Document of The World Bank FOR OMCIAL USE ONLY LAd. 2s39- A)J RepNo. P-3624YIJ REPORT AND 1EO N OF THE PESIDENT OF THE INTERN. IONAL BANK EO RECONDSTRUCtION AD DEVELOPMT TO THE EIECCVITE DIRECTORS ON TWO PROPOSED LOANS IN AN AMDUNT EQUIVALENT TO US $70 HILLION TO UDRUZENA KOSOVSKA BAIKA PRISTNA AND IvESTlICIONA BANKA TITOGRAD - UDRUZENA BANKA WI THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A * SEVET INDUSTRIAL CRDIT PROJECT June 29, 1983 [ This docment bas a restricted distibution and may be used by recipients only In the performance of their olficial duties. Its contents may not otherwise be disclosed without World DBak autoriatoc. CURRENCY-EQUIVALENTS Currency Uoit 1/ Calendar- 1982 / June 15. 1983 US$1 Dinar 51.32 Dinar 86.82 Diner 1 US$0.019 US$0.012 Dinar 1,000,000 US$19,485.58 US$11,518.08 . YUGOSLAVIA: --FISCAL YEAR January 1 - December 31 GWOSSARY OF ABBREVIATIONS BOAL Basic Orzanization of Associated Labor IBT Investiciona lanka Titograd Udruzena Banka IC Industrial Credit KBP Udruzena Rosovska Banka Pristina LDR Less Developed Regions hDk bore Developed Regions PBS Privredna Banka Sarajevo SBS Stopauska Banks Skopje SDK Social Accounting Service GHP Gross Material Product 1/ The diner has not been maintained within announced margins since July 12, 1973. Its parity is reviewed frequently to ensure maintenance of external competitiveness. 2/ Period Average. FOR OMCAL USE ONLY YUGOSLAVIA SEVENTH INDUSTRIAL CREDIT PROJECT Loans and Project Summary Borrovers; Udruzena Kosovska BaiLka Pristina Investiciona Banka Titograd - Udruzena Banka (Each Borrower being a party to a separate Loan Agreement with the Bank). Guarantor; Socialist Federal Republic of Yugoslavia Amounts: US$ million equivalent KBP 45 (both including capitalized IBT 25 front end fee) Terms: The loans will bear interest at the standard variable rate. Repayment would be according to schedules reflecting the composite amortization schedules of the subloans financed. Allowing up to three years for commitment of individual subloans and a maximum repayment period of 15 years, the two Bank loans would thus be repaid in 18 years. The technical assistance component ($670,000) will be repaid in 18 yaars including three years' grace period. Project Description; The pr ject is designed to assist labor intensive and export oriented industries through the provision of foreign exchange. Besides, the project involves preparation of studies to identify and develop projects in labor intensive and export oriented industries in order to help KBP and IBT increase their future role in the promotion of such industries. The aggregate direct em;loyment creation is expected to be about l0,OXG jobs. Other objectives of the project are to contribute to the institution building of the borrowing banks, and to encourage joint ventures and cofinancing. The project also includes a technical assistance component of $6,0,000 ($400,000 for KBP and $270,000 for IBT), for preparation of above-mentioned TIs doumn ha a _ nrce eistri nbuto an may be used by recipients only in the performance of their official duties. Its contents may not otherise be discksed without World Bank authorization. - ii - studies, staff training, and procurement of office equipment. The risks associated with the loans relate to meeting the employment and export targets by beneficiary enterprises. However, provisions included under the loans and Yugoslavia's policies to foster industrial exports should reduce the risk to within acceptable limits. . Lstimated Disbursements: 1984 1985 1986 1987 1988 1989 (Bank FY) (US$ million) KBP Loan Annual 1.4 11.2 15.6 10.3 4.9 1.6 Cumulative 1.4 12.6 28.2 38.5 43.4 45.0 IBT Loan Annual 0.8 6.3 8.8 5.8 2.8 0.5 Cumulative 0.8 7.1 15.9 21.7 24.5 25.0 Rate ot keturn: Not applicable btaff Appraisal Report: Report Number 4301-YU, dated tay 23, 1983 EhENA Projects Department INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPOkT AND RECOMhENDATION OF THE PRESIDENI OF THE IBRD 10 TIE EXECUTIVE DIRECIORS ON TWO PROPOSED LOANS ONE EACH 10 UDRUZENA KOSOVSKA BANKA PRISTINA AND INVESIlCIONA BANKA TIIOGRAD - UDRUZERA BANKA WIlh IhE GUARAIiTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGO5LAVIA FOR A SEVENTH INDUSTRL&L CREDIT PROJECT 1. I submit the following report and recommendation on two proposed loans tor the equivalent of US$70 million (including capitalized front-end fee), to Udruzena kosovska Banka Pristina (KBP) ($45 million) and Investiciona Banka Titograd - Udruzena Banka (IBT) ($25 million) to help finance the foreign exchange cost of investments in labor intensive and export oriented industries. The loans also include a technical assistance component tor the preparation of studies to identify projects in labor intensive and export oriented industries as well as for training and procurement of office equipment. The loans would bear interest at the standara variable rate. Repayment would be according to schedules reflecting the composite amortization schedules of the sub-loans financed. Allowing three years tor commitment of individual sub-loans and a maximum repayment period of 15 years, the two Bank loans would thus be repaid in 18 years. The technical assistance component ($670,000) will be repaid in 18 years incluaing three years' grace period. PART I - THE ECONObY 1/ 2. An economic mission visited Yugoslavia in June 1981 and its report Yugoslavia; Adjustment Policies and Development Perspectives (3954-YU) was distributed to the Executive Directors ou November 2, 1982. Basic data on the economy are given in Annex I. A. Institutional Setting 3. The social sector in Yugoslavia, which includes government, enterprises ana public institutions, plays the leading role in economic and social development. It accouints for 85% of GDP and employs over half the total labor force. The private sector predominantly consists of peasant farms ana small enterprises. Decision making at all levels is governed by the principle of workers' self-management, involving a unique set of institutions and instruments of economic policy. Responsibility for important social ana economic decisions has increasingly shifted from the federal level to the republics, autonomous provinces and communes. Concurrently, the control of workers' collectives over production decisions has been increased by a restructuring of all economic organizations into legally autonomous Basic Organizations of Associated Labor (BOALs) which are the smallest units producing a marketable output. 1/ Part I of this report is substantially unchanged from Part I of the President's keport for the Sixth Railway Project scheduled for consideration by the Executive Directors on July 19, 1983. 4. In addition to this strengthening of workers' participation at the microeconomic level, the concept of workers' management has been extended to encompass macroeconomic decisions. A set of instruments, called social compacts and self-management agreements, enable the participation of all economic agents in the formulation of macroeconomic policy, while maintaining decentralized responsibility for policy implementation. These instruments are used to supplement more conventional monetary and fiscal policy measures, particularly in the areas of prices, incomes, and employment. 5. The 1974 Constitution also introduced a new framework for economic and social planning, designed to reconcile decentralized decision-making with consistent and coordinated action. The system of planning first seeks to establish, through a set of social compacts, a national consensus on the major mediumrterm goals for the economy. Thereafter, plan formulation is based on participation of all economic and social units, including government bodies. Once consistency is achieved, economic units enter into medium-term agreements on supply, demand and investment intentions. In case agreements cannot be reached by the prescribed date, state bodies at the relevant level are permitted to intervene, but only on a temporary basis. B. Economic Trends and Development Issues 6. The economic development of Yugoslavia over the past two decades has been impressive, characterized by rapid economic growth and structural transformation. Between 1960 and 1981, GDP grew at an average annual rate of about 6% in real terms. The share of investment in GDP has been high throughout the period, above 30% in recent years. As population growth has been only 1% per annum, real per capita income has more than doubled during the period. Per capita GNP in 1981 is estimated to be US12,790 at 1981 markeft prices. 1/ The past three decades have also witnessed the growing integration of Yugoslavia into the world economy. Between 1960 and 1981 merchandise exports and imports grew by around 62 and 81 per annum in real terms, respectively. However, Yugoslavia's export performance to the industrial market economies has showed increasing weakness over the past decade, particularly since 1973. 7. While overall growth performance has been impressive, large regional disparities persist. The Republics of Bosnia-Herzegovina, Macedonia and Montenegro, each with two-thirds of the national average per capita output, and the AuLonomous Province of Kosovo, with one-third, are officially designated as less developed regions (LDR). The difference in per capita output between the most developed region in the country, Slovenia, and the least developed, Kosovo, is 6 to 1. These diiparities reflect several factors, notably the greater incidence of low productivity agriculture in the LDR, their higher dependency ratios and their higher population growth rates, which averaged 1.2% annually during 1971-81. 1/ According to World Bank Atlas methodology. Since 1965 concessionary investment credits have been granted to the LDR through the Federal Fund for the Accelerated Development of the Less Developed Regions. In addition, the Federal budget provides supplementary resources for social sector expenditures in the LDR. Together, these resources account for about 10% of the social product of the LDR. 8. Since 1954, employment in the modern social sector has increased by around 4% per annum, facilitating rapid outflows from the agricultural sector. Despite this impressive record, substantial productivity and income differentials remain between the modern (mainly social) and the traditional (predominantly private) agricultural sectors. These differentials have resulted in high demand for modern sector employment on the part of the rural labor force. Large numbers of Yugoslavs have sought temporary emplovment abroad since the late 1960s. At its peak in 1973 there were about 1.1 million external migrants. Since 1973, however, this trend has been reve-3ed, and returning migrants have added to the pressure on the social sector to create new work places. Unemployment rates have risen rapidly from about 72 in 1971 to over 12X in 1982. 1/ The incidence of unemployment is highly regionalized; in 1982 unemployment rates ranged from 29% in Kosovo to 2% in Slovenia. C. Recent Economic Developments 9. Despite an impressive record of economic and social development since 'orld War II, Yugoslavia today faces perhaps its most difficult economic situation since the upheavals which accompanied economic liberalization in 1965. In many respects the difficulties facing Yugoslavia are similar to those facing most middle income developing countries: higher oil prices and interest rates, sluggish world trade and more difficult access to international comercial bank credit. The severity of Yugoslavia's economic problems, however, also reflects structural deficiencies in the pattern of Yugoslav development w,hich became increasingly apparent in the seventies. In response the Government has introduced a series of stabilization measures since 1980. The main elements of the stabilization program introduced thus far have been restrictive monetary and fiscal policies to curb investment and reduce inflationary pressure, and the more active use of exchange rate policies to encourage exports. At the same time, imports have been scaled back in line with the revenues accruing from export earnings and more limited foreign borrowing. Yugoslavia's stabilization efforts are being supported by the IhF in the form a three-year SDR 1,662 million standby arrangement in effect s;nce January 1981. 1/ These -ates are not directly comparable to those in other countries. They represent the ratio of registered job-seekers (including some currently employed) to the social sector labor force. The ratio of registered job seekers to the total resident labor force was about 92 in 1982. - 4 - 10. As a result of its stabilization program, Yugoslavia succeeded in reducing its current account deficit from $3.7 billion in 1979 to $0.9 billion in 1981. Underlying this improvement was a strong surge in merchandise exports which increased in volume by 112 in 1980 and 82 in 1981. At the same time, merchandise import volumes vere reduced by 14Z in 1980 and 12% in 1981. In 1982, however, exports increased by less then one percent in value over the previous year, indicating negative real growth. Performance ot invisibles in 1982 was also below expectations. The Yugoslav authorities responded by devaluing the dinar (by 49Z against the dollar during 1982) and by further cuts in imports (the value of merchandise imports in 1982 declined by 8.2x). As a result of these efforts the current account deficit was further reduced, to an estimated $0.5 billion. While every effort is being made to isolate important domestic producers (and exporters in particular) from the effects of the import restrictions, the import squeeze is continuing to cause difficulties for Yugoslav enterprises. 11. Yugoslavia's economic growth has slowed markedly sinc'? 