| U.S. Government Assistance to Eastern Europe under the Support for East European Democracy (SEED) Act -FY 2004 Released by the Bureau of European and Eurasian Affairs January 2005 II. Country Assessment--Serbia and Montenegro (Serbia, Montenegro, Kosovo) Area U.S. STRATEGIC INTERESTS The primary U.S. interest in Serbia and Montenegro (SaM), as throughout Southeast Europe, is promoting the political and economic development that is central to maintaining regional peace and stability and ensuring its membership in a Europe whole, free, and at peace. Throughout the region, the U.S. supports ethnic reconciliation, good neighborly relations, development of civil society and market-based economies, and integration into Euro-Atlantic institutions. Through regional and bilateral efforts, the U.S. also endeavors to fight terrorism and extremism; trafficking in persons, weapons, and drugs; and organized crime and corruption. In pursuing these goals, the U.S. promotes its highest national objective, the security of the United States and its citizens. OVERVIEW OF U.S. GOVERNMENT ASSISTANCE In FY 2004, the U.S. Government (USG) provided an estimated $4.94 million in assistance that was not disaggregated between Serbia and Montenegro:
SERBIA & MONTENEGRO
OVERVIEW OF U.S. GOVERNMENT ASSISTANCE In addition to the $4.94 million in assistance to Serbia and Montenegro listed above, the USG provided an estimated $83.90 million in assistance to Serbia in FY 2004:
In FY 2004, a total of 119 Serbian citizens traveled to the United States on USG-funded exchange programs. U.S. ASSISTANCE PRIORITIES Democratic Reform Programs: USG democracy programming in Serbia emphasizes support for civil society and more effective governance at all levels. USG democracy and governance assistance for Serbia totaled $66.64 million in 2004. USAID’s community development and local government reform programs have focused on increasing citizen participation at the grassroots level and increasing the transparency and management capacity of local governments. Community development programs have increasingly emphasized the importance of job creation and economic development. This emphasis will remain the program’s primary focus as it enters its fourth year. Through its democracy and governance Strategic Objective, USAID also supports civil society, independent media, trade unions, anti-trafficking initiatives, a more democratically oriented political process, and rule-of-law programs. SEED-funded Public Diplomacy programming in Serbia promotes democratic reforms through support for projects by indigenous NGOs, media training, educational and other exchange programs, translation and publishing of American titles, and bringing U.S. experts to speak on a variety of topics. A total of $6 million budgeted in this area for FY 2004 was restricted, based upon the failure to obtain certification for assistance to the Government of Serbia (GOS) under the FY 2004 Foreign Operations Appropriations Act (FOAA). Economic and Social-Sector Reform Programs: In FY 2004, the USG provided $24.15 million in transition-related economic assistance to Serbia. This assistance supported U.S. policy objectives by addressing aspects of reform necessary for the economic recovery and growth that are a key for Serbia to become a stable component of a region moving toward EU integration. SEED funds also supported efforts to improve Serbia's business environment and create a more transparent, rules-based trading regime to expand market access and protections for U.S. companies. USG technical assistance focused on strengthening institutions necessary to sustain economic reform and support the development of a market economy. USG programs continued or initiated assistance in a number of areas, including macroeconomic policy reform, fiscal reform, bank supervision, non-bank financial sector regulation, strengthening the central bank, financial intermediation and credit mobilization for small and medium-sized enterprises (SMEs), combating financial crime, preparation for WTO accession, customs reform, agriculture, building the competitiveness of Serbian enterprises, commercial law reform, and strengthening the capacity of commercial courts to enforce the law fairly and efficiently. USG assistance activities are conducted in close coordination with those of other multilateral and bilateral donors. The USG's highest social-sector priority is poverty reduction, through reducing barriers to private sector development, helping communities to help themselves through infrastructure and income generation projects, and pension reform. For the economic and social sector, a total of $8.58 million budgeted in this area for FY 2004 was restricted, based upon Serbia's failure to meet certification standards of the FY 2004 FOAA. Security, Regional Stability, and Law Enforcement Programs: USG assistance on judicial reform and rule- of-law activities continued to intensify in FY 2004, through USAID and a U.S. law enforcement team coordinated by the Resident Legal Adviser (RLA). The primary focus remained on bolstering Serbia’s domestic capacity to prosecute war crimes cases and combat organized criminal activities. USAID completed its effort to help the GOS build and equip a Special Court for War Crimes and Organized Crime, with the RLA providing follow-on assistance to facilitate effective prosecution and develop the court’s capacity to absorb additional cases, as the International Criminal Tribunal for the former Yugoslavia (ICTY) moves toward the 2010 expiration of its mandate. In FY 2004, the USG began to implement a fuller range of criminal justice/rule of law programs, through an ICITAP program focusing on the police who investigate organized and war crimes, an FBI Southeast European Cooperative Initiative (SECI) advisor on trafficking in persons (TIP), and an Export Control and Related Border Security (EXBS) advisor. The Special Court began to try the high-profile cases of the assassination of Prime Minister Djindjic and murder of former President Stambolic, and continued to try the Vukovar/Ovcara war crimes case transferred to it by the ICTY. The RLA and U.S. Marshals developed a witness protection program. The RLA and U.S. Treasury Department continued to provide successful assistance in building the capacity to combat money laundering, terrorist financing, and other financial crimes.Both the RLA program and the new FBI/SECI advisor have provided needed equipment, advice, and training to the anti-trafficking police, prosecutors, and judges. These programs, as well as ABA/CEELI's focus on the victims, represent a comprehensive approach to combating trafficking in persons. ABA/CEELI has also been working with the prosecutors’ association on ethics and training, supporting the magistrates association, providing anti-TIP training, and assisting the Humanitarian Law Center in its efforts to locate and aid witnesses and victims in domestic war crimes cases and to transform itself into a war crimes documenting center. A total of $2.4 million budgeted in this area for FY 2004 was restricted, based upon Serbia's failure to meet the certification standards of the FY 2004 FOAA. SECTORAL ASSESSMENTS Democratic Reform After several months of negotiations, agreement on forming a Serbian government was finally reached in March. Since then, Prime Minister Vojislav Kostunica and his Democratic Party of Serbia (DSS) have headed a fragile coalition of several small democratic parties in a minority government that depends on support from Milosevic’s nationalist, and barely reformed, Socialist Party of Serbia (SPS). Serbia’s first democratically oriented president, Boris Tadic, was elected in July 2004, following three failed presidential contests the previous year. The elections pitted a well-organized group of nationalists with 30 percent popular support, led by the Radical Party (SRS), against a block of democratically oriented parties, together representing most of the rest of the population. Tadic won in the second round of elections as a result of a concentrated effort by progressive political parties and reform-minded groups, advised by USAID’s political process partners. Serbia, however, continues to struggle with weak, ineffective leadership due to continued internal divisions within the governing coalition over policy and philosophy. Political debate remains focused on cooperation with the ICTY, the status of Kosovo, and the union with Montenegro. March 2004 saw the outbreak of the most intense inter-ethnic violence in Kosovo since 1999, causing significant material damage and loss of life, and further harming relations between Serbs and Albanians in Kosovo. The violence largely did not spill over into ethnically mixed Southern Serbia. The U.S. program of political and economic support to the Southern Serbian region has contributed to creating an environment capable of managing ethnic tensions and resisting significant outbreaks of violence, even under the pressures seen in March. In the civil society sphere, NGOs continue to operate in an environment where there still is no NGO legislation. In addition, the media have not been privatized or regulated, and proper frequency regulation does not exist. While other reform agenda laws have been enacted – addressing freedom of information, lustration, and alternative military service – their provisions fall short of features advocated by the USG and its civil society partners. The judicial system, often attacked by the media and politicians as corrupt and inefficient, still requires extensive technical reform to operate efficiently. Against this backdrop, the USG continued to provide substantial support for democratic development at all levels of government and society. USAID takes the primary role in this