Yugoslavia - Current economic developments and creditworthiness

RETURN TO I'i ~ ~EA - Sa REu'7 ss FILE, COPY RESTRICTED VITIN ONE VWEEK This report is restricted to use within the Bank. INTERNATIONAL BANK FOR. RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC DEVELOPMENTS AND CREDITWORTHINESS of YUGOSLAVIA January 30, 1953 Department of Operations FILE COPY Europe, Africa and Australasia Currency Equivalents New Par Value - January 1, 1952 U.S. $1.00 * 300 dinars 1 dinar a U.S. $0.003 1 million dinars * U.S. $3,330 CON'"S Basic Statistics Charts Summary and Conclusions.................. 1 1. Introduction........................ 3 II. The Yugoslav Economy - Progress and Prospects....... 3 A. Economic Policy - A Controlled Economy.,......... 3 B. Production Progress and Potential Output......... 8 3. The Investment Program.......................... 13 ITI. Yuagslavials External Position....................... 19 A. The Post-Nar Foreign Trade Posi1tion.............. 19 B. Import Polic.............. .................... 21 IV. Tht Creditworthiness of Yu;oslaviat.........******** 22 Amndi.- Tables Table I - Key Projects Program - Selected Capacity Increases Table II - f tz Industrial Projects Not Fully Financed Table III Export Projections Table IV - Ir.po:t Projections YUGOSLAVIA Basic Statistics Area 256,880 sq. kms. 73lation 16.85 million (mid-1952) Currency Unit: Dinar Exchange Rate: 50 dinars = U.S.11.00 (to December 31, 1951) 300 dinars a U.S.$1.00 (since January 1, 1952) Foreign Trade (in millions dollars) 1935-39 1950 1951 January-November 1952 Exports (f,o.b.) 115,4 13.6 13.7 222,4 Imports (c.i.f.) 103.7 235.8 390.8 322.3 Foreign Trade, by Countries, July 1951-June 1952 (in million dollars) Exports Imports United States 31.6 94.3 United Kingdom 50.3 31.6 France 13.9 22.9 Western Germany 59.9 54.8 Austria 29.7 20.5 Italy 25.1 27.6 All Other 53.3 109.4 Total 263.8 361.1 Foreign Trade, by Commodity Groups (% of Total) Exports Imports July 1950- July 1951- July 1950- July 1951- 1935-39 June 1951 June 1952 1935-39 June 1951 June 1952 Agric. Prods. 50.5 18 '4.5 Agric. Prods, 7.7 32.1 18.7 Timber 16.7 34.1 21.8 Textiles and Ores, Metals, Leatber 36.9 21.2 23.4 etc. 16.6 31.7 22,9 Capital Equip- All Other 16.2 14,4 10.8 ment 18.9 23.3 25.5 All Other 36.5 23.4 32.4 Balance of Payments (in million dollars) 1938. 1950 1951 Exports z3 160. 1:84.5 Imports j./ -99.0 -270.9 -399,6 Trade Balance -Tf -110.2 -215.1 Net Invisibles b/ 18.7 35.9 46.8 Balance 20.0 -7T4.3 -16,3 a/ Excluding reparations and restitutions deliveries. b/ Excluding debt service and payments of income on private capital. YUGOSLAVIA CROPS OUTPUT Y1ELD PER HECTARE (MILLIONS OF METRIC TONS) (QUINTALS) TOTAL CEREALS YEARLY TOTAL CEREALS YEARLY 8 --- 6 K {0o 4 WHEAT 30 20 O_9_ _1\ 4WHEAT 0g 2 *CORN 3 220 0 6 CORN 10 4 ... -÷.- 0 ... LSUGAR BEETS 300 200 SUGAR BETS 100 TOBACCO 5 00 .050 TOBACCO .025 1--i.i .... 5 '3039 '47-'51 '47 '48 '49 '50 '5 '52 '53 '47 48 49 '50 '5I '52 '53 AVERAGES *Yugoslav estimates. LIVESTOCK NUMBERS (MILLIONS) CATTLE 6 PIGS 15 SHEEP (inci. lambs) 4 4 -Z,0 -51 2 2 5 0nt 0 '' '47 '48 '49 '50 '51 '52 '53 '47 '48 '49 '50 '51 152 53 47 '48 '49 '50 '5I '52 '53 1/26/53 BEGINNING OF PERIOD No.705 . B. R.D. - Economic Staff YUGOSLAVIA INDUSTRIAL PRODUCTION 3 -' F 15 ELECTRIC POWER COAL (Billions of KWH) (Millions of tons) 2- 10 1.5 ---- 50 COPPER ORE (Millions of tons) 1'.0 -w 25 BLISTER COPPER (ThDusands of tons) .5 -1.. I ' 0 1.5 r-1.0 LEAD-ZINC ORE BAUXITE (Millions of tons) (Millions of tons) 1.0 -- .5 .5 I- O 1.0 500 .5N' -_ _ _ __ _ _ _250 IRON ORE STEEL (Millions of tons) (Thousands of tons) 500 1.5 TRANSFORMERS CEMENT5 (Thousands of KVA) (Millions of tons) 250 1.0 *-~ O1 n.a. -. 4 - 20 PLYWOOD (Thousands of M3) 2 - I 5 TOTAL SAWN WOOD (Millions of M3) n.a. n.a. 0 n. 3 n.o 110 20 -- 200 15 (Millions of pairs) 15 - 100 COTTON FABRICS (Millions of MP) 10 n.a _j _L _j _j ,L ' -' _' _' 1939 '46 '47 '48 '49 '50 '51 '52 '53 '54 1939 '46 '47 '48 '49 '50 '51 '52 '53 '54 1/26/53 *Annual rates based on 9 months data. No.706 I.B.R.D.- Economic Staff YUGOSLAVIA TOTAL EXTERNAL TRADE (MILLIONS OF U.S. DOLLARS) 60 -6- 0 . I I , I I I I - I I GO MONTHLY AVERAGES 40- 40 IMPORTS p... *. 20 --7\ /_*____" 20 0RIMPORTS (Excl. aid) '35-'39 '47 '49 '51 '53 I II III IV I * 11I11 IV 1 t 1 III IVt 1 It 1l1 IV AVERAGE 1950 1951 1952 1953 *Monthly averages for half year. t Based on average oi October and November. EXTERNAL TRADE BY PRINCIPAL COMMODITY GROUPS (MILLIONS OF U.S. DOLLARS) 500 500 EXPORTS IMFORTS 400 400 ALL OTHER 300 -300 ALL OTHER AGRICULTURAL PRODUCTS ORES, METALS : PRODUCTS 200 :00 TIMBER PRODUCTS O R 1950 1951 1952 1953 1954 15 91 15 93 15 EXTRES,TM SRIC&RLTORADU C (LUELS ERPO S I TTEXTILES 11111sI I I 1 0 1950 1951 1952 1953 1954 1950 1951 1952 1953 1954 YEAR ENDING JUNE 30 EXTERNAL TRADE BY PRINCIPAL TRADING PARTNERSD o (MILLIONS OF U.S. DOLLARS) 500 EXOT]FM1 0RT- 500 400 400 300 OTHER 300 7&-OOVERSEAS OTHER U.S. 20 0 -..-..:20O E:: --. OTHER .. :i::: EUROPE 100 -1u.00O ...... GERMANY.. 1950 1951 1952 1953 1954 1950 1951 1952 1953 1954 1/26/53 YEAR ENDING JUNE 30 No. 707 "Countries of origin and destination. I.B.R.D.- Economic Stoff YUGOSLAVIA BALANCE OF PAYMENTS (MILLIONS OF U.S. DOLLARS) 0 100 200 300 400 500 600 1948 1 FINANCING OF DEFICIT RECEIPTS PAYMENTS 1949 GRANTS OTHER FINANCING OF DEFICIT RECEIPTS PAYMENTS 1DEBT SEVC 1950 FINANCING OF DEFICIT RECEIPTS PAYMENTS 1951 FINANCING OF DEFICIT RECEIPTS PAY ME NTS ......j( 1952 JAN.- JUN. (ANNUAL RATE) RECEIPTS.......................... PAYMENTS EXTERNAL PUBLIC DEBT (MILLIONS OF U.S. DOLLARS) 400 I ,, , ,I, , I I,,,u 1,, 400 END OF MONTH 300 300 SUNDIBRE 200 200 STILL OUTSTANDING 100 JUNED J 0 1/26/53 1951 1952 1955 1954 1955 No..708 .B.R.D.-Economic Staff Surmary and Conclusions 1. Yuroslav economic policy has passed through three principal stages since the end of the war. In the first stage, which lasted until the break with the Cominform in 1943, the economy was modeled directly on the U.S.S.R. pattern. Industry, trade and credit were nationalized, and detailed cen- tralized controls of prices, wages, production and distribution were utilized to implement an ambitious Five Year Plan with heavy emphasis on new industrial investment. The second stage, mid-1948 to mid-1950, witnessed a partial re- treat from earlier policies and techniques, forced upon Yugoslav authorities by foreign exchange shortages. No basic changes in economic attitudes or policies appear to have been made; such shifts as were made in economic policy and planning during this period appear to have been primarily tactical and undertaken with reluctance. The economic impact of the disastrous drought of 1950 combined with a recognition that comprehensive centralized economic controls had basic defects in practice resulted in numerous changes in economic policy and administration. This ushered in a third phase in Yugoslavia's post-war history which has thus far been characterized by the creation of new economic incentives in industry and agriculture through the restoration of market mechanisms, the abolition of many detailed controls on the production and allocation of both industrial and agricultural products and an increasing recognition in practize of the importance of agriculture and foreign trade to the nation's well-being. These steps appear to involve a considerable departure from the immediate post-war economic system which followed the Soviet model. 2, Although industrial production, which had been very seriously affected by war damage, rose rapidly between the end of the war and 1919, there has been no further increase in industrial outnut since that time and industrial production w a probably somewhat lower in 1952 than in 1949. On the other hand, total industrial capacity has increased by more than 10% since 1949, as a result of the completion of new industrial facilities. Shortages of raw materials have prevented these capacities from being fully utilized. A substantial increase in industrial capacity is now in the course of con- struction through the "Key Projects Program" which should result in a 1955 industrial capacity about 30% - 40% above that of 1949. 3. Agricultural production is of fundamental importance in Yugoslavia since almost three-quarters of the population are employed in agriculture. Post-war production of agricultural products, particularly of cereals, has been below pre-war levels. In large Dart, this is due to the severe droughts of 1950 and 1952, but unwise agricultural policies which were followed until recently. have also limited output. Substantial revisions in agricultural policy have recently been made, and the output of cereals should be consider- ably higher by 1955 and 1956, given average weather conditions. 4. The one factor which has probably been the most important cause for Yugoslavia's economic difficulties in recent years has been the effort to carry on an over-ambitious investment program, This resulted in an unbear- able strain, both on domestic resources and on the balance of payments. Since the fall of 1950, however, there have 'een important changes in the -2- investment policies followed by Yugoslavia. The government decided to curtail investment and to channel it along sounder lines, concentrating largely on the completion of a reduced program, called the "Key Projects Program", rather than undertaking a large number of huge new projects. The Key Projects Program was about 58% completed by the end of 1951 and, with the loan presently under consideration, the financing of its total foreign exchange cost, amounting to .288,6 million, is assured except for about ,20 million in projects which are beirg deferred as of lesser priority. The future investments policy of Yugoslavia seems to be soundly conceived since it involves a shift in emphasis to agriculture, transport, and housing, and away from industry, and a reduction in capital goods imports. 