1979, when GDP grew by 4.2%. In both 1980 and 1981 GDP growth is estimated at 2.22. The latest available estimates indicate that GDP growth declined by 12 in 1982. This reduction in growth is partly a result of the stabilization measures, but is also due to shortages of imported inputs. Mining and manufacturing output has been particularly affected. There have been marked fluctuations in agricultural output mainly due to climatic factors. After stagnating in 1980 and 1981, agricultural output increased by 52 in 1982. Fixed investment has also fallen markedly in the past three years. Whereas fixed investment increased at an average rate of 9.52 between 1975 and 1979, it declined by 6.0% per year in 1979-82. Despite these slowdowns in investment and economic growth, Yugoslavia has been remarkably successful in maintaining a fast pace of job creation in the social sector. Social sector employment increased by 3.2% in 1980, 2.92 in 1981 and 2.3% in 1982. Generally speaking, employment growth has been fastest in the LDk where the incidence of unemployment is more severe. 12. One of the major aims of the stabilization program has been to reduce the rate of inflation, which increased from 13Z in 1978 to 222 in 1979. however, despite significant declines in investment and real domestic demand, inflationary pressures have continued. In 1980 and 1981 inflation accelerated to 302 and 38% respectively. In an effort to bring inflation under control, the authorities introduced temporary price ceilings on a wide range of goods on July 31, 1982. This policy met with only limited success, however, and inflation during 1982 was 322. The persistence of inflation has been due to a combination of factors. The etforts of the authorities to restructure the pattern of relative prices to promote more efficient resource allocation, stimulate agricultural production and rationalize energy use have all put upward pressure on the price level. The increase in international prices since 1979 and the cumulative effects of the substantial depreciation of the dinar considerably increased domestic production costs. Nominal personal income - 5 - growth has also proved difficult to control. The Government's intention is to reduce the rate of inflation to 20X during 1983. Given the likely inflationary effects of the depreciation of the dinar and mounting pressure from workers to reverse the decline in real wages (which have fallen by 17X in real terms since 1979), any reduction in the inflation rate below the 1982 level should be considered a significant achievement. 13. Yugoslavia's adjustment efforts have been cc'uplicated by adverse developments in the international capital markets. Increases in international interest rates since 1979 helped push interest payments from $0.8 billion in 1979 to an estimated $1.9 billion in 1982. Principal repayments on medium- and long-term debt were an estimated $1.9 billion in 1982. IWhile there is recognition of the magnitude of Yugoslavia's adjustment efforts, the commercial banks have tended to adopt a cautious position toward increasing their exposure. This has partly been due to adverse developments in other parts of the world and partly to liquidity problems experienced by some Yugoslav banks. Medium Term Prospects 14. The Federal Five Year Plan for 1981-85 was adopted in March 1981, but in view of the external constraints on economic growth, particularly the constraints oa external borrowing, the plan is being significantly revised. The main goal of economic policv is to put the balance of payments on a secure footing and to ensure stable and sustained growth during the 1986-90 plan period. For the next few years, however, the authorities expect to see continued slow growth in social product and even slower growth in domestic expenditure to allow resources to be released for exports, with the aim of achieving a current account surplus before the end of the plan period. This strategy also implies continued reductions in the rate of fixed capital formation. Within the reduced investment program, the priorities stressed are export promotion, the development of domestic energy sources and raw materials. The plan also stresses agricultural development in order to reduce food imports and to expand food exports. Nonproductive investment is to be cut back sharply. 15. Since slower growth will make it more difficult for the social sector to generate additional employment at the pace of the past, emphasis is being laid on the development of labor intensive activities, including small-scale enterprises and the increased use of shift work. Finally, the reduction of regional disparities remains a major objective of Yugoslavia's economic planning. Financial transfers between regions will play an important role in this process, with particular stress on encouraging social sector enterprises in the more developed regions (MDR) to make direct investments in the LDR. The initial experience with such joint ventures is encouraging and a substantial number of such projects have been launched. They could make a significant contribution to the overall efficiency of production within the LDR by facilitating the transfer of technological and managerial know-how within Yugoslavia. -6- Creditworthiness 16. Commercial financial credits to Yugoslavia have declined significantly and most recent credits have been organized on a bilateral intergovernmental basis. Gross medium- and long-term capital inflows declined 'rom $4.2 billion in 1980 to an estimated t2.0 billion in 1982. Total medium- and long-term debt, outstanding and disbursed, in estimated at about $16.3 billion at the end of 1982 while short-term debt at the end of December 1982 stood at about $1.8 billion. While Yugoslavia was able to increase its short-term borrowing by about $1 billion during the 1979-81 period, it was unable to roll all of this debt over during 1982 and outstanding short-term debt declined by approximately $500 million over the course of the year. During 1982 there was a substantial decline in foreign exchange reserves which at the end of that year amounted to $1.7 billion, or roughly one month of imports of goods and services. 17. About three-quarters of the debt contracted by Yugoslavia in past years has been provided in convertible currencies through commercial sources. The bulk of this commercial credit has been in the form of suppliers' credits. The World Bank is the principal source of non-commercial long-term credit to Yugoslavia. Yugoslavia will continue to require a substantial inflow of foreign lending if it is to achieve its medium-term objectives. Taking account of workers' remittances, the debt service ratio averaged 16X between 1976 and 1981, while the debt service ratio in convertible currencies averaged 192 over the same period. In 1982 the estimated aggregate debt service ratio climbed to 22 percent reflecting the increase in interest payments on floating rate debts and the decline in the value of exports. Similarly the estimated debt service ratio on convertible currency debts rose to 27 percent. A major effort, involving some OECD countries, international comnercial banks and the IMF, has been initiated to assist Yugoslavia in maintaining an orderly debt repayment. Agreement has now been reached in principle on a total foreign assistance package amounting to approximately $6 billion. The Yugoslav authorities have also requested Bank consideration of a structural adjustment loan to complement this effort. Although Yugoslavia's liquidity situation may remain difficult in the near term, the aggregate debt service ratio is expected to decline somewhat over the next few years. Given it's past debt service record, pragmatism, and demonstrated capacity to implement firm stabiliza'ion policies when these are called for, Yugoslavia remains creditworLny for a substantial level of Bank lending. PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA!/ 18. The proposed project would be the 81st loan by the Bank to Yugoslavia totalling about $3,884.46 million.2/ Of this, approximately 36 percent ($1,358.4 million) has been for 24 operations in the transportation sector -- 12 Eor highways, 8 for railways, and one each for a natural gas pipeline and an oil pipeline, and two for a port project. Historically, Bark lending has concentrated on infrastructure including, in addition to the transportation loans, six power loans, one telecommunications loan, three water supply and sewerage and three multipurpose loans (two of which include substantial irrigation components). In recent years, Bank lending bas increasingly focussed on the agriculture sector for which fifteen operations, totalling *945.6 million (about 27 percent of the total) have been made. Twenty-one loans amounting to $475 million (about 14 percent of the total) have also been made for industry. Two loans have been made for tourism and a first Bank loan for air pollution control was approved in 1976. 19. Yugoslavia's disbursement performance deteriorated somewhat in 1981 largely due to a shortage of local funds arising from financial constraints. Following an implementation review of the whole loan porttolio witb Borrowers in the fall of 1981, performance has markedly improved in 1982. Yugoslavia's performance now, as traditionally, compares most favorably with Bank-wide and regional averages and with most other countries of a similar per capita income. Annex II contains a summary statement of Bank loans and IFC investments as of March 31, 1983, and notes on the execution of ongoing projects. 20. The interrelated objectives which the Bank has pursued recently in its lending to Yugoslavia are to; (i) increase exports and improve the efficiency of import substitution; (ii) increase the efficiency of domestic investment with a view to increasing production with the more limited investment resources available; (iii) improve access to capital markets; and (iv) reduce unemployment, particularly in the LDR. Not every Bank operation can address all these objectives nor be entirely oriented towards the LDR, but the basic thrust of the Bank's activities in Yugoslavia continues to be toward the development of the LDR. Underpinning this orientation are economic surveys of the four LDRs undertaken by the Bank, intensified Bank assistance in project formulation, and ongoing economic and sector analysis. 1/ Part II of this report is substantially unchanged from Part II of the President's Report for the Sixth Railway Project scheduled for consideration by the Executive Directors on July 19, 1983. 2/ The 79th loan would be the Structural Adjustment Loan (US$275 million) approved by the Executive Directors on June 28, 1983. The 80th loan would be the Sixth Railway Project (US$110 million) which is scheduled for consideration by the Executive Directors on July 19, 1903. - 8 - 21. Given the complexity of the Yugoslav system, the process of evolving acceptable solutions to problems in cumbersome. The Bank has therefore put increased emphasis on forstering coordination, particularly in the transport and energy sectors where significant progress has been achieved. Through its future operations the Bank will seek to consolidate past successes in institutional reform. further development of the project preparation, appraisal and supervisory capabilities of the regional banks through which a large amount of Bank funds are channelled will remain a major objective. The Bank will concentrate its lending operations in areas where its incremental institutional and/or policy coordination impact has most potential. 22. A persistent foreign resource gav looms as the major impediment to Yugoslavia's ability to maintain its growth momentum and to address the critical issues of unemployment and regional disparities. The Bank has helped to attract additional sources of credit through co-financing arrangements and through assisting in the establishment of new banking relationships for Yugoslavia. The Bank, however, is the major source of long-term external capital and is expected to remain so in the near future. In its future lending to Yugoslavia, the Bank intends to put increased emphasis on co-financing, recognizing, however, commercial market constraints that Yugoslavia is facing. 23. Yugoslavia's debt to the Bank in 1981 amounted to about 9.0 percent of its total debt outstanding and disbursed and this ratio is expected to remain fairly stable. Service on Bank luans as a proportion of total debt service was 5.4 percent in 1981 and is projected to be about 6 percent by 1986. 24. IFC started its involvement in Yugoslavia in 1970; since then, IFC has made 19 investments in the country and, as of March 31, 1983, IFC's portfolio amounted to $327.5 million gross and $178.7 million net of participation and repayments. The basic objectives of IFC in Yugoslavia are to: (a) assist priority subsectors in industry and natural resources development; (b) encourage foreign investment on a joint venture basis; (c) foster technological transfers; and (d) mobilize other financial resources in addition to IFC's own funds. Also, IFC continues to give special, although not exclusive, emphasis to the LDRs. -9-- PART III - THE INDUSTRIAL AND FINANCIAL SEPTOR A. The Industrial Sector A. Industry-Structure and Performance 25. The industrial sector of Yugoslavia has been the leading sector of the country's economic growth since the early 1950's and plays a central role in its foreign trade. In 1980, industry 1/ accounted for over 36 percent of 'Yugoslavia's GNP 2/ (27 percent in 1960), employed one fifth of the total labor force (13 percent in 1960) and accounted for 95 percent of merchandise exports (75 percent in 1960). The industrial structure is quite diversified with a number of basic industries based on the country's sizeable natural resources and a well-developed manufacturing sector which produces a wide range of capital, intermediate and consumer goods. Large, and generally capital intensive enterprises are predominant. Yugoslavia became an important exporter of industrial goods in the 1950s. Although the share of exports in total industrial output declined somewhat in the 1970s, it still represented more than 9 percent by 1980. The bulk of industrial exports is generated by the KDR, although Bosnia-BerzeSovina and hacedonia in LDR are also making some contributions (14 percent and 5 percent of total commodity exports in 1980). 