area, with $64.41 million in related programming in FY 2004. State Department Public Diplomacy activities augmented other USG democracy and civil society efforts, with $2.23 million in FY 2004 SEED-funded programming. USAID's program includes the Community Revitalization through Democratic Action Program (CRDA) and the related Serbian Local Government Reform Program (SLGRP), which together account for the majority of assistance in this sector. Other USAID democratic development programs include a civil society program designed to support NGOs, independent media, trade unions, and anti-trafficking efforts; political process and elections support activities; and initiatives to strengthen the rule of law. CRDA is the most visible USG program in Serbia. By providing citizens with a means to voice their concerns and priorities, CRDA has motivated them to work together to achieve community goals and contributed to strengthening grass-roots democracy. The response of the communities has been extraordinary. Counterpart contributions now have risen to 47 percent of the total project costs and, in FY 2004, actually surpassed the funding from USAID. Although the communities highly appreciate and desperately need the CRDA-funded schools, clinics, roads, bridges, water supply systems, and income-generating activities, the citizens consistently report that the most important aspect of the program is that for the first time they are being heard. By the end of FY 2004, the five American private voluntary organizations (PVOs) implementing the CRDA Program had been active in 505 communities countrywide, covering about 4 million people. Of the more than 3,500 community projects initiated during the first three years, over 2,500 have been completed. During FY 2004 alone, the program began 1,284 projects, of which 281 have been completed. In the health sector, the CRDA Program expended $2.9 million in FY 2004 to equip and rehabilitate health facilities and to initiate programs in 40 communities focused on such topics as reproductive health and breast cancer prevention. The reproductive health activities included education on STDs, including HIV/AIDS. As a result, over 1,395,000 people have increased access to modern reproductive health diagnostic tests and treatment. The Serbia Local Government Reform Program (SLGRP) is active in 84 municipalities throughout Serbia, where over 80 percent of the population lives. Over 20,000 local government staff (more than half of them women) received management training, which includes financial management, public services management, information technology applications, and citizen participation. As a result, transparent, accountable budgeting and financing systems have been or are being established in 70 municipalities, and 65 participating towns have held public budget hearings for the first time. Citizen assistance centers and/or one-stop permitting centers have been set up in 13 municipalities, with more to follow. The centers have cut the average time for issuing building permits from 30 days to 1-7 days, and from 7 days to 1-3 days for business permits. Such reduced bureaucracy helps resolve a key constraint to business, as identified by entrepreneurs. In the first of four SLGRP-established Business Improvement Districts (BIDs), business volume has increased by 10 to 17 percent and employment within the BIDs has grown by 10 percent. During the first phase of the 2005 budget hearings, over 4,200 citizens attended the 119 public hearings. Last year, citizen input at budget hearings led to a 17 percent reallocation of budgeted funds. SLGRP has also helped Serbia’s local government association, the Standing Conference of Towns and Municipalities (SCTM), to become financially sustainable. Over 95 percent of Serbian municipalities participate in the SCTM’s quarterly and annual meetings. The GOS has officially recognized the SCTM as the representative of local government interests and, in collaboration with SLGRP, has prepared a number of model ordinances for local governments to adopt. By the end of FY 2004, the SLGRP had leveraged $3.7 million from other donor agencies, $0.2 million from international NGOs, and, $1.7 million from participating municipalities. The successful presidential elections, in July 2004, also represented a success for USG-supported civil society efforts. CeSID, NDI, IRI, Freedom House, and IREX worked with other civil society organizations and democratic political parties on the first major, targeted get-out-the-vote effort conducted through direct mail and door-to-door canvassing, which helped mobilize democratically oriented voters. Further assistance provided through USAID supported Serbian media outlets in bolstering election coverage and encouraging critical questioning on relevant issues, and enabled the first-ever televised presidential debate. USAID assisted Serbian media to cover war crimes trials from the International Criminal Tribunal in The Hague and to produce domestic programming on human and minority rights. As a result of a long period of anti-trafficking advocacy by IOM with USAID support, foreign trafficking victims now have temporary legal status while awaiting trial, health care, or repatriation, rather than being detained and deported without any assistance. USAID support for magistrate training added another line of protection for trafficking victims, who would otherwise face deportation or criminal charges. March 2004 saw the outbreak of the most intense inter-ethnic violence in Kosovo since 1999; however, notably, despite the potential, this strife did not spill over into Southern Serbia. While violent demonstrations occurred in Belgrade and Nis, ethnically mixed Southern Serbia, where armed ethnic conflict raged only a few years ago, remained calm. Local officials acted with restraint, and in an unprecedented act of inter-communal solidarity, the ethnically split municipal assembly of Bujanovac condemned the destruction of Serb churches and property in Kosovo and donated funds for reconstruction. U.S. political and economic support to Southern Serbia has contributed to building a strong foundation of ethnic tolerance. Although inter-ethnic tensions persist and much remains to be done, the overall strategy of political reform, civil society development, and investments in much neglected infrastructure appears to be working. SEED-funded Public Diplomacy programming in Serbia assists democratic reforms through support for projects by indigenous NGOs, media training, educational and other exchange programs, translation and publishing of American titles, and the U.S. Speaker program. The Democracy Commission small grants program supported grass-roots projects from indigenous NGOs, primarily outside of the capital. Projects supported in FY 2004 aimed to promote tolerance and reconciliation among different ethnic and religious groups; explain to the general public Serbia’s international obligations, such as cooperation with ICTY; and empower citizens, particularly youth, to participate actively in transition processes at the local levels. Media training programs included sending groups of Serbian journalists to the U.S. to follow the American presidential campaign and for hands-on training at American media outlets through internship programs, as well as bringing U.S. media experts to Serbia to provide training in media management, election reporting, defense and security issues, and reporting on trafficking in persons. At the university level, programs such as the Ron Brown and Hubert Humphrey fellowships, the Junior Faculty Development program, and English language training helped reform higher education through training students and professors from all universities in Serbia. Freedom Grants enabled 22 Serbs to travel to the U.S., who subsequently helped implement democratic standards in such fields as minority political participation, combating financial crime, public administration and intellectual property rights. Nineteen titles by American authors were published in Serbian through the Book Translation program. SEED funded U.S. speakers who gave presentations throughout the country on a broad range of topics. Economic and Social-Sector Reform The pace of Serbia's economy recovery picked up in FY 2004, with much of the progress attributable to reform activities supported by USG assistance. After low growth of two percent in 2003, due to drought and industrial sector weakness, the projected GDP growth in Serbia is six percent or more for 2004. This would be the highest since 1997. The main drivers are agriculture, manufacturing, retail trade, construction, and financial services. Industrial production growth of 10 percent in 2004 was directly linked to successful privatized companies, particularly those with foreign investment. The economic reforms promoted by USG programs have created an improved business environment that is gaining increased interest and capital from foreign investors. Inflation increased slightly after a three-year decline, but is expected to remain at 11-12 percent for 2004. This rise was driven by a combination of external pressures resulting from higher world oil and commodity prices and continued strong growth of aggregate demand in the economy due to higher growth of real wages and consumption. Imports continued their strong growth of about 42 percent. Serbia's key macroeconomic challenge remains the sustainability of external accounts in an environment of reduced but still significant foreign currency debt and a growing trade deficit expected to reach $7 billion in 2004. The International Monetary Fund’s (IMF) key concern is an associated and persistent official current account deficit of 13 percent of GDP. Nonetheless, total foreign exchange reserves remain