5. Although Yugoslavia has had a deficit in its foreign trade in each of the post-war years, the prospects of a trade surplus by the mid-1950's are relatively bright. On the basis of rather conservative estimates of foreign trade made by the Bank staff, Yugoslavia should be able to achieve. a trade surplus of ;35 million equivalent in 1955-56, given normal crop weather, and assuming that prices remain at the first half of 1952 level. To this should be added the equivalent of 10-15 million of not earnings from invisibles. If allowance is made for some deterioration in the terms of trade from the level existing during the first half of 1952, Yugoslavia should be able to earn a surplus of about $30-35 million to service its debt, 6. The total post-war Yugoslav foreign debt, as of November 30, 1952, amounted to about '300 million. A surplus of $30-35 million annually Vuld be large enough to service this debt and a loan equivalent of 130 million presently under consideration, and allow fo:r some service on the pre-war bonded indebtedness. At present, however, a very large amount of the debt is due within the next three years, in total amounts exceeding servicing capacity during those years, and these amounts will have to be refinanced. - 3- I. Introduction 7. Before the 3econd World War, Yugoslavia was primarily a producer of raw materials from its farms, forests and mines. A.riculture was by far its most important economic activity, employing over 75% of the gain- fully occupied. In contrast, only a little over 10% were employed in mining, the handicrafts and the small manufaturing industry which existed. Its national income was lowi on a per capita basis among the lowest in Earope. 3. The country's economic character was reflected in its exports, Such industrial activity as existed was far too small to be able to process all the domestically produced a ricultural products, minerals, and timber. Agricultural products, for the most part unprocessed, constituted over 60% of its exports, and timber and minerals, also mainly unprocessed, made up another 30%. Imports consisted almost entirely of raw materials for domestic processing, such consumer goods as textiles, and a small amount of machinery, equipment and parts for the maintenance and expansion of its limited industrial facilities. 9, Exports averaged about 115 million a year and imports $104 million a year in the late 1930's. The small export surplus, together with a like small surplus on invisibles, covered profits on private foreign investment but only part of the contractual service on foreign owned public debt. 10. T:le 9ost-war period has been marked by an intensive industrial- ization drive, but Yugoslavia is today still primarily a producer of raw materials. Tae-w is little prospect, moreover, that its character will be altered rapidly, although plants now under construction will result in a substantial expansion of industrial production. II. T,ia Yugoslav Econom_- ProEress and Prospects A. Economic Polic)r A Controlled Ecoom7 (1) he .Sz.A.Pattern 11. The basic economic policy of Yugoslavia has -one through three star es since the 1oixunist Government 7thich onme io ootr in te lst year of the war, embarked on an ambitious program to establish control over the economy and to industrialize ugoslavia. The first stage began at the close of the war and continued until Yugoslavia's break with the Cominform in June 1948, During this period, the government patterned its policies directly on the U.S.S.A. model. It nationalized industry, credit and trade and created institutions for centralized and detailed direction of production, consumption, investment, prices and wages. Initially, however, it left agricultural land largely under private ownership, even redistributing to individual farmers who were politically favored some of the land in large holdings which it had confiscated after the war, but it attempted to subject agricultural activity to centralized control, -4 - There was rather detailed planning of agricultural activity, including area to be sown for various crops and even yields per hectare were planned. In addition, farmers were required to sell specified large quantities of most important products at fixed low prices. Moreover, the government and the Communist Party carried on a vigorous campaign to bring farmers into cooperatives, where their activities could be more easily controlled. 12. In 1947, the government initiated its indu3trialization program. Embodied in a conventional Communist Five Year Plan, it aimed at doubling pre-war national income by 1951. Primary emphasis was placed on the basic industries, whose output was to increase three to ten times pre-war levels, compared with increases of 100% in the consumer goods industries and 50% in agriculture. To achieve its goals, the Plan provided for an investment of 25-30% of the anticipated national income during the Five Year period. In addition, foreign financial assistance wa expected to finance the substantial imports of capital goods without which the projects to be con- structed could not be operated. 13. Although the construction of these projects began at once, the first stage in Yugoslavia's post-war history was characterized rather by rehabilitation of existing production facilities than by new investment. Industrial facilities were repaired, rebuilt and expanded, with substantial assistance from UNAIA which lasted until the end of 1947. Farm land was restored to cultivation and herds and flocks reconstituted. By 1948, as a result, industrial production in mo3t fiells had risen above pri-war levels and crop output, which had been poor In 1947 because of bad weather, approached pre-war magnitudes. Living standards improved, especially in the poorer regions, as compared with war and immediate post-war conditions. 14. In the face of these signs of advance it ws easy to overlook the problems which were developing, Short-ges of consqmer ;oods,resulting from concentration on investment, made it impossible to offer incentives to farmers. As a result, agricultural surplusas for export fell far short of pre-war size, and the need for foreign financial assistance, which would have existed in any case, was intensified. The urgency of the need for such help was reflected in the new struatures complaid or still under construction, which were either comnlately without equipment or only partially equipped, At the same time the prospect of securing such assistance was growing dimmer. UNPDA aid ended in 1947, Yugoslavia's alignment with the U.S.S.A. and its refusal to participate in the Mar- shall Plan barred aid from non,communist sources. Its conflict with the Soviat Union, culminating in its expulsion from the Cominform in June 1948, which was probably due at least in part to the unwillingness if not inability of the U.S.S,R. to provide financing, eliminated the only re- maining source of foreign aid. (2) The Break with the Cominform 15. The break with the Cominform marked the end of the first stage in Yugoslavia's post-war economic development. It not only eliminated the hope of foreign aid but creat3d serious immediate problems by impairing ugoslavia's foreign trade. Trade with the U.S.S.A. and the satellites, - 5 - which had accounted for 50% of the total trade in 1947 ani the first half of 1948, fell off abruptly to zero. Delays in finding nw markets and difficulties in selling certain commodities (alcoholic beverages, certain grades of tobacco, cigarettes, etc.) that had figured p:omi- nently in Yugoslavia's trade with Eastern Europe, caused total exports to decline. Non-delivery by these countries of capital goods on order and partinlly paid for, and demands by Yugoslavia's new suppliers for payment in hard currencies, placed an additional burden on Yugoslavia's meager foreign exchange resources, 16. During the second stage of Yugoslavia's post-war history, which lasted for roughly two years, until mid-195C, the government endeavored to persist in its economic policies. It was compelled to retreat, but the retreat was slow and reluctnt, Investment in the basic industries was continued full scale ani these industries received imoort priorities. The only change was a slight shift in emphasis to the production of non- ferrous metals where ixport prospects were gpod. Cuts in investment, which were given little publicity, wei-e confined to the light industriLs, agriculture (including fertilizers) and transport. 17. To meet the problem raised by the growing trade deficit, which rose from less than $14 million in 1948 to 199 million in 1949, the government employed a variety of expedients. It exhaustd its foreign exchange reserves, secured as much short term credit as it could, and, as the pressure increased, cut imports of raw materials and maintenance equipment. 18. The domestic situation grew steadily worse. Shortnpes of con- sumer goods made it impossible to increase incentives to farrmers, who were further antagonized by an intensified drive to induce them to enter cooperatives. The mechanism for collecting and marketing agricultural products did not operate properly and, as a result, non-farm consumers were forced to buy more and more food at very high prices in the "free market", with a resulting deterioration in their living standards. By 1950, many factories were close to a shutdown for lack of raw materials and replacement parts. The crisis .-s sharpened by a severe drought and a crop failure in 1950 whicq brought the threat of acute food short- ages. (3) The New Economic System 19. The threat was averted by a large grant from the United States and loans from European co-antries, notably The United Kingdom. Howev.r, the government, which had already been aware that the economy was being driven into an impasse, was compelled at last to alter its policies. The third phase of Ygoslavia's post-war economic history has been characterized by considerable revisions in these policies. In the fall of 1950, the government announced th-.t the .Five Year Plan could not be completed by 1951 as originally planned. In place of the former invest- ment program, it substituted - new limited program of investment in kay projects, - the so-called iKay projects Program" - to be completed not at some specified data but only as rapidly ts technical considerations and the availability of foreign exchanro ps7mitted. - 6 - 20. At the same time, the government began to revise its methods of operating the economy, Represented as changes from the mistaken policies adopted through too slavish an imitation of those of the Soviet Union (descri,ed now oy the Yugoslavs as distortions of true Communist doctrines), the revisions were all directed at a relaxation of the tight and compre- hensive system of centralized controls that governed the economy. Ration- ing was abandoned at the consumer level, The number of commodities which farmers were obliged to deliver at fixed low prices was reduced, and, by the end of 1952, the system of "compulsory deliveries" was eliminated completely. The pressure for the formation of agricultural cooperatives was relaxed and aDout 15% of existing cooperatives were dissolved, especial- ly in those areas where little or no economic basis existed for cooperatives. 