26. On the vhole, performance of industry during the 1970's was characterized by relatively rapid average growth of output (one point higher than the average growth of the economy), high rates of irvestment, and significant reduction in the growth of industrial imports, aue to both import protection and successful import-substitution, but also sluggish industrial exports growth, particularly in the developed countries market. At the same time, the capital intensity of industrial investment increased, and there was only a modest growth in total factor productivity. Industrial employment increased from 1.4 million to 2.2 million between 1971 and 1980; there was, howvver, a decline in the elasticity of employment creation to induscrial output. Distortions in sub-sectoral investment allocations led to lagging development of the designated priority sectors. Industry in the LDR 27. Over the past 30 years, the share of industry in GMP in the four LDR grev faster than in other regions. Although the LDR started with a considerably lower level of industrial development after Second World War, by 1980 industry's share in the GNP of the LDR (38 percent) exceeded that of the more developed regions (MDR) (37 percent). However, the value added in industry in the MDR is tvice that in the LDR on a per capita basis. 1/ Including manufacturing and mining. and excluding electrical power generation and construction. 2/ Gross Material Product - :o - Because of the LDRs' substantial wealth of u-neral and energy resources, basic industries have played a very importan: role in their economies, implying a more capital intensive industrial structure than for the MDR. Among the LDR, Montenegro and Kosovo continua! to have the most capital intensive industrial structures, with basic industries making up nearly 40 percent of industrial value added. In KOsOVO. basic industries have been developed in mining and energy (coal, electricity and gas based on lignite). The manufacturing industry is limited to about fifty medium and large enterprises in a few sub-sectors. Commodity exports were of the order of $200 million in 1981, 50 percent of which are lead and zinc. The current Social Plan emphasizes the completion of ongoing projects and the creation of small and medium scale labor intensive industries for the processing of local raw materials to serve the domestic market in Kosovo and other republics. Ihe high rate of unemployment (17 percent of the labor force) is the single most important issue that Kosovo has to address and the Plan aims at the creation of 65,000 new jobs in the social sector, largely in industry. In Montenegro, industrial development is even less advanced than in Kosovo. Large capacities have been established for the production of steel and aluminum which are mainly used by other republics. Beyond that, there are few processing industries. Vomodity exports are small - about $150 million in 1981 - and include mainly aluminum and steel. Unemployment (12 percent of the labor force) and, to a larger extent, availability of the skills needed by industry are major issues in the republic although less acute than in Kosovo. In industry, the Social Plan gives a marked priority to the development of processing industries for export, based on locally produced raw materials (aluminum, steel, wwood, leather and textiles, and agriculture), and emphasizes rapid income generation and efficiency, regional development within the republic, and employment creation. Industrial Development Issues 28. After three decades of rapid development Yugoslav industry is faciig a number of problems. The stress placed on import-substitution restAlted in a bias against exports and distortions in the industrial st7ucture. The growth rate of Yugoslav exports slackened to 6.5 percent during 1965-72 and 3.8 percent during 1973-80 from the 11.4 percent achieved in the period 1953-65. Except in certain sub-sectors, the structure of Yugoslav industrial exports has become highly diversified. Exports have often been of a spill over nature and implied a high domestic resource cost. As a result of this, as well as the rapidly rising costs of imported energy and deteriorating terms of trade since 1973, the trade deficit has substantially widened. In view of the constrained foreign exchange position, it is becoming vital for Yugoslavia to give its industry a strong drive toward export for the long term, to optimize the utilization of domestic resources and to specialize in areas of comparative advantage. - 11 - 29. Raising labor productivity, as well as capital productivity is a key issue for the external adjustment of Yugoslav industry, particularly in the LDR. The system of investment planning has a number of weaknesses which, when combined with inappropriate p. iicies and market signals have created the conditions for low factor productivity in Yugoslav iviustry. The economic analysis underlying investment selection does not always take into account such issues as the comparative advantage of Yugoslav industry and minimization of domestic resource costs. The subsidized interest rates and the preference to modern technology have not responded adequately to the Yugoslav situation of lower labor costs, scarcity of foreign exchange, and high levels of unemployment in the LDR. Because of the predominance of local and regional interests, the fragmentation of the capital market among regional lines and difficulties in pooling resources among enterprises and across regions, there is little incentive and no well-defined mechanism to analyze alternative location or scale of projects and coordinate industrial development on a country-wide basis. The export drive of Yugoslav industry may result in improvements in these areas in the long run. Greater responsiveness to international competition would necessitate optimizing resource allocation, increasing capacity utilization, seeking economies of scale, and improving technology and productivity. A sustained export orientation would also require a rationalization of industrial incentives which, in turn, would stimulate industries serving the domestic market to make more efficient and rational use of resources and to increase their productivity. Ultimately, certain sub-sectors would have to be restructured and enterprises among regions would have to coordinate their development and associate themselves through domestic joint ventures to achieve economies of scale and specialization, and penetrate foreign markets. 30. Policy-makers at both the Federal and regional levels have recognized the need to tackle these issues in preparing the Social Plan for 1981-85 and the industrial sector is expected to play a central role in Yugoslavia's external adjustment. The new industrial policy provides for a pronounced shift from import substitution towards export-led growth. There is to be a stress on rationalization and greater efficiency of investment planning, implementation and use, and the completion of ongoing projects. Emphasis is placed on the modernization of existing industries, backward and forward linkages among industries and removal of bottlenecks, and productivity increases to save on the use of scarce investment resources, and to achieve competitiveness in exports and more efficient import substitution. The stabilization program introduced since 1982 (para. 9) includes a reduction of the rate of fixed investment, although to a lesser extent in industry than in other sectors.Within the reduced investment total the share going to the designated priority sectors (energy, basic metals, minerals and basic chemicals, capital goods and exports) is higher than in the past. Employment creation is a continued objective of industrial policy, particularly in the LDR, and is to be fostered through the development of labor-intensive processing industries and the encouragement of small and medium scale enterprises. There is also a continued desire to industrialize all regions and communes of the country, a goal which has been pursued with considerable success so far. - 12 - Attempts have been made to improve inter-regional industrial coordination through the conclusion of social compacts among regions on the development of industrial capacities, particularly in basic industries. Progress in this area should also result from the "pooling" of resources among enterprises and joint ventures between IDR and LDR enterprises, which are stimulated by more active measures. Joint ventures between LDR and MDR enterprises are seen as a major mechanism for raising LDR productivity and adjust their productive structure, improve industrial coordination and know how transfer among regions, and provide access to domestic and foreign markets for LDR enterprises. 31. There is an active policy dialogue between the Government and the Bank on employment and industrial development issues. Bank reports on export performance and policies, raising productivity in Yugoslav industry, small scale industry and employment strategy and manpower policies for the 1980s dealt extensively with the country's industrial policy framework and paid particular attention to the need to improve the incentives for industrial exports and employment creation.l/ The proposed project builds on the lessons drawn from the economic policy dialogue in a variety of ways. Specifically, in line with the Bank's overall policy recommendations, it focusses on labor-intensive and export-oriented sub-projects and encourages joint ventures in the two LDR with the less advanced industrial sector. B. The Financial Sector 32. Multipurpose banks (whose founders are their depositors and borrowers), are the dominant form of financial intermediaries carrying out all commercial aud investment banking functions for all sectors of the economy. ahe two proposed borrowers Udruzena Kosovska Banka Pristina (KBP) and Investiciona Banka Titograd Udruzena Banka (IBT), together with their member basic banks, handle the bulk of investment and commercial banking in their respective regions. In addition to the multipurpose banks, the financial sector includes the National Banks, which essentially perform the role of central banks at the Federal and Regional levels, the Post Office Saving Bank and other savings institutions, investment loan funds and insurance institutions. A Federal Credit and Banking Law, effective January 1978, changed the banks to a three-tier organizational commercial banking structure consisting of internal, basic and associated banks. An internal bank is essentially a service organization established by BOALs (see para 3) within a Kombinat. A basic bank may carry out all kinds of credit and banking operations in Yugoslavia, within the framework of its own resources, and as such forms the core of the restructured banking system. It can be founded by any social legal entity. An 1/ Recent Bank reports on Yugoslavia's industrial sector include special studies on Export Performances and Policies (No. 2972-YU), on Productivity in Yugoslav Industry (No. 3383a-YU) and on Small Scale Industry and Industrial Policy (No. 3452-YU), Chapter VI of the report: Yugoslavia - Adjustment Policies and Development Perspectives (No. 3954-YU). - 13 - associated bank is established as a legal entity through a self-management agreement of two or more basic banks, its main function beLng to concentrate resources for financing major investments and to carry on foreign business transactions on behalf of its member basic banks. It also administers the Federal Fund (see para. 7) allocations in its region. Both KBP and lBT are associated banks. 33. Resource Mobilizatior and Allocation. The resources of banks are made up of mainly intermediated tunds, i.e. sight and term deposits of social and private sector enterprises, households and other organizations, borrowings from other banks in Yugoslavia, and foreign borrowing. In the case of banks in the LDR, such as KBP and IBT, non-intermediated funds such as Federal and Regional funds are another major resource. As to foreign commercial borrowings, the National Bank of Yugoslavia has recently replaced the regional banks as the principal borrower. In drawing up their Five Year Plan and allocating their funds, regional banks follow decisions reached at enterprise, regional and federal levels. This is in line with Yugoslavia's extensive planning system which culminates in the conclusion of social compacts and self-management agreements which have the force of law (see para. 4). At the stage of investment decisions the banks have a key role to play in ensuring that the projects presented by the enterprises are consistent with the plan priorities in terms of sectors, locations, markets, technology, employment effects etc., correspond to the investment proposals initially agreed in the planning process and are economically and financially viable. Past Bank Industrial Credit Lending 34. The Bank has thus far made six loans to associated banks in the LDR, totalling $376 million. The first five loans were aimed primarily at (i) providing foreign currency resources mainly for the development of small and medium sized industries and supporting Yugoslavia's industrial development; GiU) supporting rapid development and employment creation in the LDR, particularly by encouraging labor intensive projects; (iii) promoting greater inter-regional cooperation and coordination through joint-ventures between enterprises in the LDR and MDR; (iv) helping access to external commercial sources of finance for Yugoslav enterprises by encouraging co-financing; and (v) contributing to rational nllocation of investment resources and institution-building of participating banks in the industrial sector. The sixth loan, made to Privredna Banka Sarajevo (PBS) and Stopanska Banka Skopje (SBS) in 1982, aims to assist mainly export-oriented industrial projects, besides meeting the above general objectives. 35. Out of the past loans, commitments and disbursements under the first and second industrial credit lines (IC I and II), (Loans Nos. 1012 - 1013 and 1277 YU), totalling $100 million, have been completed and a completion report on the first loan has been prepared; an evaluation of this loan by OED is currently underway. IC III and IV (Loans Nos. 1611 - 1614 YU) of $40 million and $60 million respectively are also fully committed and expected to be disbursed by December 31, 1983. In line with their partial objective, the - 14 - first four loans have contributed to employment creation at a reasonable cost per job. Also, the estimated financial rate of return (FRR) and economic rate of return (ERR) of the sub-projects financed vere in most cases well above the agreed minimum of 11 percent. Finally, under IC III and IV, 26 sub-projects financed by KBP and IBT have attracted foreign currency co-financing totalling $16.5 million. IC V (Loans Nos. 1909 - 1912 YU) which became effective on August 17, 1981 allocated $50 million to KBP and *20 million to IBT. Funds are expected to be fully committed by September 1983, ahead of the February 1984 target date. To date, 26 sub-projects have been approved by KBP and IBT under IC V but they have attracted co-financing of only $3.2 million because of recent difficulties in mobilizing new external loans. 