Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

246. Telegram From the Embassy in Yugoslavia to the Department of State¹

11366/Depto 6012.

Washington, November 12, 1987, 1533Z

SUBJECT

• Deputy Secretary Whitehead’s Meeting With Yugoslav Prime Minister Mikulic.

1. Confidential—Entire text.

2. The following message has been cleared by the Deputy Secretary’s party.

3. Summary—On November 9 Deputy Secretary Whitehead met with Yugoslav Prime Minister Mikulic for one hour in a discussion that focused primarily on Yugoslavia’s economic problems and its plans to deal with them. Mikulic said there had been much criticism of his economic stabilization program including the suggestion of a vote of no-confidence in his government. However, Mikulic insisted that his government will stay the course to enact and implement the program. The two major goals of the program are curbing inflation and establishing conditions for stable but dynamic growth. Mikulic several times reiterated his confidence that his program will succeed. In order to provide a breathing space of about six months, Mikulic intends to impose a freeze on all prices and, through interventive measures if necessary, severely restrict investment in “non-economic sectors” and require that wage increases be linked to increased capital formation. Mikulic said that foreign debt rescheduling will be necessary in order for his program to succeed, noted that Yugoslavia is different from other debtor countries in that it has regularly serviced its debt obligations, and expressed the hope for USG support and understanding. He told the Deputy Secretary that Yugoslavia had prepared a platform to present to the IMF. If Yugoslavia’s interests, an agreement, possibly a standby or an extended fund facility (EFF), will be negotiated with the Fund. The Deputy Secretary responded that the U.S. supports Yugoslavia, that Mikulic’s program appeared to have the right thrust, and that an IMF agreement would be in Yugoslavia’s interest. End summary.

4. Deputy Secretary Whitehead, accompanied by Ambassador Scanlan and EUR/EEY Office Director Wenick, spoke with Yugoslav Prime Minister Branko Mikulic for approximately one hour during the early afternoon of November 9. Mikulic was accompanied by Deputy Foreign Affairs Secretary Budimir Loncar and the Prime Minister’s Chef de Cabinet. In order to meet with the Deputy Secretary, Mikulic had left a meeting at which he and aides were discussing the GOY’s economic stabilization program with the Prime Minister’s counterparts in Yugoslavia’s eight republics and provinces. Mikulic noted that fact in saying that this was a particularly interesting time for the Deputy Secretary to visit Belgrade. The Deputy Secretary agreed, adding that he felt almost personally involved in the development of the program by visiting at this particular time.

5. Mikulic said that he assumed the Deputy Secretary would be very interested to learn what the program consists of and its chances for adoption and implementation. He said that his cabinet adopted the program at two o’clock that morning, following public debate, discussion by the republican and provincial parliaments and the Federal authorities. As expected, Mikulic continued, the program he originally presented to the Federal Parliament (on October 19) was highly controversial. Implementation of the program will not be easy, simple or quick. Yugoslavia must ask itself “do we continue with the illusion of plenty or face reality?” The Mikulic cabinet insists on the latter course. It will not be easy to give up the easy life built on an accumulation of domestic and international debt, but the Mikulic government will not give up on its course, its orientation, or its policy. For this reason, Mikulic said, many oppose his program, and there has even been raised the question of a vote of confidence. But, Mikulic said, “We are not worried”; the suggestion of a proof of Yugoslav democratization. As the program nears finalization, there will be less opposition. With adoption by the Parliament, the next, and much harder step—implementation—will commence.

6. Mikulic said the economic stabilization program has two major points: resolutely curbing inflation and creating conditions for stable, but dynamic, growth. While some may believe that both tasks cannot be successfully undertaken at the same time, Mikulic said, Yugoslavia has sufficient reserves and resources to restrain public and private consumption and to employ underutilized productive capacity to increase savings, leading to growth. Although the Federal government has not had an easy time gaining support for its program, Mikulic (several times) expressed confidence that it will be successful. Mikulic expects the Parliament to support the principle of his program when it is formally introduced on November 12 and to receive suggestions on how it may be improved.

