir respect to meat has resulted since July 1967 in a progressive rise in import levies which threaten the viability of Yugoslavia's meat industry and could severely curtail meat exports. Peat exports in recent years have been valued at approximately ;'150 million (20-25% of total exports to convertible currency markets) and any sizeable reduction would present an additional obstacle to the resumption of economic growth. 11. In the medium-term, prospects for .expanding convertible currency earnings are more favorable. The heavy investments now taking place in the non-ferrous metal industry and in tourist and transport facilities offer the prospect of substantially increased convertible currency earnings by the early 1970's. Although the application of the Common Market tariff on manufactures has resulted in a rise in tariffs in the Federal German Republic on some items exported by Yugoslavia, the implementation of the tariff reductions negotiated at the Kennedy Round should at least offset these increases, so that in regard to manufactures Yugoslavia would be in no worse position than before. It seems reasonable to assume that, apart from e)tpanding exports of non-ferrous metals,, Yugoalavla could continue to increase her exports of selected manufactures to the West, including wood and wood products, clothing and textiles, leather goods, steel and - iv - some items of machinery and components. The investments now being made and those planned for the future in new tourist facilities and expanded transport capacities, when considered in relation to the probable growth of the European economy, indicate a continued fast growth in earnings from tourism and transportation. Remittances by Yugoslavs working abroad almost trebled between 1964 and 1967 to reach $89 million, and with a revival in the Federal German economy further growth may be expected. 12. Though medium-term prospects are quite favorable, the impact of the Economic Reform and the accompanying decentralization of decision- making o. the direction of investments is at present difficult to evaluate. While a Jevelopment Plan for the period 1966-70 was prepared, it has become clear thzt the growth targets of the Plan (e.g. a growth of social product of 7.5-8.5% annually) will not be realized and these targets have been abandoned. The Plan also included specific investment projects in basic sectors (e.g. steel, railway and transport, electric power, etc.), which are bein: implemented, though delayed by the shortage of investment funds. The Federal authorities have played an important role in planning and implementing these projects, but after their completion in 1970-72, it is envisaged that, as decentralization proceeds, the role of the Federal authorities in planning and implementing such basic projects will be greatly reduced. Greater responsibility has already passed to Republican and local governments and to enterprises for planning and implementing the expansion of infrastructure. In this process problems of coordination seem likely to become more complex, and it is not at present possible to see what planning structure might evolve in the 1970's. 13. Yugoslavia has maintained high rates of investment over the past fifteen years, financed mainly from domestic savings. Capital imports have financed a small part of gross investment; the average since 1962 was less than 2% and the peak (in 1964) less than 6%. Nevertheless, total aid from abroad has been substantial and until the early 1960rs much of this was provided on special terms (for example, with credits repayable in dinars). Since 1963 such aid has sharply diminished, and Yugoslavia has relied increasingly on suppliers' credits as the principal type of foreign assistance available. The IBRD has been one of the few sources of longer-term loans from the West. The country's external debt rose from $850 million in December 1962 to about $2.2 billion in December 1967 and all but $300 million of the latter figure is debt owed to western creditors. Because the bulk of the debt has relatively short maturities, debt service in convertible currencies is high being equivalent to approximately 25% of convertible currency earnings in 1967. 14. While the figure of debt represents the country's total debt and not only public or publicly guaranteed obligations, the Yugoslav authori- ties recognize that any further increase in the burden of annual dobt ser- vice would be imprudent. Having had only limited success in attempts to renegotiate repayment terms on part of the debt, they are reluctant to see any major increase in the total debt outstanding. Nevertheless, having regard to the difficulties now being experienced in export markets, a -v - moderate net capital inflow from the West will probably be necobsary in the next several years to meet essential import requirements. This would on present prospects be consistent with a reduction in the debt service ratio by the early 1970's as.export earnings rise. 15. Having regard to Yugoslavia' remarkable record of economic growth over the post-war period, to the policy objectives of the Ecconlic Reform, and to future growth prospects despite present difficulties, Yugoslavia's performance can be considered satisfactory and an adequate basis for further Bank lending. I. INTRODUCTION 1. Yugoslavia is a socialist state but one in which more than half the active population is engaged in the private sector. The private sector comprises mainly peasant farmers who account for about half the worldng population. Private enterprise is permitted also in the professions, handi- crafts and services, the limitation being that no such enterprise may employ nore than five employees. In the socialist sector the means of production are socially owned and managed in trust for society by those who work in them. This concept of "workers' self-management" is unique to Yugoslavia. 2. Yugoslavia is a federal state where regional loyalties, inherited from earlier divisions of the country, are strong. There are six republics .n the federation, three official languages, and three religious tradi- tions which contribute to feelings of separateness. Regional ties have limited the mobility of labor and capital and have contributed to marked differences in the levels of development and of income between the several republics. National income per capita in Slovenia, the richest republic, is more than two and a half times that of the poorer republics, Macedonia, fontenegro and Bo3snia-Hercegovina. 3. Yugoslavia has good natural resources. Though the greater part of the country is mountainous, approximately a quarter consists of valley lands and the southern nart of the great Hungarian plain. Lr these areas lies some of the richestagricultural land in Europe. The country has iron, copper, lead and zinc, extensive bauxite and lignite deposits, oil and natural gas and a large hydro-electric power potential still to be devel- oped. Yugoslavia also has great natural beauty which supports a rapidly expanding tourist .industry, and,it lies across important trade routes from the Adriatic into Central and Eastern Europe and from countries bordering the Black Sea into Central Europe along the Dajaube. The population of 20 million is growing slowly - by 1% annually - though in the poorer, more bacW ard parts of the country the growth rate is much higher - up to 2.6%. This has been accompanied by migration from the poorer republics - Bosnia- Nercegovina, Macedonia and Montenegro to Serbia and Croatia. L. After a period of centralized direction of the economy In the immediate post-war years, Yugoslavia adopted the concept of workers' self- management in 1952 and from that time has gradually modified its system of economic organization taoards an economy gtided in the main by market forces. In this process the responsibility for determining output, invest- ment, prices and incomes has been increasingly devolved from political bodies to enterprises. The Economic Reform of July 1965 and the measures associated with it constituted a further major step in this process. :;. Although Yugoslavia achieved a high rate of economic growth during the 1950's, by the early 1960's certain weaknesses in the structure of the economy had become increasingly apparent. The main emphasis in earlier years had been given to the promotion of manufacturing industry. - 2 - This had resulted in lagging output of agricultural products and basic raw materials and deficiencies in power and transport services. Sheltered by severe restrictions on foreign trade industrial diversification had been pressed to the point where in some sectors too great a range of prod- ucts was produced in too small a quantity to be economic. The limited internal market made it necessary to place greater emphasis on exports to support the continued growth of the economy and this in turn implied greater specialization. Although by the early 1960's, responsibility for many economic decisions rested with enterprises, political bodies still retained great influence in decisions on investment. 6. Thus the Economic Reform of July 1965 and the measures associated with it were designed to provide the framework for a more efficient alloca- tion of resources, partly by limiting still further political influences in investment decisions, partly by correcting long-standing distortions in relative prices between manufactures, raw materials and agricultural products, and partly by measures to integrate more closely the Yugoslav with the world economy. The latter measures included devaluing the dinar (from tl = 7.5 to $1 = 12.5), approximately halving customs tariff rates and liberalizing imports. These changes occurred over several years. The major reductions in the taxation of economic enterprises, designed to leave with the enterprises the major responsibility for investment decisions, occurred in 1964, the devaluation of the dinar and the princi- pal price adjustments in July 1965 and the liberalization of imports and the foreign exchange regic in January 1967. 7. The Esonomic Reform of July 1965 was described in greater detail in the last economic report on Yugoslavia (EA-162a) of September 1966. The present report focusses more on subsequent developients. - 3 - II. THE GRGW!Th OF OUTPUT q. Yugoslavia has maintained an impressive growth in outpt over most of the post-war period. Real grass material social product - rose on average by 9-10% annually from 1953 after rather far-reaching changes in the orpanizaticn cf the economy bad been made, ntll 1965. Growth was not, of course, even. In the early 1?60t, growth &lowed sharply to 4-5% annwully, but the authorities took measures to stimulate a revival, and growth rates of about 12$ were recorded in 1963 and 196L. 9. The fast expansion of manufacturing industry contributed greatly to the growth of output over the period. Industrial production rose on avernro by 12. r- alnually from 1953-1965. Growth rates of 16% were recorted in 1963 and 1964. With a large reserve of labor in private a ri Cultore, wich supported three quarters Df the population in 1939, thc cxpansionc of nanufacturing draw substantial numbers of new and largely untrained workers into industry and allied activities. In total more than 750,000 nw workers were absorbed in manufacturing and mining from 1.. Agricultural output over the post-war period rose more slowly. In order to achievc the benefits of modern technolcgy, the emphasis in arricultura1 policy was placed on the development of large social farms where modern mrerchanizod farmir! could be practiced. Private agriculture nas hnmnersd in vtr_ouf ways, though it still accounts for over 70% of te total arricutural area. Agricultural output grew by 6$ annually frim 19t3Kr The weather in 1965 was unfavorable and output fell by 5%. 11. The share of maniifacturing and mining in social product was 36, in 1965 whilc a!'ri:culture contributed 271. Construction and transport -h aicuted fcr rtboit 7'Z :f social product in 1965 and conerc% botels and zaterin for about ih%. 12. Since 1965 the growth of the economy has sharply slowed. Output in 1966 rose by about 81, largely because of an exceptionally favorable year in apricullture. In 1967 the growth rate was only 1% reflecting a 25 drop in arricultural output compared with 1966 and a further sharp decline in the growth of industrial production which recorded no increase in 1967 compared with 12 in 1966 and 8% in 1965. 1/ qross naterial social product is the value of material output and prr.Juctive services 6ut excludes certain services such as public administration, defense, and professional services which are included in the -Uestern concept of Gross National Product. Gross "Saterial Product has been estimated at 12-15, below G.N.P. The Use of Resources 13. High levels of investment contributed to the impressive growth of the economy in the post-war period. Total investment in fixed assets and working capital exceeded 0% of gross material social product in most years. Heavy taxation was the principal means of mobilizing investment resources until the early 1960's, and although the cost in terms of con- sumption foregone was high, the fast growth of output made possible rising real incomes. The breakdown of gross material social product between consumption and investment is shown in Table 1. Table 1: Percentage Breakdown of Expenditure on Social Product 1960 1964 1965 1966 - 1967 Personal consumption 46 48 50 52 57 Collective consumption 12 10 9 8 9 Gross fixed capital formation 29 33 27 25 2h Inventory accumulation 9 12 14 13 10 1/ Provisional Source: Appendix Table 2. 14. Since 1964 fixed investment has declined both as a proportion of output and absolutely, measured in constant prices. This decline reflocte. partly the growth of personal incomes and personal consumption (a trend which was broadly in accord with the objectives of the Economic Reform) and partly the absorption of resources in inventory accumulation. The problem of the build-up of inventories is discussed later in this chapter. Fixed Investment and its Financing 15. The breakdown of fixed investment since 196h is shown in Table 2. Table 2: Fixed-Investment (billions of dinars at current prices) 19661 1966 19 Industry and mining 6.7 6.9 8.3 8.0 Agriculture and forestry 1.9 1.8 2.0 1.8 Transportation 2.4 2.2 2.7 2.4 Commerce, hotels and catering 1.2 1.0 1.3 2.1 Other 0.7 0.5 0.5 0.6 12.9 12s1, Bousing and public utilities 3.9 L.6 4.4 3.6 Social welfare and administration 2.0 2.1 1.9 1.5 Total in the Socialized Sector 18.8 19.1 21.2 19.9 Pri vate Sector 1.6 2.4 3.8 4.8 1 Total Fixed Investrent 20. 21.5 25.0 24.7 1/ 1/ Provisional Sourpe: Satisticki Dilten No. 2. 1968. 16. Having regard to price changes, the volume of fixed investment in the cocialized sector has declined since 1964 by an estimated 15-20%, the decline having been relatively greater in "non-productive" investment, including housing. An expansion in private house construction has offset the decline in housing investment in the socialized sector, and although statistics on private investment are less certain, private housing con- atruction is estimated to have increased quite sharply in 1967. While fixed investment in productive sectors declined, there.was in accordance with the objectives of the Economic Reform a shift in emphasis from new pr6jects to modernization. Thus of total investment credits of two leading investment banks in 1967, 80% were granted for the modernization and completion of existing capacities. - 6 - 17. As recorded in earlier economic reports, the role of government in the financing of ivestment has greatly diminished since 196i1, when direct taxes on enterprise incomes were abolished. Self-financing by economic enterprises increased rapidly up to 1966 as financing by governments declined. Financing by banks also rose, as the banks came to fill more effectively their intended role as mobilizers of investment resources. The total of bank credits, however, still includes funds channelled by governments through the banks for investment in the economy. In 1967 these funds amounted to about 40% of the banks' investment lending. They are directed to completing basic projects which were established with government backing in the past. As these projects are completed, the governmentts role in financing economic investments is expected to decline still further, although at the Federal level, the special fund for the development of less developed regions will continue, and part of the resources of this fund will continue to be channelled through the banks. The financing of fixed investment in the socialized sector is summarized in Table 3. Table 3: Financing of Fixed Investment in the Socialized Sector (billions of dinars) 1964 16 1966 1967 Self-financina Enterprises 4.9 5.5 8.3 6.5 Other organizations 1.2 1.5 1.4 1.0 Bank credits 5.9 7.0 8.2 8.9 Public (Government) funds 6.9 5.2 3.2 3.5 18.9 19.2 21.1 19.9 Source: Statisticki Bilten No. 2. 1968. Savings 18. Though fixed investment declined in real terms in the past three years, savings in the economy remained at a high level. In 1967 domestic savings equalled about 35% of gross material product. While savings of enterprises declined after 1965, as personal incomes rose more rapidly than output, savings of households rose sharply so that household savings amounted to 27' of total domestic savings in 1967 as compared with 10' in 1965. Enterprise savings as a proportion of the total fell from b7c, in 1965 to 435 in 1967. Savings by sectors over the past four years are summarized in Table 4. - 7 - Table 4: Gross Savings by Sectors (billions of dinars at current prices) 196h 1965 1966 1967 i/ Economic enterprises 10.9 21.5 18.3 15.5 Other organizations 3.0 2.4 2.5 2.7 Households 2.5 3.3 8.7 9.7 Government and other 10.0 5.2 5.0 6.0 Total domestic savings 26.4 32.6 34.4 35.9 Savings from abroad 1.6 - 0.6 0.6 0.1 Total 28.0 32.0 35.0 36.0 Ratio of Domestic Savings of Social Product 43% 41% 35% 35 1/ Provisional: Figures of savings and investment are derived from differ- ent sources. There are some discrepancies which it has not yet been possible to reconcile. Source: National Bank, Annual Report, 1968 19. The decline in savings of enterprises in 1966 and 1967 was a factor contributing to the decline in fixed investment. Another was the absorption of resources in inventory accumulation. Enterprises used part of their own resources to finance inventories and also a substantial part of the savin;rs of households which were channelled into inventory financiog th'. h tKe banks, The balance of household savings wus usad to finance prLw . irlestment, mainly private housing and investments in peasant agriculture. Prices 20.. Following the price adjustments accompanying the Economic Reform. in July 1965, and subsequent further increases, major adjustments in relative producer prices had been brought about by the end of 1965. By comparison with 1963, prices of agricultural products had approximately doubled, prices of industrial raw materials had risen by about 40$ (e.g. non-ferrous metal prices had risen by F0,, steel prices by somewhat less) while prices of finished capital goods rose much less - on average by about 12-13%. Further but more moderate increases in producer prices occurred in 1966, again relatively greater in the case of agricultural products and raw materials for industry than for finished products. The rise in pro- ducer prices was halted in 1967, with no overall increase in industrial prices during the year, and a moderate decline in the prices of agricul- tural products. 