36. A review of sub-projects of KBP and IBT shovs that their results are generally satisfactory. A few projects are facing problems mainly due to cost overruns or difficulties in the import of raw materials due to foreign exchange constraints. Efforts are being made by concerned enterprises, vith the help of their banks, to obtain foreign exchange from other enterprises with a surplus of such funds and to borrov additional funds for financing cost overruns. PART IV - THE PROJECT 37. The proposed loans and project are sumamrized in the Loans and Project Summary at the beginning of this report and described in detail in the "Staff Appraisal Report on a Seventh Industrial Credit Project" No. 4301-YU dated May 23, 1983. This report is being distributed separately to the Executive Directors. The project was appraised by a mission which visited Yugoslavia in October/November 1982. Negotiations were held in Washington from April 25 to May 4, 1983. The Yugoslav delegation was led by Mr. A. Ilic, Assistant to the President of the Federal Committee for Energy and Industry; KBP was represented by Nr. R. Zahiti, President, and IBT by Mr. I. Culjkovic, President. Objectives of the Proposed Loans 38. The last industrial credit --IC VI- to Yugoslavia represented a new orientation by addressing more specifically the priorities for industrial development for the country and the two beneficiary LDR (Bosnia Herzegovina and Macedonia) and taking into account the institutional situation of their banks (PBS and SBS). A similar approach has been taken in developing the proposed project for the other two LDR (Kosovo and Montenegro) and their banks (KBP and IBT). Specifically, the ptoposed loans are designed to (i) help alleviate the unemployment problem of Kosovo and Montenegro by assisting labor-intensive industries; (ii) support Yugoslavia's more general objective of industrial export growth by assisting export-oriented industries; (iii) encourage joint ventures between different republics and provinces of Yugoslavia; (iv) help the borrowing banks to increase their role in the identification of projects in priority areas through specific studies; and - 15 - (v) strengthen the institutionel capability of the borrowing banks. Subject to improvement in the eAternal resource mobilization situation for Yugoslavia, the loans would also encourage co-financing in sub-projects financed under them. The above objectives are in line with the Federal and Regional plans and the Bank's lending strategy vis-a-vis Yugoslavia as elaborated in Part II above. The Borrowing Banks 39. Institutional Aspects. The two borrowers, KBP and IBT, are associated banks (see para 37). Each bank has its own self-management agreement and statutes; its operations are regulated by the National Bank at the Federal level and various Federal directives, and supervised by the Social Accounting Service (SDK). The Absembly of a bank is its highest governing body; in the case of an associated bank it is made up of delegates elected by the members of the basic banks. The Assembly appoints, for a four-year term, each bank's President who is the chief executive. In late 1982, the number of employees was 288 at KBP and 205 at IBT. Both banks have almost similar organizations, divided into functional departments. 40. Like all other Yugoslav banks, XBP and IBT do not have formal financial policies per se concerning their operations such as exposure limits and maximum debt to equlty ratio. Nevertheless, they generally follow prudent practices. Any substantial allocation of funds to a particular project has to be in accordance with the Regional Plan. The banks use similar procedures for project appraisal. All projects are first examined and approved by member basic banks, and projects which exceed their resources, and/or involve Federal or Regional Funds, or foreign exchange, are forwarded to the associated banks for further detailed appraisal and approval; these include all Bank-financed sub-projects. 41. The progress on institution building of KBP and IBT has been limited. Consequently, under the proposed project, a special emphasis will be given to the institutional improvement aspect of the two borrowers. A plan of action has been prepared in consultation with UBP to improve staff capability of project appraisal and supervision, managerial capabilities and overall coordination and review of work with particular emphasis on the work related to the Bank's industrial credit projects. RBP has already started implementing the plan and a timetable for implementing the plan has been agreed upon during negotiations (KBP Loan Agreement, Schedule 4). The appointment of a development banking advisor acceptable to the Bank will be a condition of effectiveness of the proposed loan to KBP (KBP Loan Agreement, Section 6.01). IBT initiated a study on strengthening its institutional structure and loan portfolio by hiring local experts in these fields. IBT and the Republican Government of Montenegro have started implementing recommendations contained in the study. IBT has also initiated implementation of the Bank's recommendations which emphasize, inter alia, the importance of strengthening the IBRD unit within IBT and improvement in staff capability in project appraisal and supervision. After review of progress so far made, a timetable has been agreed for carrying out remaining measures - 16 - contained in the recommer.dations of local experts and the Bank (IBT Loan Agreement, Schedule 4). As a measure to strengthen staff capability in both b.anks, the project will provide $100,000 of technical assistance for the training of two staff members of each bank in project identification, appraisal, and supervisira work outside Yugoslavia, mainly witb a vell established development bank. In view of the current foreign exchange constraints, the proposed loans provide $150,000 for the importation of essential office equipment for KBP and IBT. 42. Financial Position. The banks plan their operations on a disbursement rather than a commitment basis. As a result, each bauk has D substantial overcommitments vis-a-vis available resources at any point in time which it expects to cover by transfers from the Federal and Regional funds for priority projects and other sources. The banks maintain a tight liquidity position which is regulated by the National Bank of Yugoslavia together with regional National banks and supervised by SDK. Debt/equity ratios (exclusive of the Federal and Republican/Provincial Funds) reached 2.7:1 at the end of 1981 in the case of KBP and 13.6:1 in the case of IBT but are not to be conventionally interpreted in the Yugoslav context. The solvency of Yugoslav banks is a function of the solvency of their basic member banks and, in turn, their founder members (each assuming unlimited liability for the bank's debts). The banks are only expected to earn an income which is adequate to cover their expenses and to make required allocations to a Joint Liability Fund and a Reserve Fund. However, annual allocations made by KBP and IBT to these reserve funds have not fully met Yugoslav regulations. During negotiations, understandings were reached with the banks that they would increase the Joint Liability Fund to the required level of 3% of total investments by 1987. As regards the Reserve Fund, the banks will meet the requirement of transferring out of their net annual income a sum equal to at least 0.3% of total investment. 43. The long-term loans in arrears of over three months as a percentage of long-term loans portfolio were 3.9 percent ann 5.3 percent respectively for KBP and IBT at the end of 1981. KBP's arrears are considered to be within acceptable limits. Also, as a result of legal restrictions on additional financial assistance to delinquent enterprises an4 the strengthening of the project supervision system further improvements should become visible in the coming months. IBT's arrears are relatively more serious although confined largely to a small number of borrowers. IBT's management is concerned with the arre;.r situation and, in 1982, it appointed locel consultants to review this matter. Their recommendations for improvement of operations of concerned enterprises and loan recovery have been largely accepted. Improvements in IBT's overall loan recovery have already occured, arrears over three months is a percentage of long-term loan portfolio declined from 5.3% at the end of 1981 to 3.32 at the end of 1982. Further progress on implementation of the consultants' recommendations and IBT's loan recovery position will be closely monitored by the Bank. A few basic member banks of KBP and IBT have suffered foreign exchange losses on foreign currency savings accounts due to currency fluctuations. While these losses are manageable and will be amortized against future annual income, KBP - 17 - and IBT agreed to make appopriate arrangements to protect themselves in the future against the foreign exchange risk in their lending and borroving operations (Loan Agreements, Section 4.05). 44. Both banks are audited by SDK following generally accepted inLernational accounting standards, to the extent consistent with Yugoslav law. Over the past several years, SDK has expanded the scope of its international standard audits and, in 1979, as part of its annual audit, it started a detailed portfolio analysis of all four banks having been recipients of previous Bank lines of credit. 45. Both banks are considered credit-worthy for Bank lending. This assessment is based on the fact that: (a) there have been no significant loan 'osses in the past, (b) management of resources and selection of projects are generally satisfactory, and 'c) the basic member banks and, in turn, their founder members have unlimited liability for the associated banks' obligations. 46. Operations. The main areas of operation of the two banks are loans and guarantees. Long-term loan commitments have shown an overall growth over the past several years, reflecting the increase in investment in the regions the banks serve. In 1981, long-term loan commitments of KBP amounted to $473 million, with manufacturing accounting for 61.7 percent of the total. IBT's long-term commitments amounted to $363 million of which manufacturing accounted for 61.1 percent. Guarantees in favor of enterprises, primarily in the industrial sector, have also shown a generally increasing trend, amounting to $132 million for RBP and $183 million for IBT in 1981. 47. Forecast of Operations. Operational and financial projections of KBP and IBT are based on their medium-term plans for the 1981-85 period and linked to the regional plans for Kosovo and Montenegro. The banks' forecast of operations indicate that each expects long-term loan commitments to continue to expand. Their long-term resource mobilization plans appear reasonable, with Federal and Regional funds allocations expected to be the most important source for KBP. The loans would meet about 21 percent of the banks' total foreign currency requirements for industrial lending from mid-1983 to end 1985 on a commitment basis. The final date of sub-project submission under the loans would be December 31, 1985 and the Closing Date December 31, 1988 (Loan Agreements, Sections 2.03 (c) and 2.04). Features of the Proposed Loan 48. Allocation: KBP and IBT will receive $45 million and $25 million respectively out of the total loan amount of IC VII. Sub-loans can only be provided for labor-intensive and/or export-oriented sub-projects. 49. Labor-Intensive Projects. The main beneficiary under the proposed loan will be labor-intensive projects. Eligible labor-intensive projects under the proposed project would have a more restrictive criterion of a total capital cost per job not exceeding $25,000 in 1982 prices, as compared with - 18 - $31,000 equivalent under IC V. The new criteria are based on the actual cost per job )bserved in six relatively more labor-intensive industrial subsectors in Yugoslavia. 50. Export-oriented Projects. Ir order to ensure viable exports based on comparative advantage under the project, new sub-projects would export direccly at least 30 percent of their production, and balancing, modernization, and/or expansion sub-projects would export at least 40 percent of their incremental production. The eligible export oriented sub-projects would also include those sub-projects whose output is further processed by another project for direct export. To ensure their overall positive contribution to the balance of payments of the country and optimum use of domestic resources including raw materials, labor and technology, eligible sub-projects would have to recover their foreign exchange cost through net foreign exchange earnings within a six year period commencing six months after their completion (Loan Agreements, Schedule 3, Part A, paragraph 1(a)). The borrowing banks will closely supervise and review the export performance of sub-borrowers to ensure compliance with export targets and periodically report their findings to the Bank. In case sub-borrowers fail to comply with the export targets and the banks sbould conclude that such failure is due to negligence or lack of sufficient effort by the enterprises, the borrowing banks would take any of the following measures against the enterprises: (i) a penalty interest of up to 4 percent per annum; (ii) restrictions on future credits (both long-term and short-term) to the enterprise; and/or (iii) call back of sub-loan or shortening of sub-loan maturity (Loan Agreements, Section 3.02 (a)(vii)). 