21, In industry, consderable responsibility was transferred from the federal government in Belgrade to the governments of the republics (equi- valent to provincial governments), and indirect means of control of the economy, such as taxation and credit policy) were substituted for direct controls. Industry directorates and even individual enterprises were given some latitude in price formation and required to sell their products on the open market instead of delivering them on allocation at fixed prices. Oper- ating efficiency was further promoted by permitting enterprises to retain part of their profits for investment and supplementary wage payments, and by altering the wage system to provide for :_ncentives and penalties based on profitability, 22. Although they made for greater flexibility in economic activity, these changes did not alter the basic commuist character of the economy nor affect the ultimate authority of the government over it. They did represent signs of growing realism in econonic poli2-T and they were noted as su .h in the reports of the President anC the staff issued when the IBRD extended Yugoslavia a loan in the equivalent of W28 million in Oc- tober 1951. ince that date further steps Ln the same direction have been taken. 23. As a result of an excellent harvest in 19,1 and a .rant by France, the United Kingdom and the United States, of .120 million for the period July 1951 - June 1952, conditions in -ugoslavia improred greatly in late 1951 and 1952. Living standards rose. The Ke, Projects Program progressed, aided Dy heavy imports of equipirent. vespite these large imports, the foreign trade deficit in the period from Julv 1951 - June 1952 was ;31.5 million less than the anount of grant aic. given to ugoslavia, so that there was an increase in exchange reserves and a reduction in debtor position on bilateral clearing agreements. 24. The government continued in its attempt t&o use market factors to control the economy rather than centralized planning. In Jannary 1952, it changed the old e. change rate of 50 dinars to the follar to a more realistic rate of 300 dinars to the dollar. A system of multiple exchange rates still insulated the domestic economy from world prices, out the choice of this indirect means of control rather tan arbitrary price fixing for each import and export comwodity permitted individual enterprises -7- to engage in foreign trade directly instead of through a foreign trade monopoly. As a further stimulus to exports, enterprises were permitted to retain nart of their export earnings for their own import needs and a limited foreign exchange market was established. () Present Policies 25. In view of the improvement in economic conditions and the fact that the three powers had agreed to continue rrant assistance to Yuro- slavia for the year July 1952 - June 1953, the Bank considered it advis- able to send a mission to Yugoslavia to reviei" the situation preliminary to a consideration of another loan. The mission, consisting of three staff meibers and consultants on iron and steel and aluminum, spent 11 weeks in the country in intensive discussions of current conditions and policies and future nrospects, and visits to a number of orojects. 26. While the mission noted clear evidence of improvement in many respects, including the quality of clothing and shoes ;orn by the nopul- ation, there were still some signs that the government -as trying to push the economy beyond its capabilities. For example, food and tobacco prices were reduced to improve the living standards of the non-farm nopul- ation but prices of industrial goods, like textiles and glass, which include heavy taxes accruing to the governmen, remained high. Such measures, favoring the urban over the rural population, tend to dull farmers' incentives. 27. By August it became apparent that the 1952 harvest would be very poor, c1.arly necessitating some reduction in living standards and some investment retrenchment. Although the Federal Economic Council did order a postponement of work on several projects (including two thermal oower plants and a cement olant), other necessary measures were delayed. The conversations in Belgrade indicated that at least some Yugoslav officials v,ere reluctant to act nromptly and vigorously to cope rith the new crisis. 28. No significant stens to increase exports of non-agricultural products were taken until early October, 1952, At that time certain import curtailments or orohibitions w-ere also decreed. Some indirect measures to curtail domestic consumtion were taken but these were rather limited. House rents, for examnle, were doutled, but housing exoenditure had only accounted for 2' of consumer exnenditure before the increase. Prices of major foodstuffs, like bread, sugar and fats, were not initially raised, presumably because it was deemed undesirable to raise living costs, yet these were the very items for which imoorts in hard currency would be needed on a large scale. Horeover, the failure to allow orices of wheat and maise to rise probably resulted in peasants holding stocks off the market, waiting for a price rise. 29. The problems cited, however, were recognized at high levels in the government and action, although somewhat delayed, is being taken to cope with the Problems. Indirect controls which are now being used have enabled the government to follow a more flexible policy then previously. Its investment program, while still accorded top priority, is no longer considered unalterable as to content ani timing. The important role of adequate incentives for industry and workers (but to a lesser de,7ree for private farmers) is recognized in practice, although sometimes only to a limited degree, Even defense expenditures, and social service expenditures we-e reduced in the fa:.l of 1952 below the planned levels for the year, 30. Aecent actions taken by the governnent indicate that it is con- tinuing to follow a realistic course in mee-ing current economic prob- lems. The "Social Plan" for 1953 -- the na"5ion' s economic budget -- has continued to restrict expenditures for social services, general govern- ment and military expenditures, below the planned 1952 levels. Govern- ment spokesmen have reiterated its intentioi to relate future investment and equipment imports to the country's trade Pnd balance of payments capabilities. There has been greater public recognition of the vital role played by agriculture in YugoslaviaT economy and its balance of payments. This has been underlined by a proposal to shift the "Social Plan" period from a calendar year to an "economic year" basis - the twelve month period from July to June - in order to permit fuller account to be taken of the anticipated level of crop output. There has, moreov r, been no retreat from the policy of substituting indirect for direct con- trol of the economy. Although the government has shown both, a reluctance to reduce consumption from the higher levels reached in 1951-52 and a continued determination to press for rapid industrialization in Yugoslavia, its behavior, in the face of the new stenins to which the economy has been subjected as a result of the crop failure, indicates a distinct in- crease in flexibility of policy as compared with the eanlV post war years. B. Production Progress and Potental Output (1) Industrial Production 31. Yugoslavia's industrial production, which hai been seriously affected by the war, increased rapidly in the years from 1946 to 1949, largely as a result of the rehabilitation of existing facilitiJs. The increase was particularly grept between 1966 and 194.3, when it amounted to 30 4 10% per annum; between 1948 and 1949, it fell to 10,. Since 1949, however, overall production has remained virtually unchanged, al- though there have been significantimprovements in quality, particul,rly in textiles and leather goods, which are not reflected in quantitative data, 32. The following table (based necessarily on incomplete date) shows the development, both overall and in three major fields of industry during the period 1946-1952, - 9 - INDUSTRIAL PRODUCTIOM IM YUGOSLAVIA (1951 - 100) a b Total Index gtals,7 Textiles & Leather 1946 51 49 48 67 1947 71 66 71 99 1948 93 79 85 115 1949 102 92 93 118 1950 103 101 99 113 1951 100 100 100 100 1952 (est.) 99 102 104 85 A/ Electric power, coal and oil b/ Iron and steel and non-ferrous metals 33. All industries shared in the increase between 1946 and 1949. The failure of overall production to rise since 1949 is due to the fact that increases in certain industries (power, oil, non-ferrous metals and elec- trical machinery) have been offset by decreases in others (textiles, leather. chemicals, non-metals). The standstill in production is attri- butable mainly to the existence of bottlenecks in processing capacity, electric Dower and coal, and especially in imported raw materials. In 1949, as has already been noted, Yugoslaviali balance of payments deficit increased sharply. Since it was unable to continue financing deficits of this magnitude, imports essertial to certain industries (fibers@ metals, etc.) had to be curtailed. with an inevitable reduction In output in the industries requiring them. 34. In certain fields, such as coal mining and timber processing, special factors operated to restrict production. In 1951, for example, there was an actual decline in coal output as the result of inadequate maintenance and development in the mines in previous years. In timber processing, output has had to be reduced since heavy over-cutting of the forests, a serious conservatI.on problem for the last decade, could not be continued. 35. While overall nroduction has not changed appreciably since 1949, total industrial caMacity has already increased more than 10% as the result of the completion of new industrial facilities. Shortages of raw materials. however, have prevented these capacities from being fully utilized. Moreover, a very sizeable increase in industrial capacity is in the course of construction. Industrial capacity in 1955, on the basis of that portion of the "Key Projects Program" whose financing is already assured or would be assured through the loan under consideration. would make possible an increase estimated at more than 40% above the industrial - 10 - output level of the 1919-52 period. For an increase in output of this huge magnitude to be actually achieved, however, there would have to be a large increase in imports, nrimarily of raw materials for the textile and leather orocessing industries. Tt is reasonable, however, to expect total industrial nroduction in 1955 to increase by a minimum of 30% over the 19h9-52 level. This could be obtained even if textiles, leather, rubber, food, tobacco and building materials remained only at the 1951 level. 