21. Consumer prices were also zharply changed in July 1965. The overall increase was about 3014. Since then retail prices and the cost-of- living index have risen by about 6-7% a year. Rents and prices of services have risen most sharply. Rents were approximately doubled in July 1965 and were increased by about 25% in January 1967 and again in January 1968. With further increases the objective is to bring rents to an economic level by 1970. 22. Prices of about 90% of manufactured products were administratively controlled after the Economic Reform. A progressive freeing of prices has occurred and, at present, prices of about 55% of the value of industrial output are free as well as the prices of all agricultural products and imports. Prices of certain key-producer goods - e.g. electric power, iron and steel, non-ferrous metals, chemicals - are largely or wholly controlled. The broad objective of the authorities at the Reform was to align prices to the extent feasible -with prices in international markets, and to free prices when supplies seemed a2quate to meet demand and when imports could act as a check on price policies of domestic suppliers. Hence the freeing of prices is linked partly to import liberalization. Where monopolistic conditions exist, it is expected that price controls will be continued. 23. While the broad revision of relative prices, required by the Reform, has been achieved with favorable results, the subsequent freeing of prices appears to have led to some reversal of these changes. In some sectors competition has apparently been quite limited and the movement towards industrial integration may well reduce this further. When prices have been freed, enterprises in some sectors have attempted to re-establish earlier price relationships, and prices have been raised even where sales were slack and inventories accumui.ating. The rigidity of prices down- wards reflects a number of factors, some beyond the enterprise's control. Enterprises have been precluded from drawing on reserve funds to cover losses of working capital resulting from price reductions, and, in terms of the Constitution, could not incur capital losses of social capital. Under the conditions now existing, the authorities have introduced legal amendments which allow greater flexibility in the use of reserve funds and also the writing off of capital losses provided that such losses are recovered in subsequent years. In these circumstances, price reductions to clear excessive inventories should be made more readily but enter- prises holding large inventories will also be subject to pressure from a probable tightening of bank credit and measures to enforce faster settlement of inter-enterprise obligations. Price reductions on a limited scale have already occurred in order to stimulate sales, but it appears necessary to extend this in scope if inventories are to be reduced to more acceptable levels. -9- 1/ 2h. While the minimutn wage is set by law, wages are determined by each enterprise for each member of the working collective. The Workerst Council has the responsibility for determining what proportion of the income of the enterprise, after payments for inputs, taxes and other contributions, should be retained for reinvestment and what part paid out in personal incomes, and the Council decides on the incomes of all those in the enter- prise from the general director to the unskilled workman. This system has resulted in relatively narrow differentials between the highest and lowest incomes in the typical enterprise, the average spread for the country being about 4:1. In recent years, as Yugoslav workers have left in increasing numbers to work in Western European countries, wage dif- ferentials in some Yugoslav enterprises have had to be widened - to as much as 8 or 10:1 - to retain the more skilled. In other respects also market forces have affected wage levels, as evidence for example by the differences between wages in the more developed and less developed parts of the country - average wages in Slovenia are substantially higher than in Macedonia - and in the differentials existing between wages in different industries. In Yugoslavia, these differentials are not out of line with those in market economies, with workers in the oil industry, in steel, chemicals and engineering earning substantially more than workers in textiles. clothing, footwear and food processing. 21. , The increases in cons\-er prices accompanying the Reform were intended by Government to be offset by increases in wages. Nominal personal incomes in the second half of 1965 were about 30% greater than in the first half. They rose again, however, by more than 30y, in 1966 far more than the rise in consumer prices. Enterprises were in a position to in- crease personal incomes as a result of increases in prices, decreases in taxation, and a reduced rate of provision for depreciation. In line with the price changes of 1965, the assets of enterprises were to be re- valued as a basis for determining depreciation provisions and the capital tax. The revaluation of assets was not, however, completed and made effective until the end of 1966, so that enterprises in that year had larger funds to distribute in wages. The growth of personal incomes in 1967 was on average L%, less than half that of the year before. Import liberalization and restrictive credit policies put pressure on enterprises to moderate wage increases. Nevertheless with little or no increase in output and rising unemployment even this rise, which meant an increase in real incomes for the employed of 7% as compared with 12% in 1966, was felt to be excessive by the Government, and in those sectors where the rise had been greatest such as banking and public administration personal incomes were frozen by the Government in January 1968. 26. The average rise in nominal incomes in manufacturing industry in 1967 was 105. In some branches, where demand was high such as electric power, petroleum, chemicals and construction materials, increases were 1/ In Yugoslavia the term "wage" is not used; the Yugoslav term is "personal income". In the repcrt both terms are used with the same meaning. - 10 - substantially greater; in others much less, but in all branches wages increased even if output declined. This rise in personal incomes was made possible in part by deferring the payment of debts, as wage payments were given priority over payments for other inputs. A change in the law which would require an enterprise to give priority to meeting its debts is now being considered. 27. Increases in personal incomes on the scale of 1967 and stability in total output are clearly incompatible with stable prices. The Govern- ment's policy is that wages should increase in line with productivity gains, but it does not wish to encroach on the rights of enterprises to determine wage levels. It has exercised infhrnce through price controls, but the scope here diminishes with the progressive freeing of prices. Serious consideration is being given to other ways of influencing the growth of personal incomes, perhaps by regulating more closely the share of income which must be retained in the enterprises. Moreover, stricter payment of obligations by enterprises may be expected to have a consider- able impact on wage increases. 28. The problem must be considered in relation to the objectives of maintaining price stability and of securing an adequate rate of savings and investment, the needed structural changes.in the economy, and the modernization of industry. The large increases in personal incomes of the past two years had a less than proportionate impact on prices, partly because of greatly increased Dersonal savings and partly because of a greater demand for imports. The Government envisaged at the time of the Reform that the share of output going to investment would be smaller in the 1966-70 period than in earlier years. Since then, the total volume of investment has been less in question that its composition, and as indicated above, savings, though declining as a proportion of output, have nevertheless continued at a high level. Thus, although the moderni- zation of industry has been hampered by the decline in savings 'o enter- prises, this problem would have been eased if it had been possible more effectively to channel part of the sharply increased savings of households into productive investment rather than, as seems to have occurred, largely into inventory accumulation Employment 29. The fast growth of the economy until 1965 was accompanied by the movement of workers from private agriculture in manufacturing and other activities as indicated in paragraph 9. The numbers employed in the socialized sector approximately doubled in the decade ending in 1962, and increased by a further U to reach almost 3.6 million by 1965. Since then with the slowdown in the economy, average employment in the socialized sector has declined by 3.h%, while the numbers of registered unemployed rose from 267,000 in December 1965 to 291,000 in December 1967 and 338,000 in February 1968, equal to about 10% of employmenb in the socialized sector. The position was made more difficult by the increase in the num- bers of young workers coming into the labor market, as the post-war "baby boom" reached adulthood. New entrants to the labor market numbered about 130,000 in 1967, roughly double the numbers of four and five years earlier. - 11 - 30. The movement of workers from agriculture into manufacturing and other sectors had meant the employment of large numbers with no industrial tradition and few skills, although adult education and training programs were expanded rapidly. Many of these workers continued to operate their small farms while working in industry. This resulted in seasonal absenteeism and militated against the acquisition of greater industrial skills. The price changes accompanying the Economic Reform increased the returns avail- able in agriculture and at the same time put pressure on industrial enter- prises to economize in the use of labor. There has been a movement of part-time industrial workers back into full-time agriculture, which has eased the unemployment problem. The emigration of workers to Germany, France, Sweden and Austria, the principal destinations in irope, has also helped to absorb excess labor. Data on Yugoslavs working abroad are in- complete, but the numbers are estimated to have risen from 190,000 in 1964 to about 300,000 in 1967.. With the slowdown in the West German economy, the numbers of Yugoslavs eTployed there declined moderately in the past year, and the total employed abroad probably did not rise in 1967. 31. Unemployment has been more serious in some sectors than in others. Employment fell by 121 in coal mining in 1967 and by 13% in tobacco process- ing. In absolute terms, the greatest decline in employment occurred in socialized agriculture, where emphasis was placed on increased mechaniza- tion. Unemploynent is particularly serious also among younger people and those seeking work for the first time, who account for almost a third of the registerea unemplo,ed. While this is understandable in a period of declining c;mployment, the system of workers self-management, which gives all employecs a voice in management of the enterprise, seems to make it rather more difficult for the younger, better educated and more highly trained workers to replace the older and less educated workers than in other systems of industrial organization. This rigidity which may extend to the executive levels in an enterprise has been a factor in the rather slow adjustment by many enterprises to the new conditions brought about by the Economic Reform. 32. To relieve the unemployment problem in the short-term, the authori- ties are taking measures to stimulate a revival of the economy. Enterprises are now required by law to offer employment to qualified young people, though how this may work in practice is unclear. The situation is likely to be eased also by economic rccovery in West Germany. Part of the unemploy- ment is structural - for example in coal mining, as other fuels are in- cre;singly substituted for coal - which will be eased by re-training programs. In the longer-term the authorities hope to coordinate more closely the tvpes of training provided with those required as the economy develops. Though emphasis will continue to be placed on economy in the use of labor and on raising productivity, the countryts large labor reserve should con- tribute to a relatively fast growth of output when investment revives. - 12 - III. AG3'ICULTURZ Introduction 33. Agriculture contributes about 25% of Yugoslavia's gross social product and provides a livelihood for more than half the population. Private sector farms account for about 70% of total output, but a much smaller share (56%) of marketed production. Private holdings are limited by law to 10 hectares of arable land, but most farms are smaller, avor- aging 4.2 hectares, and are often fragmented. In the early years after the Second World War, the Government decided to establish large socially- owned enterprises in agriculture where the rapid application of modern technology would be possible. The social sector 1 now holds about 15W of the total cultivated area. Its holdings have increased by about 3% per annum in recent years largely through the purchase of private land. It is expected, however, that further growth of the economy over the long- run, with the accompanying shift of population to industry and urban areas, will accelerate the sale of private land to social enterprises. 34. There are marked differences between the relatively developed and less developed agricultural areas of Yugoslavia. The more developed areas are largely in the northern half of the country particularly in the rich Vojvodina area in northern Serbia, and in the Republics of Slovenia and Croatia. The Vojvodina alone contributes more than 20 of total and more than one-third of marketed agricultural output by value. The.more devel- oped areas are well integrated into the market economy while in the other areas (with about 30% of the country's population) subs:Lstence farming predominates. These areas are characterized by rapidly growing popula- tion, high demographic pressures on agricultural land, low productivity and incomes, and a relative absence of economic and social infrastructure. 35. Yugoslavia is principally a producer of cereals - mainly wheat and maize (which together account for about one-third of the value of total agricultural output), sugar beet, potatoes and meat. Tobacco is grown in Macedonia, and fruits, chiefly plums, apples and grapes throughout the country. Cereal production in 1966 totalled 13.3 million tons, 80' of which was produced on private holdings. Output of' industrial crops (mainly sugar beet, cotton, tobacco, hops, and oil seeds) was L.7 million tons in 1966. The private sector accounted for about hD,. Vegetable production was 5.4 million tons in 1966, of which private farmers produced 98 . The areas of major crops, the numbers of livestock, and the relative shares of the private and social sectors are shown in Table 5. 1/ The social sector, which in 1966 owned about L.b million hre of agri- cultural land, includes state farms, combination agricultural-in- dustrial enterprises (11combinat"), general agricultural cooperatives, peasant work cooperatives, and other organizations such as research stations. The state farms and combinats are the most important agricultural enterprises in terms of area, produDtion and employment. - 13 - Table 5. Areas of ajor_Ct.s and i,umbers of Livestock Total Social Sector Private Sector Areas of Maor Crops (million ha) Corn 2.5 8 92 Wheat 1.9 25 75 Potatoes 0.3 2 98 Sugar beet 0.1 50 50 Orchards 0.4 - - Meadows 1.9 10 90 These crops as % of total cultivated area 70% Livestock (million animals of av. wt.) 5.7 8% 92% Sources: Statistical Yearbook 1967; Statistical Pocketbook 1968. The Growth of Output 36. During the first years after World War II, the Yugoslav authorities gave priority to the development of manufacturing industry. Output in agriculture grew very slowly until the mid-1950's when production of wheat and maize was still below pre-war levels. As the disadvantages of lagging agriculture became clearer, more resources were devoted to it and over the next decade production increased substantially, as shown in Table 6. Table 6. Production of Selected Commodities Averages in 1000 tons commoditx 1930/39 1953/55 1963/65 1966/67 Wheat 2,646 2,362 3o729 L,710 IaiZe ,284 3,581 6,236 7,635 Sugar beet 616 1,381 2,707 3,815 Sunflower 9 113 252 266 Potatoes 1,6468 2,017 2,740 3,010 Meat 399 422 668 720 Source: Anpendix Table 7, and data supplied by the Yugoslav authorities. - 1L - 37. Despite this growth of output, Yugoslavia remained deficient in sone important foodstuffs, most notabJy wheat. YmrportE of wheat averaged 912 thousand tons annually during 1961-66, but recent gains in production have made the country self-sufficient, at least in good crop years. Other major agricultural imports are cotton, citrus fruit, coffee, wool, rub- ber, and hides. Imports of refined sugar have bulked large in most years (246,000 tons in 1966 and 113,000 tons in the first 11 months of 1967). E:panded domestic production, however, is now estimated to be sufficient to cover domestic requirements. 38. The growth in production since 1960 has been mainly on social farms as shohwn in Table 7. Table 7. Indices of Agricultural Production (1960 = 100) 196i 1962 2963 196L 1965 1966 19b7 1/ Agriculture (total) 97 100 111. 117 107 124 122 Social Sector 101 123 1h2 16h 16h 197 199 Private Farms 96 97 106 110 98 113 110 1/ Preliminary data, Source: Data suplied by the Tugcslav authorities. 