51. Joint Ventures. Joint ventures are seen as a major mechanism for increasing transfer of resources, industrial know-how and managerial capability, achieving better industrial integration and coordination among regions, and raising LDR productivity. Joint venture projects will include an investment by one or several enterprises of republics and provinces of at least 20 percent of the total project cost and provide for a technical and management assistance agreement with the investing enterprise(s). To facilitate the conclusion of joint ventures in the two regions under the project, at least one third of the proceeds of the loan will be earmarked for joint venture projects which would meet the labor intensity and/or export orientation criteria (Loan Agreements, Section 2.03 (a)). 52. KBP and IBT have received feasibility reports for 32 labor-intensive and 18 export-oriented projects wnich are expected to meet the proposed eligibility criteria and would require a total of about $146 million in foreign currency financing. Also, it is anticipated that, on the basis of agreements signed and ongoing negotiations on specific projects between Kosovo and Montenegro and other regions, the two banks should be able to use at least one-third of the loan amounts for joint ventures. - 19 - 53. lechnical Assistance for Studies and Institution Building. In order to prepare more diversified project pipelines in the area in which the two regions have comparative advantages, KBP will undertake studies for the iaentification of labor-intensive and export-oriented sub-sectors and projects in Kosovo; IBT will undertake the study of export-oriented sub-sectors and projects. A study of labor-intensive industries has already been completed by the Economic Institute of Montenegro. Although certa.n Yugoslav institutes have the general expertise to prepare these types of studies, short-term foreign experts will be needed to assist in the preparation of export studies and assessment of foreign markets. Due to financial constraints, the entire cost of studies will be financed under the Bank's loans. The selection of consultants will be made following the Bank's guidelines. Studies of export-oriented industries would require about 50 man-months each ($3,000/man-months 11) and would cost about $170,000 for each bank. The study -f labor-intensive industries would require about 40 man-months ($1,8'J/man-months 1/) and would cost about $80,000 for each bank. Studies c* labor-intensive and export-oriented industries are expected to be completed by harch 1984 and June 1984 respectively (Loan Agreements, Section 3.06). As noted above, the project also aims at substantial institution-building of the two banks, particularly better management control and improved project appraisal and supervision. The project includes plans to finance components of the institution building program (paras. 39 to 41). 54. Sub-project and Sub-loan Size: The maximum size for labor-intensive sub-projects will be $20 million and the maximum sub-loan amount for such sub-projects will be $4 million. There will be no limit on the maximum size of export-oriented sub-projects (since they may need to be fairly large to achieve economies of scale and be competitive internationally) but their maximum sub-loan amount will be $5 million. A review of the banks' pipeline of sub-projects indicates that, except for one, all sub-projects would be within the maximum limit of $20 million. 55. Free Limit; In order to give the Bank a continuing role in the institutional improvement of the two banks, the free limit for individual sub-loans under the proposed loans will be set at $1.5 million. The aggregate free limit will be maintained at 60 percent of the total loan amount for each bank. The first five sub-loans in the export oriented category will be submitted for the Bank's detailed review and approval to provide guidance and enable the banks to improve their sub-project appraisal. It is expected that the above arrangement would ensure the Bank's review of about 80 percent of the loan amount and about 40 percent of sub-projects. 1/ The average man-month cost of export study is higher because of engaging short-term foreign consultants. - 20 - 56. Terms of Sub-loans; The repayment period of individual sub-loans will not exceed 15 years including a maximum grace period af ;hree years. As an incentive fcr (i) joint ventures with enterprises in other republics and provinces, and (ii) cc-financing with other foreign exchange rescurces, the maximum grace period will be extended up to five years, provided the need fcr such a longer grace period can be demonstrated. The $670,000 technical assistance component will be repayable by the banks over 18 years including three years ct grace. 57. Eccncmic and Financial Evaluation: As under previous industrial credits, the borrowing banks will prepare a satisfactory economic and financial evaluation of sub-projects including the calculations of ERR and FRR. As prcvided in IC VI, the minimum ERR of sub-projects will be 12 percent and the minimum FRR will be increased in line with lcng-term interest rates in Yugcslavia (para 58). Sub-projects should be financially viable even when financed by loans fran specially earmarked funds at subsidized interest rates. The sub-projects will, therefore, have a minimum FRR which will be nct less than the borrowing banks' interest rates on long term lcans made fram their own local currency resources at the time of approval cf a sub-project (minimum of 18 percent). Interest Rates and On-Lending Rates 58. Despite a prevalent view in Yugoslavia that the role of interest rates in investment allocation is subordinate to that played by social planning and group consensus, a more active use of interest rate policy has increasingly became the cbject cf government policy. Indeed, the new Federal Sccial Plan and the Naticnal Assembly have resolved that interest rates shGuld play a more important role in resource mobilizaticn and allocation. The medium-term objective is tc introduce over time a structure of positive real interest rates by gradually adjusting naminal rates upwards and concurrently reducing inflation. In this respect, Gcvernment anti-inflationary measures, applied in accordance with agreements reached with the IMF, have succeeded in bringing inflaticn down fram an annual rate of over 50Z in the first half of 1981 to 322 in 1982. Inflation in 1983 is expected to be about 30%, with a further deceleration expected in 1984 to about 25%. Recently, in ccasultation with the IMF, the Yugcslav Banks Association conducted a review of the interest rate structure. In May and in October 1982 and again in February 1983, significant increases in the structure of depcsit rates and rediscount rates were implemented. The Government has cver the past three years more than doubled lending rates fcr consumer credits, m at recently in October 1982 raising from 16 to 18% the ccsts of lcng-term consumer credit while raising interest rates cn time deposits. The three year time deposits are now at a level of 28%. 59. In the context of the propcsed loan it has been agreed that KBP and IBT will charge a minimum of 18 percent an loans made from their own local currency resources fcr Bank supported sub-projects (Loan Agreements, Section 3.05). However the actual minimum interest rate charged cn sub-projects approved after January 1, 1984 would increase in accordance with the understandings reached under the Structural Adjustment Lcan to Yugoslavia. - 21 - Thus a ilcor lending rate will be introduced on local currency resources of 18 percent plus one third of the difference between 18 percent and the rate of inflation (as measured by the producer price index). Further adjustments will be made with the intention of achieving positive real rates by 1986 (as measured by the higher of producer price or retail price inflation). Certain high priority industrial sector investments to be defined in the revised 1IU1-85 plan will be subject tv a lower floor rate initially with the intention of moving to positive real rates by 1989. However, this lower floor rate will not apply to Bank subprojects financed under the proposed project. 60. The banks also provide long-term local currency loans from the Federal and Regional funds. Most of these funds are obligatory contributions imposed on enterprises in Yugoslavia to meet specific social objectives and, therefore, they are of a quasi-equity nature. In line with what was agreed under earlier industrial credits and the Structural Adjustment Loan, no floor rates should apply to banks' lending from these resources and the rates currently applicable to such funds should continue. 61. Like the Sixth Industrial Credit, the proposed Bank loans will be onlent by the borrowing banks to sub-borrowers after adding a minimum spread of 1.25 percent on the Bank's applicable interest rate. This spread would be sufficient to cover administrative expenses and other related costs/provisions of the borrowing banks. As sub-borrowers will carry the foreign exchange risk on the proposed loans, the real cost of the Bank's funds to sub-borrowers would be very close to that of international commercial sources taking into account the currency pooling system and current international lending rates. The banks will relend the loan proceeds at variable interest rates to avoid interest risk. 62. Procurement and Disbursement. International competitive bidding (ICB) procedures will normalliy be required for contracts estimated to exceed $2 million equivalent. The Bank will undertake a full review, prior to contract award, of all procurement documents and procedures for contracts expected to cost $5 million equivalent, or more. For contracts of $2 - $5 million equivalent responsibility for ICB will be delegated to KBP and IBT; however, the Bank would review the bid evaluation report, award and final contract prior to the first disbursement. Procurement for contracts below $2 million will continue to be in accordance with appropriate commercial practices (Loan Agreements, Schedule 3, Part C, para. 2). Disbursements of funds by the Bank will be made against standard evidence of expenditures with supporting documents. Project Benefits and Risks 63. Kosovo and Montenegro, two of the less developed regions of Yugoslavia and beneficiaries under the proposed loans are facing significant unemployment problems. The situation is more severe in Kosovo. They are also experiencing major foreign exc'ange constraints which is a serious economic problem of the whole country. The proposed project would help - 22 - develop labor-intensive and export-oriented industries to alleviate these problems and would also have demonstrative effects on KBP and IBT for implementation of the Plan objectives through svstematic identification and development, methodical appraisal, and effective supervision of priority projects. The balancing, modernization, and expansion of industries under the project would result in better utilization of existing facilities and creation of economies of scale which are a prerequisite for successful industrial exports. The project would also contribute to improving the industrial structure in the two regions concerned. and, in Yugoslavia as a whole, by encouraging/ stimulating joint ventures. It would also contribute te the correction of development disparities among regions in Yugoslavia. The proposed loan is estimated to finance about 35 sub-projects with total investment of about $200 million equivalent. Assuming that one third of the sub-projects would be export-oriented, the aggregate net foreign exchange earnings of the sub-projects would be about $15-20 million per annum upon the commencement of their normal commercial operations. The aggregate direct employment creation should be of the order of 10,000 jobs. 64. The project envisages a comprehensive program for the institution building of the two borrowing banks and it should result, inter alia, in more intensive promotional work by banks, channelling of funds to high priority industrial projects based on more efficient project appraisal, effective project supervision and better management control particularly on project processing and monitoring. The technical assistance component in the project would help in the identification and development ot labor-intensive and export-oriented projects for the banks' future assistance (beyond IC VII) and the institution-building through staff training. 65. The risks under the proposed project mainly relate to meeting the employment/export targets by beneficiary enterprises. These targets may not be met due to problems in implementation and operations of sub-projects. however, this risk will be minimized through more effective project appraisal and supervision by the banks and involvement of the Bank staff in project review. Also, the actual exports of sub-projects may fall short of targets for two main reasons. First, the conditions in expnrt markets may change to the disadvantage ot Yugoslav producers due to development of more economical substitutes, enhanced competition from other develoring countries, or creation of production capacity within the iwporti-ag countries. Second, beneficiary enterprises may concentrate on the domestic market, which has been generally more profitable due to protection policies, and make only "spill-over" exports in line with their past practice. Provisions have been i made to minimize these risks through (i) a careful and indepth evaluation of marketing viability and prospects of all export oriented sub-project by the borrowing banks and their subsequent review by the PdnK staff before the sub-project approval even in free limit cases (para 55); (ii) close supervision and monitoring of export performance of assisted enterprises by borrowing banks and submission of periodical information to the Bank in this regara; and (iii) exercise of remedies on beneficiary enterprises which fail to meet the export target due to negligence or insufficient efforts (para 50'. It is expected that the above arrangements, as well as the new policy tramework to encourage exports, would help to keep the risk within acceptable limits. - 23 - PART-V - LEGAL INSTIRUENTS-AND-AUTHORITY 66. Each of the draft Loan Agreements between the Bank on the one hand and Udruzena Kosovska Bank Pristina and Investiciona BankA Titograd - Udruzena Bai.ka respectively on the other hand, the draft Guarantee Agreement between the Socialist Federal Republic of Yugoslavia and the Bank, and the Reports of the Comaittee provided for in Article III, Section 4 (ii.), of the Articles of Agreement of the Bank, are being distributed to the Executive Directors separately. 