36. The following table shows the estimated Droduction increase between 1951 and 1955 in major industrial fields: ESTT11ATED 1955 INDUSTRIAL P1E lDUrCTION IN YUGOSLAVI Estimate for 195 (1951*,100) Electric Power 142 Coal 132 Oil 116 Iron and Steel 190 Non-Ferrous 170 Metal Working 140 Electrical Machinery 169 Chemicals 153 Timber Processing 87 Paper & Pulp 156 Sub-Average 142 Building L.aterials 100 Textiles 100 Leather 100 Rubber 100 Food Products 100 Tobacco Products 100 All Industrial Production 131 The realization of such estimates would result, of course, from the completion of a number of important investment projects, many of which are being financed by the Bank's existing loan to Yugoslavia or would be financed by the proposed loan under consi,deration here. (2) Agricultural Production 37. Of the arable land, amouting to sl-ghtly over seven million hectares, some 901% was eultivated in 1947 - 51, with - 11 - about 80% devoted to cereals. Tn1z' remaining 20% of tie cultivated land was devoted in almost equal proportions to (1) industrial crops (sugar beet, fibres, oil s)eds and tobacco), (2) vegetalas, and (3) fodder plants for animal feeding, 38, During the post-war period the.7e appenrs to have been a substan- tial decline in the area devoted to cereal production as comp-red with pre-war, although precise statistical comparisons are difficult becaus2 of changed methods of crop reporting and es.-imating. The aras devoted to industrial crops (particularly sugar beet;, oil seeds, and tobacco) rose substanti-lly, while the area devoted so vegetables appears to have declined, 39. Production of ce;eals declined substantially in the post-war period (see charts in front of report). De-lines have been greatest in the late season crops like maize, for which estimate- yields per hect!7re also showed a slight decline; on the other hand, yields of whent and rye appear to have risen. Undoubtedly vagaries oL' weather -- including the severe droughts of 1950 and 1952 -- have been the major influences on crop results in this period, but other fqctors have probably also been of substantial importance. 40. Governmentnl policies encouraging the 'ormation of cooperatives and penrlizing farmers in the privpte sector dulled the incentives of farmers to produce. Governmental plans nnd actions to increase areas devoted to industrial crops (e.g. cotton ard oil seeds) diverted sotne land from cereal and vecetnble production in the iraredinte post-war period, when the imp3t4s for autarchy along Soviet lines was greatest. 41. The economic costs of these policies now Rooser to h-ve been recognized and agricultural policies have been consider-bly ch-nged during the past year or two. Future plans are to encour-ge an increase in fodder pl.nts, thereby freeing more cereals, prrticul!rly whot -nd rye for human consumption. The expected pattern of land use in the future (1955-56) as compared with -he 1947-51 p,,riod is shown in the following table: EXPECTED CHANGZS IY AVABLE LiOD IU:E (thous7nd hectares) hrable Land 7,233 7,350 Under Cultivation: 6,519 6,850 Cereals 5,200 5,200 ladustrial Plants 407 400 Vegetables 432 530 Fodder Plants 480 720 42. Total arable land is expected to iacrease by less than 2% but land under cultivation is expected to rise by 5%, with increases only - 12 - in vegetables and fodder plants. The incref.se in cultivated land is expected to result from: (1) the planting of fodder and vegetable crops on part of the land now lying fallow, and (2) greater availability of fertilizers and farm equipment which should make possible cultivation of a larger area with the existing labor force. 43. Despite an unchanged area to be devoted to cereals, production of these crops is expected to rise sharply. EXPECTED CHVNGES INL , OUTPUT AND YIELD FD M J4. CEMILS area Output Yield ('000 hectares) ('000 metric tons) quintals per hectare) 19/4-51 195 5-56 19475 1955 1242=51 19 5L56 Wheat & Rye 2055 2055 2399 2600 11.7 12.6 Barley 317 335 322 330 10.2 11.4 Oats 344 365 290 330 8.4 9.0 Corn 2318 2318 3618 4200 15.6 18.1 Total 5034 5073 6629 7510 13.2 14.8 44. Yugoslav authorities expect these increas-d yields to result from (1) better seeds, (2) increased use of fertilizers, and (3) better fprm pracrAce, including more mechanization, 4'ich will enabla more land to be deep plowed. Undoubtedly P 'actor of equal if not greater importance is the reestablishment of incentives to the inlividual farmer to produce and market more. Lessened pressure to form cooperatives, elimination of the system of compulsory eliveries, ani. the reestablish- ment of the market mechanism for the exchange of agricultural for indus- trial products are factors that should be important in stimulating in- creased agricultural output. 45. These output estimates, although probably over-optimistic, are not impossible of attpinment. The snticipr-ted increase in 1erge yields is only 12%, a figure considered feasible by the Bank's agricultural consultant in 1949 in view of the improved techniques suitable to \ ugo- slav agricultural conditions which could be introduced. In the case o' maize, which is the mnin crop, however, the inc!ease of 16% in yiald would result in a yield higher than for any po'3t-war year. 46. Although the requisite conditions for fulfillment may be met (particularly since one of the projects in the proposed loan is for increased fertilizer production), it nevertheless appears to be impru- dent to rely heavily on such lnrge increaos in estimating future balance of payments piospects. The creditworthines3s section of this report is, therefore, based on less optimistic forecasts of agricultural output. - 13 - C. The Investment Program (1) The Five Year Plan 47. Since the end of the war, the Yugoslav Government has regularly followed a policy of heavy capital investment, prim-rily in the industrial field. The Five Year Plan called for an inv3stment totalling $5.5 billion in 1947 prices, or the equivalent of 25-30% of the anticipated national income for the period 1947-51. This program was expected to result in a doubling of pre-war national income. 48. In retrospect, at least, it is clear that Yugoslrvian authorities underestimated the foreign exchange difficulties involved in r large scale industrial investment program, even though they counted on obtaining the equivalent of several hundred millions of dollars in foreign financial assistance from the U.S.S..t. Furthermore, they appear to have overestimated their available domestic resources and their ability to ch-nnel so large a portion of available resources to investment without undermining production incentives, both for the agricultural and industrial producers. The fact that the great bulk of eauipment for thes- plants had to be imported, at a time when Yugoslavials foreign exchange resources we,e very limited, added to the difficulties. Finally, many of the earlier equipment orders were placed with Cominform countries and were never delivered after the political break with the East in 1948, even though some had been paid for. Since a large part of the program was devoted to the building of new plants of large size, the production benefits would at any rate have been slow in materializing. 49. lthough substantial local currency costs for labor and domestic- ally produced materials were incurred, an inordinately large part of the investment by the end of 1949 was still not yielding any return since it took the form of factory building wit.out the equipment needed for pro- duction. As early as 1949, it became inc-easinrly evident that the I-ck of balance between building and equipment was a serious problem despite heavy drawings on meager foreign exchange reserves and the contracting of naw debts to pay for imported e-iuipment. By the summer of 1949, when a Bank mission first visited Yugoslavia, a foreign payments crisis had arisen, yet investment was still being accorded priority over personal consumption. While some projects had inevitnbly been delayed for lack of foreign exchange, there had been no public indication of any invest- ment retrenchment. In the course of discussion with Bank repre.entatives, Yugoslav oCficials, moreover, continued to voice their belief that comp- letion of the investment program of the Five Y%ar Plan was feasible al- though admitting an additional year would be required for its execution. 50. This attitude persisted through mo;1. of 1950, although by then it had become increasingly obvious that curtailed imports of raw materials were reducing living standards and preventing the full utilization of existing industrial capacity. The 1950 drought brought the situation to a climax. - 14 - 51. In the fall of 1950, coinciding with the visit of the President of the Bank to Yugoslavia and probably resulting in considerable prt from that visit, a number of important changes in economic policy were mf.de. Among these changes was a decision to curtail investment substantially and to channel it along sounder lines, Yugoslavia decided to concentrate largely on completion of a reiuced investment progrnm, rather than un1er- taking a large nnber of huge new projects. This decision was taken as a result of the adoption of a policy of limiting foreign indebtedness to a level within Yugoslav creditworthiness. Since availabilitv of financial resources was limited, the investment program had to be reduced. 4t the same time extensive modiFications in other spheres of the economy elso occurred. (2) The Key Projects Progrs. 52. The new progr-m, called the Key .Projects Program, included many of the uncompleted projects initiated under the Five Year Plan, although a large number of other projects (especiallyr rayon, rubber products, and nitrogenous fertilizers) were dropped, at least for the time being Lp- pendix Table I indicates the extent to which industrial capacity would be increased on completion of the program. 53. Total industrial investment in the Five year period 1947-51 was 92.8 billion dinars ($1,956 million equivalent at the old rate of ex- change). Of this amount, more than 5% was expended on projects making up the Key Projects Program. Although the equivalent of about $1 billion had been invested, realized results so far were relatively amll since most of the projects were not yet complted. 