39. The concentration of capital investment and the application of modern technology gave yields on social holdings consistently higher than in private agriculture and comparing favorably with yields in Western Europe. To bring modern technology to private farms, general agricultural cooperatives weve organized whose primary purpose was to stimulate and coordinate the production of small units. On private farms or7anized in such cooperatives, yields have also been high, though lower than on sccial farms. In the private sector proper, still the larger and morc backwird part of agriculture, low productivity and a high degree of self-sufiCiency prevail. - 15 - Table 8. Yields of Wheat and Maize NtMals Per ha7T Yugoslavia Social Private Holdigns Nether- Switzer- Germany Holdings Without In lands land F.R. .. cooperation cooperation Wheat (1964) 27 lb 19 19 31 7 37 36 (1965) 3 16 29 23 33 44 32 31 (1966) 38 n.a. 29 Naize 7964) 5h 22 h2 37 23 60 42 35 (1965) 169 17 34 32 40 42 42 36 (1967) 53 n.a. 14h Source: FAO Production Yearbuok 1966, and data supplied by the Yugoslav authorities. Prices Io. During most of the 1950's, prices of agricultural products were depressed, as part of the policy of stimulating the growth of manufacturing industry. Subsequently, to provide greater incentives, agricultural prices were allowed to rise. Between 1960 and 1963, agricultural prices increased 13c each year, and in 196h, with the decision that domestic pricOL; should be aligned with world market prices, agricultural prices rose by 2bic. The devaluation of the dinar in 1965 caused internal prices to be increased again to maintain parity with world prices at the new oechatnge rate. Prices of agricultural inputs over this period rose much less so that the net effect was very favorable to agricultural producers. hi. Although agricultural prices are allowed to f."ctuate, the Government maintains guaranteed support prices for cereals, livestock, and fresh plums. Tiilk and industrial crops have minirmum p.2.ces although the Government is ndcommitted to buy these products to support price levels, which have on occasion fallen below the official minima. Prices of industrial inputs in agriculture are no longer subsidized, except for fertilizers. Price changes since 1960 are shown in Table 9. - 16 - Table 9. Prices of Manuactureyd and A,ricultural Products 196h 1965 1966 1967 i7 Manufactured Goods 2 110 127 141 144 Chemicals for use in Agriculture 106 129 156 161 Agricultural machines and implements 100 108 114 116 gricultural Products 179 249 29 291 1/ Preliminary data. 2/ Producers' prices Source: Statistical Yearbook 1965, 1967. Marketing 42. With expanded farm output, the amount marketed over the past few years also has climbod substnrtially. Although difficult to measure, the liberalization of agricultura. marketing in 1965 probably aided the pro- cess. Before the reform, the general agricultural cooperatives held t monopoly in marketing farm products. Since then, individual farmers, cooperatives, and other agricultural enterprises., such as combinats, can freely sell their products in local urban markets, directly to large con- sumers (e.g. retail stores, restaurants, hotels, institutions, and the defense forces), or through the various business associations and trading enterprises. 03. In terms of value, about 40% of the agricultural social product has been-marketed each year since 1960 (although the figure dropped to 32; in 1965, bad crop year). The share of the social sector in total marketed production rose from 3L*< in 1960 to more than 50$ in 1967 as the area and output of this sector expanded, from-commodity to commodity. For wheat and rye, the social sector accounted for about two-thirds or more of the marketed volume over the past three years; in maize it accounted for 36-1/'J; in sugar beet 58-78:; in fattened cattle 41-45b; and in fattened pigs 35-44%. L1. For commodities produced in cooperation (i.e. on the land of individual farmers but under contract with cooperatives), the general agricultural cooperative has priority in their purchase. Similarly, there is a significant and growing amount of private farming under con- tract with agro-industrial enterprises (combinats). This produce is marketed through these enterprises which also purchase additional output from private farmers not producing under contract. Both cooperatives - 17 - and combinats deal with domestic and export enterprises in marketing their products, but frequently have their own commercial marketing organizations, export organizations, and retail outlets; some even has motel chains. The chief part (830t in 1966) of marketed private production is handled through agricultural cooperatives and combinats.. Investment and Credit 45. Figures of investment in agriculture since 1960 are of limited significance as there is no series available at constant prices. However, from available data on price changes, it appears that while real invest- ment in agriculture has risen, the rise was very much below the near doubling indicated by investments at current prices. The great bulk of investments in agriculture went to the social sector and with rising efficiency of capital invested output of this sector nearly doubled over the period. Interest rates on funds invested in agriculture were sub- sidized by Government in the past. Banks now lend for the most part at comriercial rates. This together with other changes in prices of inputs and outputs has stimulated a greater market orientation of investment and had contributed to the better use of capital. b6. While social sector enterprises can obtain short-term loans directly from banks, private farmers as a rule must rely upon cooperatives or con- tract farming arrangements with combinats or other enterprises for their production credits. Credits provided to private farmers through these means are for both investment (e.g dairy cows, breeding stock, equipment for broiler production) and short-term production needs such as seed, fertilizer, and pesticides. The investment credits usually are for about five years and the production credits for repayment at the end of -the year. Poth generally are repaid in kind. With recent reforms, commercial banks have begun also to advance private farmers'loans for the purchase of tractors and agricultural equipment and the construction of farm buildings. The Social and the Private Sectors 47. Although social holdings constitute a small part of total agri- cultural land, priority has been given to their development. Until 1965 assistance to private farmers was limited to that-obtained through the general cooperatives. These cooperatives own and lease land which they farm. They also assist both member and non-member private farmers as their main source of farm inputs, credit, and extension and machine services, and serve as the principal marketing agency for private farm production, usually under production contracts. Their collaboration with private agriculturalists expanded rapidly during the 1960's (as Table 10 below shows). Table 10. Collaboration of Social with Private Sector 1960 1966 Farmers cooperating (millions) 0.8 1.2 Area cultivated with social sector machinery in cooperation ('000 hectares) 986 1,592 Fertilizers supplied through cooperatives ('000 tong) 321 996 Pesticides supplied throu h cooperatives (t)0 tons V 12 Purebred cattle supplied brough cooperatives (1000) 39 1/ 1961. Source: Data supplied by the Yugoslav authorities. - 18 - The area cultivated (ploughed, sown, and harvested) on individual farms with social sector machinery in 1966 was about 181 of the total privately cultivated area, compared to approximately 11 in 1960. 08. With the Economic Reform, the private farmer was given greater latitude in his economic dealings. Previously he had been allowed to acquire agricultural machinery only through private importation (through Yugoslav workers returning from employment abroad) and through the dis- posal by the social sector of limited amounts of second hand equipment. gis other farm inputs and credit as well as the marketing of his produce were handled only through the cooperatives. The lifting of these re- strictions, together with the increased prices for agricultural products, however, constituted a marked change in the position of the private farne%, and, although the period during which the new conditions have operated is short, the response has been favorable 49. Production marketed from private farms has risen sharply since 1965, although good weather in the two succeeding years undoubtedly was a major factor. The number of tractors on private farms has mcre than doubled, rising from about 5,000 in 1965 to more than 12,000 at the cnd of 1966. Nevertheless, the general cooperative and the combinat still provide important services to the private farmer which he has difficulty in obtaining otherwise. Thus, it is expected that during the next five years the growth of output from the private sector in cooperation with combinats and cooperatives will be faster than that in the remainder of the private sector, The 1966-1970 Develozment Plan for Agriculture 50. The broad objectives of the 1966-1970 Development Plan for Agri- culture were to expand productton of wheat to meet the deficiency in Yugoslavia's requirements and to expand production of commodities for which the country is favorably placed in export markets, the emphasis being primarily on maize and meat. Total agricultural product was scheduled to rise by 25Z (L.6% annually) with output in social holdings rising by 11, annually, on private farms cooperating with the social sector by 1IS annually, and other private farms by 3% annually. The targets in the Plan for production of the main commodities are set out in Table 11. - 19 - Table 11. Targets of Production for the Main Commodities 1964/61 1970 Production Production Production Index ('000 tons) ('000 tons) (196.4/65 a 100) Wheat 3,580 4,600 125 Maize 6,440 81000 125 Cereals (total) 11,175 13,900 125 Grapes 1,185 1,220 103 Fruits 1 1,025 1,700 165 Vegetables 1,918 2,650 140 Meat 2/ 698 965 140 Milk (million liters) 2,334 31 3,160 135 Eggs (million) 1,736 07 2,440 140 1/ Average production 1959-65 was 1,300 tons. I/ Carcass weight. 3/ 1964 only. The principal export targets are set out in Table 12. Table 12. Export Projections in 1970 (O00 tons) 1965 1970 Agricultural Products aize 48 1 700 Neat 172 228 Fruits 63 104 Processed Agricultural Products Tobacco 22 35 Processed meats 40 50 Fish 19 30 1/ Exports of maize over the past few years have varied widely, ranging from 376,000 tons in 1961, 18,000 tons in 1964 to an estimated 786,000 tons in 1967. - 20 - 51. The 1970 targets for production of wheat and corn were realized in 1966. Wheat production rose further in 1967 and although maize pro- duction declined moderately in 1967 there seems little doubt that the targets for both wheat and maize are likely to be exceeded by 1970, unless that year is a particularly unfavorable season. 52. Meat production, however, fell increasingly behind Plan projections. The production of pork, Yugoslavia's major meat product, declined markedly mainly due to growing difficulties in export markets particularly within the EEC. Beef also was hit by EEC restrictions, coupled with some shift in urban consumption away from high-priced quality foods, such as meat, due to the rising food prices since 1965. Given the present outlook for exports and for domestic demand, it appears doubtful that the 1970 tar- gets for meat will be met. 53. Agricultural investment in fixed assets in the social sector also lagged behind Plan expectations. New investment averaged D 1,750 million annually during 1966-67, compared with the Plan's annual average of D 2,600 million. 54. With regard to exports, the 1970 target for maize was achieved in 1967 and further increases in maize exports may be possible. The major problem is the export of meat. The principal markets for meat have been the countries of the EEC, particularly Italy, and the United Kingdom. As the EEC has developed and implemented its agricultural policies, bar- riers to Yugoslav meat exports have risen. In the first instance, these barriers affected principally pork. Exports, in consequence, declined from $39 million in 1965 to $18 million in 1967. 55. Exports of beef and live cattle continued to rise, however, reaching 698 million in 1967. In the latter part of 1967 levies were raised by the Common Market to levels which made continued export in- creasingly unattractive. As a result, in the first two months of 1968 earnings from total livestock exports were 36% below the first two months of the preceding year. Although Yugoslavia is to negotiate with the EEC on the import levies on meat, the outcome and hence the prospects for meat exports are highly uncertain. 56. In the longer term, the Yugoslav export position may prove some- what more favorable. The OECD and FAO project a shortfall in the EEC of beef and veal in 1970 and 1975. In such a situation, Yugoslavia might be able to retain a share of imports into the EEC and at the same time exploit expanding markets in other countries, particularly Greece. W'ith improved market intelligence, greater efforts to seek out and develop new markets, and more flexibility in its meat production (e.g. larger emphasis on exporting processed and canned meats and selected cuts rather than whole carcasses, depending upon the market), Yugoslavia might be able to improve its present export prospects. Nevertheless, even on these rather favorable assumptions, it seems unlikely that exports of cattle beef and veal by-1970 would be significantly higher than in 1967. - 21- 57. For pork, export prospects in the LEC are unfavorable as it is expected that rising domestic demand ifill be met from expanded production within the Common Market. Yugoslavia hopes to expand pig meat exports to other countries, including the U.S., but again the prospects for any major increase in total quantities exported seem unfavorable. In the case of mutton and lamb, demand in the large importing countries is expected to increase more rapidly than production. Hence Yugoslavia might be ale to sbare in meeting this deficit provided that production can increase fast enough to provide an exportable surplus after meeting the expected rise in internal demand. Future Prospects 56. While some sectors of Yugoslav agriculture are at present facing difficulties, particularly in export markets, much progress has been made in the past few years in expanding agricultural production. This has had a favorable impact on the balance of payments. Although the problem of marketing meat for export seems unlikely to be quickly resolved, there are in the longer term prospects for expansion in this sector, and Yugoslavia should be able to market successfully increased exports of cereals, stock feeds, and on a limited acale fruit and vegetables. The country is in a position to meet growing domestic requirements of most foodstuffs with the exception of tropical fruits, coffee and cacao, but will continued.to be a net importer of textile fibers, rubber and hides. There is evidence that with technical developments crop yields may be less subject to seasonal varintions than in the past, but it is still possible that in poor years Iugoslavia may need to import part of her wheat requirements. 59. Natural resources and technical conditions point to.a longer term evolution of Yugoslavia's agriculture along the following lines: (a) large-scale mechanized cereal production in the northern plains in conjunction with livestock fattening, dairying, concentrated feed manufacture, meat and food processing; (b) {n this area, wheat production would be stabilized at b-5 million tons per year (roughly the current production), sufficient to meet domestic requirements, and corn output expanded to 10 million tons (8 million in 1967) of which 4 million tons would be exported; (c) increased irrigated farming limited initially to fruits, vegetables, and alfalfa, moving to other crops after improve- ments in dry land cultivation are largely exhausted; (d) in the less developed agricultural regions, concentra- tion upon livestock breeding, sheep raising, seed growing, barley, and fruits. - 22 - 60. Such an evolution cannot be expected to be brought about rapidly, implying as it does large-scale movements of population to industry and urban areas. It also implies large investments in associated facilities, such as processing plants, storage (including refrigerated storage) and improved marketing channels and in basic infrastructure, particularly improved communications both within and between the different regions of the country. 61. In the shorter term, priority is rightly being given to develop- ing the more productive agricultural areas first. Hence progress in the more backward areas is likely to be slow, though in social terms the need in such areas which have extensive under-employment and a high growth of population is great. This is, however, a wider problem which cannot be solved within the context of agriculture alone. - 23 - IV. FORESTRY 62. Although the role of forestry and forest industries in Yugoslavia is still small, forest resources constitute a major potential for develop- ment. In 1966, forestry accounted for only 1% of the gross social prod- uct, but wood and wood products constituted about 11% of total exports i/. Over 34 of the country's land area is covered by forests, making up 8.5% of Europe's total timber reserves. Yugoslavia's 1.2 billion m3 of forest resources are surpassed in Europe only by Finland, excluding the Soviet Union. Western Europe isa net importer of wood whose deficit is projected to increase from 20 million m3 in 1965.to 75 million m3 in 1975, and Yugoslavia should be well placed to satisfy at least part of this growing demand. 63. Yugoslavia's forest production is low because of still limited access to forest areas and the low stage of development in the wood pro- cessing industry.. Large areas of forest have no or inadequate access roads or rail connections. Where roads exist they are often poor and transport costs high. Many saw mills and processing plants are old, technically obsolete and too small to be economic, while the absence of modern plants to use wood by-products otherwise wasted reduces still further the economic attractiveness of forest exploitation. As a consequence, the average annual cut is only 1.7% of forest resources against a European average of 2.5%. 64. Yugoslavia's Developrrnt Plan for 1966-1970 recognized the under- utilization of forest resourcks and proposed to increase the average annual fellings from 21.5 million m3 to about 28 million m3 in 1970. In order to accomplish this goal, it proposed inter alia that 7,000 kms of forest roads should be built and that modern mechanized means of fell- ing and processing forest'resources should be further developed. The Plan envisaged that exports of wood and wood products would increase at approximately the same rate as total exports, i.e. 13-15% annually. 