67. Special conditions of the loans are listed in Section III of Annex III. 68. 1 am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank. PART VI - RECOMHENDATIONS 69. I recommend that the Executive Directors approve the proposed loans. A. W. Clausen President June 29, 1983 Ivashington, D.C. - 24- ANNEX I Page I of 6 TGOSLSVWSO. IJDICAOSS DATA SECT 1Ut5SLUL umcUM GW00s (EGHMD AVRACES erwA s'. nOST 3 r- ,T ECENT ESTIJAE)- TUrAL 255.8 DECET TOIE iNCGIC INDUSTRIALIZ ACRICULTIIAL 142.4 1960 /b 1970 /b ESTIMATE lb EUROPE Mury ECOtIES GCP PER CAPITA (USS) 3E0.0 860.0 2620.0 2323.9 1032B.2 ENERIY COHSSlTON PER CAPT (rIWCRAKS OF COAL EQUIVALEXr) 932.1 1606.5 2414.9 2107.4 7277.7 POPULATION ANiD VITAL SrTAISrCS POPULATION. KID-YEAR (ThWSAl=) 18402.0 20371.0 232o.0 MAN POPUlATIONg (PENCEr OF TOrAL) 27.9 34.8 42.3 47.9 78.0 PorPUlAO PROJECrIOns POPUlATIOs U R m ZOO (o LLIoNs) 25.8 STATIOSAR POPUATION (IalLIONS) 28.5 TEAR SrArIONARY POPULATION IS REACHED 2065 POPLATIO DENS Im PER SQ. ER. i..9 79.6 86.5 83.3 138.6 PER SQ. E. AQIC;LTIUAL LUD 124.2 139.6 155.5 155.4 509.7 POPUlATION ACE SRUCTURE (PERCENT) 0-14 YRS. 30.5 27.4 24.6 31.1 22.7 15-64 YRS. 63.2 64.8 66.5 61.2 65.7 65 IRS. AND ABOVE 6.3 7.8 8.9 7.7 11.6 POPULATION COTH RATE (PERCErT) TOTAL 1.2 1.0 0.9 1.6 0.8 URBAN 3.6 3.2 2.9 3.5 1.4 CRE IRT RATE (PER THOSAND) 23.5 19.0 17.0 23.6 14.5 CRIDE DEAT RATE (PER THOUSAND) 10.0 9.0 9.0 9.2 9.3 CGRtS REPRODUCTION RATE 1.4 1.3 1.1 1.6 0.9 FAKILY PLANNING ACCEPTORS. ANNUAL THSAS) .. _. USERS (PERCEtr OF MARIED laM) .. 59.0 FOOD AND wTRTION IDMEX OF fOO MRODCTION PER CAPITA (1969-71-100) 85.0 93.0 117.0 116.0 111.1 PER CAPITA SUkFLY OF CALORIES (PECENT OF REQUVIENES) 128t.1 130.0 135.51c 125.1 130.8 PROEINS (CRAMS PER DY) 95.5 93.3 100.9/c 92.7 97.1 OF WHIC ANIMUL AND PULSE 28.6 31.7 39.2/i_ 35.9 61.3 CHILD (ACES 1-4) (RTrALITY RAZE 11.2 4.3 2.0 9.2 0.5 HEALTH irE EUPECTANC AT BIRTH (YEARS) 63.2 66.7 70.5 67.6 73.8 INFANT ONALTY RATE (PER TOWSAND) 92.0 53.1 32.5 65.1 11.3 ACCESS TO SAFE WATER (PERCENT OF YP011ATION) TOTAL .. 33.6 . tRBAN 42.4 62.0 ImAL .. 12.3 ACCEqS TO EXCRETA DISPOSAL (PERCENrT OF POPULATION) TOTAL .. .. RURAL .. L. POPMLATION PER PUISICIA 1616.2 1O00.1 762.4/c 1105.4 620.7 OPUUJLTION PER IRURSING PERSON 632.6/d 606.4 361.91c 634.4 246.9 POPuATION PER osPrrIAL MD TOrAL 185.51d 177.1 165.81. 286.8 122.0 URBAN 91.4ri 95.7 101.7/; 192.0 140.6 UVAL 1035.5/d 1603.9 1835.3/. AINISSIONS PER KISPITAL ZED 17.3 18.2ja 20.0 17.7 NOUS1IUC AVERAGE SIZE OF HOUSEHOLD TOrAL 4.O 3.8 3.8/. URBAN 3.3 3.2 3.3re UIRAL 4.4 4.3 4.1/.. AVERAGE IER OF PERSONS PER ROOM TOTAL 1.6 1.4 URBAN 1.7 1.3 RURAL 1.5 1.5 ACCESS TO ELECTRICITY (PERCENT OF NIELLINC ) IOTAL 54.5 87.9 URBAN 92.7 98.4 RIRAL 36.1 80.1 - 25 - ANNEX I Page 2 of 6 YUGOSLAVIA - SOCIAL IIDICATORS DATA SHET YUGOSLAVIA REFEIENE GROUPS (ICEtCHD AY;2AGES - NMST RECENT ESTIMATR.-a HDST RECE DDE EE IDU5TfFD 1960 lb 1970 lb ESTLNATE /b EUROPE MARET ECDOMIES EDUCATIOS ADJUSTED ENROLLMENT RATIOS PMDARY: ToTAL 111.0 106.0 99.0 102.4 101.7 MALE 113.0 108.0 99.0 107.1 103.9 FEINAE 108.0 103.0 98.0 99.0 103.6 SECONDARY: TOTAL 58.0 69.0 82.0 60.2 U8.4 MALE 63.0 71.0 86.0 66. U3.46 FERUUE 53.0 58.0 78.0 56.0 84.2 VOCATIONAL EROL. C. OF SECONDARY) .. 26.4 20.5 31.6 18.2 PUPIL-TEACHER RATIO RLAY 33.0 27.1 24.9 25.8 20.3 SEC0NIURY 13.0 22.4 18.9 22.2 16.1 ADULT LITERACY RATE (PERCENT) 77.0 83.5 85.01f 75.9 98.9 CUDSUlTON PASSENGER CARS PER MatSAND POPULATION 3.0 35.4 se-Stc 51.0 338.4 RADIO RECEIVERS PER THOUSAND POPULATION 86.9 165.9 209.3 157.2 1021.7 TV RECIVERS PER THOSIAND POPULATION 1.4 86.3 189.2 123.7 403.6 HEWSPAPER (-DAILY GENERAL INTEREST-) CIRCULATION PER TmaSANDD POPMLATION 70.3 85.3 103.1 112.3 331.2 CISA A.NNUAL ATTESDA.CE PER CAPITA 7.0 4.5 3.3 4.0 3.6 TABOR FORCE UTOTAL LAOR .'O11CE (T11OUS5ANDS) 8302.0 8837.71g 9622.2. FEMALE (PERCENT) 35.0 35.9 36.0 36.6 36.0 ACHICULTCRE (PERCENT) 63.0 51.0 29.0 38.7 6.2 IDLNSD Y (PERCENT) 18.0 23.0 35.0 25.9 37.8 PARTICIPATION RATE (PERCENT) TOTAL 65.1 43.4 42.2 4.5 45.4 MALE 60.0 56.6 54.8 56.3 58.9 FEMALE 30.9 30.6 30.0 32.8 32.4 ECODtaC DEPENDEICY RATIO 0.8 0.8 0.8 0.9 0.8 INCOHE DItRBUTIOS PECNT OF PRIVATE INCONE RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 16.4/b 15.11/ 13.1 HIGHEST 20 PERCT OF HOUSEHOLDS 1. 57ii Ci.&7i 387 63.0 LOIEST ZO PERCENT OF HOUSEHOLDS 6.97i 6.67i 6.6 ,, 5.5 LtUEST 60 PERCENT OF HOUSEoLDS 1907ii 18.47i 18.7 16.5 POERTY TARrET GROUPS ESTULATED ABSLUTE POVERTY INCME LEVEL CUSS PER CAPITA) URBAN ,. .. . RURAL , ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN RURAL ,, ,, 530.0 406.6 ESTIMATED POPULATION BELOW ABSOLUTE PoVERy ICOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. lOTES /a The group averages for each lndleator are populction-weighted aritlelck .ea. Coverage of countries among the Indicators depends on avalabilIlty of data and Is not unlform. /b Unlesa otbervise noted. data for 1960 refer to any year between 1959 and 1961; for 1970. between 1969 ind 1971; and for Most Recent Estlmte. betwen 1978 and 1980. Ic 1977; Id 1962; /e 1976: /f 1975: 2S Including sigrants workers abroad. /h 1963: 11 1968. Nay, 1982 EaR. atonn nnioM Po. aabai loausq o~i t-last M0 tois tId' Ad -, ots P a-*13901 qaa-i- 3 otaa o0-" ooMan "tt 2011. 900 a.I15 dfidSf 3-p.09 - tII-e fI-"01P Pa %aaia t arti- Lda t.S.s a--la --ai-ISIdd .ogltd-a sitat alaota atom.A fan (t-flP- A0--- hlAnd?;idad sbO ij -1A, SM P--% A.~~~~~~J is . a-23.0 A1402 flaoo da01 1-N op pIta--n 001 Zn -i satato--. -~ 105 300090)2 mtidJ.g toitj9P - 10i tWI De -%I..1 091W Lt- wa-M ..ddP .3in *Md- * 'I 1t sq o S 003- ]--P M, 31a11 Jo fl AotS-la atJ.-taIp 911 d :atOst ll 009 aa OoPSI n 2005300210n J- Wo t TdOS a (.10- - Id.sa Att Mn. PS.ia ..-.2 aa 094 sta T.." p A. A 03j..asa M r.z-. tS - ttaa iiot Jo ..Sooaji -_ P---,a,t 1- 00 300 -oaq - da-b) 104 911) t5M da--t *As-aad sotlO 0.10-ttpsala aiatoh03.51- 30103 "~M-,) ALMO - s t- a' 4tina .Td 3003-a AMtoa jdti ae iz-Wnt..-T M00 aooi - oa3 - (oaId" tn-oiia)3-oow* s ai-m watata . I .aaa Ii -i ood-doi i n.d .aojtaqv --I-p fst 9-3 . Bias. allttt iwoOTa adaN 03 ~~aai10at a190530ta0t 9110 POlOidiatol ~ ~ ~ ~ ~ ~ -P 11P-0911 OiOp '01 4w. P-Ot *ll, -923.-t GI 1-d T. M; ____A$01333 9 01131 ats ooIIJtS]iU$t 3.01 -ato tINS Pot -Let 1t90 , -A a-oI 03 aaaoi ali-.05 a3 --i-u snat ma.ott p-, 50 £1540. a-taad - WIfi V.. tt3. 0-J AIddoA oaiad 02110 3, oM ba St p- .a ui..Pa oaiiaa 0 t - Zott .-oZaa Iiq _sot Plo 3353 a- 5G ft-loit tLA-.S p-ao 91109 P1191 P-. -1. -i.saoboai-.0-l daoaaioaoa a- Sa P- A-" pa-Sad*pi P t1 50 A.Ooiam - - 1 *.iI~ iaotn *- -pas sI. 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Pa-oaS 91 30 A. iOq M. 09101.anti3lfoo :ia 30atoi - ta-i Lao.- osa .00-0 :t. A- aa-ln.o Lsotti u9 *,l.-oo flI-., -ds i-s-l9. 3-4 3-100a to 1P` -pa a -Ni 91 191 MU1* i00 9351 tt - I3030 - 03 0t.-3 - t llaUIt- JO ta-la) MliJla 01 A03't-i .OA pa to-O a--I M Snps- A13 - Litus- -t oi1l - na pa .0Oii- OOOOi- taIii 1Ml2l1W -AlIaattdaO ao11f1lhP -a 13. O iitt iA-tad- .1051 01- pa 'tta a--I 011d01 20002.0-03 304013 103a 300t093 IiO T 0 asi 0 dAi.A.. tit31.iotn*1 %2319 -. L3A-t-da lit o-11l 3 aOoiaoa 111311 30 ~a09d0 1010i ad *-:303 _ 031 -39 30 3S.13-.0 I.00 £1122. -05 oi-aOl aots-os 0i ts,s i.-l oi. O A- j-PiO .I 3 dos.0ti 3. P1190-s 0- am,asP- Ti" .-.3iiD0I. p3-i3000091 ~O01 - sit000304)92100-0 50301 000w 009 lSt 0L1 0tt tal.i.ai3- o M - . =_ Lfopt iftoisiIs 10300 010~0-iOt0 tOflP ..ItIS 00201091 0 110- 210 P 011.-.P)add013 -apa 5030w-I 13 A ~pM0Pmnwn.a.. 0-g -ato 0-00912950 O -010130 O iw- bot-P0 101d1 sl atolof tt p *3530ft I lar.a o -(03 4 301.033*0ii000l 210 t0t0 df3. i..9191)0 03 atv.ttat302101SUtlJ 01 0fIIO pa_ 109atdIo109%oldo 11.01 3_301a1-1."3 06313-) 10130ta1 £104100 bpta O131iotttItOtObJ 7-3.13 -£td f 3-,l 00 A t0.Aost p 0fl a 3013.Aioaia Onlt io. - td-4ln "101I11 :019t-liSt)p ooi9 to- P3309 a oo-0iOaIbOA30not) 0109 oti- O 3O etoaaa- Iltii 3911 SjOdad -30- 9-3d0 d AM pa_aaa .0st41. *a- P- tooO -OO %a0300 P- oiO -I.030 Ma 201 Lol-.I" s-.. mie- -.a" 30310t13 30 me -A3-ttotOis -oal033 of&%lg (lsoIl)02) sokat 50q oaootq ..s-ot 0 j -Jusp a-a-I30 0ta19t 331-aa -aa.do 3.-- 3 n5 tdotao) 43-3.1 - .Ct 930£~~~. a2e -T9p - AIt XSNNV3A-M -t .a.%-M 33-1 1 4 - 27 - AIuN I PageW &4 ef 6 Pcpulation: 22.3 mill1on Imid-191) CUP Per COpita: US5.790 (1951) ?1E051.AfLA - ECISIC INDICATOS MSOSe Annual Grow A C (2) (million US$ at (at eonutent 1972 nrice.) la.caeor current prices) Actual cI r.cSe,_d 19W c/ 197S 1976 1977 1D7 1979 19U 1951 1952 1953 iW911 1955 1990 HarIwasi. ACCOUKsm Cros doestmc product ./ 69.232 0.9 5-2 5.4 8.5 4.2 2.2 2.2 -1a0 -1.7 2.0 2.7 4.3 Agriculture 8.51b -2.6 6.4 5.7 -5.4 5.4 0.0 1.0 5.G 0.0 2.0 2.0 2.0 Industry 25.801 7.4 4.1 9.5 9.3 5.5 3.I 1.4 -Z.7 -2.0 3.0 4.0 6.0 Services 24.993 1.4 5.3 7.1 13.1 -2.0 -2.2 3.4 -1.0 -2.0 1.0 1.5 3.0 Cons.pttn 48.150 -3.3 0.0 9.8 1330 3.5 0.6 -1.1 -0.7 -1.7 2.5 2.4 39 -Crose inveutment 23*21b 10.1 3.6 17.4 -3.2 12.0 -3.2 -1.2 -6.0 0.0 L.0 3.2 4.0 Exports of CIIS 14.053 1.1 10.4 -2.0 4.8 2.6 12.6 9.; -:. -1.0 ..a 6.0 6.8 Imports of CUFS 16.799 -1.3 -6.6 16.1 2.5 12.0 -9.7 -2.6 -10.5 -2.0 5.7 6.0 5.6 Cross nstional avings 19.619 14.7 20.6 5.6 -3.1 j.4 5.8 - - - - - - PRICES CUP detlarer (1972 -100) 411 170 206 232 260 313 411 575 731 - - - - Exchan rate 24.9 17.4 18.2 18.3 18.6 19.0 24.9 35.5 51.3 - - - _ SharW of CDP at Narket Prices II) Average Annual Incree (2 (at currsc prices) b/ (at constant 1972 prices) 1960 1970 1975 1980 1985 1990 1960-70 1970-75 1975-80 195G-55 1985-90 Grass D-sastxc product a/ 100.0 100.0 100.0 100.0 100.0 100.0 5.9 6.5 5.7 0.5 4.2 Agrielcure 22.5 16.3 13.8 12.3 13.1 11.8 3.3 2.9 2.4 2.0 2.0 Industry 42.2 37.4 4.3 41.6 41.4 44.7 6.3 8.3 7.0 0.3 5.9 Serwic-- 29.0 38.1 33.1 36.1 35.7 33.6 6.9 4.7 4.3 0.2 2.9 uaospetue 67.2 72.5 74.3 70.4 69.2 68.6 6.5 6.9 5.4 -0.2 4.0 Cross invest_n 36.5 32.3 33.5 30.5 29.0 29.0 4.7 5.5 5.3 -0.9 4.1 Exports CliS 13.9 15.5 20.2 27.7 29.3 33.0 10.2 6.7 5.7 1.5 4.1 Imports GUTS 17.5 23.5 25.0 31.4 27.5 30.7 9.8 6.7 2.5 -1.5 6.5 Cress esciunal sing 32.6 29.6 25.6 2853 29.5 29.9 5.3 6.2 6.S - - As I of CDP 1960 1970 1975= 1980 1951 PUSLUC FISAK Totel revenue 27.9 33.1 36.8 34.0 32.3 TotaL eIpenitures 2461 33.2 37.2 34.b 31.6 -..rpluv () or deficit 1-) 3.3 0.1 -0.4 0.6 0.6 Foaisn finaning 0.0 0.0 -0.4 0.0 0.0 1960-70 1970-75 1975-60 1980-55 1985-90 lUIER IlNDICATOIS GiNP grovths rate CZ) 6.1 6.7 5.7 0.1 4.2 Caw per capita groth0 rate 5.0 6.6 4.7 -0.8 3.3 _ IcOM 5.4 4.6 5.8 35.3 7.0 Import elasticity 1.6 1.0 0.5 -3.0 1.5 of At svaer prices: components are espreaed at factor coat and will not ad up to total due to exclusion of net indirect taxes and subsidie. b/ Projected year- at costant 1972 prices. w l Etimste. DlSA IC April 19. 1953 - 23 - Zs ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~n s f LAx I Page- 5 o 4 Popiletiono 22.3 million (mid-1981) CUP Fer Capita: 082.790 (1I38) ncoSLAVn - usuaL Tam _ut aeI|X Grwth Mates (3)- (million USt at (at Ceaut 1972 Iriega) iadicator currant pritea) Actual of Proitctd (1951) 19TS 197t 1977 1975 1979 lio0 19U e1932 1983 1934 1935 199J In- Hrchandica axporta 10.206 0.0 14.5 -5.3 1.0 1.6 11.0 11.7 4.2 0.5 6.0 6.0 7.0 Priary S1 1.709 -3.1 1.4 3.9 1.5 2.0 2.5 -14.6 1.9 0.5 6.0 4_0 7.0 Nnatactures b/ 3.495 0.4 13.9 -3.3 0.3 1.5 13. 19.0 -7.3 0.5 6.0 4.0 7.0 Uerchdiae Importa 14.523 -2.3 -e.5 15.5 3.3 12.9 -10.5 4.9 -19.0 0.3 8.6 6.0 5.5 Fond gas -40.9 45.8 4.3 -24.2 35.4 -2.3 -7.4 -13.1 0.0 5.0 4.0 4.5 Petroleum l 3,742 -5.0 10.1 12.0 11.4 7.3 -e.2 -1.4 -14.2 3.0 5.0 6.0 7.0 .Nacaenry ed equipmet 3.756 22.3 -8.3 17.3 7.1 15.4 -17.4 -15.4 -12.7 -5.4 9.4 6.0 6.0 Otbhra 6.123 -11.9 -12.7 22.1 4.4 3.3 .7.0 0.0 -14.1 2.0 9.4 6.0 5.1 PflcKS (197a - 1OuJ Export price index 316 172 I80 202 220 259 303 314 336 354 353 411 5S0 Import prices dex 352 134 159 216 226 Ul1 337 342 349 3e3 3S4 407 560 T-r_ of trade index 39.7 93.5 95.2 93.5 97.3 92.2 91.4 91.8 96.3 97.6 99.S 101.0 93.3 Coumpeition of Merchandise Traed CZ) Average Annual Incrase (2) Cat current prices) dl (at emetant 1972 price ) 1960 1970 1975 193 195S 1990 1940-70 1970-75 1975-10 1930-35 P,85-90 Seorta 100.0 100.0 100.0 100.0 100.0 1o0.0 3.1 57 5.1 2.5 4.3 Primay Al 49.6 29.4 19.5 22.0 21.0 21.0 - -1.3 6.0 2.7 4.3 anfaEtWures bI 50.4 70.4 30.5 73.0 79.0 79.0 - 3.1 4.7 2.4 4.3 lmports 100.0 100.0 100.0 100.0 100.0 100.0 9.0 7.4 4.1 -1.6 6.5 Food 9.1 7.2 5.5 7.2 3.S 3.0 - 5.0 14.9 -4.0 S.4 Petroleum c 5.4 4.8 12.3 23.6 3.7 3.6 - 8.2 7.2 1.3 4.1 achmsery and equipment 34.5 33.2 33.9 28.0 29.2 29.7 - 9.4 3.1 -3.4 6.9 othara 46.7 54.3 48.3 41.2 53.4 53.6 - 6.0 3.5 -0.7 6.5 Share of Trade with Umare of Trade with Share of TVrde with Capital Sbarn of Trade. with Lnduetrial Cwutrier CZ) Developing Coitrie (2) Surplus Oil Eportere CZ) Centrally Planned ceonwie- (2) 196s 1970 1975 1931 1965 1970 1975 1981 1965 1970 1915 1S9t 1945 1970 1975 19s3 DIUCSIWc OF T1UE Esporte 40.1 53.3 34.0 31.0 17.4 13.4 16.3 13.3 0.4 0.7 2.1 11.3 42.1 32.4 47.1 45.9 Primary 61.0 70.Z 54.0 - 9.1 3.2 8.9 - 0.2 0.2 1.9 - 29.7 21.4 35.2 - Manufactures 27-0 41.9 2640 - 23.5 17.1 20.0 - 0.4 1.0 2.1 - S.4 39.9 51.9 - Ieports 55.3 66.1 59.1 50.1 14.0 12.7 15.7 15.3 0.1 0.1 0.6 9.1 25.6 21.1 24.6 30.7 a/ SITC 0-4 it SIT; 5-3 e SITC 3; includes lubricate. coal aId electricity. d Ptoj eted FrM at ConUcnt 1972 price. D Ic My 24. 1983 or~~~~~~~~~~~~~~~~~~~P3 r .1 e or S TlsouAvz& - MMiAn OF PaUIuur3. smnTmm CwFIn, AM tur fltp.3n.: 22.3 millie. (mid-1951) cG Fr. "p.t. 0 a12.790 1ss933 ftdi-xor et_I Irof 1970 3975 1916 3977 316 1979 39I 1931 3I9Z or 191 3 35 39 OF102 ophnmurs Epot. 0 1 ." otie 3.07 8.012 91,3 3O. U U 12..09 14,271 13.300 20.007 19.41? 20.974 23,535 26,40 45.77? .o flahck frctl adiso f..b. 1.479 4.075 4,393 5.191 530 4.9 5,975 I0204 10.247 11.019 12.l35 14.374 25 .21 imorts 0 t _ d .rEc- 3.385 9.013 59P71 1.932 133212 11.937 20.592 20.954 20.340 20.924 73.73O 26.1t 41.191 o flackh .r-haodna .i Z.8174 2.G9? 7.26? 