01j with the expenditure of an additional 33.8 billion linprs ($675 nillion equivalent) to com- plete the projects, could any significant results be expected. 54. The status of industrial projects in the Key Projects Program, at the end of 1951, is shown in the following table: Status of Key Projcts Program (Expressed in Billion of Diners at the old rate of exchange) Imported Dom-,,stic 0osts Total Cost ji2apmc-nt Construction Eo123, Others Total Dom.Costs Total Industrial Prolects 81,5 14.0 4-.2 16.9 7.3 67.5 Amount Co2leted Dec. 31, 1951 47.7 4.9 2.3 9.8 3.6 42.8 Percent of Completion 58% 35% 68 58% 49% 63% 55, As might have been expected, progress in construction was well ahead of provision of eouipment, either docies-ic or imported. For example, only about 1/3 of required eq-ipment imports had been received, but more than 2/3 of the construction work had been completed, - 15 - (3) Financing Eauipment laports 56. Industrial projects in the Key Projects Program required equip- ment imports nmounting to the equivalent of $280 million (14.0 billion dinars at 1951 rate of exchange). In addition to the industrial pro- jects, the Key Projects Program also included expansion of forestry, transportation and construction activity requiring additional imports of $8.6 million. Total import requirements for the Key Projects Pro- gram thus amounted to $288.6 million equivalent. 57. Although only about one-third of the equipment exp cted to be imported hid actually been received by the 3nd of 1951, arrangements had been made to finance the import of an additional third of the total equipment needs. By Wagust 31, 1952, additional pnyments made by the government and reductions in the program hai reduced requirements for financing to the equivalent of $55.9 million. The following table shows the status of financing equipment imports for the program: FINhNCING KEY PAOJECTS Pt0GNI SQUIPIENT IIPOXTS (Expressed in Millions ofT$) Total Imports iequired 288.6 Amount Imported by December 31, 1951 98z2 .1emaining to be Imported on January 1, 1952 190.4 Financed by Exsting Credits 91.2 Balance not Financed January 1, 1952 99.2 Pa7ments from oirn Resources, J .Au 1952 26.5 Balance to be Financed 72,7 Subsequent ieductions in Pogram 16.8 Balance not financed, 1ugust 31, 1952 55.9 58. Completion of the Key ?rojects Program would thus require addi- tional financial resources for euipment iaports amounting to the equi- valent of $55.9 million. Yugoslavia has recently negotiated a medium term credit arrangement with Germany to provide $9 million equiv.for equipment. The proposed loan by the International Bank amounts to the equivalent of $30 million and is intended to be expended entirely on the coapletion of the Key Projects Program, except for a new coal washery project, cost- ing the equivalent of $2 million. This proJect has been selected for Bank financing, even though it is not included in the Key Projects Pro- gram, because it merits higher priority than other uncomplete-1 projects. 59. If the proposed I.B,A.D. loan is m,ae, the revisod total Key Projects Program will h-ve bren completely linanced, except for about - 16 - $20 billion equivalent. Thus the Bank loan and the German credit would make possible completion of projects whose total foreign exchange cost is more than $137 million, of which about $1CO million had been financed by October 31. 1952 as shown in the following tablet IMY PROJECTS PROGRAIM TO BE COMPLETED BY PROPOSED- IBR LOAN AVD THE GEEAf CREDIT Sector of the Total Foreign Already To be Financed bv: Ectnomy Exchange Cost Financed Uriianced German Loan IhRD (in $000) Electric Power 13,887 11,780 2.107 576 1.531 Coal 17,001 13,111 3,890 - 3,890 Iron & Steel 47.433 38.078 9,355 2.064 7.291 Mon Ferrous Metallurgy 27,602 22,074 5,528 1,657 3,871 Yon Metals 1.339 856 483 - 483 Electrical Equip. 5.370 1,543 3,827 1.175 2,652 Chemicals :100411 8,207 2,204 1,537 667 Pulp & Paper 4.500 303 4.197 1,848 2.349 Food Processing 3 -3.889 49 _A*J Total Industry 131,925 99,841 32,084 8,857 23,227 Transoort 1,950 F 1.950 - 1.950 Forestry 1734 .16 1.626 Total 137,235 101.575 35,660 8,857 26.803 60. In addition, projects costing about 375 million in foreign exchange are already completely financed, in Dart by the loan of $28 million equi- valent extended by the Bank in October 1951. These projects were not in oneration at the beginning of 1952. either because imnorted equipment had not yet arrived or because certain domestic construction or installations had not been completed. 61. Thus projects costing $212 million in foreign exchange (0137 million and $75 million) will be able to come into operation in the next few years, mainly in 1954 and early 1955. although a few were comnleted during 1952 (e.g. one unit at the Vinodol power station and the Lukavac cokery) and others are expected to come into production in 1953 (e.g. the Blazuj ply- wood plant and Pojatno ceramics plant financed by the first I.B.R.D. loan as well as several power stations). 62. The projects whose foreign excharge "inancing is not completely secured comprise only about 22% of the total. Appendix Table II shows that the total foreign exchange costs of the industrial projects whose foreign financing is not fully arranged - 17 - was )56.4 million of which only $17,5 million was as yet unsecured on August 31, 1952. As the tabulation below shows, most of the projects have only small uncovered balances, and only three projects have balances in excess of kl,000,000. SIZE DISTNIBUTION OF UNECUiED MiEIGN EXCHi4N-E EQUIMMENTS Unfinanced Number Total Balances of ?rojects Unfinanced 7000) (000) Under 50 9 149 50-199 21 2,473 200-499 13 4,443 500-999 3 2,377 1,000-1,999 2 2,670 Over 2,000 1 0 Totals 49 17,482 63. It appears r3asonable to assume that, Yugoslavia will be able to finance most of the remaining balances from its own exchange resources, particularly in those cases where relatively small amounts are needed. Thus, by 1955, all of the projects should bE in operation except for a few large projects such as the A.azine aluminum plant ( 5,370,0O0) and the Novy Popovac cement plant (.'l,487,000). 64, Availability of domestic resources is not expected to be a bottleneck in the completion of the program. 1s of June 30, 1952, the remaining internal expenditures for the Key Projects Program were estimated at about )350 milliDn equivalent. The rate of interna. expenditure on in- vestment in the Key Projects Program during 1951 and the first half of 1952 was higher than the rate required for The completion of the domestic expenditures phase by mid 1954. (4) Future Investment Plans 65. Because a major reason for Yugoslavials chronic balance of payments difficulties has been an inordinately large inve3tment program, the Bank mission visiting Yugoslavia last summer was particularly concerned about its future investment plans. More porticularly it was concerned about planned imports of capital goods and their relation to the balance of payments outlook, in the period after the cmplation of the pr?sent Key Projects Program, 66. Yugoslav authorities indicated th-t, although total investment would continue at Ppproximately the same rate in relation to national in- come as in 1952, the pattern of investment would be greatly changed. Be- ginning in 1953 and continuing for several ye.rs at least, the emphasis in investment would be shifted increasingly to agriculture, transport and housing and away from industry, an indication of the magnitudes involved - 18 - is given in the following table, which shows that planned investment in industry is expected to decrease from about 70% of total investment in 1952 to about 40M in 1953 and to less than 30% by 1955. COMPaATIVE LEVELS OF INV4STMENT IN DIYL?S.E$NT SECTOAS OF THE ECONOMY (Billions of New Dinars) Estimates 1952 P-an 1953 1955 Industry 109 65 40-50 Agriculture 5 28 30-35 Transport 18 31 31 Housing 4 20 30 Administration 3 3 3 Private Investment 21 20 30 160 167 164179 * In agriculture and housing, The figures shown separately for agriculture and housing refl3ct only state activities in these fields. 67. Yugoslav representatives pointed out that a 1-rge proportion of investment in industry went into equipment, Cor the most part imported, while investments in other sectors of the economy could be carried out to a much greater extent through the use of domestic resources, labor and construction materials. With the shift iway from industrial invest- ment, therefore, imports of capital goods would be gr,eatly reduced. The effects of the shift should be reflected pro,'ptly in a reduction of new commitments for imported equipment, but its reflection in trade statis- tics will necessarily be delayed since deliveries of such items are usually made as much as two or three years after contracts are placed. 68. The discussions further revealed th-t few new large indu3trial projects are expected to be undertaken, once the Key Projects Program is completed. i sector by sector discussion revealed that only three large projects are contemplated for compLAtin by 1960 -- nitrogen fertilizers, rayon and copper mining -- in aidition to miscellaneous smaller projects, such as thermal power plants in certain areas and some further expansion in ste4l and aluminum. Tae Yuw;oslrv representatives agreed that the size of this additional industrial investment would de- pend largely on foreign exchange resources available and could be so spaced as to reduce greatly the burden on the balance of payments, Furthermore, greater internal av4labilities of steel and other metal products should make possible lrrger internal production of equipment, thereby reducing the proportion to be imported, although certain types of equipment will be available only through imports. - 19 - III. Yugoslavia's External Position A. The Post-War Foreign Trade Pojition 69. Yugoslavia has had a deficit in its current balance of payments in each of the post-war years but the size of the deficit has varied tremendously. In 1948, for example, the tr!de deficit (excluding re- parations and restitutions imports) was only '14,4 million. The trade deficit r3ached a peak of '215.1 million in 1951 but dropped to only 27.1 million in the first half of 1952? Basie dpta on the balance of payments and on the method of financing of deficit are given in the following table: YJGOSLAVIA - BXLANCE OF PAYMENTS (In millions of doLlars Jan-Jun The Deficit to be Financed 1948 1950 1951 1952 Exports 321.5 160.7 184.5 151.0 Imports* -2 "5Q-270. -199.6 =1'8 1 Trade Deficit - 14.4 -110.2 -215.1 - 27.1 Non-Commercial (net) - 1.0 9.1 17.3 11.8 Private Donations (net) 17.7 26.8 29.5 1.3 Debt and Nationalization Service - 18.9 - 8.1 - 26.1 - 23.3 Gold Subscription to IiF & IB3D - 0.2 Investment in 1lbania - 19.8 Deficit on Goods and Service s - 36,4 - 82.4 -194.6 - 37.3 Method of Financing Gold 52.3- 1.9- 1.8 - 0.6 Foreign Exchange assets 1.2 - 7 Loans & Commercial Bank Cre3its) - 2n,a Payments hgreementa Credits (net) 10.5 22.9 16.9 - 1.4 Grant Aid 3.2 8,6 151.7 64.4 Miscellaneous _9 t2 Total 40.4 87.2 196.4 n.