65 . Based upon performance to date and current prospects, it is doubtful that Yugoslavia will meet the Plan targets for foresty. T,,ble 13 below shows the 1966 and 1967 performance in investment and exports. Table 13. 1966 and 1967 Forestry Investment and Eyports (millions of dinars) 1966 1967 Target Actual Target Actual Investment 320 210 320 170 Exports 1,728 1,736 1,852 1,703 Source: Data supplied by Yugoslav authorities. -7 Exports of forest products, i.e. timber, sawnwood, processed wood and wood manfactures, and pulp and paper products totalled D 1,736 (US$139 million) in 1966 and D 1,703 million (=US$136 million) in 196,. - 2,1 - 66. Export prospects are encouraging, and internal demand for wood products, particularly paper and pulp, is expected to climb rapidly during the next several years. The forest potential of the country is such as to warrant greater emphasis being placed on forest development, but it is clear that large areas cannot be exploited economically until transport routes are improved. The new railway from Belgrade to the port of Bar on the southern Adriatic coast and a program for constructing access roads in Bosnia-Hercegovina will aid materially in opening up forest resources. - 25 - V. MANUFACTURING AND HINING The Growth of Output 67. Manufacturing and mining contributed 35% of gross social product in 1967. On the bats of the 1961 census, of the total economically active population (including the large private farm sector) less than 1% were engaged in manufacturing and mining. This proportion has risen somewhat since then. Prom 1953 until 1965 the average annual growth in industrial production was 12.5%. Thereafter growth slowed sharply; industrial output rose by b% in 1966 and there was no increase in 1967. 6B. Over the post-war period large investments have been made in new industrial capacity. There was also a major shift of workers from agriculture into manufacturing and allied activities (see paragraph 9). Output per worker increased rather slowly until 1960. Since then the growth in industrial employment and rising productivity contributed about equally to the expansion of manufacturing output. 69. Growth rates in industry have been diverse. In the immediate post-war period and during the 1950's there was heavy emphasis on developing the country's infrastructure and capital goods industries. Output of clectric power rose by 16% annually from 1952 to 1960, of steel 19. annually, while production of heavy electrical equipment rose by more than 20, annually. Prod.:ction and refining of petroleum, of chemicals and pulp and paper also grew rapidly, but output of some other basic materials, for example non-ferrous metals, rose more slowly, lagging behind the expansion of fabricating capacity (cf. Appendix Tables 10 and 11). Since 1960, more emphasis has been placed on the expansion of the consumer goods.industries and the capital goods and consumer goods industries now contribute abort equally to total industrial output. 70. The leading industries in terms of their contribution to social product are metal fabrication, textiles, chemicals, electricity and food products which together account for almost 50 per cent of total industrial output (cf. Appendix Table 9). Industry and Foreign Trade 71. In the earlier post-war years the growth of industry was designed primarily to meet the needs of the domestic market and with severe restric- tions on foreign trade, there was a rapid diversification of output. As industry grew, some production branches found that the domestic market alone was too small to achieve even the minimum economies of scale. This was particularly true for capital goods such as heavy electrical equip- ment; it was found difficult, however, to compete successfully with producers in the Wet. Various export incentives, including subsidies, were provided and Yugoslav manufacturers built up their exports of capital equipment mainly to Russia and other East European countries and to a more limited extent to countries of the developing world. - 26 - 72. Some other industrial branches, notably textiles, clothing, leath- er and footwear, established themselves primarily on the basis of the domestic market and then found it possible to compete successfully abroad. Such products have been sold to East European countries, but Yugoslav manufacturers have been able to compete also on Western markets, notably in West Germany and Italy. Bowever, the principal products exported to the West have been basic materials such as non-ferrous metals and rolled copper and aluminum products. Ttal exports of manufactures have risen rapidly since 1960, by 11.6% annually, and the share of exports in gross industrial output is now about 162,. 73. The growth of manufacturing has not made Yugoslavia less .dependent on imports. Major imports of raw materials and semi-finished products include coking coal, textile fibers and yarns, crude petroleum, chemicals and fertilizers, rolled steel products and plastics. Moreover, notwith- standing the development of the capital goods industries, Yugoslavia continues to import a substantial part of her needs of machinery and equip- ment, and here particularly the orientation of trade is mainly towards the West. The program of investment in industrial modernization now underway is likely to have an import content of not less than 30%, and for investments in machinery and equipment this proportion, based on past experience, will probably be of the order of 50C%. 74. The diversification of output and in many cases the small scale of production meant that enterprises had difficulty in competing success- fully with larger enterprises abroad, while the heavy expenditures on research and development in more developed countries imposed a heavy burden on Yugoslav enterprises in attempting to keep pace with technical change. The principal advantage of Yugoslav industry has been relatively low labor costs in relation to Western Europe and North America. The response of Yugoslav enterprises in these circumstances has been to enter into a variety of cooperative arrangements with both domestic and foreign partners. In the former case, cooperation has sometimes meant the merging of firms but in many cases looser forms of association have resulted in agreements on production planning, marketing and the organizing of exports without a full merger. Cooperative arrangements with foreign partners have usually involved licensing agreements to produce copies of the foreign product for sale in Yugoslavia. In some cases the Yugoslav and foreign enterprise exchange components for their respective product lines, and in a few cases the Yugoslav enterprise has become a major supplier of a particular item in the foreign partner's range of products. Industry and the Economic Reform 75. Considerable progress along these lines had been made by tiie early 1960's. Many enterprises had striven to modernize their production processes, to specialize in production and to keep abreast of tnchnicol progress. Nevertheless progress was limited as long as severe restrictions on foreign trade remained, and as long as political bodies had a Lire influence in investment decisions which tended to hamper the reorganiza- tion of industry required by economic considerations. Furthermore, while many Yugoslav exporters could find markets in Eastern Europe for their products, they could not sell in the West. Imports from the East were - 27 - often not competitive in price and quality with those available in the West. Hence enterprises looked mainly to the West for imports of equip- ment and components, as well as for new technical know-how. Thus in relation to the manufacturing sector, the Economic Reform of 1965 was designed to curb the influence of political bodies in the direction of industry, and to promote the modernization of industry by orienting pro- duction and trade increasingly to Western technology and Western markets, which implied the further development of those branches where Yugoslavia had particular advantages. The specific steps taken to achieve these ends are summarized in paragraph-6. 76. The impact of these various measures has been felt increasingly since July 1965. Devaluation stimulated exports of manufactures in 1966, but the major changes in relative internal prices hit some industrial branches as did other cost increases arising from devaluation itself and the growth in personal incomes. The slowdown in the West German economy in 1967 led to reduced imports from Yugoslavia, and at the same time stimulated exports to Yugoslavia. Some industrial branches were hard hit by the liberalization of imports and by the tariff reduqtions accompanying the Reform just as other branches benefitted. The decline in fixed invest- ment in 1966 and 1967 at a time of increasing imports of capital equip- inent depressed donand for domestic producers' goods, while the rise in private consumption was largely concentrated on imports and a few domestic products, particularly automobiles. Production of cars rose by 27/ in 1967 to !A8,000 while car imports rose by 1505, to 52,000. As a result of these various factors, outpub of capital goods rose by only 15 in 1967 after a 2/, rise in 1966, while output of consumer goods fell by 15 in 1967 after a 5 rise in 1966. 77. Although industrial production rose by only 2% on average in the past two years, even this slow growth largely reflected production for inventory. Stocks of nanufactured products rose almost 55% in the past two years. Some part of the rise in inventories in 1967.reflected the stocking of materials the import of which had been liberalized, but much of the total increase in inventories was of finished products which in quality or price could not compete with imports after liberalization. Had inventories not been permitted to increase, industrial production would have declined in 1967. 78. While the growth of industrial production as a whole has sharply slowed since the Economic Reform, some industrial branches have continued to expand at a fast pace. Output of electricity, petroleum fuels, paper products, and some chemicals has risen substantially as well as the production of automobiles. Nevertheless the prospects for growth of total industrial output in 1968 are not considered satisfactory and the authorities have taken a variety of measures to help stimulate recovery. 79. While adhering to the basic policy objectives of recent years, the authorities will assist certain branches of industry hard-hit by the tariff reductions and import liberalization. One industry particularly hard-hit was the steel industry. Domestic steel prices are.competitive - 28 - with domestic prices in Western Europe. However, with excess capacity in the more advanced countries and export prices much below domestic prices, Yugoslav steel producers could not compete with average tariff protection of only 6.5% once imports had been liberalized. The Government has agreed to give assistance to the steel industry by levying supplementary duties on steel products, increasing the average tariff to 12%, and has placed greater restrictions on imports of some steel products. These supplementary duties have been imposed in terms of regulations making provision for such duties and also for compensatory taxes when the competing import enjoys a subsidy in the exporting country. Although assistance is likely to be given also to other industrial branches through supplementary customs duties or levies to offset export subsidies, such assistance will be given on a selective basis and only after careful study of the likely impact on other branches of the economy. Import quotas may also be imposed as a temporary measure. 80. Apart from assisting industry by giving additional protection on a selective basis, further steps have been taken to expand medium-term credits in order that domestic suppliers of equipment can compete more effectively with foreign competitors both in the domestic market and abroad, and additional credit will be given to finance production for export. These as well as mezsures to stimulate consumer demand and home construction are expected to plovide a sufficient stimulus in 1968 to make possible an increase in industrial production for the year of about The Economic Reform and Structural Changes 81. The difficulties confronting manufacturing industry over the past two years were greater than expected at the time of the Economic Rform. Nevertheless progress has been made in particular sectors in accordance with the objectives of the Reform, although the modernization of industry has been hampered by the shortage of investment funds. Investment in different industrial branches (cf. Appendix Table 11) since 196h, the year preceding the Reform, has been oriented increasingly to the pro- duction and processing of petroleum and the expansion of output of non- ferrous metals and chemicals, particularly fertilizers. These three branches absorbed one-third of all fixed investments in industry in 1967 against 19% in 1964. Iron and steel continued to absorb 18-19% of total fixed industrial investment, while the shares of most other branches declined, with above average declines in metal working, electrical equip- ment, and textiles. In these branches particularly, specialization and modernization are important if Yugoslav enterprises are to compete success- fully with foreign producers. 82. The integration of enterprises and greater specialization in pro- duction is proceeding. For example, Yugoslavia's six steel plants havo over several years coordinated production planning and investment programs, each specializing in particular products to achieve essential economies of scale. Six shipyards have recently formed an association with the object of achieving greater specialization in output and economies in operation. - 29 - In the past two years a leading producer of heavy electrical equipment has reduced its range of products by approximately one-third, and a leading machine-tool manufacturer by about one-half. Such changes are taking place over a wide field, and the quality of many products has been improved under the stimulus of import liberalization. Nevertheless, many enterprises have understandably found difficulty in adjusting to the new conditions brought about by the Reform, and the Government is con- sidering additional measures such as tax incentives or special credit facilities to promote the more rapid integration and specialization of industrial branches. Industry and the 1966-70 Develoment Plan 83. A growth of industrial production of 9-10% annually was forecast in the 1966-70 Development Plan; and this will not be realized. Of the remaining years of the Plan period, 1968 is the only one for which a revised target growth rate has been set so far. Although the growth of industrial output as a whole will be substantially below the Plan target, substantial investments in particular branches of industry are proceeding approximately in accordance with the Plan projections except in the case of aluminum, and the additional capacities forecast for these branches are expected to be realized, though perhaps with some delay. These capacities are sum- marized below: Table 1. Planned Capacities in Selected Industrial Branches 1967 1970 1972 Electric generating (M.W.) Capacity 3,672 6,370 7,070 Steel (million tons) 1.8 3.2 3.6 Oil refining (million tons) b.5 8.7 la.1 Copper - primary ('000 tons) 50.0 80.0 100.0 Lead ('000 tons) 94.0 160.0 200.0 (approx.) Zinc ('000 tons) 53.0 90.0 125.0 (approx.) Aluminum ('000 tons) 15.0 n.al/ 100.0 (approx.) 1/ n.a. - not available Source: Data supplied by the Yugoslav authorities. - 30 - The project to establish a new aluminum smelter has been delayed by difficulties in securing finance and the assurance of profitable market outlets abroad. 64. While the Plan envisaged that total investment in industry (including electricity) over the five years would be nearly D 6 billion, invest- ments during the first two years of the Plan were approximately D 16 billion, a at 1966- prices. No revised estimates of total investment in industry have yet been made, but in certain branches the planning of projects is well advanced and the estimated investments from January 1, 1968 in these branches, which include iron and steel, non-ferrous metals, chemicals, petroleum and electricity and are broadly in accord with the Plan targets, total almost D 15 billion. (cf. Chapter 10, Table 22.) Some of these projects will not be completed until after 1970, notably those in iron and steel, non-ferrous metals and the later stages of the electric power installations of the Iron Gates project on the Danube. Nevertheless the major part of the investments projected is expected to be made through 1970, and these investments will comprise a large part of total invest- ment in mining and manufacturing in the next fthree years. 85. Apart from the branches for which estimates of investment are available, emphasis will also be placed on the developme2t of timber re- sources, particularly the production of wood and wood products and pulp and paper, an expansion of clothing and footwear and other leather products, and on those branches of the metal industry which are relatively labor intensive such as precision inchanics and foundry products. In all these branches the prospects for export to convertible currency markets are relatively favorable in spite of certain increases in tariffs resulting from the application of the common tariff of the EEC and the increase in compensatory duties in West Germany following the introduction of the new value-added tax. These increases in tariffs are expected to be largely, if not wholly, offset by tariff reductions negotiated in the Kennedy Round. 