stable at a value equal to nearly five months of imports, bolstered by large unrecorded remittances from abroad. There were positive signs in FY 2004 that privatization and FDI were improving the structure of imports. A 52 percent increase in imports of capital during 2004 bodes well for improving industrial efficiency and export capacity. Under strong IMF pressure, the GOS continued to reduce the fiscal deficit to 2.3 percent of GDP in 2004. However, public spending remains high, at about 44 percent of GDP, reducing resources available for more productive use by the private sector. Serbia faces increased challenges in managing its fiscal burden, with debt servicing due to increase in 2005 and ever increasing deficits of social benefits funds. USAID tax collection assistance targeted government deficits. Revenues have risen but are still well below target. The introduction of the value-added tax (VAT) on January 1, 2005, is a key initiative to address the gap and may do more to improve revenues and to shrink gray market activity than any other single step. USAID and U.S. Treasury advisors are directly involved in all key aspects of VAT implementation. An estimated 41 percent of the employable population has their primary or secondary job in the gray economy. Close to 40 percent of the economy in urban areas and over 60 percent of rural economic activities are estimated to be in the informal sector. VAT will push more economic activity into the formal sector, where it can be taxed. The USG continued to provide assistance on improving Serbia's tax policy environment through the U.S. Treasury Department’s Office of Technical Assistance (OTA), in the form of a resident and intermittent advisors. In FY 2004, the tax advisor provided comparative analysis on regional and European tax laws for corporate, personal, and VAT draft tax laws or amendments, and worked with a local think tank to presented a blueprint for tax policy reform in Serbia. The advisor provided detailed comments on the Serbian gaming law. OTA also provided assistance to the Ministry of Finance (MOF) Macroeconomic Sector in revenue forecasting and VAT models. The successful cooperation between OTA and the USAID contractor providing assistance to the Tax Administration continued. An OTA resident budget advisor continued to assist the Serbian MOF in reforming and modernizing its budgetary and financial management processes. The advisor supported the MOF in preparing the temporary financing for the January-March 2004 period during the formation of the new government following the December 2003 parliamentary election, and with the subsequent 2004 budget law. Serbia currently spends about 14 percent of GDP on pension liabilities. Budget transfers of 6 percent of GDP to cover the outstanding pension fund deficit represent the single largest budget line item. Serbia's expensive and imperiled pension regime threatens to undermine its ability to reach fiscal sustainability in the future absence of donor inflows, and thus to meet external obligations. Although the GOS has taken positive steps to contain public sector spending, difficult decisions on deeper structural reforms are needed. In 2004, USAID took the first steps on pension reform by providing policy advice related to the design of a reformed pension system. Serbia's external debt picture improved substantially with the July 2004 conclusion of an agreement with London Club creditors to write off 62 percent of $2.7 billion and reschedule the remainder over 20 years. USG assistance through the resident OTA debt advisor was crucial to this deal. The debt burden, totaling $14 billion, remains heavy but not unmanageable. OTA and USAID supported the preparation of a provisional country risk rating by Standard & Poors that was critical to the London Club negotiation. As a result, Serbia received its first-ever international credit rating of B+. Publication of the rating has increased interest in Serbia among investment banks and opened doors to new capital for the quickly developing commercial banking system. Serbia’s full reintegration into international capital markets resulting from the London Club deal and S&P rating will also provide enhanced financing options to foreign and local investors, and eventually for public finance. Low investment persists due to continuing perceptions of high risk, fostered by unresolved political issues (strained relations among democratic political parties, a strong anti-reform opposition, insufficient ICTY cooperation, State-Union status, Kosovo), macroeconomic risks (fiscal and trade deficits, high debt), and a still underdeveloped business environment. GOS bureaucracy inhibits setting up a business in Serbia. According to the World Bank’s "Doing Business in 2005," the cost relative to GDP per capita to create and register a collateral agreement in Serbia is among the highest worldwide. Closing a business is also excessively difficult. To improve the foundations for the private sector in Serbia, USAID provided key support to the development of legislation identified by the donor community, the GOS, and business as essential for reform. Reforms were sufficient to meet World Bank conditionality for a $40 million loan. In July 2004, the Serbian National Assembly ratified 10 key laws for improving the environment for business development, investment, and economic growth. The USG, through USAID, was directly involved in drafting eight of these laws, including important laws on bankruptcy, business registration, and execution of court judgments. The new bankruptcy law will increase the speed and transparency of the liquidation of insolvent businesses, thus helping to break a key constraint to economic recovery through facilitating large enterprise restructuring and privatization by easing the closure of unproductive portions of state or socially owned enterprises prior to sale. USAID technical assistance and funding for the new Business Registry Agency is helping to simplify the process for registering businesses. Throughout 2004, enterprise restructuring in Serbia remained stagnant, primarily due to a lack of political leadership. With the appointment of a new Minister and new GOS commitments to the IMF and World Bank, privatization is expected to accelerate again in 2005, without further U.S. assistance. USAID’s privatization assistance program ended in May 2004, having laid the groundwork for the privatization of several problematic Serbian conglomerates. USAID ended its privatization assistance with recommendations on how to accelerate the restructuring of over 70 large socially and state-owned companies that must be financially restructured prior to privatization. A Restructuring Department has been established to deal solely with these complex firms, which could not be privatized under traditional privatization procedures due to excessive levels of debt. In FY 2004, $100,000 in SEED funding was provided to the U.S. Commerce Department’s Central and East European Business Information Center (CEEBIC) to support enhanced Commercial Service assistance to U.S. companies interested in doing business in Serbia. SEED support to CEEBIC helped to leverage other USG programs supporting trade and investment, such as the U.S. Export-Import Bank (Exim), Overseas Private Investment Corporation (OPIC), and U.S. Trade and Development Agency (USTDA). In line with the USG’s policy goal of promoting stability in Southeast Europe, CEEBIC’s goal in FY 2004 was to attract U.S. business to SaM to spur mutually beneficial economic development. The U.S. was the leading investor in SaM during FY 2004. CEEBIC facilitated $4.5 million in U.S. exports and $23 million in U.S. investment in 2004. For FY 2004, $2 million was budgeted for USTDA to continue a successful record of high return on investment in the form of economic development and business opportunities for U.S. companies. However, these funds were not disbursed to USTDA due to lack of certification. During FY 2004, TDA projects funded in FY 2003 in the energy, civil aviation (airport, air traffic management), and IT/telecom sectors came to fruition. Assistance provided on improving the legal/regulatory framework in the telecom sector, for instance, is both moving Serbia along the development curve and positioning U.S. companies to take advantage of export sale, consulting, and investment opportunities of upcoming telecom privatization. In January 2004, the Serbian Ministry of Energy and Mining was granted $757,000 for funding a feasibility study on modernization of the Belgrade District Heating Plant. U.S. company Parsons was selected to complete the study. In March 2004, the Belgrade Airport was granted $414,000 for partial financing of the Phase II of a feasibility study on the proposed Belgrade Airport Expansion project. U.S. companies are already competing in tenders for business opportunities stemming from this project. Serbia and Montenegro Air Traffic Services Agency, Ltd has been awarded $643,000 to partially fund technical assistance in conducting a tender procurement of a $100 million air traffic management modernization. Banking system reform is key to spurring private sector growth and job creation in Serbia. USAID is providing assistance to strengthen the National Bank of Serbia’s (NBS) ability effectively to regulate the entire financial sector by assisting with implementation of consolidated NBS supervision of the non-bank financial sector as well as banks. Improved regulation will increase financial sector stability and raise consumer confidence, thus expanding access to lower-cost credit, providing new financial tools to individuals and businesses, and increasing monetary policy instruments. The USG is supporting the development of a sound, stable, and well-regulated