%. Errors and Omissions - 4.0 - 4.8 - 1.8 *Reparations and Restitutions deliveries, because of their special nature, are excluded both in the computation of the deficit and of its financing. 70. These wide variations in the size of the trade deficit are due lLrgely to varintions in two factors -- substantin1 fluctuetions in the amount of agricultural exports and changes in the size of eouipment imports, - 20 - 71. Because of the influence of fluctuations in Yugoslavia's trade in food and tobacco on its trade balance, the following table has been Pre- pared to illustrate that point, In the 1935-39 period, thetrade in food and tobacco provided a net surplus of $503 million, which was large enough to cover the net deficit in other fields including $19.6 million of imports of capital goods, while still leaving a surplus of 11.8 million to apply to invisibles, including debt service. STRUCTURE OF TRADE - 1235-1952 (in millions of d6llart) 1935-39 1948 1949 19h9-50 1950-51 1951-52 Exports 57.1 150.4 128.2 105.9 125.1 146.4 (excluding Food & Tobacco) Imports (excluding Food & 76.0 224.6 214.2 152.5 1l6.1 201.4 Tobacco & Capital Goods) Net Trade (as above) -18..9 -74.2 -86.0 -46.6 -21.0 -55.0 Net Trade in Food & Tobacco /50.3 134.4 /h2.5 /38.3 -7.3 /9.7 Net Trade (excluding Capital 31. $60.2 43.5 - 8.3 -95.3 - 5.3 Goods Imports) Capital Goods -19.6 -73.3 -.556 -65.5 -76.2 -92.1 Net Trade /11.8 -13.1 -99.1 -73.8 -171.5 -97.4 72. In the post-war years, as in pre-war years, agricultural produc- tion in Yugoslavia has varied greatly. In view of the importance of these fluctuations and the fact that agricultural production and emports can best be analyzed on a "crop-year" or "economic-year" basis, rather than on a "calendar-year", the previous table has been prepared, where data was available on an economic-year basis (Ju".y through June). In 1950-51 the drought seriously reduced agricultural production and resulted in substantial net food imports. The trade deficit, including trade in agricultural products, but excluding imports of capital goods, in that year consequently amounted to 95.3 million, compared with only .8.3 million in the previous year and . ?5.3 million in theeconomic year 1951-52, both years of reasonably satisfactory harvests. 73. The second big variable in the Yugoslav balance of payments posi- tion is the size of capital goods imports. These have varied in the post- war years from 355.6 million in 1949 to -;92.1 million in the 1951-52 economic year. Apart from capital goods imports, the trade of Yugo- slavia was virtually in balance in the 1951-52 economic year and in the 1949-50 year; it actually ran a substanrial surplus in 1948. If capital goods imports, for example, in the 1951-52 period had not in- creased above the average level for 1948-51, the trade position of - 21 - Yugoslavia would have beer better in 1951-52 than in any year since 1948. the year in which a bumper crop resulted in a trade surplus, 74. In view of the severe drought in 1952, the 1952-53 trade balance is likely to be similar to that for 1950-51, with a large net deficit in food and tobacco, as well as in other sectors, and an even larger import of capital goods than in 1950-51, as the result of de- liveries of equipment previously ordered and previously financed. The total trade deficit will probably exceed '200 million. B. Import Policy 75. The shortage of foreign exchange resources, which has existed during the entire pre-war period, has required Yugoslavia to select carefully the types of products which it imported. The basic policy has been to give priority to the importation of capital goods, neces- sary components and raw materials for domestic manufacture of capital goods, and products required for national defense, primarily metal products and chemicals. The flexible items, the importation of which was reduced when exchange limitations required, were imports of con- sumer goods (newsprint, textiles, leather and rubber materials products), fuels (coke and petroleum) and less essential products (paper products, non-metals and chemicals). 76. The normal policy also involved strict curtailment of imports of food products, particularly fats, oils and beverages, This policy was, of course, completely discarded in the periods following the drought of 1950 and 1952, when large-scale emergency food imports of bread grains, lard and sugar were made. Grain imports for livestock feeding purposes were also accorded a high but lesser priority than basic foods for human consumption. Even in the drought periods, how- ever, when food imports were necessary and other cuts were involved, the cuts were made in the raw materials and consumer goods categories, rather than in capital goods and defense items. The restrictions on imports and raw materials necessarily meant thnt production crtpacity, particularly in the textiles field, was not fully utilized because of lack of materials for processing, 77. Whenever the availability of exchange resources permitted, as for example in the 1951-52 year, itports of consumer Poods, fuels and raw materials, the fields previously severely restricted were sub- stantially incre-sad, Increased imports in the 1951-52 period were used in part to rebuild stocks, especially of cotton, rubber, coke, and chemicals, such as dyestuffs, 78. In 1952-53, imports are again being curtailed substantially in the same fields as in 1950-51, with the resultant drawing down of stocks. In a few fields where domestic capacity in the interim has been in- creased, e.g. firebricks and pig iron, etc1, import curtailments may have a less serious impact than in the past, but such increases have been few and unimportant relative to the size of the emergency food - 22 - imports* In 1952-53 curtailment in imports of textiles and leather appears likely to be relatively greater than in 1950-51 because the anticipated imports of capital goods are greater than in the earlier period. IV. The Creditworthiness of Yugoslavia 79. Foreign trade results of recent years are not truly indicative of the future prospects of Yugoslavia's trade. In 1949 Yugoslavia was making readjustments in her trade which had been oriented largely toward the Soviet Union and other Eastern European countries in the early post- war years. Before this reorientation had been completed, Yugoslavia suffered from a severe drought, which resulted in a net foreign exchange loss of )112 million in foreign trade, arising fromthe need to be a net importer rather than exporter of food and tobacco. In the year 1951-52, favored by a good cereal and fruit crop, exports of agricultural products improved so that there was again a sur-1us in trade in this category of .10 million. Unfortunately, Yugoslavia in 1952 has again suffered from extremely unfavorable weather. There has been heavy hail and freezing rain vhich injured early crops and drought which damaged late crops. As a result of the poor crop, Yugoslaviats trade position in 1952,53 will be quite similar to that of 1950-51, rather than like the 1951-52 year. 80. An intensive examination has been made of the economic prospects of Yugoslavia, particularly in relation to probable trade patterns for the economic year 1955-96. That year was chosen primarily because the bulk of the key investment program, including most of the projects now being financed or being considered for financing, should be in operation by then. In addition, the effects of recent changes in Yugoslav econ- omic policy, particularly with reference to agriculture, should then be reflected in production and foreign trade. In so far as agricultural trade is concerned, the trade estimates are based on an assumption of normal weather conditions. 81. The main findings of the study are as follows: 1) The great bulk of the Yugoslav Key Projects Program will have been completed, although two or three plants may not be in full production until a year later. 2) Yugoslav industrial production should have risen to 130% or more of the 1951 level, 3) Yugoslav grain production should anroximate 1105 of average output in the 19751 neriod, given normal weather. 4) Substantial increases in export:3 and decreases in imports should have resulted. - 23 - The conclusion emerges that: Yugoslavia should have a substantial export surplus by 1955-56, given normal weather for the main agricultural crops. 82. The following table compares the patterns of trade in the economic years 1950-51, 1951-52 and estimates for 19'2-53, with ex- pected position in 195546. Two estimates are shown for 1955-56, one as presented by Yugoslav authorities and the other representing a Bank staff estimate. All estimates are expressed in terms of import and export prices prevailing in the first half of 1952, to make pos- sible a comparison of the changes in physical volumes, past and anti- cipated.* 1950-51 1951-52 1952-53 1955-56 1955-56 Yug.estimate Staff estimate (in millions of dollars) Exports 188 259 187 330 278 Food and Tobacco 32 117 34 123 95 Others 156 142 153 207 183 Imports 251 258 280 216 193 (exc, capital goods) Food and Tobacco 95 64 125 38 38 Others 156 196 155 178 155 Partial Trade Balance - 63 / 1 - 93 A411 85 Capital Goods Imports - 85 -97 -120 60 50 Trade Balance -148 - 96 -213 54 S. 35 83. If the year 1951-52 is taken as a base, the indices of trade are as shown below: Because prices have fluctuated widely, the figures for 1950-51 and 1951-52 differ from those shown previously in tables on Foreign Trade in "III. Yugoslavia's External Position" where actual current prices were used, - 24 - Total Total Imports Except Capital Exports I02orts Capital Goods Goods ImDorts (1951-52 =100) 1950-51 73 95 97 88 11951-52 100 100 100 100 1952-53 73 113 108 124 1955-56 (Yug.) 127 75 84 62 1955-56 (Staff) 107 68 75 52 84. It will be noted that Yugoslav estimates for 1955-56 rre pre- dicated on an increase in export volume of 27/ above 1951-52. Bank staff estimates of the increase are substantially lower, assuming an increase of only 7%. The difference is accounted for by the facts (1) that the staff has assumed considerably lower prices for certnin new exports (aluminum, fabricated brass and copper wire and pulp) than those used by the Yugoslavs - this accounts for about 5 points of the difference; and (2) that the staff has assumed a lower volume of certain exports, in particular maize, (but also for several other products) - this accounts for the remaining 15 points. 