9.739 10.439 .019 35.065 14.523 13.234 13.3917 15397 17.29S 32.515 Not twins 1t - - - - _ - _ - _ _ - torcoot accoomo b-l*-.o -345 .4.003 165 .4.344 -1.233 -31641 -2,22 942 -44 52 -195 1 S5 Privato 4,r.et jg"......... .. ...tSt - - . . - - - _ - _ - - - _ _f ? - t Co.. fot) 194 "I 1,094 1,412 l.339 1.009 2.410 33 tic 1.429 42 -459 554 Ottu"i[ I 244 213 41 123 131 S9 1.313 1.00 1.546 2.495 1.95I 63q P.-.C. 175 705 951 1.3171 1.26 375 2.351 -5S -920 -120 -2.014 -2.225 -3 ocher capate El 13 131 11 43 541 ,451 457 34? -19 917 10 119 -490 ...0 to r- . 114 aS -1.375 -131 .412 1.145 -775 -z33 1.012 -3.000 *47? -390 -751 totoromlacoal t denos s* 276 3.502 2.330 3.011 3.663 Z.*41 3.273 Z.687 1t,1s 2,.75 3.152 3.142 5.712 OI G eld Wlfricil Sxlttt_ 51 42 63 G 69 73 To 73 is 75 in 71 7I l.. .. otb. import. 1.0 2.0 3.3 3.0 3.3 137 1.9 1.5 1.3 3.5 3.4 1.6 b 1. 101UAL CAPITAL 4SID OA? Groom da1.b-rmomot. 41l 1364? 2.09 2.4S 2.500 2,435 4.154 2,710 2.054 4.115 3.0" ,675 31.526 Official ran. - - - - - - - - - - - - - Uaaoool Io_ 47 134 134 1 1 20 12 - - VAt 0 71 62 AG 13 11 I3 5 - _ _ _ OPEC - - - - _ _ _ - - - _ _ - 10 - - - - _ _ _ _ - _ - thor_*675 63 72 93 13 2 5 4 - - - - - keon-toecm.a.o. loon. 573 2.03? 1.9U2 2.50Z 2.713 2,423 4.134 2,755 2,044 4,134 3.009 3.75 13625 uttcal aPoCt credt. 39 203 253 73 76 e 0 33 1,375 1,014 1.3 III l 41 440 1two 32 154 11 133 350 294 253 735 253 545 517 s35 1i5 Other aItaI.t.ial - - - - a 24 336 " - Naval. 497 1.45 1.560 2,293 2.49 2.041 3,757 1,0I9 us 2,20 2.000 ,.000 1,000 T.Aol *ap.t credi Iot) (-373 (-02) (-100) (-1833 (-10) (-125) (-3001 (1933 3-2001 (-220) (-240 (-13 f-3902 External dabt ob eu-taeoda n-d daxbw-.d 2,053 5 ,320 7,177 3,9s5 13.11? 13.6Is 1S,s 16.156 16,237 37,714 18,378 3.303 22.952 Olfif... l 354 2.32? 2,.19 3,005 3,410 3,662 4.552 5,019 5.069 7,.63 10.3L5 32.273 23,151 Priate 1.199 3.493 4,310 5.571 7.70? 9.944 10.9 11,133 10.Z13 30.093 5.042 5,337 -205 .di.bnr_d 4.b. 943 2.971 2.525 4,435 3.713 3.,17 2.542 1.947 3.553 1.515 1.4r 13,0 53 1n D,,t a.nroa .1 Te-al _c. p"-ct. 03 1.441 1.440 3.19s 3.36 2,125 2.441 3,490 3.,07 4,394 4,355 1.033 S.S.v Itteat Li 128 289 302 367 575 521 W5 1.757 3.33 1,710 1.961 2,3.5 2.,27 ayo_oto - 2 oertn 14.b 11.0 15.3 15.4 14.9 14.9 13.3 15.4 19.3 21.0 35.5 18.9 12.2 rran-., tr r mo anox. lon-. (2) 741 *_1 71 7.4 .7 5_0 3.4 12.7 11_.9 313 12.5 12.9 14.0 Official 7.0 3.3 7.0 7.3 7.7 - - - - - - - P ivoto 7.5 7.5 5.4 9.3 5.7 9.5 - - - _ _ A-rs _e -ty of o laxta (yan 13.5 15.2 18.3 15.4 15.1 10.3 10.1 10.1 11.2 1.4 10.3 1043 9.0 official 13.5 14.5 10.0 15.9 I5l - - Private 10.9 10.9 5.7 7.5 - - _ - _ _ _ _ _ !I Ealafla- 1 lacLoda. -t o. ot W credit (drfip Xee opoeT , t ma O ont-tn troit od bea_o In bi3xtrl 0i ZacldmsZ grn -to- aUtee t oceorciel ban. dl ZKoral boro-og roportod iL. hl teb-ct bT lce of pymt. im -t ooiatoat wjr ot-ooml ufbt dote, Eizl IC di Woe-c nLdax acrcttion _ ixt-et a --ort -rodit etedd y s laia. April 19. 193l 1 Age- 1931. aIxod i-t-rot pofn. 1 m- f W r e Trre. - 30 - ANNEX II Page 1 of 12 TEE STATUS OF-BANK GROUP OPERATIONS IN YUGOSLAVIA L A. STATEhENT-OF BANK LOANS (as of-March 31i-1983) US$ million Amount (less cancellations) Number Year Borrower(s) Pumw Je Bank Undisbursed Forty Loans fully disbursed 1,339.46 916 1973 Naftagas Gas Pipeline 59.4 8.05 1262 1976 Republicki Fond Voda Water Supply, Sewerage & Water Resources 20.0 0.22 1263 1976 Sarajevo Water Supply & Vater Supply S Sewerage Enterprise Sewerage 45.0 0.07 1360 1977 Management Organization Multipurpose "Metohija" Water 54.0 31.73 1370 1977 Investiciona Banka Agriculture Titograd Industries 26.0 2.60 1371 1977 Stopauska Banka Skopje Agriculture Industries 24.0 3.11 1469 1977 JUGEL and six Electric Power Organizations in Second Power each Republic Transmission 80.0 11.06 1477 1977 Vojvodjanska Banka Second Agricul- tural Credit 75.0 7.74 1534 1978 Community of Yugoslav Railvays Railways 100.0 3.01 1561 1978 Elektroprivreda Bosnia Herzegovina Hydro Power 73.0 11.48 1611 1978 Kosovska Banka Pristina Third Industrial Credit 40.0 7.90 1612 1978 Privredna Banka Sarajevo Fourth Industrial Credit 20.0 1.44 - 31 - ANNEX II Page 2 of 12 US$ million Amount (less cancellations) Number Year Borrower(s) Purose Bank Undisb,ursed 1613 1978 Stopanaka Banka Skopje Fourth Industrial Credit 20.0 3.90 1614 1978 Investiciona Banka Fourth Industrial Titograd Credit 20.0 1.53 1616 1978 Stopanska Banka Skopje Macedonia Strezevo Irrigation 82.0 0.71 1621 1978 Privredna Banka Bosanska Krajina Sarajevo Agriculture and Agro-Industries 55.0 31.20 1678 1979 Road Organizations of Kosovo, Montenegro, Vojvodina and Heze- govina and Macedonia Roads 148.0 41.95 1756 1979 Zagrebacka Banka Croatia Sava Drainage 51.0 33.14 1768 1979 Port of Bar Earthquake Rehab- ilitation-Port of Bar 50.0 33.63 1769 1979 Railway Organization Earthquake Rehab- of Montenegro ilitation- Railways 14.0 7.61 1801 1980 Vojvodjanska Banka Third Agricultural Credit 86.0 56.11 1819 1980 Road Organizations of Slovenia, Croatia, Serbia and Vojvodina Roads 125.0 76.42 1909 1980 Kosovska Banka Pristina Fifth Industrial Credit 50.0 46.55 1910 1980 Privredna Banka Sarajevo Fifth Industrial Credit 30.0 11.14 1911 1980 Investiciona Banka Fifth Industrial * Titograd Credit 20.0 19.31 1912 1980 Stopanska Banka Fifth Industrial Skopje Credit 10.0 2.80 - 32 - ANNEX II Page 3 of 12 US$ million Amount (less cangcellations) Number Year Borrower(s) Purpose Bank Undisbursed 1951 1980 Investbanka Agriculture & Agro-Industries 87.0 74.63 1977 1980 Priatina Railway Transport Organization Railways 34.0 26.22 1993 1980 Kosovska Banka Pristina Agriculture & Agro-Industries 90.0 83.22 2039 1981 Stopanska Banka Skopje Agriculture 80.0 67.04 2055 1981 Radna Org. Regional Vodovod Kosovo Water Supply 41.0 29.22 2132 1982 Privredna Banka Sarajevo Sixth Industrial 33.0 32.51 Credit 2133 1982 Stopanska Banka Skopje Sixth Industrial 33.0 32.51 Credit 2136 1982 Privredna Banks Sarajevo Agriculture 35.0 34.48 2161 1/ 1982 Privredna Banka Sarajevo Semberija Drainage 34.6 34.60 2233 1/ 1983 Regional Work Organiza- Tuzla Water Supply 30.0 30.00 tion KOMPRED and Environment Total (less cancellation) 3,214.46 898.84 of which has been repaid 597.21 Total now outstanding 2,617.25 Amount sold 9.2 of which: Amount repaid 9.2 Total now held by Bank 2,617.25 Total undisbursed 898.84 1/ Signed but not yet effective. - 33 - ANNEX II Page 4 of 12 B. STATEMENT OF IFC INVESThENTS (as of March 31. 1983) Fiscal Type of Amount in USt mi,llion Year ObliLor Business Loan EqJuity Total 1970 International Investment Investment Corporation for Yugoslavia Corporation - 2.0 2.0 1970/ Zavodi Crvena Zastava Fiat S.p.A. Automotive 1972/ Industry 12.4 0.6 13.0 1980 1971/ Tovarna Automobilov in Motoriev Automotive 1980 Maribor (TAM)/Klockner-Humboldt Industry 9.2 0.9 10.1 Deutz A.G. (KID) 1972/ FAP-FAMOS Belgrade/Daimler- Automotive 1980 Benz A.G. Industry 16.3 0.8 17.1 1972/ Sava Semperit Tires 12.5 2.5 15.0 1978/ 1980 1973 Belisce-Bel Tvornica Papira Pulp and Paper 70.9 - 70.9 1974 Zelezarna Jesenice/ARMCO Special Steel 10.0 - 10.0 1974 Salonit Anhovo Cement Plant 10.0 - 10.0 1975 1MK Zenica Steel 50.0 - 50.0 1977 Frikom RO Industrija Smrznute Food and Food Hrane/Unilever Processing 4.0 2.4 6.4 1977 Tvornica Kartona i Ambalaze Cazin Pulp and Paper Products 15.6 2.6 18.2 1978 Soko-Mostar Hermetic Compressors 7.0 - 7.0 1980 Investiciona Banka Titograd- Udruzena Banka Tourism 21.0 - 21.0 1980 Radoje Dakic Machinery 18.7 - 18.7 1980 Eight Republican/Provincial Small-Scale Banks Enterprises 30.3 - 30.3 1982 Igalo Physical Medicine Center 16.5 - 16.5 1982 Industrija za automobilski Motor Vehicles Delovi I Traktori (Ruen Auto) & Accessories 11.3 - 11.3 Total Gross Commitments 315.7 11.8 327.5 less cancellations, terminations, exchange adjustment, repayment and sales 173.5 5.2 178.7 Total commitments held by IFC 142.2 6.6 148.8 Total Undisbursed held by IFC 38.7 0.8 39.5 z - 34 - ANNEX II Page 5 of 12 C. PROJECTS IN EXECUTION I/ (As-of March 31. 1983) Loan 916 Naftagas-Pipeline: US$59.4 Million-Loan of-June 25, 1973; Effective Date: harch- 22, 1974; Closing Date; June 30, 1983. For a variety of reasons substantial delays occurred during the implementation of this project (cost overruns, administrative hurdles, organizational change, etc.). In December 1979, the Government requested and the Bank eventually agreed to divide the loan into two tranches, Naftagas Gas Unit (NGU) being in charge of the pipeline in Vojvodina, and Butangas of the pipeline in Serbia. The amendment of the loan was approved by the Bank in November 1980, and became effective in May 1981. The pipelines in Vojvodina and Serbia are now under construction. The only outstanding major contract still to be awarded before the current closing date concerns Butangas' telecommunications and supervisory control and data acquisition (SCADA) systems. Depending upon early contracting of the SCADA system a further and final extension of the closing date is under consideration. Loan 1262 Morava Regional Developme,nt-Project - Water Supply, Sewerage and Wate,r Resources: US$20.0 Million Loan of June 14 1976 Effective Date:--November 3, 1976; Closing Date:, DecemberI-J1,_l9821_(account left open). After some initial delays, the project is progressing satisfactorily. Major works still to be executed are the Vrutci dam and water supply distribution and sewerage network in Titovo Uzice. The loan was closed on December 31, 1982 (after two extensions) but the account remains open to allow disbursement in respect of expenditures under contracts signed before the closing date. Loan 1263 Sarajev,o Water -Supply and Sewe,rase: US$45.0MKillion Loan of June 8, 1976; Effective Date:,November 9i 1976; Closing Date: December 31, 1982; (account left open). Construction works are proceeding well and the project is substantially completed. The loan was closed on 12/31/82 but account remains open to allow final disbursements. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 35 - ANNEX II Page 6 of 12 Loan,1360 Metohija Multipurpose W,ater: US$54.0 Million Loan of February 3. 1977; Effective Date: July 27, 1977; Closinp Date: Dece,mber 31, 19&3. Radovic Dam, intake weir and feeder canal to the reservoir are completed. Overall project progress is about three years behind schedule and the Closing Date has been postponed initially by one year to December 31, 1983. Contract for ICB procurement of G.R.P. pipes was signed on January 22, 1983; however, it was necessary to reduce the scope of supply to conform to the tender. Modified contract is expected to be validated on April 8, 1983. The single remaining ICB contract for automatic regulation equipment is expected by mid-May, 1983. Based on current progress, all LCB contracts should be avarded by July 31, 1983. Irrigation system fnr about 1,200 ha will be ready by 1984. Completion of the total system is now planned for December 31, 1984, which will fit in with current plans for land consolidation. Loan 1370 Montenegro Agriculture-and Agro-Industries: US$26.0 Million Loan of March 10, 1977_; Effective Date: July 27, 1977; Closing Date: June 30L 1983. The project is substantially completed. The winery operations are completed and operational. Farnm center construction is complete and farm roads are nearing completion. The completed irrigation system is supplying 2,014 ha under vineyards and orchards. The loan is 902 disbursed. Due to high rates of local inflation costs have exceeded appraisal estimates by about 602. Loan 1371 Mac,edonia Agriculture, and-Second. Agro-Industries: -US$24.0:-Killion Loan of March 10,, 197,7; Effective Date: July 27 1977-; Closing D,ate June 30,, 1983. Due to delays in implementation of social sector sub-projects the loan Closing Date has been postponed by 12 months to June 1983. Recently, progress in project implementation has shown improvement as all contracts for construction of agro-induatry facilities have now come into force and four of the seven sub-projects are completed. Contracts have been signed and approved for the remaining sub-projects. All individual sector furnds have been completed and disbursed. The loan is 87X disbursed. Loan 1469 Second Power Transmiss,ionu:, US_$80,.0 Million Loan of July 11, .1.977; Effective Date: Janu,ary 31, 1978; Closin. Date: June 30i, 1983. The project is expected to be completed with a delay of about two years and the closing date has been extended by six months to 6/30/83, in - 36 - ANNEX II Page 7 of 12 order to allow full loan disbursement. The loan is practically Eully comitted. The Borrowers have been advised that there would be no further extension of the closing date. Loan 1477 Second Agricultural Credi,t US*75.0 Million Loan of July 29, 1977; Effective Date: January 30, 19,78; Closing Date: August 31, 1983. The loan in fully comitted and all agro-industry investments are in the implementation phase. Implementation of the project is about one and a half years behind appraisal estimates. About 902 of the loan has been disbursed. As a result of the Government's recent stabilization measures however, exceptional delays in contracts coming into force have resulted and conseq.zently the closing date has been exLended a second time, to August 31, 1983 so as to be able to disburse against purchases of equipment for the agro-industry component only. Loan 1534 Fifth Railway: USU1O0 Million Loan of April,13, 1978; E,ffective Date.: September 28. 