insurance industry as part of strengthening the broader financial sector in Serbia. USAID advisors assisted in drafting a new EU-compliant insurance law and are conducting financial examinations of insurance companies to identify weaknesses and establish a baseline for effective regulation. The USG provided important assistance on bank restructuring and privatization though an OTA resident banking advisor at the Agency for Deposit Insurance, Rehabilitation, Bankruptcy and Liquidation of Banks (BRA). The BRA is responsible for managing the bankrupt estates of failed banks and selling the GOS ownership in other open banks. It currently is handling 13 bankrupt banks with assets in excess of $11 billion. In FY 2004, the BRA, utilizing advice from the U.S. Treasury Department, created a Bank Consolidation Unit (BCU). Teams were established to handle not only workout of the $11 billion in assets, but selling the former premises, resolving claims against the failed banks, archiving of records, and preparing and preserving final accounting statements. In addition, the BCU now gives the BRA a vehicle in which to place the problem assets from the banks being privatized, which is crucial not only to the sale of the banks but also to the restructuring and privatization of the large state and socially owned companies that are the debtors for the majority of the banks' problem loans. The BRA is also responsible for selling the GOS interest in the 13 open banks, nine of which are majority stakes. It adopted a privatization strategy in 2004 and has begun privatizing the first six banks on the list. The inefficient functioning and lack of transparency of commercial courts is a serious obstacle to increasing investor confidence and economic growth. Recognizing that improving the functioning of the commercial courts was central to making reform legislation effective, protecting U.S. business interests, and unlocking the potential of Serbia's economy, USAID initiated a program in FY 2004 to strengthen those courts. A comprehensive baseline analysis identified points where assistance will be most effective to reduce the risks and delays that the current system allows. In 2004, USAID supported training for Serbian Commercial Court judges, as well as the new Law on Enforcement of Commercial Judgments. These initial steps are being augmented by pilot projects at the commercial courts in Serbia's two largest cities, Belgrade and Nis, which are also those most likely to hear cases involving U.S. investors. USG programs also support the microeconomic foundations for accelerated growth of the private sector in Serbia. USAID identified six business sectors as critical for private sector growth: fruit, furniture, apparel, information and communication technology, pharmaceutical research, and tourism. Assistance was provided in marketing techniques and intelligence, export development, legal and regulatory analysis, investment and finance information, quality control, and product innovation. USAID worked with business associations to raise their capacity to understand and advocate for appropriate government policies. Notable results have already been achieved in particular firms and sectors through assistance on quality standards and marketing. Agriculture represents about a quarter of the Serbian economy. USG assistance throughout the agricultural supply chain, from small farmers to helping food/beverage processors improve their export competitiveness, has strengthened the capacity for sustainable growth in this sector. A majority of the activities under USAID’s Community Revitalization through Democratic Action (CRDA) program focused on economic policy, finance, or growth. Of the 1,284 CRDA projects, over half were for income- generating activities or economic infrastructure. Such activities respond to the clear linkage between economic dissatisfaction, particularly outside Belgrade, and support for non-reformist political forces. A third of income-generating projects were in the agricultural sector. In addition, the CRDA program partners awarded over 300 micro-enterprise grants and almost 80 small business grants. As of the end of FY 2004, 14,780 full-time equivalent jobs were created by the CRDA program’s economic development activities. CRDA activities also generated $13 million in additional income and $5.3 million in increased agricultural sales. In addition to the agriculture-related income generation activities of the CRDA project, in FY 2004, $2 million of SEED funds supported USDA technical assistance in areas critical to the development of SaM's agriculture sector. USDA assistance included activities designed to achieve three primary objectives: 1) economic growth and job creation in the agriculture sector; 2) improved consumer health, food safety, and animal and plant health regulations; and 3) expanded U.S.-Serbia trade, including increased integration into the world market. The success of USDA programs is visible though the increase in production and exports in 2004 and social welfare gains through improved consumer health. For example, USDA, with USAID assistance, helped Serbian institutions create a Market Information System (MIS) program to provide farmers, policy makers, and agribusiness, via 18 agricultural stations, with the pricing information they need to make rational production and marketing decisions. The USDA animal health program focuses on building capacity in diagnosis and prevention of endemic diseases, as well as animal health from the food safety and international trade standpoint. In FY 2004, the USDA Faculty Exchange Program (FEP) expanded its curriculum development and teaching methods from agricultural economics to providing new university courses in veterinary medicine and biotechnology. So far, 25 Serbian university professors have successfully participated in the FEP. USDA also continued to support the development of Serbia’s agricultural and food sector through its Young Scientist Program (YSP) by providing research grants and agricultural extension projects on a competitive basis, all of which are linked to U.S. land-grant universities. In 2004, USDA brought 24 Serbia-Montenegro YSP fellows to the U.S. for training in the areas of food safety, animal health, and biotechnology. The GOS has lagged behind in some areas where the USG has provided assistance. Steps necessary to gain membership in the World Trade Organization (WTO) were slowed by the distraction of a lengthy, and ultimately unsuccessful, EU-directed effort for Serbia and Montenegro to harmonize their economies, particularly tariffs. While progress on actual WTO accession was largely stalled during FY 2004, the USAID WTO Accession project made valuable contributions to creating a more rules-based trading environment by assisting both republics to prepare modernized legislation, particularly on intellectual property rights protection. The U.S. Department of Homeland Security, Customs & Border Protection (CBP), through its SECI/Trade and Transport Facilitation in Southeast Europe (TTFSE) Advisory Team (STAT) in Belgrade, continued to assist with the modernization and reform of control and clearance procedures at border crossing points and inland clearance terminals in Serbia, with particular reference to identifying the need for increased inter-agency cooperation, improved customs broker performance, and faster and more open cross-border communications. The STAT also assisted Serbian Customs to develop a comprehensive anti-corruption program, organize its public relations function, and compose an information technology system development strategy. Security, Regional Stability, and Law Enforcement The assassination of PM Djindjic in March 2003 spurred the GOS to conduct a major offensive against the organized criminal gangs believed responsible for the murder. As a result of the assassination, new powers were granted to police under emergency decrees. Serbian law enforcement then launched "Operation Saber," which resulted in the arrest of 10,000 people, many of whom were later released. In July 2003, new legislation was passed to combat both organized and war crimes. To date, there have been about 12 organized crime indictments naming over 150 individuals. The prosecution of war crimes has also become inextricably intertwined with Serbia’s future as a democratic state. The Serbian War Crimes Judiciary is proceeding with the case against 17 defendants in the infamous Vukovar/Ovcara farm massacre of 200 civilians. In FY 2004, USAID completed its support for setting up and equipping the Special Courts on domestic war crimes and organized crime, to, which the GOS also contributed significantly. Through the RLA program, the USG provided additional equipment and support to the Special Court and prosecutors to facilitate effective prosecution of organized and war crimes. With the full establishment of the DOJ/OPDAT RLA program, the USG has begun to implement a full range of Criminal Justice/Rule of Law programs. These include an ICITAP program focusing on the organized crime and war crimes police, an FBI/SECI TIP advisor, and an EXBS advisor. The Special Courts have already begun to try organized crime cases, including the Djindjic and Stambolic assassination trials. The court is also trying the Vukovar/Ovcara war crimes case, transferred to it by the ICTY. U.S. federal judges, court administrators, and U.S. Marshals have continued to visit Belgrade to provide advice on the interior layout, security modifications, equipment, and personnel staffing of the Special Courts. The U.S. Marshals have provided highly effective technical assistance on the development of a witness protection program, including promoting a regional dimension to the program. In conjunction with the U.S. Marshals, the