Belgrade, 7 December 1998

Esteemed deputies,

On the agenda of the today's National Assembly session is the Republic of Serbia 1999 Budget bill, about which Minister of Finance Bora Milacic will report in more detail.

Allow me to first review the 1998 achievements and give a general introduction on the intended next year's economic and reform policy.

Set goals of an energetic economic growth, economic and social stability and reforms implementation were pursued this year under considerably harder condition compared to 1997, or compared to expected conditions for this year. Above all, Yugoslavia was re-exposed to pressures coming from individual parts of the international community because of its principled policy in Kosovo and Metohija and because of the determination of Yugoslav leadership and all citizens to defend sovereignty and territorial integrity of Serbia and Yugoslavia. New bans: abrogation of the EU trade preferences, ban on foreign investments in Yugoslavia, ban on JAT flights on international cost-effective lines, restrictions in foreign payment operations, etc., have produced marked negative impact on the production growth rate and export, and have slowed down commenced processes in the ownership transformation and economy restructuring.

Regarding the internal affairs, wild activity of Albanian terrorists in Kosovo and Metohija and attempts to destabilise Serbia and Yugoslavia by various threats and pressures, above all coming from the USA and NATO, asked for resolute actions and more sizeable funds for the country's defence and citizens security. Concurrently, the entire public expenditure, substantial funds for the revival of production, bolstering of economy, and stabilisation of the market with key products, were financed exclusively from the domestic real sources, because of the absence of planned foreign resources from ownership transformation and other forms of investments in our economy.

Under such, quite unfavourable, conditions the Republic of Serbia Government has managed to accomplish all the fundamental strategic commitments. In this year, all key economic growth indexes are positive. Annual price increase is half the percentage of the effected Dinar devaluation.

These are the results that, I am convinced, the deputies and all citizens will know to evaluate in good light.

Allow me to give a more specific commentary on the achieved results:

Firstly, according to official estimations, in 1998 the GDP growth was above 4%. Positive growth was registered by the key sectors: industry by 5%, agriculture - in spite of unfavourable weather conditions - by 1%, trade by 10%, transport by 4%. Also other fields registered satisfying results, which ensures a solid material basis for further economic growth and development.

By its market oriented policy and substantial resources, the Serbia Government has given a strong contribution to accomplished production results. Substantial financial support was extended to production revival programs in the metal complex, textile industry and leather and footwear industry, as well as in other fields. Over the last two years, about Din. 800 mill. was invested in the program of agricultural mechanisation alone.

Strongest financial support was extended to the agrarian complex. State total interventions in agriculture, from bonus payments and production subsidising, over reprogramming and financial liabilities writing-off, up to investment in agriculture and rural areas, amount about Din. 5.5 bill.

Maintenance of the price stability, as one of the key goals, was a very hard assignment this year, because of the imposed limitations in foreign economic relations, effected Dinar devaluation, and necessary adjustments of the monetary policy. By active measures and substantial budgetary resources, the Serbia Government has managed to stabilise prices and ensure good supply of the market with vital products. The opted policy was validated by price stability in the end of the year. In November, price increase was only 1.5%, and about the same figure is expected for December.

Maximum efforts were dedicated to a stringent fiscal discipline and financing of public expenditure exclusively from the real sources. Accomplishments in this regard have eliminated the strongest danger related to new inflation critical points. In this, the republican budget was maintained strictly to the plan and without any rebalance, while for the financing of social insurance, and particularly pensions, also supplementary real sources were pursued. A major accomplishment this year is that the new fiscal measures have disburdened the economy, whereby additional resources have been ensured for the financing of production. Besides this, the tax laws packet, adopted at the previous National Assembly meeting, enables broadening of the tax base, increase of revenues from excise products and further suppression of the grey economy.

In spite of the difficulties we were facing this year, substantial progress has been made in the field of economic and ownership transformation.