86. In certain other branches, for example the heavy electrical equip- ment industry, prospects are less clear, but there seem reasonable chances of Yugoslavia being able to maintain and expand exports to East European countries as well as to sell part of production in other markets. Yugoslav shipyards have on hand orders for over 1 million tons and expect to launch this year 320,000 tons. Here again the principal markets are in Russian and other clearing account countries, but limited orders have been re- ceived from the West. In the automobile industry a recent agreement between Fiat and a leading Yugoslav producer envisages a major expansion of output to 75,000 vehicles by 1969 and 130,000 by 1972. This agreement is the first involving a foreign private investment in a Yugoslav enter- prise in terms of The enabling law passed in July 1967. Fiat will invest approximately ')10 million equivalent in the enterprise and will then have 10.6% share in the capital. The agreement envisages the provision of modern machinery and equipment, technical assistance and the training of personnel by Fiat, and the export of components to other Fiat enter- prises to the value of almost 50 million over ten years. The agreement - 31 - follows a decade of association between Fiat and the Yugoslav partner during which the latter produced a linited range of Fiat products under license. The Yugoslav authorities have laid considerable stress on the need to attract equity participations in Yugoslav enterprises by private investors from the West, with the objective of obtaining access to modern technologies and marketing channels as well as investment finance. While there has been sone disappointment at the rather slow progress to date, the chances for such private investments are probably greater where there has been an earlier association between the potential foreign investor and the Yugoslav enterprise, as in the case of Fiat. - 32 - VI. TOURISI1 87. International tourism has become an important sector of the Yugoslav economy and a major earner of foreign exchange over the past decade. Foreign tourists number 0.6 million in 1958 and 3.7 million in 1967, the average annual rate of growth being 20%. Noreover the rate of growth has risen since 1962 as more and better facilities have been pro- vided. Since that year the number of foreign visitors has risen by almost 25% annually and gross foreign exchange earnings have risen by 36% annually to reach $150 million equivalent in 1967. 88. The great majority (80%) of foreign tourists visit resorts along the Dalpatian coast, principally during the months from June to September. About 905 of foreign tourists come by road and all but 3/ from European countries, with visitors from the Federal German Republic and Austria comprising almost one-half of the total. Most of the remainder come from countries in Western Europe. Hence the bulk of earnings are in convertible currencies, and tourism has already become the largest single earner (on a gross basis) of convertible exchange. 89. In these circumstances, the Yugoslav authorities rightly place emphasis on efforts to incrense the flow of tourists by directing invest- ments into new tourist facil>iies and into the basic infrastructure, such as new highway connections, of particularimportance to the foreign visitor. In the past six years, nearly 48,000 beds in new hotels, boarding houses and motels have been providod to reach a total of 115 000 in August 1967. Supplementary accommodations in private homes, youth hostels, camp sites, etc., provided another 420,000 beds at that date. In 1968 20,000 beds in hotels, motels, etc., are expected to be added and it is hoped that a further 50,000 beds can be added over the two succeeding years. Invest- ment in new hotels is encouraged by the Federal and local governments providing interest rate premiums up to 7% on funds provided by banks and enterprises for such investment, and partly as a result of this measure fixed investment in hotels and other tourist facilities is estimated to have reached D 1 billion in 1967, more than twice the amount of 1966. 90. There are plans to improve highway connections in the next several years particularly from the Austrian and Italian frontiers to the main tourist centers on the northern Adriatic coast, and the highway from Skopje to Titograd in Montenegro to connect the Adriatic highway in Yugoslavia iwith Macedonia and Greece. In the longer-term investments will be required in facilities to supply water from inland sources to growing tourist centers along the relatively arid south Adriatic coast. Preliminary plannigg has already started in this connection as part of an overall development and land use plan of the southern Adriatic region being made with the assistance of the UN Special Fund. 91. The projected investments in new hotels, motels, etc., would approximately double the number of beds in these facilities in only four years. This target may prove too ambitious, but there is ev-idence that growth in the past might have been even faster, if more adequate facilities - 33 - had been available. Hence, having regard to Yugoslavia's favorable geographical position, the great beauty of the country and the continuing provision of new tourist facilities, it seems reasonable to expect a continued fast growth in earnings from foreign tourism, provided that the European economy continues to expand and Yugoslav prices remain competitive. - 314 - VII. 3A7TING AND CPEDIT 92. The Yugoslav banking system has been greatly modified over the past twenty years, as described in earlier economic reports, and with the new Banking Law of !-larch 1965, the changes in the organization of banks and in the conditions under which they function are designed to lead to a banking structure which can operate effectively in a market oriented economy. 93. The banking system consists of the National Bank of Yugos!avia (the central bank) and the business banks which numbered 8O on March 31, 1968. Among the business banks there were 9 banks classified as invest- ment banks, principally engaged in longer term lending, 39 commercial banks engaged in short-term operations, and 36 "mixed" banks engaged in both long- and short-term operations. 9b. The 1965 Banking law removed the geographical restrictions on banks in order to promote competition between a limited number of larger banks capable of mobilizing greater resources and channelling these re- sources to all parts of the country. Many bank mergers have occurred - the number of banks has fallen from more than 200 in 1965 to K& - and further mergers are expected. No bank has yet established a nationwide network of branches, and a fairly clear demarcation on republican lines has emerged, although a few banks have established branches in republics other than their "home" republic. 95. The Reform envisaged that the banks would play an important role in mobilizing savings and channelling these resources to productive invest- ment. While government funds channelled through the banks still account for a substantial part - LO1 in 1967 - of investment credits, in the past two years the banks have succeeded in mobilizing savings from enterprises and households- time deposits rose from D 3.3 billion to D 11.7 billion over the period - which have been used for investment financing. Interest rates offered on time deposits have been high - up to 9 - while lending rates are normally 7'5 or 8). The banks' lending policies are guided by their judgment of an enterprise's profitability when disposing of their "own" funds, but Government funds channelled through the banks are made available for particular purposes and often at less than the market rate of interest. 96. Following the changes in credit control mechanisms in 1965 and 1966 the main emphasis has been placed an quantitative rather than quali- tative controls. In earlier years the regulation of short-term bank credits to enterprises had defined the conditions under which and the hrposes for which the commercial banks could lend, with almost automatic rediscount facilities at the National Bank. From the end of 1966, however, the commercial banks were given greater discretion in their lending opera- tions while the National Bank aimed to control the overall volume of credit by regulating its own lending to the commercial banks. In the past year the National Bank has followed broadly this approach but in addition it has provided special rediscount facilities for particular purposes. Thes special facilities seem likely to be continued and perhaps extended in - 35 - the future. The princ pal instruments of credit control are at present the minimum reserve requirements and rediscount facilities. 97. Selected figures relating to the short-term operations of the commercial banks are summarized in Table 1. Table 15. Short-term Credits and Selected Liabilities of the Commercial 3anks (billions of dinars) Credit Short-term Credit Demand Sight-Savings Re- from fHouse- stricted National Year Total Enterprises holds Other Deposits Deposits Deposits Bank 19c{ 25.6 20.8 L.1 0.7 13.9 3.7 3.0 1U.7 1965 27.7 23. 3.8 0.5 16.0 4.3 5.3 14.7 1966 28.9 25.2 3.2 0.5 13.7 5.7 6.2 12.8 1967 3C.9 28.3 2.5 0.2 13.2 6.2 6.6 11.6 Source: Statisticki Bilten, No. 2, 1968. 98. The money supply over the period 1964-66 rose by only 2.2% annually and declined marginally in 1967. Within the total, however, demand deposits declined while currency in the hands of the public rose by 73X, reflecting the large wage increases over the period. Currency is legal tender be- tween the sociali?ed sector and the population and within the private sector. Currency is not legal tender within the socialized sectcr and payments are made through the giro account sysLem. Individuals may have savinis deposits which cannot be used for making payments but can be withdrawn on demand. 99. In Ea,iporting the Economiz Reform and the subsequent import liberalization, the monetary authorities have pursued restrictive credit policies since 1964. Short-term credit to the economy from the commercial banks rose by only 6.5% annually in the three years ending December 1967. Having regard to the growth in output and the large price adjustments over this period, credit policy was highly restrictive and undoubtedly contributed to the sharp slowdown in the economy in 1967. Nevertheless, having regard to the objectives of the Reform and particularly the major liberalization of imports effected in January 1967, it is doubtful whether a less restrictive policy could have been followed without serious effects on the balance of payments. - 36 - 100. In 1967, short-term credits were eased somewhat with a rise in credits outstanding of almost 7%, compared with [ 3 in 1966. Credit from the National Bank to the commercial banks continued to decline, hovever, and the resources for expanding short-term credits came prin- cipally from sight-savings deposits of households and foreign exchange credits. As a proportion of commercial bank short-term lending, credit from the National Bank fell from 57% in 196L to 37% in 1967. Although the National Bank felt that savings of the population should be used to finance consumer credits, the commercial banks channelled these funds to economic enterprises, where they became partly frozen in inventory accumulation. This was particularly unfortunate as this use of house- hold savings depressed consumer demand and made the problem of inventories still more difficult. While credit restriction was designed in part to put pressure on enterprises to dispose of inventories by cutting prices, and some price reductions have occurred, the resistance to such action appears strong. Hoping for a recovery in demand, many enterprises con- tinued to produce for inventory, financing this from short-term bank credit, from investment credits and depreciation reserves, and by trade credits of which the total outstanding rose from D 17.8 billion in 190L1 to D 51.1 billion by the end of 1967. Data on the turnover of bank credits is not available, but the evidence points to a considerable slowdown in turnover with ma4v credits frozen. The sharp rise in trade credits outstanding, which ma' inly reflects the non-payment of inter- enterprise obli-,ations, makes the overall situation still more difficult. Some bank lending appears in retrospect to have been unwise, but the banks like the enterprises found thomselves operating under changed conjitiois with which they were unfamiliar. 101. As a step to improve the liquidity position of enterprises, a law was passed early in 1968 to provide a framework within which trade credits could be offset, and with the banks extondinr 8ome edditional credits under careful supervision it is hoped that the total of trade credits outstanding can be reduced to more normal levels. 102. Credit policy will be eased in a number of respects. Additional credit to finance production for export will be provided in addition to the credits provided earlier to finance the export trade. Medium-term credits to finance the sale of capital equipment, both at home and abroad, will be expanded. The rediscount limit will be raised from 15, to 20. Restrictions on consumer credits will be lifted, both in respect of the amount and terms of such credits, which will be left at the discretion of the business banks. The legal maximum interest rate has been reduced from 10 to 8%. 103. While credit will be expanded on a selective basis, a broader expansion of credit to stimulate economic recovery would threaten a larger deficit on the balance of payments at a time when convertible foreign exchange reserves are still low. Measures need to be devised to free resources frozen in inventory accumulation for investment in modernization without at the same time causing inflationary pressures. This involves shifts in real resources as well as in financial resources and cannot - 37 - easily be brought about. Nevertheless the banks have an important role to play in putting pressure on enterprises to cut prices to dispose of in- ventories and in directing both long- and short-term funds to those enter- prises capable of using them most effectively. The process of freeing frozen credits is difficult and likely to be slow. Some banks may founder in the process and be taken over by stronger institutions. Such a consoli- dation of banks is desirable for other reasons. Even the largest banks today cannot provide the loan resources required for the larger projects in the country; banking consortia have been established in these circumstances but further bank mergers are expected. A structure with a few major banks operating in several republics or throughout the country, by securing a greater mobility of funds, should promote the more effective use of finan- cial resources. Furthermore such a structure could probably made better use of the still scarce banking expertise and experience available in the country. - 38 - VIII. PUBLIC PINANCE 10. The fiscal changes associated with the Economic Reform were designed to reduce the total burden of taxation on the economy, and to reduce the impact of the budget on the pattern of production and invest- vent. Taxes on the income of enterprises were abolished and rates of tax on personal incomes reduced. The turnover tax structure was greatly simplified and the tax was irposed only at the level of Anal sales. The tax on the capital (equity) of enterprises was simplified (the proceeds of this tax, used to finance investment and the development of the less developed regions are not included in the budget) and if the role of the Federation in financing investment is further reduced in future, which is presently expected, the rate of the capital tax is likely to be reduced. 105. The weight of direct taxes and social security contributions on individuals has been considerably eased since the early 19601s; for example, taxes and contributions amounted to 37-365 of gross incomes of workers in enterprises in 1961-63 but 31' in 1967. The burden of customs duties has also been reduced with the approximate halving of custons duty rates in 1965. The we it of turnover taxes in relations to inal sales has been sligntly eased iron about 12.5 in 1963/60 to 10.0 in 2967. The overall impact of these changes may be sunmarized as follows: defining the public sector breadly, as including the governnents, soctAl security and other public funts, tax revenues of governments and social funds amounted to about 50 of gross material social product in 1943 (before the ?forn) but less than LCY in 1967, while revenues of govern- ments alone amounted to about 30 of social product in 193 and 20 in 1567. 106. "1ith the Reform the impact of the budget on the economy was modified also by changes in expenditure. Subsidies to the economy of various kinds were greatly reduced and with the abolition of the social investment funds government's share in the financing of investment was sharply curtailed. 107. The approach to budgeting has been conservative. Governments at the Federal , Republican and local levels are now precluded by law from short-term borrowing from the banking system to cover seasonal shortfalls in revenues, and are required to build up reserve funds to cover this need. Governments are permitted to borrow long-term resources from banks to finance investment. Such borrowings have been small. After meeting investment expenditures included in the budget, all governments together recorded surpluses in each of the past four years, though there was a small deficit on the Federal budget, equal to 3.5% of expenditures, in 1965. On the broader definition of the public sector, current revenues have considerably exceeded current expenditures, with the surplus being used mainly to finance investment. In 1967, the current surplus exceeded 11% of total revenues. On the budget proper (cf. Table 16) the current surplus was 7.5% of current revenues in 1967. - 39 - In. The principal sources of revenue are turnover taxes, taxes on personal incomes and customs duties. Turnover taxes levied by Federal, Republican and local governments yielded about 40 of revenues in 1967, personal income taxes about 33% and customs duties 11%. 109. Defense absorbs 27.5% of total government expenditures (about 60% of the Federal budget), social services about 30%, administration 170 "Non-economic" investments refer primarily to the construction of adminis- trative buildings, schools, etc. "Economic" investments are excluded from the budget as are many economic and social services. A summary of budgetary revenues and expenditures is shown in Table 16. Table 16. Revenues and Expenditures of All Budgets 1/ (billions of dinars) 1965 1966 1967 Revenues Turnover to:s 5.4 7.1 .1/ Taxes on prsonal incoves . 5.0 5.1 6.7 Customs duMies 2.0 1.9 2.32/ Othe revennes 3.6 3.5 3.0 16.0 17.6 20.2 7ypndfiturs Administration and defense 7.0 8.3 8.7 Social services 3.6 4.3 5A 5rants for extra-budge0.:.ry funds 1.0 1.1 1.9 Other current expenditures 3.3 2.6 2.7 Total current expenditures 1h.9 16.3 18.7 "Non-economic" investments 1.0 0.9 1.0 Total expenditures 15.9 17.2 19.7 Surplus 0.1 0.4 0.5 !/ Including Federal, Republican and local government budgets. 