RLA program has participated in the drafting of the Witness Protection Statute that will eventually govern the use of the procedure in Serbia. In anticipation of the passage of that law, the RLA coordinated $350,000 of assistance from the U.S. Marshals and began plans to build the new witness security unit. The RLA, in consultation with the U.S. Marshals, has come up with an action plan to implement the new law. The RLA program also maintains its focus on enhancing Serbia’s war crimes prosecution capacity by continuing to offer training programs for the Special Prosecutor for War Crimes and his 10-member team, as well as for the war crimes investigation unit within the Ministry of Interior. This training on such topics as proper case management in large trials, the use of informants and plea-bargaining, the relevance of international law within the domestic Serbian system, etc. has proven very helpful. Such assistance will become increasingly critical as the ICTY mandate expires in 2010, and the burden of war crimes prosecution shifts to domestic courts in the region. The RLA is also providing technical assistance and training to the Special Prosecutor for Organized Crime in such relevant subjects as investigative techniques in combating organized crime and drug trafficking. One legacy of the previous regime that the GOS has sought to address is the vast web of financial crimes and money laundering that underpinned Milosevic’s 13 years in power. The U.S. has helped the nascent Serbian Administration for the Prevention of Money Laundering (SAPML) make major progress in developing Serbia's anti-money laundering regime, despite major institutional and financial obstacles. In June 2003, the SAPML became a member of the Egmont Group, an international organization of 94 financial intelligence units (FIUs). Membership will provide Serbia the opportunity to exchange information on financial crimes and money laundering with other jurisdictions around the globe and to receive assistance in FIU operations and development. Serbia has emerged as a regional leader and model for the implementation of its anti-money laundering law, the establishment of its FIU, rapid membership in the Egmont Group, and signing cooperation agreements with neighboring countries. The Treasury Department also provided technical assistance to the SAPML in such areas as information technology (IT) development and anti-money laundering/combating-financing-of-terrorism (AML/CFT) training. An information technology system development plan will guide modernization and provide a more robust processing and analytical capacity. The Treasury enforcement advisor, in conjunction with the RLA, administered a workshop on anti-money laundering techniques, which was an important opportunity to train Serbian investigative magistrates, prosecutors, and judges in the new tools and resources that are now available to them. AML/CFT training was also provided to commercial banking institutions through the Serbian Banking Association and to attorneys through bar associations in conjunction with ABA/CEELI. Technical assistance was provided in amending Serbia’s money laundering statute to bring it fully into compliance with international standards of the Financial Action Task Force and EU Directives. Assistance was also provided for the MoneyVal evaluation, conducted in October 2003, in the Republics of Serbia and Montenegro to assess progress and identify next steps to strengthening the AML/CFT regimes. However, even with the laudable accomplishments of SAPML, the limited cooperation between the FIU and its counterparts – the Ministry of Interior, Tax Administration, Office of the Prosecutor, and the Customs Administration – remains an impediment to more effective results. This problem, coupled with a legal environment that prohibits the conviction for money laundering without the conviction of the underlying predicate crime, still needs to be addressed. Serbia also needs to enact terrorist financing legislation and make the Serbia FIU the central point for receiving and analyzing information related to such activities. The lack of adequate GOS financial support for the FIU since its inception is also a concern. Both the RLA program and the new FBI/SECI advisor have provided needed equipment, advice, and training to the anti-trafficking police, prosecutors, and judges. These programs, as well as ABA/CEELI's focus on victims, represent a comprehensive approach to combating human trafficking. COUNTRY PERFORMANCE MEASURES ECONOMIC & DEMOCRATIC REFORMS, 1991-2004
Data are drawn from EBRD, Transition Report (November 2004) & Freedom House, Nations in Transit 2004 & Freedom in the World 2004. Ratings are based on a 1 to 5 scale with 5 representing the most advanced. Latest year observation refers to 2004 economic reform data and 2003 democratic reform data; i.e., 2004 data for democratic reforms are not yet available. ECONOMIC STRUCTURE AND HUMAN DEVELOPMENT, 1990-2004
World Bank, World Development Indicators 2004; UNICEF, Social Monitor 2004; EBRD, Transition Report (November 2004); and UNDP, Human Development Report (2004). MEASURES OF PROGRAM EFFECTIVENESS IN FY 2004 DEMOCRATIC REFORM Performance Indicator: NGO Sustainability Index (Source: USAID 1 = highest; 7 = lowest)
FY 2004 Results: Serbia’s average ranking on the USAID NGO Sustainability Index for 2004 fell by 0.8 points (draft rating) compared to 2003. This unfortunate step backward is largely a consequence of changes in the macro-political environment in the wake of the 2003 assassination of Prime Minister Djindjic, whose government partnered actively with NGOs on many reform issues. Following the dismissal of Parliament in late 2003, and continuing since the formation of the new government March 2004, NGOs have not had a reliable partner (or individual counterparts) in the GOS. At best, government is seen as indifferent toward NGO activism on behalf of democratic reforms; at worst, it seems to engage actively against the NGO issues and interests. This has negatively affected NGO effectiveness in advocating on sensitive social and political issues, and resulted in occasional criticism and harassment. Not only do NGOs remain without an adequate legal basis on which to operate, but also a new government draft NGO law has surfaced, which is more restrictive than that under discussion with the previous government. NGO financial viability has deteriorated, partly due to the lack of legal provisions allowing NGOs to generate income, but also due to virtually non-existent local funding sources and further reduced donor funds. USAID activities contributed to NGO operations by increasing their technical capacity to adapt to the more demanding circumstances and less favorable environment. Performance Indicator: Media Sustainability Index (Source: USAID 1 = highest; 7 = lowest)
FY 2004 Results: Media index figures for 2004 are not yet final. Serbia’s average index rating in 2003 was 2.5, indicating a media sector "near sustainability," up from an "unsustainable" 1.86 in 2001. Areas assessed include free speech, professional journalism, and plurality of news sources, business management, and supporting institutions. The climate for independent media suffered considerable setbacks this year amid extralegal government maneuvering to stack the deck on upcoming licensing processes to benefit state-favored private media from the Milosevic period. This was reflected in lower than desirable "free speech" ratings for 2003. USAID activities helped strengthen media performance in "professional journalism" and "business management." Performance Indicator: CRDA communities mobilize at least 25% of project costs. (Source: CRDA PRS, USAID)
FY 2004 Results: The success of the CRDA communities in mobilizing the required 25 percent counterpart contribution is a measure of their participation in and willingness to work together on activities to improve local living conditions. The contribution target remains at 25 percent throughout the life of the program because that is the target stated in the cooperative agreements. To date, USAID has largely exceeded the target in Serbia (43 percent in Year One, 45 percent in Year Two, 47 percent in Year Three) and expects to continue to remain above the 25 percent mark for the program as a whole. Performance Indicator: Percentage of SLGRP Municipalities with Transparent Financial Management Systems (n = 50) (Source: SLGRP, USAID)
FY 2004 Results: To be fully transparent, the results of the annual local government budget process must include a concerted effort by local officials to inform the public of the key budget features, including how it was formulated, community participation was solicited, priorities were identified and decided, and external factors are affecting the budget. The annual budget review letter provides an accessible summary of key issues to increase public understanding of the budget process and expected budget outcomes. Nonexistent before the advent of the SLGRP, the budget review letter is a good measure of a transparent financial management system. In FY 2004, the 60 percent target of was exceeded (36 municipalities). ECONOMIC AND SOCIAL REFORM Performance Indicator: Foreign Direct Investment (US$ in millions, Source: IMF and National Bank of Serbia)