Along with the ownership transformation of the existing companies, also setting up of new, above all small-size, companies rapidly increases. This process goes on for already a few years, which is the best confirmation of the appropriate Serbia Government policy in spurring new economic activities.

Esteemed deputies,

The principal commitments and economic policy goals for 1999, fully reconciled with the Federal Government and the Yugoslav National Bank, are clear:

The first one is maximum realistically achievable economic growth, and based on this - raise of the population standard of living. We estimate that by ensuring adequate market environment, active measures of stabilisation policy, rapid implementation of reforms, and more favourable international setting, a seven percent GDP growth can be achieved in 1999, which is considerably higher compared to other European countries.

An essential presumption of such energetic economic growth is a more rapid adjusting of all protagonists: companies, banks, state and others, to the market principles and international standards. This ought be supported by the policy of structural adjustments designed to enable better flexibility of economic structure, better efficiency of economic dealings, and better valorisation of the Serbia economy comparative advantages and its successful inclusion into the world's commodities, financial and technological flows. A quality advance in foreign trade, particularly in export, shall be attainable only this way.

In this regard, stress was placed on gradual increase of the importance attached to tertial activities, industry and building industry propulsion programs in the generation of the social product and, on the other hand, on speeded-up development and establishment of new, above all, small and medium-size companies. To this end, the Serbia Government prepares a special program within which institutional mechanisms shall be set and specialised institutions formed to provide incentive for the establishment and development of small and medium-size companies.

The other key commitment is the accomplishment of price and currency stability. This aim will be attained by the policy of real and fixed exchange rate, restrictive monetary policy and stringent financial discipline in the field of public expenditures. Therefore the key task is to cut public expenditure share in the GDP down to 49.5 percent. In the planning of the next year budget and total public expenditure , we took particular care to stringently observe this principal restriction.

The Din. 21,458 mill. budget is, above all, intended for the financing of basic state functions, social programs and public services. Using of the budget resources shall be based on maximum economy in spending.

Also substantial resources are planned for the development of agriculture. Within the agriculture budget, over one billion Dinar is earmarked for this purpose. Budget draft has also earmarked substantial resources which, with the view to carry out economic development program in the territory of Kosovo and Metohija, shall be invested through the Directorate for regional development headquartered in Pristina.

The Serbia Government is firmly determined to further on pursue active social policy, financed from real sources, which ensures regular payment of social benefits. Payment regularity is also based on the law bill governing provision of the resources for the financing of the Republic of Serbia social programs in 1999. Enforcement of this law shall ensure additional Din 5 bill. for the social purposes. Concurrently, redistribution of public expenditure is scheduled in favour of the social insurance funds, and all with the aim to ensure regular payment of pensions and normal financing of the health care.

I would also like to note that it has been agreed for the next year to increase the share for the Federation in the distribution of the revenues from turnover taxes (from 35 to 40%). Thereby the Republic of Serbia gives its concrete contribution concerning providing more ample financial means for the upgrading of the Yugoslav Army readiness for the country's defence, for the servicing of liabilities related to citizens' old foreign currency savings, as well as the liabilities related to the conversion of credits extended to agriculture into public debt.

Regarding the state liabilities to citizens from the previous period, a program of settling debts to population, and other beneficiaries of different rights, shall be drawn. We are a law-governed state and we shall meet all our liabilities, but not in a fictitious and inflationary way. Therefore the tempo of their settlement will be adjusted with the influx of the resources from the ownership transformation, concession compensations and other real resources of financing. It is of great importance that by the enforcement of the federal law shall start the servicing of the old foreign currency savings, which shall promote citizens' trust in the state and establish conditions for new, much needed, savings and accumulation.

Prices of the commodities and services should be further on freely formed based on offer and demand principles. In the next year much stronger stress is placed on the building up of the market competition as the main discriminating factor differentiating successful from unsuccessful participants. This implies deregulation with the establishment of new companies, openness of the market for the entrance of new participants, and further liberalisation of foreign-trade regime.