2/ Proisional 3/ Mission estimate Source: Data supplied by the Yugoslav authorities. - LO - 109. With the trend to further decentralization in Yugoslavia with services organized increasingly on the basis of local autonomy and with diminishing intervention by the public authorities in economic affairs as exemplified by diminishing subsidies to the economy and smaller govern- ment investments, budgets in future may record little more than appropria- tions for defense, internal security and administration, while other services will be reflected in extra-budgetary funds. This is already largely true of the Federal budget, where defense and administration absorb 70%O of expenditures estimated for 1968. 110. The trend towards decentralization, reflects, inter alia, the complex political structure of Yugoslavia, and also the view of the authorities that centralization in the past has led to mistakes in invest- ment decisions and an uneconomic use of resources. It is felt that people at the regional or local level have greater knowledge of and are better able to decide on provisions to be made for services such as education, highways, water supplies, etc, and it is the intention that the provision of these services should become increasingly the responsibility of local self-managing entities, though under the broad direction of governments at the appropriate level. It is recognized that local needs cannot be viewed in isolation and that coordination is required. buch coordination is and will be provided at various levels, partly through political bodies (Parliaments) and partly through the administration. At present, however, the emphasis on decentralization is strong and the problems of coordina- tion seem to be receiving less attention. 111. The narrowing of the -cope of the budget bears also on its use as a broad regulator of the economy. It seems time to say that in the task of regulating the economy in recent years little emphasis has been placed on fiscal policy. Credit policy has been the main, if not the sole, instrument used to control the overall level of activity. The authorities appear to be aware that an excessive burden has been placed on credit policy, and that other instruments of control are required. But thinking on the use of fiscal policy in this context does not appear to have progressed far, and it seems likely that a highly decentralized system of providing public services would make the use of fiscal policy in this context considerably more difficult. - L1 - IX. EXTERNAL TRADE AND TIE BALANCE OF PAYMENTS External Trade 112. The rapid growth of the Yugoslav economy since the early 1950's has been accompanied by a rapid growth of foreign trade. Exports since 1953 have risen on average by about 130 annually and imports by 11% annually. The value of invisible transactions has also risen atafast pace, parti- cularly in more recent years. Invisible earnings, mainly from transport-- tion and tourism, have risen by 25% annually since 1960, while expendi- tures, chiefly on transportation and interest payments, have risen by 21 annually. 113. The growth of exports was accompanied by a marked change in their eorposition. The share of finished manufactures in total exports rose fron only 3 in 1953 to 36% in 1966, while that of raw materials and semi- manufactures (including bass metals) fell from about 65% to less than one- tthird. Food, drink and tobacco accounted for almost a quarter of total exports in 1966, about the same proportion as in 1953. The composition of Lmporto has changed less radically. The share of food, drink and tobacco has declined rather slowly; it was 10% in 1967 but has been reatly affected by seasonal variations in domestic agricultural output. Materials for industry and capital equipment have constituted the bulk of imports, togetler accounting for about three-quarters of the total. Consumer goods excluding foodstuffs have been less than 10% of imports in recent yoars, though there was a sharp increase in 1967 following import li1eralization. 1Ib. Approximately half of all exports go to bilateral partners - principally the U.S.S.R. and East European countries - and more than one-third of all imports come from bilateral partners. The substantial deficit in trade with convertible currency countries in recent years has been covered mainly by net earnings from invisibles. 112. Exports to convertible currency markets consist largely of primary products or semi-manufactures, including foodstuffs (mainly meat and maize), tobacco, wood and wood products and non-ferrous metals. These categories accounted for 60% of all exports to convertible markets in 1966. Exports to bilateral markets consist largely of manufactures including a high proportion of capital goods. _16. Imports from convertible currency areas consist mainly of manufactures, largely chemicals, steel and capital equipment, and wheat. Imports from bilateral partners include tropical foodstuffs, crude materials and capital goods, the latter mainly from Russia and East European countries. 117. Italy and the Federal German Republic are Yugoslavia's principal trading partners among convertible currency countries and the U.S.S.R. among bilateral trading partners. - 42 - 118. Russian and East European countries offer favorable markets for Yugoslav exports of manufactures by comparison with convertible currency countries, but in terms of quality and price are not for the most part competitive with Western Europe and the United States as sources of supply of Yugoslav imports. Hence a problem has been the persistent tendency for Yugoslavia to build up surpluses under bilateral payments agreements with the Communist countries, while the actual and the larger potential deficit in trade with the convertible area has necessitated a rather complex system of rationing convertible currency earnings. 119. As an essential part of the Economic Reform, the Yugoslav authori- ties aimed to integrate the Yugoslav economy more fully into the world economy, sharing to a greater extent in the international division of labor. To this end the dinar was devalued in July 1965 and customs tariff rates were approximately halved; Yugoslavia became a full member of the G.A.T,T. in August 1966, and substantially liberalized her imports from January 1967. 120. About 25% of imports from convertible currency countries were fully liberalized in 1967 and a further 20% of Imports were liberalized subject to the prior fulfillment of obligations under bilateral trade agreements. Taking into account other changes in inport regulations it is estimated that about 50a of all imports were liberalized in varying degree. The extent of liberalization was greatest for raw materials and components and least for consumer goods (though it became possible to import a substantial nunber of consumer products which had formerly been excluded). The effect of libgralization was a sharp increase in imports from the convertible area in 1967. Imports from East liEropean countries fell by 10% while imports from EEC and EFTA countries rose by almost 60% and 22% respectively. Exports were also directed more to the convertible area, those to bilateral partners falling by almost 3% while those to the convertible area rose by 8Z. 121. As a result of these developments the adverse balance of trade with the convertible area reached a record $440 million in 1967. With a small deficit on trade with bilateral partners as well, the overall adverse balance of trade was also a record at '455 million. Balance of Payments 122. The trade deficits of recent years have been covered in the main by net earnings from tourism and transportation, other services and workers' remittances. The balance of payments is summarized in Table 17. - 3 - Table 17. Balance of Payments Summary (miLlion of dollars) 1964 1265 1966 1 A. Goods and Services Exports (f.o.b,) 893 1,092 1,220 1,253 Imports (c.i.i.) 13323 1708 Trade balance -430 -196 -355 -455 Services (net) 163 192 261 362 Current balance -267 -4 -94 -93 P. Trnnsfer Payments Private 48 47 48 32 Covernment 20 30 11 - Total (A and B) -199 -73 -35 -61 i, CapitYL Transactions loi-trri capital (net) 151 163 204 157 Exhports credits (net) -33 -44 -39 -43 Short-term capital / 6o -126 -87 19 D. Monetary 141ovements Net INF position -30 35 -10 33 Bilateral balances (increase -) 32 -74 -23 -94 Cold and convertible exchange (increase -) 19 -27 -10 -11 1/ Preliminary. 2l Including errors and omissions. Source: Appendix Table 20. - L - 123. Gross earnings from tourism have risen rapidly (by 37% annually) in the past five years. The rate of growth has slowed but was as high as 28 in 1967. Though the foreign currency allowance for Yugoslavs travelling abroad is small (only $50 per head) tourist expenditures abroad also rose rapidly, but net earnings from tourism were a record in 1967 at almost $100 million. Earnings from transportation are considerably larger. Freights from Yugoslav shipping, earnings from the transshipment of goods from Adriatic ports to Austria, Hungary and other East European countries together with receipts from international traffic on the Danube have risen on a net basis by nearly 23% annually in the past five years and yielded nearly $190 million (net) in 1967. The third largest item in invisible receipts is remittances of Yugoslavs working abroad, principally in the Federal German Republic. Though with the slowdown in the Federal Germany economy, the number of Yugoslav workers abroad probably did not increase in 1967, remittances continued to rise, reaching $89 million in 1967, almost three times the 1965 figure. With a revival of the Federal German economy, and continued expansion in other European countries, a further growth in remittances may be expected. 124. Though 1967 ended with a moderate deficit on current account, this comprised a sizeable deficit with the convertible area and a surplus on bilateral exchanges. An accurate breakdown for all items of the balance of payments between convertible and bilateral trading partners is not available, but a large part of net earnings from transportation are received from Eist European countries while the bulk of capital transactions are with the con- vertible area. Net drawings on foreign loans (after loan repayments and including food credits from the U.S.) averaged l$75 million in each of the past three years. Food credits exceeded $100 million in both 1965 and 1966; there were small food credits in 1967. Capital imports on this scale have been sufficient to cover the current deficit on convertible transactions and make possible modest increases in foreign reserves after taking account of drawings from the I.M.F. After taking into account drawings outstanding, 'net, reserves of gold and convertible currencies were small. Credit balances under bilateral payments agreements have approximately trebled since 1965 as shown in T.ble 18. - 45 - Table 18. Foreign Exchange Reserves (U.S. $ million) Gold and Convertible Currencies I M F End of Drawings Bilater4, Year National Bank Other Banks Total Outstanding Balances.. Convertible Gold Currencies 1963 14 60 13 107 10$ 27 196L 17 $7 1 88 75 17 1965 19 8b 12 115 110 65 1966 21 9h 11 126 108 91 1967 22 $8 $7 137 141 183 1968 (March) 22 122 21 165 1L0 202 1/ Changes in bilateral balances do not reconcile closely with Table 17; the dta are derived from different sources, Source: National Bank and I. F. S. Foreotn Debt: 12$. Yugoslavia's external debt repayable in foreign currencies has approximately quadrupled since 1960 and doubled since 1963, but has grown much more slowly since 1965, as shown in Table 19. - L6 - Table 19. Medium- and Long-Term External Debt Repayable in Foreign Currencies (U.S. million) End of utstanding Including Outstanding Net Year Undisbursed of Undisbursed 1955 315 281 1960 $53 385 1963 1,136 772 1964 1,350 853 1965 2,012 1,087 1966 2,111 2,262 1967 1 2,200 1,470 1/ Partly estimated Source: National Bank 126. On December 31, 1967, Yugoslavia's external public and publicly guaranteed debt outstanding (including undisbursed amounts) and repayable in convertible currencies was $1.6 billion. Debt carrying no guarantee of the Government or agencies of the Government probably totalled another $300 million, Debt owed to East European creditors totalled $310 million equivalent. Of the $1.6 billion almost Y400 million were debts to inter- national organizations, almost $70 million were official loans from Western countries and just over $600 million were suppliers' and bank credits. 127. Debt service payable in foreign currencies rose from about $150 million in 1963 to almost $280 million in 1967, even after taking into account a re-scheduling of repayment obligations. At the time of the Economic Reform, re-scheduling agreements were made with some Western creditors which deferred repayments for short periods as indicated in Table 20. - 07 - Table 20. Debt Re-scheduling Arrangements (U.S. $ miLlion) 1965 - h0.& 1966 - 119.4 1967 - 6.9 1968 65.1 1969 / 15.1 Later Years $ 66.5 In March 1968, an agree-ment was reached for a second three-year deferment of repayment of a DM 105 million German loan, due in 1968. This deferment is reflected in Table 20 above. 128. Debt service in convertible currencies is the great bulk of the total, being about Y"270 million in 1967, or approximately 25% of con- vertible currency earnings. Debt service to East European creditors totalled less than :10 nillZon equivalent in 1967. - L8 - X. MROFqTH PROSPECTS AND CREDITWORTIMESS 129. The Development Plan for 1966-70 was largely an indicative plan, but it contained certain specific targets for basic sectors, such as steel, non-ferrous metals, electric power and agriculture, as indicated in the table below: Table 21, Selected Output Targets 1966 1970 Electric energy (billion KWH) 15.5 30.5 Coal (million tons) 30.0 L1.5 Aluminum (co tons) 61.0 100.0 Copper ('000 tons) 56.0 80.0 Cement (million tons) 3.0 L.1 Steel (million tons) 1.8 3.2 (1964-1965) average Total cereals (million tons) 11.2 13.9 Vegetables and fruit (million tons) 4.2 5.6 Meat (million tons) 0.7 1.0 130. The target rate of growth of total output was set at 7.5-6.5/ annually during the Plan period, and target rates of growth were set for major sectors of the economy, for example, industry and mining, 9.9%, agriculture, 5.5%, etc. The overall growth target was achieved in 1966 primarily as a result of an exceptionally good year in agri- culture but, as mentioned above, output in 1967 grew by only 1', and it seems clear that, having regard to the present difficulties facing the economy, the target rate of growth of output for the whole Plan period is unlikely to be achieved. 131. The DIvelopment Plan is being reviewed, but it is not the inten- tion at present to revise and extend it for a further period. Whether new overall growth targets for the remaining years of the Plan will be set is not yet known, nor whether the authorities will revert to an earlier practice of projecting annual growth targets. Such a target was set for 1968 with a projected growth of output of about 4". 132. While the overall growth targets of the Plan are unlikely to be achieved and indeed appear to have been abandoned, some of the specific targets summarized in Table 21 above seem more capable of realization, as indicated in earlier chapters of this report. The investment progrars in new electric power capacity and in the expansion of iron and steel, non-ferrous metals and oil refining are proceeding, though investments in some sectors have been delayed, notably in aluminum. The prospects - L9 - for agriculture were discussed earlier; the 1970 targets for the main cereal crops secm likely to be realized and probably exceeded, while prospects for achieving the target for meat are less favorable. 133. In transportation, targets for investment were made for each transport mode. Here also some investments have been delayed due partly to a shortage of funds. Nevertheless these targets have not been abandoned, and the allocations between different transport modes are still considered satisfantory, though cvmpletion of the inwestment programs will probably occur later than originally foreseen. 13L. In the absence of a revised Development Plan, and having regard to the progressive decentralization in the economy,t is not possible at present to project the magnitude and sectoral breakdown of total investment over the next five years. However, major projects in electric power, iron and steel, non-ferrous metals, oil refining, chemicals (mvinly fertilizers), railways and highways are being implemented with the sUpport of the Federal authorities, which in some cases are providing financial assistance. The investments tentatively scheduled for these projects are listed below: Table 22. Projected Investments in Selected Sectors I. Mining and Indunkry E. billion Iron and steel 3*5 Non-ferrous metals - copper 1.2 lead and zinc 1.6 alurinum 1.4 Chemicals 1.5 Dil refining 0.5 II. Electric Power 5.2 III. Transport Railways 7.0 Highways 2.0 23.8 - 550 - 135. The figures for transport include both projects now in hand and projects likely to be started within the next five years. The projects included under I or 1I are scheduled to be completed or substantially completed by 1972. In the case of electricity, most projects included under II will be completed by 1970; there will be additional investments in projects to be started in the next five years bub for which cost estimates are not yet available. 136. Following the measures of decentralization associated with the Economic Reform, a comprehensive view of total planned investment in the economy in each of the next several years is not at present available partly because of the effects of decentralization on the flow of in- formation to the center and partly because of the impact on investment plans of the 1967 recession. After the decline in real fixed invest- ment of recent years, it is important that means should be found to stimulate a revival of investment to avoid a further period of economic stagnation and to underpin the future growth of output. 137. As indicated in Chapter 2, while total savings continued at a high level, too large a share has been used to finance inventories, and there is a need to mobilize additional funds to speed industrial modernization. To provide the additional funds for fixed investment financing has perhaps become iore difficult given the reduced role of government as a mobilizer of savings and the still limited role of the banks as suppliers of investment capital. 