FY 2004 Results: Privatization activity slowed substantially, following the March 2004change of government. The vast majority of FDI has entered Serbia through privatization. Greenfield investment has been very limited. Due to a lack of leadership and clear policy of the new government, reduced offerings, particularly tenders for larger companies, limited the potential for FDI. Political factors and negative signals from the new government about the direction of privatization contributed to an increased level of uncertainty, causing hesitancy among potential investors. Nevertheless, most existing foreign investors experienced success and were satisfied. This dynamic, economic stability, strong growth and the general perception that Serbia is solidly on a path toward EU integration combined to continue the increase in foreign investor interest, if not commitments. Privatization activity picked up toward the end of FY 2004, with the appointment of an effective minister, and is expected to increase in FY 2005. USG assistance on business environment improvements and increasing the profile and competitiveness of the Serbian economy has been central to fostering the general rise in investor interest in Serbia. A joint USAID/U.S. Treasury project that secured a commercial credit rating for Serbia was particularly significant. The U.S. remains the largest investor in Serbia. Performance Indicator: EBRD Economic Reform Index (Source: EBRD)
FY 2004 Results: The Kostunica government posted a commendable record on passing important economic reform legislation in FY 2004. Quality new laws were passed on core elements of a market economy, including bankruptcy, business registration, execution of legal judgments, and corporate governance. The GOS passed an energy law that sets the stage for the unbundling and eventual privatization of state-owned electricity and oil companies, as well as EU-standard regulation. The USG provided critical technical assistance for drafting most of these laws. The EBRD index was weighed down by the stagnation of privatization in the first three quarters of 2004. The fact that the EBRD completes its Transition Report and Economic Reform Index in the summer also makes the index understate the actual scope of reform achievements for the fiscal year. This was particularly relevant in FY 2004, because the new coalition government was not formed until March 2004, and most of its reform achievements came by mid-summer at the earliest, leaving many not factored into the index. Performance Indicator: EBRD Financial Sector Reform (unweighted average of EBRD banking and non-bank financial indicators)
FY 2004 Results: Both EBRD financial sector reform indicators remained the same as in 2003, at 2.3 and 2.0 respectively. These also understate the actual achievements in this sector due to the timing of the report. Progress in the development of banking supervision was disappointing in FY 2004, with the USG, World Bank, and IMF all pointing to this as an area needing faster improvement. The National Bank of Serbia did not take steps to enforce the increased capital requirements for banks, made effective in January 2004. An inappropriate degree of regulatory forbearance was influenced by the dominant government and NBS priority on keeping a stable environment for the start of bank privatization. This latter got off to a good start with the release of tenders for three banks and for a privatization advisor for the largest bank with majority state ownership. These very positive steps, however, were in the early fall, too late to be factored into the EBRD indicators. The decision to establish consolidated financial sector supervision within the NBS, with USAID assistance, was also an important development in FY 2004. SECURITY, REGIONAL STABILITY AND LAW ENFORCEMENT Performance Indicator: Judicial Reform Index (Source: ABA/CEELI)
FY 2004 Results: 2004 ratings for the Judicial Reform Index are not yet available. In the 2002 baseline data for this index only 10 percent rated "positive" across 30 factors rated. Factors assessed include quality, education, and diversity; judicial powers; financial resources; structural safeguards; accountability and transparency; and efficiency. Rather than assessing all 30 factors in 2003, ABA/CEELI examined 14 factors that were most affected by legal and political developments during 2003, and the score dropped to 7 percent as a consequence. The drop in "positive" scores for judicial selection and appointment, judicial oversight of administrative practice, the system of appellate review, guaranteed tenure for judges, objective judicial advance criteria, judicial immunity for official actions, and removal and discipline of judges were not surprising, given the events of 2003. There should be some improvement by the next assessment in 2005, but it is unlikely that most of even 14 factors will be rated as "positive" by then, in view of the uneven attention the GOS paid to judicial affairs during 2004 and the elections-related political turmoil expected early in 2005. During the relative improvement of 2004, rule of law assistance programs were able to achieve notable results, as discussed in the Democracy and Security sectoral assessments, particularly in work with magistrate and prosecutors associations, and in the first systematic examination of case backlogs in Serbia’s non-commercial courts. SERBIA
MONTENEGRO U.S. STRATEGIC INTERESTS The Republic of Montenegro is the smaller constituent republic in the Union of Serbia and Montenegro. The primary U.S. interest in Montenegro, as throughout South Central Europe, is promoting the political and economic development that is central to maintaining peace and stability in the region and to integrating it into a Europe whole, free, and at peace. Throughout the region, the U.S. supports continued peace and stability, ethnic reconciliation, neighborly relations among states, development of market-based economies and civil society, and integration into Euro-Atlantic institutions. Through regional and bilateral efforts, the U.S. also fights terrorism and extremism; trafficking in persons, weapons, and drugs; and organized crime and corruption. In pursuing these goals, the U.S. promotes its highest national objective, the security of the United States and its citizens. OVERVIEW OF U.S. GOVERNMENT ASSISTANCE In addition to the $4.94 million in assistance to Serbia and Montenegro mentioned above, the U.S. Government (USG) provided an estimated $34.79 million in assistance to Montenegro in FY 2004:
In FY 2004, a total of 90 Montenegrins traveled to the United States on USG-funded exchange programs. U.S. ASSISTANCE PRIORITIES Democratic Reform Programs: The USG provides support for democratic reform, strengthening of democratic institutions, and civil society development through USAID and State Department Public Diplomacy programs. USAID democracy programming promotes support for civil society and more effective governance at all levels through three major programs. These focus on increasing citizen participation in community development and local governance; improving the transparency, fiscal soundness, and management capacity of local governments and intergovernmental systems; and modernizing judicial system structures and operations at the Republic and local levels. Through its democracy and governance strategic objective, USAID helps independent media, NGOs, political parties, and trade unions to develop competence and operational transparency, and to represent citizens effectively. USAID also provides support for trafficking victims. SEED-funded Public Diplomacy programming promotes democratic reforms through support for projects by indigenous NGOs; media training; educational and other exchanges; translation and publishing of American titles; and bringing U.S. experts to speak on various topics. Economic and Social-Sector Reform Programs: In 2004, the USG, through USAID and U.S. Treasury Department technical assistance, continued to work with the Government of Montenegro (GOM) to implement a comprehensive economic reform program. The program’s primary goal is to transform Montenegro from a state-driven economy battered by the impacts of a decade of war and sanctions in the region into a stable, market-driven system buoyed by private sector growth. This support has shifted focus from its initial phase of drafting the new legislative framework governing most key areas in the economy toward implementation of that legislation and the building capacity in key institutions necessary for a modern market economy to function. USAID continued assistance for business consulting, analysis, and lobbying to support the development of the private sector and initiated an expanded effort for private enterprise development and sector competitiveness in tourism, agriculture, and wood processing. Activities undertaken to implement the 2004 coastal earmark ($12 million) will provide key water infrastructure improvements by next tourist season. Security, Regional Stability, and Law Enforcement Programs: In FY 2004, the USG continued its emphasis on assisting border security, reflecting the 2003 shift ofborder security functions from the former Yugoslav Army to the Republic's police. In addition, the U.S. provided continued SEED funding to OSCE for police training in Montenegro to raise professional standards and, in particular, to combat trafficking in persons. A separate U.S. program supported the renovation of the police training center. Meanwhile, the establishment of a Resident Legal Adviser (RLA) program provides the U.S. with additional means to facilitate training and provide equipment to law enforcement and judicial bodies in response to new investigative techniques introduced by revisions to the Law on Police and the Criminal Procedure Code. Finally, U.S. assistance continues to support the Montenegrin Financial Intelligence Unit and strengthens action taken by Montenegro in 2002 to criminalize money laundering for the first time. SECTORAL ASSESSMENTS Democratic Reform Driven by the goal of EU integration, the GOM launched a substantial Economic Reform Agenda (ERA), in March 2003. The ERA has been the key tool the Prime Minister and his cabinet have used to drive