7. Mikulic then told the Deputy Secretary, in confidence, next steps the GOY has planned. Yugoslavia, he said, has been grappling with the problem of price disparities since 1957; inflation has provided justification for price rises several times a year. Immediately following adoption of the stabilization program, Mikulic intends to impose a six-month freeze on all prices. Laws forcing a reallocation of public expenditure and rigorous limitations on investment in “non-economic” sectors are to be passed. Wage increases will be permitted only to enterprises who also increase capital formation. All of this will be done to provide a breathing space for accumulation of funds for investment in production. Mikulic said Yugoslavia must do this as the rate of inflation is already alarming, but if piecemeal steps are taken, a great deal of time would be necessary to achieve results. There is already considerable and rising social tension. About six months will be required to put the basic stabilization program into effect. Immediately after adoption of the stabilization measures, “interventive measures” will be enacted as “shock therapy” for the economy.

Yugoslavia’s Foreign Debt

8. An essential condition for realization of the stabilization program is creditor agreement on restructuring Yugoslavia’s foreign debt. Mikulic said that Yugoslavia cannot continue to tolerate a net capital outflow. Yugoslavia needs a several-year grace period on its obligations and a reduction in total foreign exchange inflows to around twenty-five percent. Yugoslavia will remain current on interest payments while seeking deferment of payment of principal.

Yugoslav Relations With the IMF

9. Mikulic told the Deputy Secretary that the GOY had prepared a “platform” for presentation to the IMF. Mikulic said he had met with Ripley and Russo of the IMF when they visited Yugoslavia in late October and that technical experts had assisted the Yugoslavs in preparation of the macro-economic aspects of the GOY “platform”. Thus the IMF is familiar with the GOY plan. If the IMF agrees to the GOY “platform”, then a future form of [garble] Yugoslavia. In addition, Yugoslavia is different in an essential way from other debtor countries: Mikulic noted that of thirty-one debtor countries, Yugoslavia is the only one that has regularly fulfilled its obligations regarding its payments of interest and principal. Mikulic asserted that Yugoslavia has untapped resources and potential with which to solve its economic problems. His program is designed to ameliorate both Yugoslavia’s economic and political shortcomings. At the same time, work on constitutional amendment is going forward. In concluding his discussion of his plans for economic reform, Mikulic stated his hope that the United States will demonstrate “understanding and support for our program”. He also said that Yugoslavia will work hard to develop joint ventures with foreign partners, to establish duty-free zones to be used by foreign enterprises, and to formulate a strategy for development of tourism and other services, which Mikulic believes has been underestimated as a source of foreign exchange earnings.

The Deputy Secretary’s Response

10. The Deputy Secretary thanked Mikulic for his frank and detailed description of Yugoslavia’s problems and the plans of the Mikulic government to solve them. He said that he wished to respond with three points:

(A) The United States is indeed Yugoslavia’s friend. We have a “selfish” interest in Yugoslavia remaining stable, independent, and free, so we will support Yugoslavia and its government.

(B) As described to the Deputy Secretary, the Mikulic economic reform program sounds good in [omission in the original] Secretary urged Mikulic to stand fast and not permit the proposed program to be watered down: people respond positively to a need for sacrifice if they believe the intended results will be achieved. The reform program must be “big, bold, and tough.” Conversely, if they do not believe the intended goals are obtainable, they will withhold support.

(C) Mr. Whitehead said he was very pleased that the Yugoslavs have decided continued cooperation with the IMF is worthwhile. We believe that the IMF can help Yugoslavia, not hurt it. Furthermore, it will be easier for the USG to assist Yugoslavia in its relations with the World Bank, the Paris Club, and commercial bank creditors if Yugoslavia has an agreement with the IMF.

11. Mikulic responded that he believes that the objectives and the nature of his stabilization program will mobilize most of the Yugoslav people to support it and reiterated that the IMF had been involved in the development of the economic stabilization program from the beginning. He concluded that he was glad to hear the Deputy Secretary’s views and would report them that evening to the Yugoslav Presidency.

Presel

1. Source: Reagan Library, Nelson Ledsky Files, Subject File, Yugoslavia—1987–1988 (2), Memos/Letters—Cables—Reports/Research. Confidential. Sent for information to Bonn, London, Paris, Rome, and the Department of the Treasury.