Structural Adjustment 2
Report No: ; Type: Report/Evaluation Memorandum ; Country: Yugoslavia; Region: Europe And Central Asia; Sector: Economic Management;
                                             Major Sector: Multisector; ProjectID: P009219




The Former Socialist Federal Republic of Yugoslavia (SFRY) Second Structural Adjustment Loan (SAL H),
supported by Loan 3187-YU for US$400 million equivalent, was approved in FY90. The second tranche was not
released, and the loan closed on September 30, 1991, six months behind schedule. The remaining balance of
US$250.6 million was canceled. A Project Completion Note (PCN) was prepared by the Europe and Central Asia
Regional Office. After of the breakup of the SFRY, the entire balance of the first tranche was allocated to the
Federal Republic of Yugoslavia, which was subject to international sanctions and is not now a member of the Bank.
Under the circumstances, it was not possible to field a completion mission or to request comments from the
borrower.

The project supported the Government's program of stabilization and structural adjustment aimed at creating a
macroeconomic and institutional environment conducive to sustained economic growth. Specifically, SAL H
supported (i) continued liberalization of the foreign exchange, trade and domestic pricing regimes, including
positive real interest rates; (ii) strengthening of financial discipline and accountability for banks and enterprises; and
(Hi) the initiation of enterprise and banking sector reforms.

The first tranche was released at effectiveness, in July 1990. By October, key second tranche release conditions
were in trouble, and the political situation was deteriorating. A Bank mission in March 1991 (the original second
tranche release date) found progress with structural reforms, but a worsening macroeconomic situation and an
ineffective stabilization program; tranche release was extended by six months. However, the Government was still
unable to satisfy all of the conditions, particularly those concerning stabilization, because of the relaxation of
monetary policy by provincial banks, and the unwillingness of the Republic and Provincial Assemblies (RPAs) to
control public spending.

The PCN does not rate the project. Based on information provided in the PCN, OED rates project outcome as
unsatisfactory, institutional development impact as negligible, and sustainability as unlikely. Bank performance was
satisfactory, although in retrospect, the riskiness of the loan was underestimated.

The main lesson from this project is the need for close attention to political risks. Although the complete dissolution
of the country could not have been predicted, the Bank did not give adequate weight to the possibility that the RPAs
would not support the stabilization plan prepared by the Federal Government. The PCN is of satisfactory quality.

No audit is planned.