and track reforms in the economy, and provided a useful framework for USG assistance support in many areas in FY 2004. The ERA contains 13 components, including reform agendas for the economy, the judiciary, public administration, local government, and civil society. Reform is tied to public support for the democratic transition, which can only be ensured through a fair, transparent reform process and closer cooperation with civil society. The GOM promoted continued reforms in FY 2004, providing important momentum for the passage of substantial reform legislation. In the Democracy and Governance field, this includes the Laws on Local Self Government, Public Administration, Local Government Finance, and Direct Election of Mayors. Parliament has adopted key draft laws, such as the Laws on the Prosecutor, Criminal and Civil Procedures, and Witness Protection. The opposition participated sporadically in parliamentary sessions until May 2003, when it began a boycott to protest the decision under the new media law to limit live TV broadcasting of parliamentary sessions. The March 2004 ethnic violence in Kosovo, the murder of the editor-in-chief of the opposition-leaning Dan newspaper, along with disconcerting results from Serbia’s first round of presidential elections had the potential further to destabilize Montenegrin politics. Yet, public opinion tracking showed that satisfaction with the GOM and its performance went up by 3 percent, and, despite the opposition’s best efforts, public support for its protest and boycott strategy declined. The boycott finally disintegrated after 16 months, in October 2004, with the opening of the fall Parliament session. The Serbian Peoples Party led the way by publicly stating its intention to return to propose a law on direct elections to the Union Parliament, because it was determined to prevent the ruling parties from contributing to the Union’s dissolution. The opposition also returned because of an initiative by the Organization for Security and Cooperation in Europe (OSCE) to guarantee the broadcast of parliamentary sessions that was accepted by the public broadcaster (RTCG). Against this backdrop, USG support through USAID for democratic development at all levels of government and society was $20.74 million in FY 2004, with an additional $650,000 of SEED-funded Public Diplomacy assistance. In addition to its major activities -- the Community Revitalization through Democratic Action (CRDA), Good Local Governance (GLG), and Judicial System Reform Project (JSRP) programs -- USAID activities also included smaller civil society programs to support the NGO sector, independent media, trade unions, anti-trafficking efforts, and political process and elections support activities that incorporate assistance to make Parliament more efficient and transparent. Public Diplomacy programming supported democratic reform through more than 15 education, media training, and exchange programs. Over the past three years, Montenegro has put in place a body of systemic laws that articulate the policy and structure of a decentralized, representative governing process. Local economic conditions are very difficult, however, as are the finances of the local governments charged with restructuring their operations. The CRDA program builds community-level democratic processes and capabilities through partnership with communities to select and realize hundreds of small- to medium-scale development activities in basic infrastructure; environmental improvement; employment and income generation, particularly for low-income families; and civic activities. The process is inclusive, with emphasis on the participation of and benefit by women, minorities, youth, and vulnerable populations such as pensioners and Roma. CRDA has energized communities republic-wide into active dialogue and partnership among citizens and with their local governments, the private sector, and other communities to develop their communities and improve the social and economic environment. Importantly, citizens and municipalities have set aside local party politics and other differences to collaborate on development. By the end of FY 2004, Montenegrins had democratically elected and were operating 112 community councils representing the majority of the Republic’s population, and a further 35 cluster councils were working to facilitate collaboration among multiple communities. The continued ability and willingness of the CRDA communities to mobilize significantly more than their required counterpart contribution is a compelling measure not only of their commitment to working together to improve local living conditions, but of the value they see in the CRDA approach to strengthen communities through citizen involvement. In FY 2004, CRDA had over 53,000 participants and initiated 171 economic development activities, 101 civil works projects for local infrastructure and environment, and 188 civic participation activities, worth over $5.2 million. Communities set as priority areas addressing poor and deteriorating basic infrastructure and generating new income opportunities, mainly through micro and small entrepreneurs and business associations. Economic activities created 9,127person-months of employment, $3.2 million in increased income generation, and improved economic output by small enterprises. Communities are required to provide a 25 percent cost share but have contributed together with their partners (i.e., private business, NGOs, municipalities, Republic institutions, Diaspora) on average 45 percent of project costs. CRDA communities are well equipped to implement new local government laws. A new program element – municipal development assistance – was designed to mobilize key stakeholders and formalize citizen participation in local government decision-making. USAID also implemented programs in coastal development and reproductive health, as mandated by Congress. In FY 2004, the USAID GLG Project helped implement core local government laws passed by Parliament in July 2003. The GLG expanded work with municipalities and their public service companies to introduce clear local policies, ordinances, and regulations for local governance and transparent management systems for basic municipal functions, particularly for financial resources (i.e., tax collection, municipal treasuries). These efforts lend to municipal financial stability, enhance municipal government efficiency, and help reduce corruption. In FY 2004, specific achievements include: Model Municipal Charter, the Local Assembly Book of Procedure, and a model ordinance for citizen participation issued by the Ministry of Justice. Charters were passed in local parliaments of nine municipalities; strategic economic planning support brought together citizens, municipal officials and staff, business leaders, and civic leaders, who generated action plans to guide capital investment planning in all 21 municipalities. In FY 2004, USAID launched an initiative to improve water and wastewater systems, representing the synergy among the CRDA, GLG, and coastal development programs. Water/wastewater is a top GOM priority, particularly to support the tourist economy on the coast. The activities focus on restructuring the business model in waterworks to improve service delivery, improve collections, customer service, and prepare for investment and commercialization opportunities. Water systems are being built in rural areas and renovated or upgraded in urban areas, and selected wastewater systems along the coast are being upgraded for positive environmental impact. CRDA implementers developed and implemented 24 projects and activities in FY 2004 related to Improved Access to Clean Water and Sanitation. USAID, the GOM, and other donors agreed to proceed with design and execution of 12 projects in the coastal development area. A new JSRP will build on earlier ABA/CEELI work to support an independent, efficient judiciary. Working with the Ministry of Justice, Supreme Court, subordinate courts, Judicial Training Center, and other Montenegrin counterparts, the JSRP continues to provide expertise, training, and commodity assistance to improve the structure and operations of the judiciary, including the creation of the new Appellate and Administrative courts and an Administrative Office for the judiciary. JSRP also works to streamline case processing, improve caseload management and reduce backlogs at all levels of the court system, and enhance the judiciary’s physical infrastructure, including computerization of the courts. The USAID-funded Montenegro Independent Media Program (MIMP) enhanced journalistic professionalism and the legal and regulatory framework for media and business management. In FY 2004, MIMP concentrated on the implementation of Montenegro’s innovative media legislation. MIMP provided expert advice to leaders of Montenegro's New Public Broadcasting Service on the adoption of various programming principles and organizational options for restructuring the Radio and Television of Crna Gora (RTCG). It continually advised and monitored the Broadcasting Agency to ensure that it functioned as a neutral, professional entity. Although challenges remain, MIMP results to date show advances in media capacity and competitiveness. The USAID-funded Montenegro Media Institute (MMI) is shaping a new generation of journalists, editors, and media managers by training hundreds of media professionals through seminars and workshops, including through a six-month diploma course with international certification. The Embassy’s Public Affairs Section used in-country SEED media training funds, as well as SEED funds designated for use by BBG, to train Montenegrin journalists in areas such as media management and marketing, civic journalism, radio and