1978; Closing Date: June 0,1983. Bank financed investments have progressed well and disbursements total USS 97.0 million. The level of compensation payments has however increased and substantial tariff increases have failed to keep pace with inflation. Remedial actions will be agreed upon in the context of the proposed loan for a Sixth Railway Project. Loan 1561 Middle Neretva Hydro Power; USS73 Million Loan of May 31, 1,9,78; Effective Date: ,November 15, 1978; Closing Date: June 30X., 1983. Part A of the project (construction of the Grabovica and Salakovac Dams and power plants) has been complet^d and both Gr&ovica and Salakovac have been in operation since December li82. Part B, originally not financed by the Bank (Mostar Dam), however, has been delayed by problems with the site geology and funding. The technical problems have been solved and the detailed designs of the Mostar dam and power plant are now available. Regarding the funding, a supplemental B.iik loan is now under consideration. If action on this loan is taken before June 30, 1983, Part B of the Project could be completed by December 1987, asr xming that funcing for the local costs is forthcoming. Loan 1611 Third- Industrial- Credit: $40.0 Million Loan of July 26, 1978; Effectiv,e Date: November 16, d978; Closing Date: April 30, 1983. The loan is fully committed. Disbursements are behind appraisal estimates due to late approval of two large "special subprojects" and changes in the originally approved equipment lists and often incomplete - 37 - ANNEX II Page 8 of 12 withdrawal applications. The Industrial Credit Department of the borrower Kosovska Banka Pristina (KBP) continues to be weak, especially in terms of proper project appraisal and supervision. This matter is being focussed upon through frequent supervision. Also, institutional improvements will be a maior component of a proposed new loan to KBP. r Loans 1612, 1613 and 1614-Fourth Industrial-Credit: $20.0 Million each Loans of -July 26, 1978; Effective Date; November 16, 1978; Closing Dates: December 31, 1983. The loans are fully committed. Disbursements for Loans 1612 and 1614 are vell ahead of the disbursements expected at appraisal, while Loan 1613 is somewhat behind appraisal estimates. The closing dates for all three Loans have been extended from December 31, 1982 to December 31, 1983. Loan-1616 Macedouia Strezevo IrrigAt~ion; US$82 -Million Loan of August 23,_ 1978; Effective Date: -February 14,-1979; Closing Date: September 30, 1982; (account left open). Project constraction has been substantially completed. The loan account has been kept open in order to enable disbursements against contracts for which commitments have bean ixade prior to September 30, 1982. $81.29 million disbursed as of March 31, 1983. Loan 1621 Bosanska-Krajina-Agriculture-and Agro-Industries; -US$55 million Loan of November 6, 1978; Effective-Date: -March-28,-1979; Closing Date: -June 30, L983. Project implementation has been delayed by about two years and an extension of the closing date will be necessary. Cost overruns have neces- sitated a reduction in scope of the project. Recently, the implementing agencies have taken actions which will improve performance. The financing problem and inadequate progress ir- the individual sector has been resolved and specific action programs have been agreed with the borrower and the implementing agency. As of March 31, 1983 about 93 percent of the loan has been committed and 45 percent disbursed. Given the stage of overall project implementation, the most likely completion date would be December 1984. Loan 1678 Tenth Highway: US$148 Million Loan of April 9, 1979; Effective Date: August 14, 1979; Closing Date: September 30. l984. Project now faces delays of about 15 months because of reduced road expenditures now planned by Government. Revised investment plans prepared by all participants. All links are now committed. Works will now - 38 - ANNEX II Page 9 of 12 extend to early 1984 in Kosovo, Vojvodina, Bosnia and Macedonia. Only Montenegro Bas completed its program according to the original schedule. Loan closing date has been postponed to September 30, 1984. Loan 1756 Croatia-Sava Drainage. US$51-Hillion-Loan-of October 1I. 1979; Effective Date;- April 17i 1980;Closinu Date; June -30, -'85. Decisions to award contracts for supply of equipment and construc- tion of civil works have been finalized. Project management problems acd inadequate funds together vith import restrictions had caused procurement delays. Revised financing plan with assurance of funds has nov been prepared and import restrictions for the project have eased. Studies on sub-surface drainage had a delayed start. Progress on civil works, although somewhat behind schedule, is satisfactory. Land consolidation is progressing on schedule. Farm development works are progressing. The loan is 35Z disbursed. Loan 1768-Mont ngr Earjthqua~ke Rehabiklitation --Port of Bar: US$50 Million Loan-of November 30, 1979; Effective Date.-April 29, 1980; Cloging Date: June 30, 1984. The project is currently about two years behind schedule, primarily due to delays in preparation of designs and contract documents for civil works stemming from more rigid design criteria to withstand earthquakes and from the lack of adequately experienced project and support staff. Bank missions have repeatedly emphasized need to strengthen staff, and port management has recently taken remedial action. Contracts for civil works are in progress and should be completed by about May/June 1983 or shortly thereafter. Bids for workshop equipment and for new tugboats have been received and some contracts awarded by PBWO. Deliveries of equipment and tugboats in early 1984 appears likely. The original closing date of December 31, 1982 has been postponed until June 30, 1984 to allow for longer than anticipated delivery period for remaining Bank financed items. Loan 1769 Montenegro-Earthquake-Rehabilitation --Railways:.-US*14 Million Loan of-November-30, 1979; Effective Date:.-April 29, 198; -Closinx-Date: June 30. 1983. Disbursements of about $6.39 million for urgent reconstruction works have been made. Contracting procedures for remaining works have been slower than expected largely as a result of complicated engineering design for repairs to a badly damaged tunnel. The Borrower's request for an extension of the closing date is under consideration. - 39 - ANNEX II Page 10 of 12 Loan-1801 Third Agricultural Credit:-USS86-Million Loan of February 29,,1980 Effective Date: August 25, 1980;-Closing Date:.March 31, 1985. Progress in commitments in the social sector is very slow. In the individual sector, 93% of funds are committed, while in the social sector only 41? is committed. The agroindustry subprojects have still to be identified in some Republics; and a few approved processing facilities are behind schedule. The progress in physical implementation in the individual sector is good. The loan is about 35Z disbursed. Loan 1819 Eleventh Highway: US$125 Million Loan of- Aril 23- 1980; Effective Date: AuRust 7, 1980; ClosinR-Date: June 30,-1984. All contracts relating to the participating Republics/Provinces have been approved by the Bank. The Toll Study Draft Final Report has been revieved. Cofinancing was obtained for an amount of US$ 110 million in October 1980. Due to implementation delays arising from shortage of local funds, project completion vill be about 18 months behind schedule. The closing date has been postponed by one year to June 30, 1984. Further extension of one year might be necessary and wou'.d be considered on the basis of project implementation in accordance with a revised schedule. Loans 1909, 1910, 1911 and 1912-Fifth lndustrial-Credit; $50.0. $30., $20.0 and $10.0 Million, respectively; Loans-of-February-9. 1981; Effective Date: August 17;.1981; Closing-Dates;-October 31; 1984. Loans 1910 (PBS) and 1912 (SBS) are being committed rapidly, while commitments under Loans 1909 (KBP) and 1911 (IBT) are behind schedule. Commitments by KBP and IBI started late due to external factors. but have picked up rapidly and is expected to be completed within the currently stipulated commitment period. . Loan 1951 Morava Regional Development II: $87 Million Loan-of April 13, 1981; Effective Date: August 28, 1981; Closing Da,te: De,cember 31. 1986. Eighty-five percent of the loan proceeds are committed. Withdrawals have commenced but are behind appraisal estimates. The delay is due to procedural problems in withdrawing Bank funds. This has been taken up with the Government in order to resolve the issue. As for the physical iLplementation of the Project, progress is very good. In the individual sector, about 800 livestock farms, 1,150 ha orchards and 140 ha vineyards are expected to be completed by the end of 1982, while 11 out of 14 - 40 - ANNEX II Page 11 of 12 agro-industrial facilities are under construction, of which 5 are likely to become operational in the Spring 1983. Progress under the irrigation component continues to be unsatisfactory. Action plans for support services approved by the Bank and implementation is underway. Loan 1977 Kosovo-Railway; $34-.0 Million Loan of May-15, 1981; Effective Date: November 16, 1981; -Closing-Date; December 31, 1984. After a slight delay due to expropriation issues, the project is proceeding satisfactorily. Procurement of signalling and telecommunications (SS&TT) equipment and freight wagons has been completed. Upon request of the Borrower the Bank has agreed to a reallocation of loan funds which will become surplus because of favorable results on the SS&TT contract and the devaluation of the Dinar. The surplus funds will finance the acquisition of four diesel motor trains for which a contract will shortly be awarded. Loan-1993 Kosovo Agricultural Development; -t90- illion Loan of June 15, 1981; Effective Date: December 23, 1981,;-Closing_Date;--June 30., l987. About 251 of the Loan amount has yet to be committed and the Borrower, KBP, is behind schedule in hiring requisite support staff. Six agro-industry investors have signed construction and equipment installation contracts and work has started. The investors for two other agro-industry subprojects expect within the month to finalize contracts according to the bid evaluation reports, after considerable delays due to the investors' requests to change processing capacity or product line. The four remaining agro-industries sub-projects are being replaced, taking into consideration changes in market potential of inputs and outputs. Out of 2,000 ha of plantation sub-projects, the Borrower has approved sub-loans to seven social sector investors covering about 1,600 ha for vineyards and orchards. For the individual sector, the Borrower has approved sub-loans for 300 ha of vineyards. For the Groundwater studies component, the consultants have completed the detailed terms of reference and cost estimates and started work on hydro-geologic investigations. Loan 2039 Macedonia III Agricultural Development: $80 Million Loan of JulY 23, 1981; Effective Date: January 6. 1982; _ 0sini. Date:L; June 30, l987. Project implementation is ahead of schedule. Disbursements are about one year ahead of schedule. The social sector vineyard (1.450 ha) and orchard (2,500 ha) components and the cold store component (15,000 tons) were fully committed. Individual sector investments are also ahead of - 41 - ANNEX II Page 12 of 12 schedule. Although nenr1v all fear;hility studies have been completed, the small-scale irrigation component is behind schedule due to SBS appraisal bottlenecks and to problems with generating the 20% local contribution to be provided by the Communes. Loan 2055 Kosovo Water Supply: 41 Million Loan of December 14., 1981; Effective Date; April 14, 1982;-Closing Date; June 30, 1985. Loan declared effective on April 14, 1982. Overall construction progress has been good and the quality of construction is high. Contracts for all major components of the project have been awarded. Due to several contributory factors revised total project cost has been reduced which will result in a savings of US$15.0 million from the Bank loan. Loans 2132 and 2133 Sixth Industrial Credit Project: _$33 Million Loan Each Loans of August 31, 182; Efetv-ae ovember 23. 1982; Closing Date: December 31, 1987. Loans declared effective on November 28, 1982. Commitments of sub-loans progressing satisfactorily. $0.98 million disbursed as of March 31, 1983. Loan 2136 Bosnia Agricultural Development-Project; *35 Million-Loan of- Pay 4, 1982;_ Effective Date:- November2- 3;i 1982_;_ Closing Date: March 31,.1987 This loan became effective on November 23, 1982. Bid Evaluation Reports for all six agro-industrial processing facilities have been cleared by the Bank. About 40% of the Contract Documents have been received while others are awaited by end April 1983. Construction of about 60% of the Popovo Polje Irrigation Project has been completed. L Loan 2161 Semberija Drainage: $34.6 Million Loan of Kay-27,-1982; Effective Date: April 29i 1983; Closing-Date: -September-30. 1987. The loan is not yet effective. The new Date of Effectiveness is set for April 29, 1983. Federal ratification and legal opinion are awaited. Loan 2233 Tuzla Water Supply and Sewerage: $30.0 Million Loan of January 25, 19,83; ,Effective Date: June 10_ 1983; -Closing Date: December 31, 1988 The Project was appraised in March/April 1982. Loan documents were signed on February 10, 1983. The loan is not yet effective. - 42 - ANNEX III Page 1 of 2 YUGOSLAVIA; INDUSTRIAL CREDIT PROJECT VII Supplemental Project Data Sheet Section 1: Timetables of Key Events (a) Time taken by Country to prepare the project: October 1980 - September 1982 (b) Project Preparation Kosovska Banka agencies: Pristina Investiciona Banka Titograd (c) First Bank mission to consider Project; April 1981 (d) Appraisal hission Dep; October 30, 1982 (e) Negotiations Completed; May 4, 1983 (f) Loan Effectiveness Planned; November 1983 Section II: Special Bank ;mplementation Action To arrange outside training for staff of borroving banks. Section III: bpecial Conditions A. Effectiveness Engagement of a development backing advisor, acceptable to the Bank by KBP (para. 41). h. Other (a) Protection against foreign exchange risk on the banks' savings accounts (para. 43); (b) Eligibility criteria for labor-intensive (para. 49) and export-oriented (para. 50) sub-projects; - 43 - ANNEX III Page 2 of 2 (c) Remedies for non-compliance with employment and export orientation targets (para. 50); (a) Use of at least one-third of loan amounts for joint venture projects (para. 51); (e) iaximnm sub-loan size will be $4 million for labor intensive and $5 million for export-oriented sub-projects, (para. 54) and free limit $1.5 million for individual sub-loans and 60 percent of aggregate loan amount for each bank; f.rst five sub-loans for export-oriented sub-projects will be treated as above the free limit (para. 55); (f) Bank funds lent to sub-borrowers will bear variable interest of at least 1.25% above the Bank rate; domestic funds lent to sub-borrowers from the banks' own resources will carry an interest rate of at least 18 percent (paras. 59 and 61). L