138. While the Federal Guvernment is still participating, directly or indirectly, in financing a number of major projects, it envisages that with the completion of these projects by the early 1970's and further decentralization, its own role in planning and financing investment will be further reduced, Increased responsibility for planning and implement- ing the expansion of infrastructure will fall upon the Republican and local govei-n;aents, while responsibility for deciding investments in new productive capacity is falling increasingly on enterprises and banks. In the process of decentralization, the coordination of development plans of Republican and local governments has not yet progressed far, and it is not at present possible to see clearly what planning structure might evolve in the 1970's. 139. The devolution of responsibility for planning has resulted in part from the realization that the centralised system of the past resulted in some bad investments. Another factor has been pressure from the different Republics for a greater say in the planning process and greater control of the allocation of resources. Whether or not planning is primarily at the Federal or the Republican level, however, there is a strong tendency to reduce as far as possible political factors from investment decisions, and this results in the narrowing of the sphere in which governments at all levels have responsibility for deciding investment. - 51 - Prospects 140. Although the role of government in directing and financing investment is diminishing, past decisions continue to influence strongly the framework in which the economy operates. The broad lines of develop- ment implied by the Economic Reform have not been substantially modified. Emphasis rightly continues to be placed on developing those sectors in which Yugoslavia has comparative advantages, namely agriculture, forestry, non-ferrous metals, tourism and transportation services, on specializing further in manufacturing industry, and on participating more fully in international trade, particularly with convertible currency countries. Emphasis continues to be placed also on increasing labor productivity to achieve greater efficiency and competitiveness; it is hoped that net additions to the labor force in the immediate future can find employment largely in private agriculture or abroad. 141. The immediate outlook for the economy.is rather unfavorable, however, for the reasons outlined in earlier chapters, and the authori- ties have taken measures to provide some stimulus to expansionfl parti- cularly of exports, to assist some branches of industry hard hit by tariff reductions and import liberalization, and to relieve unemploy- ment particularly among th -'-arge numbers of young people now entering the labor maricet. Some of these measures have been referred to earlier; they will be supplemented by additional stimuli if the recovery of the economy is unduly delayed. The approach of the authorities is selective: thoy are not preparing an overall credit expansion, but one directed to assisting primarily export industries, sales of machinery and an expan- sion in consumer credit; they are not proposing any across-the-board tariff increases but increases for a few items after careful study of the likely effects. 1L2. Nevertheless, one factor at present may require a more far- reaching response. This is the threat to Yugoslavia's exports to the EEC resulting from the application of the Common Marketts policy in respect to meat. As explained in Chapter III, the rising import levy imposed by the EEC on meat imports since the middle Qf 1967 threatens the viability of Yugoslavia's meat industry and could severely curtail meat exports. Yugoslavia expects to negotiate with the EEC on this matter but the timing of negotiations is still uncertain and the outcome unpredictable. Meat exports were hit also by the devaluation of the British pound. heat exports in.recent years have been valued at approximately b150 million (20-25% of total exports to convertible currency markets) and any sizeable reduction would present an additional obstacle to the resumption of economic growth. 13. In the medium-term, prospects for expanding convertible cur- rency earnings are more favorable. The investments now taking place in the non-ferrous metal industry and in tourist and transport facilities offer the prospect of substantially increased convertible currency earnings by the early 1970's. Although the application of the Cornon Market tariff on manufactures has resulted in a rise in tariffs in the Federal - 52 - German Recublic on some items exported by Yugoslavia, the implemen- tation of the tariff reductions negottitdd at the Kennedy Round at least offBet these increases. 14oreover, the Kennedy Round tariff reductions are expected to assist yugosiLavia's exports of manu- factures to the U.S., the EFTA countries and Switzerland. It seems reasonable to assume that, apart from expanding exports of non-ferrous metals, Yugoslavia could continued to increase her exports of selected manufactures to the West including wood and wood products, clothing and textiles, leather goods, steel, some items of machinery, and compo- nenets. The investments now being made and those planned for the future in new tourist facilities and expanded transport capacities, when con- sidered in relation to the probable growth of the European economy, indicate a continued fast growth in earnings from tourism and transporta- tion. 144. On rather conservative assumptions about export possibilities, Yugoslavia might increase convertible currency receipts from commodity exports, services (net), and private transfers by an average of about 11% annually in the next five years, provided that there were no major reduction in earnings from meat exports in this period. On rather optimistic assumptions about export possibilities, the increase in convertible currency receipts might average 16%o annually in the next five years, the same as the rate of growth achieved over the past five years. lh5. Although export prospects for the medium-term are quite favorable, the growth of export earnings from some products, particularly non-ferrous metals, will be faster after 1970 as investments in expanded capacities come to fruition. These and other investments in new capacity and modernization will require heavy imports of capital equipment in the years to 1970, and in this context a decline in convertible currency earnings from meat exports would be particularly unfortunate. Apart from the direct impact of such losses on an important sector of the economy, the indirect impact might be a slowing of economic recovery in order to restrain demand for raw materials and components from the West so releasing resources needed for imports of capital equipment. A miti- gating factor here could be the drawdown of stocks of imported materials and components which appear to have risen in 1967 following import liberalization. There is little room to compress imports of consumer goods. 146. Alternatively, Yugoslavia may be forced to rely more heavily on capital imports, perhaps maintaining net capital imports from the West at about the same rate as in the recent past (about '175 million per annum) at least in 1968 and 1969. To continue net capital imcorts at this rate beyond 1969 would, however, result in a near doubliii of Yugoslavia's total external debt by 1973. The burd-n of servicing the debt would then be as heavy as at present, even on favorable assumptions about the growth of convertible currency earnings. A more conservative assumption would be that net capital imports would not be more than - 53 - $J.00 million from 1970 onwards. On this basis, after taking account of the probable continued rise in import prices (on average 3% annually) the rates of growth of real imports from the West corresponding to the estimates of convertible currency earnings given in paragraph 144 above would be an average 5% and 9% annually. 17. In the former case, in order to maintain a reasonable growth of output, Yugoslavia would most probably be forced to rely more heavily on trade with bilateral partners in spite of tbe disadvantages of doing so and in spite of her current aim to orient trade increasingly to the West. If imports from bilateral partners were to grow at the same rate as in recent years (by 10-11% annually) this, together with a growth of imports from the West of 5% annually, would probably be consistent with an annual growth of output of something less than 5%. 1l68. If, however, imports from the West could grow by 9% annually, the desired re-orientation of trade could proceed, and with a moderate rise in imports from bilateral trading partners (by 5-6% annually) the rise in total imports would probably be consistent with an annual growth in output of about 6-7%. Though such a growth in output would be lower than growth rates achieved in the past, with population rising by only 1 annually, it would provide for significant increases in per capita incomes. 1$'. These projections muct be very tentative in view of the many unce~rtaYnties inolved. 'One assanption made is that the average terms of new external debts do not change radically from those of the past. Thc bulk of the existing debt is relatively short-term. The continued availability of such short- and medium-term capital in the form of suppliers' and bank credits from Western sources is probable. While 7u-Oslavia is hoping for substantial direct investments from the West and the first of such investments has already been secured, it seems unlikely that direct invesbment will become a large part of the total resources available from abroad for some years to come. Creditworthiness 150. The figures of Yugoslavia's external debt given in paragraph 125 above relate to the country's total debt, not only that of the public sector. As longer term loans from the West have been available from few sources, principally the I.B.R.D, and the U.S. Government, Yugoslavia has relied heavily on suppliers' credits as the principal type of foreign assistance aailable. lAense the bulY of the debt has relatively short maturities, and the debt service in convertible currencies is high. The debt service ratio of about 25% in 1967 seems unlikely to decline in 1968, but there are favorable prospects for rolling over supplierse credits and some other obligations, and the servicing of the debt, though diifficul% should be ranageable provided that convertible currency earnings do not faJl2. Were such a fall to occur, the lugaslav authorities would most probably seek to re-achedule part of the debt. As convertible currency earnings rise in the medium-term, the debt service ratio should decline, though gradually. Assuming a net capital inflow on the scale - 5h4 suggested in paragraph 146 above, the debt-service ratio might be 15-20 by the early 1970's. 151. The past policies of the Yugoslav authorities have been directed to providing the framework for a more efficient use of resources, and considerable progress in this direction has been made. Although some adjustments in policy may be required in response to the difficulties now arising in export markets, there are quite favorable prospects for the growth of the economy and of foreign exchange earnings in the next five years. Developments thereafter are more difficult to foresee. Much will depend on developments in the countries which are Yugoslavia's main trading partners. Domestically, in so far as a more efficient use of resources is achieved in accordance with the objectives of the Economic Reform, it is likely that the more developed parts of the country will advance faster than the more backward and the present wide differences between income levels in the different republics will be accentuated. This problem is made more difficult by the fast growth of population in the poorest parts of the country. It cannot easily be resolved, but if the surplus population from the poorest areas and from private agriculture generally is to be absorbed into productive employ- ment, it is necessary that investment should continue at a high level. The changes in the organization of the economy of recent years and the system of workors' self-management at least open up the possibility that, the relatively affluent social sector, mainly in the towns, might be tempted to consume a risinC rhnre of output at the cost of reduced in- vestment and continuing st .naation in much of the countryside. The out- come is difficult to predict, but experience over the post-war curiod points to priority being given to maintaining a fast growth of uutPut and high investment. Having regard also to Yugoslavia's favorable geo- graphical position, good natural resources and the readiness of the Yugoslav authorities to adjust institutions and policies to changing conditions, there seems rcason to expect a continued growth of output in the longer-term and rising per capita incomes. 152. When the last economic report on Yugoslavia was written in 1966, it was expected that a satisfactory rate of growth of output could be maintained with no net capital imports. At the same time, Yugoslavia was not expected to be in a position to reduce her obligations to foreign creditors before the 1970's. Since then, difficulties being met in export markets may well require continued net capital imports to support a satisfactory growth of output at least until 1970. Thereafter as large investments come to fruition and export earnings rise more rapidly, the need for external capital should decline. 153. The Yugoslav authorities are very conscious of the heavy burden of servicing the country's external debt and they aim to reduce the ratio of debt service to convertible exchange earnings in tho next several years. Hence they will aim to keep not additions to the country's external debt to the minimum compatible with meeting essential import requiranents. On present prospects, as indicated above, the debt servicing burden should ease in the medium-term as export earnings rise. 154. Having regard to Yugoslavia 's remarkable record of economic grouth over the post-war period, to the poLicy objectives of the Economic Reform, and to future growth prospects despite present diffi- culties, Yugoslavia's performance can be considered satisfactory and an adequate basis for further Bank lending. STATISTICAL APPENDIX Table No. Production. Pricesa Wages, Eaployment 1 Gross Material Social Product: 1962-67 2 OMP and Use of Resources: 1962-67 3 Selected Price Indices 4 Average Personal Incomes in the Socialized Sector & Eployment in the Socialized Sector and Registered Unemployed 6 Production of Major Agricultural Commodities 7 Livestock and Livestock Production 8 Index of Industrial Production 9 Gross Industrial Product in 1967 10 Annual Rates of Grcwth by Industrial Branch 11 Investments by Industrial Branch 12 Electric Power Generation and Consumption Banking and Credit 13 Consolidated Balance Sheet of the Banking System: Monetary Sector 14 Consolidated Balance Sheet of the Banking System: Investment Sector Government Revenues and Expenditures li, Revenues and Expenditures of All Budgets: 1964-67 16 Revenues and Expenditures of the Federal Budget: 1964-68 Foreign Trade and Payments 17 Value, Volume and Direction of Foreign Trade 18 Imports and Exports by Commodity Group Statistical Appendix (cont'd.) 19 Foreign Trade by Currency Area: 1961-67 20 Balance of Payments: 1964-67 21 Receipts and Payments for Services: 1964-67 External Debt 22 Xxternal Medium- and Long-Term Public Debt Outstanding as of December 31, 1967 23 Estimated Contractual Service Payments on the Extemal Medium- and Long-Term Public Debt Outstanding as of December 31, 1967 Table 1 YUGOSLAVIAs GROSS MATIAL SOCAL PRoUCT (billicns of dinars at current prices) Social product &67.o 124 2 1 Manufacturing and mining 15.5 18.6 2b.7 30.5 35.1 36.1 Agriculture and fishery 9.8 11.9 J5.6 21.0 27.2 25.0 Forestry 0.6 0.7 0.9 1.3 1.s 1.3 Construction 2.7 3.5 U.8 5.7 7.0 8.1$ Transport and communications 3.0 3.8 4.8 6. 7.9 8.3 Trade and catering 6.0 5.0 6.8 10.3 15.0 18.1 Arts, crafts and other 2.1 2.4 3.3 h*3 5.3 6.1 Socialized sector 28.9 35.5 b8.1 62.5 76.0 81.1 Private sector 8,8 LQ033 12.9 17.1 22.9 22.1 Of which: Agriculture 7.7 9.1 11.5 14.8 19.6 - 1/ The Gross aterial Social Product measures the volume of cutput of goods and services, but excludes certain services included in measures of Gross National Product. These are cublic adninistration and defense, and services of educations health and velfare, isurance, Acientific, cultural and professional organitations. 2/ Preliminary Source: Statisticki godianjak SFmJ 1967 Statisticki Kalendar Jugoslavije 1968 Table 2 YUGOSLAVIA: GMP AND USE OF RESOURCES (in billions of dinars) 1962 1963 1964 1965 1966 19671 Gross Material Social Product (a) at current prices 37.7 b5.8 61.0 79.5 98.9 103.3 (b) at 1960 prices 31.7 35.6 40.1 41,5 44.8 1L>.2 Consumption (a) Private 19.5 23.0 29.0 LO.2 51.2 58.b (b) Public 5.0 5.4 6.3 .2 8.4 8.9 Gross fixed capital f3rmation 13.3 15.8 20.4 21.5 25.0 24.7 Changes in inventories +2.2 +4.1 +7.3 +10.8 +13.2 +10.1 Exports minus imports -0.3 -0.9 -1.8 0.3 -0.9 -1.1 Statistical discrepancy -2.0 -1.6 -0.2 -0-h 2.0 2.h 1/ Preliminary: Mission estimates based on data received from the Yugoslav authorities. Source: Data supplied by Yugoslav authcrities. Table 3 SELECTED PRICE INDICEE (1967 - 100) Producers Prices Retail Prices Agricultural Industrial Agricultaral Industrial Products All 1/ Goods Goods 1/ Capital Raw Consumer All Goods Materials Goods 1960 70 85 68 68 35 45 51 33 1961 72 86 73 68 40 h8 53 37 1962 73 86 72 70 46 52 56 42 1963 73 86 72 71 50 54 57 47 196h 77 87 76 75 63 59 61 56 1965 88 94 87 88 89 76 76 81 1966 98 98 98 98 105 94 93 98 1967 100 100 100 100 100 100 100 100 1/ Including seasonal agricultural products. Source: Indeks: No. 3, 1968 Table 4 1/ AVERAGE PERSONAL INCOMES IN THE SOCIALIZED SECTOR/ Govern- ment and Socialized Index of average Indus- Agri- Construc- Trans- Trade and cultural sector income try culture tion portation catering services average (1966 = 100) (In dinars per month) Nominal Real 1963 Average 280 218 260 314 292 359 285 41 76 1964 " 362 277 328 402 375 439 362 52 87 1965 " 501 399 441 556 518 595 501 72 89 1966 " 686 587 632 761 724 789 693 100 100 1967 " 755 684 745 836 821 925 787 114 107 1/ After payment of income tax. Source: Indeks No. 3, 1968 TableS EMPLOYMENT IN THE SOCIAL SECTOR BY MAJOR INDUSTRY GROUP AND REGISTERED UNWWYED (in 000's of persons) 1960 1965 1966 1967 Manufacturing and mining 1072 1377 1358 1352 Agriculture and fishing 271 313 293 275 Forestry 83 87 78 69 Construction 316 331 305 306 Communication 196 251 26 248 Trade and tourism 249 3k8 349 362 Handicraft 231 215 200 195 Housing 73 68 67 70 Cultural-social 306 l10 23 428 Social and state 185 183 168 161 Total 2972 3583 3487 3466 Registered unempl/yed=/ 185 267 265 291 1/ At cnd of period. Source: Jugoslavija 1945-196h; Indeks, No. 3, 1968 Table ' PRODUCTION OF MAJOR AGRICULTURAL O01ODITIES (Thousand of metric tons) Commodit 1930-39 1952 1953 1954 1957 1959 1960 1961 1962 1963 1964 1965 1966 1967 Cereals Wheat 2430 1680 2510 1380 3100 4130 35.70 31710 3510 4140 3700 3460 4600 4820 Maize 4300 1470 3840 3000 5660 6670 6160 6550 5270 5380 6960 5920 7980 72901/ Oats 310 216 352 233 484 404 373 432 305 345 293 337 386 350 Rye 212 225 309 191 280 265 233 191 169 156 175 156 176 171 Barley 410 258 458 253 60 575 529 571 475 524 534 682 713 62 Fibers Hemp 250 120 220 272 312 241 201 255 275 256 292 306 309 253 Flax 5)± 10 18 14 22 27 22 19 12 13 12 12 12 n.a. Cottcn 1 2 3 5 10 9 7 6 6 9 7 6 6 n.a. Other industrial crops Sunflower 9 51 113 125 93 11L 98 117 161 231 260 265 282 263 Sugar beet 616 512 1510 1250 2030 2120 22)0 1730 1870 2670 2830 2620 h030 3690 Tobacco 15 15 31 32 63 A 31 15 30 5L 66 49 54 54 Vegetables Potatoes 1650 1150 2100 1880 3310 2760 31C 2590 2630 3020 2820 2360 3230 2790 Beans 134 50 150 173 179 226 17' 1± 178 205 233 17 216 214 Cabbage & Kale 243 207 436 319 553 64 6 5 46b 457 523 569 481 6l0 n.a. Tomatoes L4 85 154 151 278 269 271 272 305 293 302 283 333 n.a. Melons 167 119 338 275 438 363 355 215 319 L07 474 420 481 n.a. Fodder Alfafa 372 031 939 925 688 1360 160 13C 1390 26 1860 1530 2180 n.a. Forage beet 468 501 964 965 1250 11LO 1370 1051 95 ph) 1110 9!4 030 n.a. 1/ Estimate. Source: Statisticki C. 