TV news production, and a special program introducing democratic principles and practices to government spokespersons. Democracy Commission grants to the Working Group for Media Reform and the Journalistic Self-Regulatory Body were also completed. USAID’s Montenegro Advocacy Program (MAP) continued to strengthen NGO governance. In 2004, MAP worked to build the capacity of the two regional NGO advocacy resource centers by providing access to communication and technical services and training resources. In April 2004, the Foundation for Democratic Alternatives in Society (FONDAS) was founded by ORT/MAP trainers and technical staff as an independent organization. The objective of FONDAS is to support the NGO sector to advocate successfully for legal change on behalf of civil society, and to give NGOs the capacity to mobilize expertise and resources to tackle issues effectively. FONDAS has developed and delivered nine different types of training (organizational development, financial management, advocacy skills, watchdog skills, leadership skills, NGO budgeting, board of directors training, fundraising techniques, PR techniques) to more than 150 members of over 30 different Montenegrin NGO’s. The MAP-supported Center for Election Monitoring (CEMI) achieved a major success for NGO advocacy with the drafting of the Laws on Political Party Financing and on Political Parties. CEMI collected over 13,000 signatures from citizens in support of these proposals, and Parliament adopted the laws in March 2004. CEMI defended the laws in Parliament, only the second time in Montenegro that Parliament had adopted laws proposed to it by an NGO. FY 2004 SEED Speaker Funds from the Office of International Information Programs (IIP) were used to bring U.S. speakers to Montenegro to address audiences on issues including tourism, U.S. values, the U.S. election system, ethics in journalism, educational reform, and NGO/government cooperation. These programs not only educate, but also form bonds between U.S. and local experts. A variety of organizations in Montenegro were supported with SEED-funded Democracy Commission small grants during FY 2004, with an emphasis on refugees and internally displaced persons (IDPs); women’s, minority, and human rights; transparency in government; rule of law; independent media; and environmental protection. The U.S. Embassy’s Public Affairs Section funds education reform initiatives at all levels. In elementary and secondary schools, programs in civic education, applied economics, and school connectivity (regional understanding through the Internet) are funded by SEED and then executed in cooperation with NGO partners. SEED university linkage funds in FY 2004 strengthened relations between the Law Faculty of the University of Montenegro in Podgorica and the University of Nebraska and the University of Texas in Arlington. Another linkage program between the Economic Faculty of the University of Montenegro in Podgorica and the University of Pittsburgh continued throughout FY 2004. English Language funds were used to provide fellows to the English Department of the University of Montenegro in Niksic, as well as to the Economic Faculty and the Institute for Foreign Languages of the University of Montenegro in Podgorica. These efforts will improve the English-speaking skills of future government and civic leaders. Three Ron Brown Scholarships and three Hubert Humphrey Fellowships for FY 2004 in areas such as journalism, public administration, business administration, and drug prevention will provide U.S. experience to current and future Montenegrin reform leaders. The Junior Faculty Development Program currently has six young Montenegrin professors working with American mentors at U.S. universities. SEED-funded Freedom Grants supported 14 additional Montenegrin participants in the International Visitors Program to see first-hand how their American counterparts overcome obstacles. Areas covered ranged from judicial reform and witness protection to leadership development for women, conflict resolution, border security, and municipal issues. Economic and Social-Sector Reform Programs Due to continuing data reliability and capacity problems in the republic-level Bureau of Statistics, basic national accounts information remains controversial and likely is subject to a wide margin of error. Probably the best figures for GDP were constructed on an expenditure basis for 2001 by a USAID-supported effort. Accounting for growth, these calculations would project 2004 GDP at about €1.38 billion, or just over €2,000 per capita. Inflation continues to fall and is expected to be around 5 percent for 2004, down from 7.5 percent for 2003. Although Montenegro still has a relatively high current account deficit, the gap appears to be more than covered by unrecorded financing flows, including tourism receipts that fall into the gray economy, since most foreign tourists still use cash. Inflation may also be driven by the practice of wage indexation and continuing inflationary expectations. Although recent official data on average wages put the net monthly wage at about €145, other sources, including household-level surveys, show that income is significantly higher, at about €250 per month. The GOM continues to spend more than it collects in revenues. However, without the ability to issue currency and having a limited capability to borrow in the domestic market, budgets are in balance on a cash basis, limiting the macroeconomic effects of these deficits. Supported by on-going USAID assistance, the GOM central budget fiscal deficit was reduced by over 40 percent, to €17.2 million for the January 1 through October 31, 2004 period, well over the 20 percent target. The deficits remain relatively low by international standards, now around 4 percent of GDP, but the main fiscal problem remains the structure of expenditures, both realized and unrealized. Deficits are stable and funded, and the medium-term impact of the new pension law should help to reduce transfers over time. All revenues now pass through the central budgetary account and are subject to public disclosure. Progress is being made on rationalizing the structure of expenditures, which is still heavily weighted toward wages and social transfers. The GOM still typically under-budgets for capital expenditures and related recurring expenses. Given the priority given to public sector wages, continuing budget deficits reinforce further deterioration, resulting in an expenditure structure that does not support long-term growth objectives. The impact of the new USAID-supported treasury system and procedures, along with U.S. Treasury budget efforts, has done much to limit this weak fiscal discipline. The financial sector continues to show marked improvement. Only Podgoricka Banka remains with majority state ownership. USAID assistance in strengthening bank supervision by the Central Bank of Montenegro has put it largely in compliance with Basel II Core Principles, and the application of risk-based supervision is increasing throughout the sector. As banking sector competition has strengthened, interest rates have continued to decline, although the significant element of country risk has tended to keep them high. While the relatively low level of deposits still limits financial intermediation, leading to over-reliance on expensive international capital sources for on-lending, private sector deposits continued their strong growth in 2004. This growth of 37 percent well exceeded the 20 percent target level. The monopoly payments system (ZOP) will be fully dismantled by the end of 2004. Although bank deposits, and consequently lending, have risen dramatically, they are still comparatively low. Effective implementation of the recently adopted deposit insurance scheme, starting from mid-2004, should help alleviate some mistrust toward banks. At the micro-level, the USAID-supported Opportunity Bank (OB) disbursed more than €8.3 million in loans to small and medium-sized enterprises (SMEs) over the last 12 months, leading to creation of over 350 jobs and maintenance of over 1,700 others. OB now has branch offices and representative offices that provide service to all of Montenegro. USAID technical assistance facilitated the passage of new commercial laws that are now being implemented at a reasonable pace. The Business Organization Law, among the most progressive in the Balkans, is largely implemented. Implementation of the new Bankruptcy Law, with its voluntary restructuring provision similar to the U.S. "Chapter 11," has continued to improve. The new Mortgage Law should enhance conditions for bank lending against real estate, and the new Laws on Gaming and on Money Laundering have increased transparency in these sectors. A new Law on Licensing, designed to streamline the permit processes for establishing new businesses, is in the final stages of development and will complete the core legislation to facilitate development of an open market economy. Montenegro’s energy sector continues to suffer from over a decade of under-maintenance and tariffs that remain below cost-recovery rates. Although rates were increased in the spring of 2003, largely due to USAID budget conditionality, virtually the entire benefit was absorbed through a worsening of collections. In an important success, for the first time ever the 2003 electric utility company (EPCG) current operating accounts received an unqualified audit report, largely due to USAID support to improve accounting practices. Despite significant remaining issues regarding payments, substantial progress was made in 2004 on the structural unbundling of EPCG. Payments by the aluminum company (KAP), which accounts for early 40 percent of t | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