85. The staff estimates of exports are believed to be conservative, Food exports are estimated at only 81% of the 1951-52 levels. Total non-food exports are estimated .t 129% of that base year level, however, because most of the Key Project Program plants will be in operation at that time. While details of the estimates are given in Appendix Table III, a few striking examples of export increases are cited below. 86. The Strnisce project will be responible for exports of 12,000 tons of aluminum and 28,000 - 30,000 additional tons of alumina, the two items together having an export value Df about '7.2 millions, The Sisak seamless tube plant should make possible exports of 30,000 tons of seamless tubes with a value oi about 6 million. These two plants are among the projects to be financed by the proposed loan. 87. The bringing into operation of five new leadzine mines (one of which is to be financed in the proposed lopn) and the Sabac zinc smelter (financed by the earlier IBAD loa.) will increase total lead- zinc exports by over 6 million per year. In addition, there should be larger exports of miscellaneous metals such as silver, eadmium and bismuth, as by-products of expanded lead and zinc output. 88. Exports of wire and cable from the Svetozarevo project (financed by the proposed loan) and brass from the Sevojna project (financed by the German credit) are expected to yield 4 million more than the ex- ports of qnfabricated copper in 1951-52. Lt full production, the in- crease in copper products exports would be more thnan double this figure. 89. Modernization of cement plants financed by the first loan is expected to increase cement capacity by over 300,000 tons per year, but the staff estimates take account of only 175,000 tons (*3 million) of - 25 - additional exports. In the case o' coal, an export increase of only 150,000 tons of brown coal (11.5 million) is assumed although the mo- dernized mining capacity resulting from the Program will be ample for substantially lrger tonnages if markets are found. 90, In the case of chemicals, it is estimated that the completion of the Lukavac plant, partly financed by the first IBMD lo,n, will expand exports by only 29,000 tons (?2.2 million) although production capacity is expected to increase by about 70,000 tonst Exports of sulphite pulp should rise by 13,000 tons ("2.3 million) with the completion of the Prijedor and the Videm Krsko plants which will increase national out- put to over 50,000 tons per year from a 1951-52 output of 34,000 tons. 91. In the case of imports, adjustments of Yugoslav estimates have also been made by the Bank staff, Imports in 1951-52 were taken as the normal level, except for food, fertilizers and some industrial mnterials (where increased output requires l!arger amounts of imports). From these normal levels, reductions were made where new production would enable reductions or eliminations of iports., In several cases, even though estimated new production will exceed imports in 1951-52, the calculations of potential Yugoslav exports did *ot take account of the possibility of exporting these differences, except where exports were specifically planned by Yugoslav authorities and where market prospects for such exports seemed good. For example, rolled and drawn steel out- put is expectad to increase by over 200,000 tons, but exports of tubes and calculated reductions in imports of steel products total only U2,000 tons, It has been assumed that the remainder will allow in- creased usage within Yugoslavia, an assumptLon consistent with the estimate for production of metal working ma-hinary. Similarly, larger quantities of aluminum and copper products, newsprint, and cement are expected to be available for internal consumption, In the cese of soft goods (textiles, leather, rabber, etc.), imports are assumed at the 1951,52 levels, consistent with the production estimates made by the Bank staff. Allowance,has been made, however, for the fact that more raw cotton and wool and less yarn and fabrics will be imported because of the new facilities scheduled to be completed in late 1952 or 1953. 92, The projects proposed for financing in the loan presently under consideration will themselves result in substantial import savings. The Zenica steel project alone, for example, will reduce imports by about )16.6 million annually. The Videm Krsko newsprint plant will save $2 million annually, the Sisak pipe plant an additional 2 million, and the Svetozarevo cable plant k2.5 million annually -. to mention just a few projects, The total savings iA foreigL exchange from the projects being financed by the present loan may run as high as about 30 million. In addition there are equivalent savings resulting from the projects being financed by the 1951 loan and other projects -- such as the Lukavac coke ovens -- being complAted without Bank financing, 93. In view of the savings resulting from the completion of the Key Projects Program, the reduction in imports, other than of food products, of only 139 million from the 19S152 level, as shown above, appears - 26 - conservative and allows a rather considerable margin for increased con- sumption and for import increases in n few categories. Details of the staff calculations of Yugoslav imports in 1955-56 Pre given in Appeniix Table IV. 94. An important element in achieving the expected trade surplus in 1955-56 is the reduction in imports of capital equipment to only '50 million from '96 million in 1951-52. This decrease appears to be reason- able, however, in view of the completion of the Key Projects Program and the shift in investment emphasis away from industrial projects which re- quire extensive capital equipment imports, 95, On the basis of these export and import estimates, Yugoslavia may be expected to have a trade surplus of .35 million equivalent in 1955-56, given average crop weather, and assuming th-t prices remain at the first half of 1952 level, If to this figure were added an estimate for not in- visible earnings of )10-15 million (about the same as for recent years), the current account surplus of Yugoslavia would amount to '45-50 million per annum. 96. An appraisal of Yugoslavia's creditworthiness rust make allowance, however, for probable movements in terms of trade by 1955-56. Our cal- culations of the changes in Yugoslav terms of trade indicate that an improvement of about 10% has taken place between the first half of 1950 (pre-Korea) and the first half of 1952. This improvement was due to the fact that Yugoslaviafs main exports, cereals, timber products and metals and ores, rose more sharply in price than did her imports, largely metal manufactures, textiles and fibres, hides, fuels and chemicals. 97, Since price trends in the last half of 1952 indicated a somewhat greater weakness in prices of Cugoslav exports than of its imports, it seems prudent to assume some deterioration ir, Yugoslavia's terms of trade by 1955-56. [issumptions of fuaure price movements can, of course, not be made with any precision but, for simplicity's sake, we have assumed a fall in export prices of 10% below the levEl of the first half of 1952 and a fall in import prices of 5%. On this basis, the balance of payments in 1955-56 would be the following: (in rLillions of ) Exports 250 Imports 230 Trade Balance 20 Net Invisibles /10 to 15 vailable for Debt Service $30 to 35 - 27 - 98. The estimate of a A30-35 million surtlus for debt service is, of course, subject to wide variation in any narticular year. As we have noted earlier, there has been a year-to-year difference of over 1100 million in the Yugoslav trade balance on food and tobacco alone, very largely as a re- sult of variations in weather conditions. A truly bumper crop could easily result in exports of '25-50 million above thE nrojected level. In addition, the terms of trade may deteriorate by more or less than 5$. Small variations such as might result from a further deterioration in terms of trade, or of a shortfall in certain industrial exports in a particular year could be off.- set by small declines in imports, but any substantial fall (due to bad crop weather, for example) would be difficult to meet without external financial assistance. The problems which would arise from another crop failure would be particularly acute because Yugoslavia's foreign exchange reserves are so small. It would be wise policy in the future to use a considerable portion of any windfall receipts of foreign exchange, resulting from a bumper crop for example, to build up foreign exchange reserves to more rea:- able levels, 99. There is, however, one safety factor which has not been taken into account in considering the 1955-56 position because of its uncertainty but which is nevertheless of great importance. At oresent, Yugoslavia is sub- jected to a serious drain, both internally and in its balance of payments, by the very heavy military effort being undertaken. As much as 20-25% of total available resources are devoted to mil.tary purposes. Any lessening in international tension which would permit a reduction in military exoen- ditures and imports would have an immediate and substantial favorable impact on the Yugoslav balance of oayments. 100. The oresent external debt of Yugoslavia, including short term obligations, amounts to the equivalent of About 3CO million, as of Noverber 30, 1952. The loan now under consideration would raise the debt to "330 million, still well below the ;380 million agreed as the limit beyond which Yugoslav indebtedness should not rise. The debt, including the proposed loan, appears safely within the limits of Yugoslav credit,,'orthiness, in- cluding some service on the pre-war debt, except that an excessively large amount of the debt burden is due in the 1953-55 reriod. On the basis of present schedules, the equivalent of over $1h0 million is due to be paid off within the next three years, in addition to interest payments. This burden is clearly beyond Yugoslavia's servicing capacity and it is essentiEi that adjustments be made to fund these maturities on a long term basis. 