Prices of major infrastructure products and services shall remain under the control of the republic and federal government. Until now, price disparities in infrastructure activities have been largely eliminated. This was accomplished based on economic and market criteria, and not in an administrative way. The Serbia Government shall pursue this same practice in future as well, taking into consideration all economic and social limitations as well as the danger of inflationary consequences.

Stability of prices and offer of the basic agricultural-food products shall be ensured also by interventions from commodity reserves and export, by limiting the number of mediators in the sale and by other control measures. This implies a market prices policy which ensures economic interests of manufacturers and, at the same time, protects citizens standard of living, particularly of those belonging to lowest income group.

We also expect that federal Law on prices will be passed soon, which, in the same manner as in developed market economies, shall regulate the entire subject of prices in a permanent way.

Wages in economy shall be freely set based on the accomplished and market verified results, while salaries of those employed in social activities and state organs shall be set according to law and real possibilities of the budget and funds.

It is of key importance that wages increase and volume must not produce destabilising effects, while at the same time their motivation function must not be eroded. Therefore the Serbia Government insisted that wages must be set under the terms of stronger competition, financial discipline and in accord with the growth of labour productivity, and not based on privileged positions, tax and dues avoidance, and based on other non-market conduct.

Esteemed deputies,

The outlined 1999 economic policy shall be supported by a resolute stepping up of the commenced and initiation of new reforms. This is a necessary prerequisite for the attainment of the economic policy set goals, so that the new reforms shall start immediately at the beginning of the year. Convinced that reforms represent an essential long-term interest of our country, we are determined to enter them with or without foreign support.

During this Government's term of office a series of important reform laws have been passed, including the Law on ownership transformation, Company law, Law on concessions and foreign investments, Law on auditing, as well as many other laws. Solutions under this legislation have been largely verified in practice, and now it is most important to speed up their implementation. Also it seems clear already now that for the establishment of an integral system of market economy it is necessary to introduce also new legislation.

This particularly refers to laws governing debtor-creditor relations and company and bank closing down and bankruptcy procedure. The Republic of Serbia Government shall also initiate amendments of the current and introduction of new laws which are in the competence of the federal organs.

Previous Government's activities in the field of structural reforms were primarily directed to the control and monitoring of the ownership transformation processes entered by 1,200 companies since the adoption of the law. By the adoption of the Law on share-holding fund and formation of the central shares depot, necessary conditions have been established for the further stepping up of the process of the ownership transformation, and the Government has also considered the need to adopt supplementary incentives to boost this process.

The ownership transformation of the companies represents also an unavoidable prerequisite for their restructuring. This implies that besides ownership, most companies shall undergo a thorough business, technological, organisational and market restructuring. This process shall take a few years and certainly it will be largely carried out through foreign investments, so that also during the next year the Government shall undertake certain activities to establish more favourable conditions for the carrying out of this process. Above all, the Government shall initiate, for the first time, adoption of the federal Law on reprogramming of the internal debts among domestic companies. Thus, next year the Government shall commence the process of restructuring public companies and big infrastructure systems, in which a great part of our economy structural problems are concentrated. Lastly, in accordance with the available resources, the Government shall take part in the restructuring of the strategic companies by Government's special program. All this should be effected as soon as possible, particularly in view of the fact that about 58,000 companies employing 1,400,000 workers, are incessantly or occasionally blocked. The fact that so large number of companies', banks' and other legal entities' accounts are blocked, disables exchange of social product and continually increases illiquidity in the country, and ultimately results in economic growth rate decrease.

As for the financial sector, more comprehensive structural reforms are needed. Restructuring of the bank system should be carried out concurrently with the previously specified ownership transformation and restructuring of companies, particularly those covered by Government's special program. This deals with two sides of the same problem: large part of bank credits are placed in companies which should be thoroughly restructured. Therefore, restructuring and readjustment of the banking system should concurrently encompass the following: firstly, restructuring of the companies of biggest debtors; secondly, autonomous market restructuring of banks, supported by unconditional enforcement of corresponding law norms in this field; and thirdly, if necessary, direct restructuring of certain major banks. Resource interventions of the Government should be concentrated on the concurrent restructuring of companies and banks.