'L. Tab. LIVESTOCK AND LIVESTOCK PRODUCTION 1962 12 6 .& 16 . L 19 67 Numbers (000's) Cattle 5,884 5,355 5,094 5,219 5,584 5,710 Hogs 5,164 5,013 6,100 6,985 5,118 5,525 Sheep 11,143 10,055 9,707 9,433 9,868 10,329 Horses 1,226 1,175 1,140 1,109 1,131 1,134 Poultry 28,304 29,939 32,073 31,429 31,685 35,153 Production Meat (Oo tons) 651 657 679 776 709 750 1 Milk (million litres) 2,326 2,272 2,33 4 2,100 2,615 n.a. Eggs (millions) 1,420 1,643 1,733 1,746 1,996 2,250 V/ ;dool (000 tons) 13.3 12.6 12.2 12.6 13.5 13.8 1/ Proliminary. 3ource: Annual Statistical Yearbook, 1967. Table 8 INDEX OF INDUSTRIAL PRODUCTION (1965 = 100) C.apital Intermediate Consumer Goods Goods Goods Total 1960 63 62 57 60 1961 66 67 61 65 1962 67 71 68 69 1963 77 81 79 80 196 91 94 92 93 1965 100 100 100 100 1966 102 104 16 10 1967 103 104 105 10 Source: Statisticki Godisnjak: 1967 Indeks No. 3, 1968 Table 9 GROSS INDUSTRLAL PRODUCT l& 1967 (Million new dinars at 1966 prices) Industries 1967 Percentage Electricity 2,440 6.9 Coal and coke 11420 L.0 Petroleum 1,370 3.8 Iron and steel 1,530 4.3 Non-ferrous metals 2,160 6.1 Non-metals 890 2.5 Actal fabrication 5,590 1$.9 Shipbuilding 760 2.1 Electrical equipment 2,050 5.8 Chemicals 2,520 7.1 Construction materials 1,150 3.8 Wood procucts 2,060 5.8 Paper 690 1.9 Te.:ilUes 4,280 12.1 Li)ather 80 2.3 Rukber 620 1.7 Food producits 2,30 6.6 Printing i,54o 4.3 Tobacco 825 2.3 Other 1.2 Total 35,490 100.0 Source: Indeks No. 3, 1966. Table 10 ANAL RATES OF GROWTH BY INDUSTRIAL 'BRkNCH, 1952-67 1952-65 1960-65 1965 1966 1967 Electric energy 14.L 11.8 9.3 10.4 8.8 Coal 6.h 4.1 0.0 -2.2 -10.0 Petroleum 19.2 17.t 11.8 11.9 9.5 Iron and steel 13.3 5.6 7.9 5.0 -1.0 Non-ferrous metals 9.2 8.6 6.0 3.0 3.5 Non-metals 15.5 12.7 9.0 7.0 -1.0 Metal fabrication 13.6 10.0 8.0 0.0 -L.0 Electrical equipment 21.5 17.0 h.5 4.9 3.0 Chemicals 19.4 18.3 21.0 11.5 1.3 Building materials 8.5 6.2 L.0 0.0 4.9 Wood products 1o.4 11.9 10.7 2.9 -h.5 Pulp and paper 17.7 20.0 U.5 7.5 10.0 Textiles and clothing 10.3 9.7 7.0 8.0 -3.0 Leather and footwear 11.5 11. 5.0 1.0 -3.0 Rubber goods 13.L 9.5 10.0 7.9 3.0 Foodstuffs 13.3 9.6 7.2 8.5 2.0 Tobacco 6.3 9.h 7.1 -10.0 0.0 Source: Statisticki Godisnjak: 1967 Indeks No. 3, 1968 Table 11 INVESTMENTS BY BRANCHES OF INDUSTRY, 1964-1967 (Percent of investment expenditures at current prices) Industry 1964 1 1966 Coal and coke 6.5 8.5 7.3 6.5 Petroleum 5.7 5.1 6.3 7.6 Iron and steel 18.4 19.7 17.8 18.7 Non-ferrous metals 5.4 6.5 9.2 13.8 i'on-metallic minerals 2.9 3.2 3.2 3.0 rictal working 12.8 11.3 10.6 8.2 Shipbuilding 0.9 1.2 1.3 1.4 Electrical equipment 5.4 4.5 4.0 3.0 Chemicals 7.9 8.6 11.7 10.9 Building materials 2.6 2.7 2.8 3.0 Wood products h.5 4.1 3.7 3.0 Pulp and paper 6.1 5.2 4.3 4.1 Textile 8.0 6.7 6.3 4.8 Leather and footwear 1.1 0.8 0.8 0.7 Rubber 1.1 1.5 0.8 0.7 Food processing 5.5 5.0 5.1 6.5 Printing 1.9 1.7 1.8 2.0 Tobacco 1.1 1.3 0.9 0.7 Others 2.2 2.h 2.1 1.4 Total 100.0 100.0 100.0 100.0 Source: Statisticki Godionjak SFRJ 1967 and Yugoslav Authorities. N.B. Since percentages were obtained from figures at current prices there is not strict comparability from year to year. Table 12 ELECTRIC POWER GMERATION AND CONSUMPTION ( oWh 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1. Total gross generation 8,962 9,917 11,271 13,536 14,188 15,523 17,174 18,702 25,000 28,700 31,300 (including industrial plants) 2. Integrated power industry: a. Net genera- 1 tion 7,620 8,504 9,780 11,840 11,643 12,984 1h,479 15,896 21,500 25,600 273400 b. Purchasers from industrial enterprises 133 -74 125 183 193 214 L7 L5 - - - c. Imports less exports -93 -78 -142 -291 341 394 131 11 - - - Total available 7,660 8,500 9,763 11,732 12,177 13,592 1U,657 16,082 21,500 25,600 27,400 3. Demand 7,69h 8,572 9,8L0 11,80 13,377 11,300 17,000 19,100 22,300 25,600 27,L,00 4. Deficit 34 72 77 108 200 708 2,343 3,318 B00 - - 1/ Preliminery data Seource: Statisticki Godisnjak - and cther data supnlied by the Yugoslav Electric 7owe Ccrritv. Table 13 CONSOLIDATED BALANCE SHEET OF THE BANKING SYSTEM: MONETARY SECTION In milions of dinars) 1964 1965 1966 1367 Assets Gold and foreign exchange 845 1,711 2,055 2,016 Foreign assets 1,274 2,541 4,038 5,458 Credits to: Economic organizations 21,514 24,19h 26,742 30,899 Households h,213 3,913 3,358 2,626 Federal Government 6,364 9,108 9,237 9,001 Other 1,036 657 511 206 Transfers to investment section 1,16 1,197 408 - Others - 3,017 h009 - Total assets 39,168 66,338 50,358 54,470 Liabilities Foreign liabilities 1,695 3,295 2,715 3,616 Foreign o.::change deposits 541 1,118 1,823 3,594 Foreign exchange credit fund 271 432 1,101 1;886 Monetary sight deposits 15,554 15,537 1)4,953 14,146 Other sight deposits 5,207 6,320 8,271 9,000 Restricted and time deposits 9,163 11,886 11,508 11,959 Cu4rreny 5,599 5,144 6,948 7,95h Float 1,783 2,173 1,992 1,383 Other - h33 l,0h7 - Tntal liabilities 39,168 46,338 50,358 5L,470 Source: Statisticki Bilten No. 2, 1968. Table 1 BALANCE SHEET OF THE BANKING SYSTEM INVESTAENT SECTION (In millions of dinars) 1964 1965 1966 1967 Assets Investment credits 30,973 47,786 52,580 61,785 Fixed assets 23,686 37,143 38,308 L5,938 Working capital 6,205 8,922 10,921 12,419 Federal Government 33k 794 1,693 1,587 Other organiza .ons and governments-W 748 927 1,658 1,81 Credit to banks for relending 3,135 7,219 8,764 13,87 Claims on other banks 22,635 23,779 21,395 14,990 Housing loans - - 12,463 12,796 fiseellaneous assets 22768 2,024 2,511 - Total assets 59,511 80,808 97,713 106,877 Liabilities Banks' own funds 23,791 35,165 8,928 94,65 Deposits Time deposits 3,196 3,80 8,353 12,496 Foreign credits 1,883 3,179 3,518 3,791 Restricted deposits L29 724 1,hh7 1,556 Deposits earmarked by government for invest- ment 5,725 12,297 hO,266 48,90 Deposits earmarked for housing loans - - 124,82 13,004 Liabilities to other banks 22,092 23,880 21,693 16,318 Transfers to short- term section 1,211 1,210 2 - Other liabilities 1,18L 569 1,024 - Total liabilities 59,511 80,608 97,713 106,877 1/ Including a small amount of credits to individuals. Source: Statisticki Bilten, No. 2, 1968. Table 15, REVUE3 AND EEDITUREZ OF ALL BUDGETS (In million of dinars) According to the Final Account Prcliminary 19647 1965 1966 1967 I. Revenues Turnover taxes 4,468 4,246 5,549 5,820 Tax on personal incomes 4,483 4,994 5,093 6,723 Customs duties 2,253 1,968 1,94 2,331 Other revenues 3.469 L,780 5,063 5,330 Total 14,673 15,988 17,649 20,204 II. Expenditures Administration and defense 5,45L 7,005 8,270 8,7433/ Culture and education 2,299 2,803 3,307 b,167- Public health 550 811 1,O32 1,248 Public utilities 111 290 345 396 Other expenditures 3,327 2,996 2,221 2,232 Non economic investments 391 991 942 1,038 Grants to extrabudgetary establishments 1,674 975 1,075 1,886 Subtotal 13,806 15,871 17,192 19,710 Reserve Fund 268 206 101 M 39h Total 14,074 16,077 17,293 20,104 Surplus or deficit 599 -89 356 100 17 The classification differs somewhat from that shown in Table 16 of the text. 2/ Data for 1964 are shown according to the present system of budget financing. / Under this item is included amount of 3,562 million dinars directly allccated by Republics and cc-munes for financing of education to extra-budgetary funds. Sour7ce : Federal Secretariat for Finance. Table -6 REVENUES PND FYPFNDITURFS OF THE FEDERAL DUDGET, 196h-1968 (In millions of new dinars) Final Account Estimate Budget 1964 1965 1966 1967 1968 I, Revenues Turnover taxes 4,68 3,873 4,594 4,778 5,190 Tax on personal incomes 49 983 1,219 2,542 2,199 Customs duties 2,253 1,968 1,944 2,331 2,h56 Others 635 1,276 961 329 439 Total 7,805 8,100 8,718 9,980 10,284 II. Expenditures National defense 3,321 4,293 5,220 5,381 6,oc6 Administration 958 1,219 1,354 1,30± 1,119 General additional funds of Republics 506 662 794 892 995 Purposive additional fund of Republics for financing of internal affairs - - - 125 125 Grants and subsidies to the economy 1,232 776 787 677 657 Promotion of economic regions 95 95 72 97 214 Export premiums 647 h50 - - - Repayments of foreign and international loans and nationalized foreign property 390 635 185 149 152 Other revenues 238 253 297 196 27 Total 7,387 8,386 8,709 8,819 9,295 Repayment of credits far Federal Budget - - - 170 129 Obligations against Social Funds (Article 116 of the Basic Law on Organization and Financing of Social Insurance) - - 700 700 Allocation to the Reserve Fund - - - 291 160 Total 7,387 8,86 8,709 9,980 10,284 Deficit cr SurpluE 1±18 -226 9 -- Lcurce: Tedcral 3ecrEtariat for Finance. Table 17 VALUE, VOLUME :r;D DIECTIGN OF FOREIGN TRADE, 1957-67 (In millions of dollars) 1211 128 122 1960 1261 1962 1963 1964 1965 1966 1967 1. Total imports cif 661 685 687 826 910 888 1,057 1,323 1,288 1,575 1,708 2. Total exports fob 395 441 I77 566 569 691 790 893 1,092 1,220 1,253 3. Trade deficit 266 2L4 210 260 341 197 267 h30 196 355 455 4. Volume of imports (1953 = 100) 151 163 165 201 220 213 246 295 260 315 341 5. Volume of exports (1953 = 100) 177 200 218 254 264 310 345 363 412 48 460 6. Import prices (1953 = 100) 108 103 101 102 103 106 109 113 120 121 n.a. 7. Export prices (1953 = 100) 118 117 113 115 116 120 123 130 141 115 n.a. 8. Terms af trade (1953 = 100) 109 113 111 111 110 111 113 114 117 120 n.a. IMPORTS, BY AREA: 9. Western Europe 274 287 289 396 456 387 433 541 527 518 864 10. North America 177 136 142 93 185 189 205 188 204 212 132 11. Eastern Europe and USSR 143 194 170 212 169 189 241 377 371 637 473 12. Rest of world 67 68 86 125 100 123 178 216 185 208 239 13. Total 661 685 687 826 910 888 1,057 1,322 1,287 1,575 1,708 EXPORTS, BY AREA: 14. Western Europe 204 222 218 255 260 305 381 383 373 476 508 15. North America 34 34 34 40 43 55 52 57 77 85 90 16. Eastern Europe and USSR 105 123 147 182 176 167 211 308 483 479 481 17. Rest of world 52 62 78 89 90 164 146 144 158 180 174 18. Total. 395 41 477 566 569 691 790 892 1,091 1,220 1,253 Source: Statistical Yearbook of the SFRY. Table 18 EXPORTS AND IMPORTS, BY COMMODITY GROUP (In millions of dollars) 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 Erports, Total 186 240 22 323 395 441 477 566 569 691 790 893 1091 1220 1253 Foodstuffs 36 72 62 86 103 134 126 164 169 161 204 212 231 249 285 Beverages and tobacco 7 10 20 26 26 38 24 27 22 30 39 50 49 L7 50 Raw materials except fuels 70 71 75 77 82 75 76 88 85 95 109 118 110 108 106 Minerals fuels and related materials 2 3 3 4 7 6 5 5 7 17 15 12 11 21 23 Animal and vegetable, fats and oils 0 0 0 - - - - 1 0 1 0 0 0 0 2 Chemicals 10 10 14 14 19 14 15 23 20 21 26 38 59 70 74 Manufactured goods 55 60 71 89 109 102 118 134 129 156 169 205 248 282 281 Machinery and transport equipment 3 8 5 15 27 47 83 85 94 158 154 152 257 299 255 Miscellaneous manufactured articles 3 5 7 12 22 24 29 38 42 51 73 105 126 143 174 Others O 1 0 0 0 1 1 1 1 1 1 1 0 1 1 Imports, Total 395 339 441 474 661 63- 687 826 910 888 1057 1323 1286 1575 1708 Foodstuffs 111 82 121 151 147 131 133 76 120 127 194 165 189 231 175 Beverages and tobacco 0 0 1 0 1 1 0 0 1 h 7 3 1 6 8 Raw materials, except fuels 50 51 77 75 97 54 96 118 130 133 159 209 217 212 199 Mineral fuels 31 30 36 L7 65 41 45 45 L0 h8 47 66 72 82 85 Animal and vegetable, fats and oils 5 6 5 6 13 14 16 12 15 14 11 16 13 9 30 Chemicals 17 21 29 33 48 67 75 71 64 78 111 138 119 151 167 Manufactured goods 50 51 52 58 10b 108 108 172 185 163 187 278 279 370 402 Machinery and transport equipment 126 91 112 94 168 216 192 304 324 293 307 398 3,5 459 572 Miscellaneous manufactured articles 5 6 7 10 15 20 20 27 31 28 34 50 43 55 70 Others - 1 1 - 3 3 2 1 0 0 0 0 0 1 0 Source: Statistika 6poljne trgovine. Indeks: No. 2, 1968. Table 19 FORIGN TRADE BY CURR!C; AREA, 1961-67 (In millions of dollars) Total trade Convertible Bilateral Exnorts ImpoSulusor Eports Imports Surplus or Exports Imports Surplus or deficit(- deficit(- deficit(-) 1961 569 910 -341 288 643 -355 281 267 +14 1962 690 888 -198 402 575 -173 288 313 -25 1963 790 1,057 -267 479 695 -216 311 362 -51 1964 893 1,323 -430 482 836 -354 411 487 -76 1965 1,092 1,288 -196 519 789 -270 573 499 7h 1966 1,220 1,575 -355 631 929 -298 589 646 -57 19671/ 1,253 1,708 -455 680 1,120 -UO,0 573 588 -15 1/ Preliminary Source: Data supplied by the Yugoslav authorities. TABLE 20 BALANCE OF PAYMENTS 1964-67 (In million of dollars) 1964 1965 1966 19671/ A. Goods and Services -267 -4 -94 -93 Exports f.o.b. 893 1,092 1,220 1,253 Imports o.i.f. 1,323 -1,288 -1,575 -1,708 Trade balance -430 -196 -355 -455 Foreign travel (not) 55 63 82 98 Transportation (net) 97 118 140 187 Investment incame (net) -h8 -53 -70 -79 Workers' remittances 31 32 64 89 Government n.e.i. -3 -6 -10 -10 Other services 31 38 55 77 B. Transfors 68 77 59 322/ Private 48 127 3 2 Government 20 30 11 - Total (A+13) -199 73 -35 -61 C. Capital Transactions 178 -7 78 133 Loans for agricultural imports TY100 103 37 Other long-term loans and credits received 227 228 279 328 Repayments on loans and nationalized property -119 -165 -178 -208 Export credits (net) 3/ -33 -44 -39 -43 Other (including short-tem) 60 -126 -87 19 D. Monetary Movements 21 -66 -43 -72 Net IMF position -30 3-10 33 Bilateral balances (increase -) 32 -7U -23 -94 Gold and convertible cur- rency (increase -) 19 -27 -10 -11 1/ Preliminary. 2/ Excludes donations in kind. 3/ Includes errors and omissions. Source: National Bank of Yugoslavia. Table 21 BALANCE OF PAYMENTS: RECEIPTS AND PAYMENTS FOR SERVICES, 196L-67 (In millions of dollars) 1964 1965 1966 1967 1/ Credit Debit Net Credit Debit Net Credit Debit Net Credit Debit Net Travel 68 13 55 81 18 63 117 35 82 150 52 98 2/ Investment income'- 9 57 -468 8 61 -53 6 76 -70 8 85 -79 Government, n.i.e. 17 20 -3 24 30 -6 28 38 -10 32 42 -10 Insurance 11 6 5 12 7 5 11 7 4 13 8 5 Workers' remittances 31 - 31 32 - 32 64 - 64 89 - 89 Other services 44 18 26 54 21 33 77 26 51 _L9 27 72 Subtotal 180 114 66 211 137 74 303 182 121 389 214 175 Transportation 163 66 97 194 76 118 226 86 140 280 93 187 Total 343 180 163 405 213 192 529 268 261 669 307 362 1/ Preliminary. 2/ Includes investment income paid in local currency: $9 million in 1965, $10 million in 1966 and $12 million in 1967. Source: National Bank of Yugoslavia. Table Ét - EXTERNAL H,EDIUM- AND LOW-TERM /1 PUBLIC DT OUTSTAIfAN.NG 1N0P,YD1- UNDISBURSED AS OV DECEMBER 31, 1967 D1bt Re-payable in Foreign Currency (In thiusande of U.S, dollars) PaGe ). »abt outs aniii¯ Item December 31, 19(7 risbursed Includiing only undisburgad TI E hA L PUBLIC DEDT /2 1_6,9939 18?_31 r'-rl pub3cly-~ssved bonids .3081 30t }½ vctoJ.y-p»acod debt 370,7h6 h78,626. S upplrs cr&dite s/3 322,0 39,0 Private bank crcaditr 48,7n 81>723 IPRD 3.oans IB 1L6 2à fl11 Eurofi!naI Jo&cnt 9,920 20 J.S. Govrnwent Joans 31b,59 317 779 Export -Inport Pank T,%2! ÈÍ 01 h1:· ~ i5,57? 2(,4I7 AT, / ~ ~1,3 5E - pl:I nt of Agric ultur'a 2hh,?23 246,328 iOMI frm gcvrwr,nts of other TDJR1 må':. M it:acrid 169 085 19. - Frén: c 31,701 37,?3 G'r'n:y 31,097 31,290 It5.3y 95,3h5 134,5 Il' -'rp 210 211 -. r a 3,245 3,216 r i VEi n::å& 2,976 5,376 mm i : oter gveruaent /572,25c 266 0:. beu lo:jkia 3),382 76, 178 1M C%.:lwy 9,927 15,36L 3l : 3,57l5 34307 Pcolr.:;cd 29,1J13 h9,U 3 3 4 S .l ] 79,978 tionr na pn>pr4:rL1?s 2,152 .-1~252 Y t;.tc o: czended .stur-y of c.m year or MOIM# noo :Inc ray dobts to or g1cran.tecca by tbe Execiltized Unnks cL.I4ra( f r lcim 31, t9c6 o1cphe for the fLltidg: Q 5 7,o tz thc Xtional Bank of' Yug:"t2a'In Tale U - EXTERNAL MEDIUM- AND LONG-TERM /1 PUBLIC DEST OU2STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1967 (CONT.) Page 2 -3-7 9oe loans from governmnts may be included under suppliers' credits. 7T Only portions payable in dollars are included in this table. j fDoes not include the undisbursed portions of the following frame agreements: $ 38,500,000 from Czechoslovakia ($36 $28,I400) $ 16,000,000 from Poland ($15,7h7,50S $160,000,000 from U.S.S&R. ($155,514,800) Statistical Services Division Economics Department Tablo 23 - E3TIN,:) 01TRACIOTUAL SPLR PAYMIENTS DUE NE FUT ON EXTR4ì2AL z;0~o~ws -åu ANOWWGT,4 YUDLIC DIJ OUTSTAUDITG 11OLUDING UDXISBUPSED AS OF DECEKl,15 311 196? 1 Dobt Repayable in Foreign Curreney (In thousands of U.S. dullars) Lt&:HT 00JTST '(r?' OF p IT- I PAYmENTS vURING PERIDD j Ri;tkiIl AMC'hTI- YI4i Uji''rL1 '411 I NTERES T I QT L GRAJD TOTAL 396b 1,360,72t 211,186 54,304 265,490 1969,16942 181,21- 52,650 233,865 194 9Hh, 37 162,7d7 46,704 209.P41 19/J i?j,,9 144,45 3,571 183,416 397- 6 6 ø 126,565 32,661 159,246 19/J 554,129 112,802 25,927 13a.??9 19ý 4 1, 3 7 93, 514 2ri, 37 1)13 90 4 1975 317,79i 693 16,221 62,315 1976 2D1,700 5%,8( 13,205 69,0Q4 41,193 10,734 5,927 19 1 ,617 34,965 9,031 43.196 19 9 150,752 26,539 7,564 34.,103 191 j?4, 213 17,J99 f,,373 3,573 17,951 5,542 ?3,473 1/ Includse service on aU deb listed In Table 22 prepared May 2-0, 1968, except th-e folloving for whtch repa~meit term arm not availabler utstandin< including undisbursed as of December 31, 1967 Total $18,252,625 Pre-uar publicly-isnued bonds 27,567,625 Suppliers' credits 1,699,000 U.S. banks 2,63,000 Eurofima 330,000 U.S. Department of Agricultura 35,839,000 Au:strinli Oc7ernrnmit 3,775,000 French Govormnr4t 2,339,000 U,S. R. h,485,O Czecho lov&kia 59,586,000 Statisticnl 502vie Division Econoir's éDepartUnt USTRALTTUES 1N METERS US R AH u N G A R Y0 oMaribor 40C - so0 v ioo - 3000 V n. N... **.bot -o . ' ia St C R o =A- c..Iq Novi Sad pul A R3ELGRAb S ..rT E T YUGOSLAVI A INTERNAT[ONAL BRUNDARIF5 - -- - -- BOUINDARM5 0f the REPUýLIGS . ............ AUTON"OMOUS PROVINCES - . 111Ly 1968 IBRD 2344