101. This need was pointed out in 1951 w'hen the previous loan to Yugoslavia was considered by the Bank. At that time the Report of the President to the Board stated that the urgency of the problem was recog- nized by France, the U.K., and the U.S., the countries enraged in a tri- partite program of aid to Yugoslavia. Since then the U. S. has funded the $55 million debt owed to it on a long-term basis. France and the U.K. have not yet funded their debts but the Bank is assured that they will fund their debts ahd assist Yugoslavia in its efforts to fund other - 28 - debts, or will take other action to reduce the debt burden to a limit consistent with Yugoslavia's debt servicing capacity.. 102. In view of these assurances, it appears to be a reasonable con- clusion that the proposed loan of the equivalent of $30 million, increasing Yugoslavia's total indebtedness to $330 million, will not raise the total debt beyond the capacity of Yugoslavia to service on a long-term basis.. 103, Yugoslavia's exports to the dollar area are small; in the 1951-52 year exports to the United States were only .j32 million, or about 12% of the total. Export possibilities in the dollar area are limited primarily to non-ferrous metals and a few specialized agricultural products. On the other hand, Tugoslavia's exports of timber and cereals, as well as of metals and metal products, are readily marketable in ETurope, which took 81% of the total in 1951-52. In view of the probable future structure of Yugoslav trade, it is essential that Yugoslavia's indebtedness be incurred largely in currencies other than dollars, since credLtworthiness for loans in hard currencies is very limited. Samuel Lipkowitz Cicely Ryshpan Appendix TABLE I KEY PROJECTS PROGRAM SELECTED CAPACITY INCREASES 1955-6 COMPARED 1 ITH 1951 AS RELATED TO COMPLETION OF KEY PROJECTS Realized Estimated Projects IBRD Participatior Production Production Responsible 1951 Proposed Unit 1951 1955-6 for Increases Loan Loan Electric Power (Million KkH 2549 3635 x x ( 000 Kn 700* 1075* Coal Output 000 tons 12042 16500 12 Key Mines x x Total Coal Capacity 000 " 13500* 20200* Coke 000 " - 450", Lukavacl Zenica Iron Ore 000 " 581 1425 vares x Pig Iron 000 " 248 516 Zenica & Others x Steel Ingots 000 " 434 749 Zenica, Sisak & Others x Roi,led & Drawn Zenica, Sisak & Steel Products 000 ' 315 538 Others x Bauxite 000 n 453 720 Fuller Use Exist, Cap. Alumina 000 " 896 48 Strnisce x Aluminum 000 " 2.8 17.5 Strnisce x Lead-Zinc Ore 000 n 1189 1450 Lece & 4 Others x Refined Lead 000 " 601 71 Fuller Use Exist. Cap. Zinc Metal 000 " 13.2 25 Sabac-Zinc Elec- trolysis x Tungsten Concentrates - 6C Neresnica Rolled & Drawn Svetozarevo and Copper Products 000 " 22 46 Sevojna x Cement 000 " 1159 1570 Reconstr,FroJect6.ux Blown Glass 000 n 19.4 40 Paracin x Refractories 000 " 51.4 164 Rankovicevo Rotary Machines 000 KW 118 400* Rade Koncar x Transformers 000 KVA 298 450* Rade Koncar x Sulfuric Acid 000 tons 40.9 110 Sabac Acid Plant x Caustic Soda 000 " 19.1 50* Lukavac x Soda Ash 000 it 30.5 70* Lukavac x Calcium Carbide 000 1 37.8 60 Fuller Use A/C More Power Fertiliz6rs 000 " 58.7 150 Sabac & Gorazde x Plywood 000 m3 13.9 13.5 Blazuj x Sulfite Pulp 000 tons 31.5 6) Prijedor, Videm Kr, x Paper & Cartons t00 " 55.9 92 Doboj, Videm Kr. x x Catton Yarn 000 n 26.9 450 4 Yarn Plants Cotton Fabrics Million m2 122.8 230t Fuller Use Exist. Cap, Wool Yarns 000 tons 13.4 18* Fuller Use Exist. Cap. Wool Fabrics million m.2 23.3 28* Fuller Use Exist. Caph Starch 000 tons 9,3 40 Zrenjanin x *Represents capacity which may not be fully utilized for various reasons. Appendix TABLE II KY PqOJECTS PXOGRAM INDUSTRIAL PROJECTS NOT FULLY FINANCED (in thousands of dollars) Total Foreign Status III. Quarter 1952 Number of Sector Exchange Cost Finaiced Unfinanced Projects Comments Electric Power 3,337 1,976 1,361 5 2 Thermal p94 Jugovinil, Madjari 3 Hydro 41267 Jablanica, Mavrovo & Vusenica Coal 5,416 5,194 222 4 Rasa, Breza, Velenje, Zagorje Petroleum 6,918 5,658 1,260 3 Petroleum Aefineries Iron & Steel 5,303 4,236 1,067 4 Gustanj, Jessenice, Smederevo & Store Non Ferrous 9,234 3,268 5,966 8 Razine 05,370. Others 4596 Non Metals 5,644 4,120 1,524 7 None over 4500 Cement 7,378 5,176 2,202 2 Novy Popovac 41,478 Reconstruction (various) ,715 etal =oking,606 2.612 1,994 9 None over $500 Electrical Equipment 330 315 15 1 R.R.NIS - Radio Tubes Paper & Pulp 1,309 126 1,183 1 Reconstruction of 13 small Mills Textiles & Leather 6,928 6,240 688 5 None over 4200 TOTAL 56,403 38,921 17,482 49 Note - Excludes Unsecured Balances in Construction Machinery Appendix Table III EXPORTS Comparison of Estimated Exports in 1955-56 with Realized Exports 1951-52 (expressed in 6 million at first half 1952 prices) Sector Realized Exports Estimate for 1955-56 Comments 1951-52 Y'goala Est, IBRD Est. Food and Tobacco 117.0 123 95 See Note 1 Timber 582 4? 46 1 , 2 Metals and Ores 5911 9 87 " n 3 Non-Metals !,4 16 15 4 Fuels 4q9 10 7 " " 5 Chemicals 7.4 18 14 * * 6 Textiles and Leather 54I 16 14 " 7 Total 257i 31 TM Note 1 IBRD staff estimates corn exports of 350,000 tons in comparison with Yugo- 9l avestimate of 550,000 tons; realized exports in 1951-52 were 592,000 tons, other agricultural exports are estimated by IBRD as 55 million in place of Yugoslav est- imate of $61 million and actual exports of '450 million in 1951-52. Note 2 Reduced cuttings will reduce volume available for export in spite of open- ing new areas as result of forestry project, Difference of ;3 million between Yugoslav estimate and IBRD estimate due to Bank assumption of unchanged exports of miscellaneous timber products except plywood (as result c$ Blazuj project financed by first loan). Note 3 Copper and copper products exports are expected to increase by p442 million (Yugoslavs estimate increase at 4o1.7 million) as result of Svetozarevo project (financed by proposed loan) and Sevojna (financed by German credit), Lead-zinc exports are expected to increase by 6,6 million as result of opening five new lead-zinc mines (partially financed by proposed loan) and Sabac zinc smelter (first loan). New exports of seamless tubes are estimated at $6.0 million (Yugoslav est- imate is $8,8 million) as result of Sisak project (proposed lqan). Aluminum exports are estimated at $6,0 million as result of Strinice pro- ject (proposed loan). In addition, there will be exports of alumina. There were no previous exports of aluminum. Note 4 Cement exports are estimated to increase by 43.2 million (Yugoslav estimate TFW..0 million) as result of cement reconstruction project (first loan). Export of refractories, a new item, is estimated at $1,3 million as result of Rankovicevo project (financed without Bank assistance). Notes to Table III Continued Note 5 Brown coal exports are estimated to increase to 350,000 tons (3.8 million) Yro-m206,000 tons (02.3 million) in 1951-52. Yugoslav estimate is 650,000 tons ($7.2 million). Note 6 Soda ash and caustic soda exports are expected to increase by $2.2 millions as a result of Lukavac project (first loan). Exports of sulphite pulp are expected to increase by 2.3 million as a result of the Prijedor project (financed without Bank assistance) and Videm Krsko (proposed loan), Note 7 Hemp exports are expected to increase by $3.4 million (Yugoslav estimate of increase is Q5.7 million). In addition, increased exports of handicraft products, low grade wool, etc., are expected, Appenoix Table IV IMPORTS Comparison of Estimated Imports 1955-56 with Realized Imports 1951-52 (expressed in $ million at first half 1952 prices) Sector Realized Imports Estimate for 1955-56 Comments 1951-52 Yugoslav Est. IBRD Est. Food and Tobacco 64 38 .i 38 See Note 1 Metals 39 17 17 " " 2 Non-Metals 6 4" " 3 Fuels 33 25 25 I it 14 Chemicals 41 36 34 i " 5 Textiles and Leather 74 95 74 " " 6 Others 1 1 1 Total " " 7 Note 1 Food and Tobacco - Elimination of lard imports costing $15 millions in T951-72 and reduction in wheat imports by o12 millions, based on expected larger wheat and rye crops. Small increase in rice imports. Note 2 Metals - Reduction of :20 millions in steel (43 millions from elimina- tion of pig iron imports and '17 millions from reduction of rolled and drawn products imports from 97,000 to 15,000 tons of specialibed products) due to Zenica and Sisak projectsq Remaining $2 million net reduction is due to elim- ination of imports of aluminum ingots (Strnice) and reductions in fabricated products imports (Sevojna - brass; Svetozarevq - wire, etc.) and small increases in tin imports. Note 3 Non-Metals - Savings of $1.3 million Ln imports of refractories (Ranko- v-%-ev) and smaller savings on salt (TusanJ mine) and asbestos fibre (several small mines). Note 4 Fuels - $7 million reduction (205,000 tons) in coke imports due to pro- duction from Lukavac and Zenica (450,000 tons capacity)# Import savings on refined oils (due to increased production of light oil products at various re- fineries) of $1 million more than increases in crude oil and aviation gas imports. Note 5 Chemicals - Import savings of about 25 millions in explosives and nit- rogen compounds are attributed to Gorazde plant. Savings in kraft paper and paper bags of over $2 million are expected from the Doboj plant (first IBRD loan). A further saving of more than $2 million on newsprint and pulp is initially ex- pected from the Videm Krsko newsprint plant. These are in part offset by higher imports of fertilizer materials, mainly phosphate rock, for full operation of the Sabac superphosphate plant (proposed loan) and larger imports of potash materials. Our estimates are p2 million lower than Yugoslav estimates because we make no allowance for larger imports of dyes, drugs and pharmaceuticals and miscellaneous chemicals than in 1951-52. Notes to Table IV Continued Note 6 Textiles and Leather - Our estimates are identical with 1951-52 and 21 millions less than Yugoslav estimates oecau:e the latter estimate an increase in imports of raw cotton and yarn of 8,000 tons ($6 million), of woolen materials 4,600 tons ($7 million), of hides a,000 tons(94,5 millions) and in miscellaneous materials (over $3 millions). If all volume increases except for jute for cable coverings are eliminated and import savings by ise of raw cotton, wool and wool rags in place of yarns and fabrics are computed, the import values are virtually identical with 1951-52 levels. Note 7 General Comment - Imports in 1951-52 exceeded actual consumption in a number of cases, resulting in increased stocks aotably of metal products, coke, dyestuffs, textile fibres and products and leather and rubber materials and pro- ducts. In view of this, imports at the same level ih 1955-56 should generally be adequate for maintained consumption levels despite an increase in population.