In the fiscal domain, already the next year revenues and expenditures shall be adjusted, but in such a way to prevent generation of additional liabilities to citizens and companies. As already specified, to settle former liabilities, a debt settlement program with different possibilities will be introduced already in 1999. More comprehensive tax coverage of grey economy, above all excise products, is designed to bring forth substantial fiscal relieve to earnings. Much the same, collecting of companies liabilities due to the budget and funds, on the basis of taxes and dues, shall be settled next year also by including conversion of debts to creditor's equity.

Law governing value added tax is scheduled to be passed in the first half of 1999, while its successful implementation needs from six-month to one-year time. As for medium-range considerations, it is necessary to decrease the relative share of public expenditure in the social product, in order to ensure economy accumulation for new investments and economic growth. Therefore in 1999 it is necessary to start also the medium-term reform of the pension system, health, school system, and particularly of the state and its institutions.

Commencement of concurrent reform of the banks and restructuring of the companies, together with the receipts and expenses balancing in the domain of public expenditures, shall enable the National bank of Yugoslavia to itself carry out corresponding reforms, particularly in the domain of monetary and foreign currency policy. Thereby conditions would be established to introduce Dinar convertibility.

By stepping up the ownership transformation and building up legislative infrastructure (law on financial markets, and investment funds among others), our economy and country should come to a genuine financial market. On the other hand, this should help the process of concurrent restructuring of the banks and companies, settlement of state's debts, including foreign currency savings, as to further bolster ownership transformation and start generating accumulation necessary for successful long-term development.

The tempo of carrying out reforms shall be adjusted with available resources, and more, in the next one-or-two-year period, we must be ready to carry out and finance the reform program primarily from own resources and with own powers. If in the stated period also foreign funds would be provided, they would only speed up the overall economic reforms.

The Serbia Government shall soon submit a comprehensive and consistent operative program for the implementation of the commenced and for the starting of new reforms, that would specify reforms' subject, schedule of progress and required funds for the implementation. Finally, I would like to particularly underscore, that economic policy and undertaken reforms shall be the bases for the upgrading of economic efficiency of the companies, banks and economy on the whole, attainment of macroeconomic stability and long-term speeded up economic growth, as well as for the enhancement of the standard of living and welfare in the country.

In the end I would like to stress one, very important, element of our overall reform orientation. This year parliamentary life in Serbia was notably stronger and enhanced. In comparison to the first two years of multi-party system functioning, often burdened by numerous misunderstandings and absence of tolerance, now we can witness a much more mature, tolerant and, particularly, more efficient work of our Assembly. It has been proved that in spite of the presence of distinct political orientations of the represented parties, through the dialogue and respect of arguments good solutions can be reached, those which are in the interest of Serbia and majority of its citizens. To this, for the overall democratisation of the society essential change, also the government of national unity has given its active contribution by the defence of country's sovereignty, promotion of democratic and civil rights and building up of local self-government. All these changes are essential for the successful development of Serbia and Yugoslavia.

Esteemed deputies,

The next 1999 year must in all aspects be more successful than this one. Hence, this implies further strengthening of the production and standard rise trend, as best illustrated by the fact that since 1994, each year in sequence for already five years, we have been registering considerable growth rate in spite of the known externally imposed difficulties. This is viable because we have all the necessary preconditions: human and material resources, and long experience in running stabilisation, development and reform policy which takes for its principal aim upgrading of citizens' standard of living.

Therefore I ask the deputies to adopt the bill of the 1999 Budget Law, and accompanying legislative solutions because they represent a constituent part of the Republic of Serbia Government integral development and reform orientation.

Thank you.