This chapter is divided into three separate sections, covering Serbia, Montenegro, and Kosovo. The statistical data appearing below cover the three entities.
Area: 102,350 sq km, slightly smaller than Kentucky
Population: 10,655,774 (July 2003 est.)
Annual Inflation: 19.0% (2003 est.)
Population Growth Rate: 0.07% (2003 est.)
Gross Domestic Product (GDP): $ 23.15 billion (2002)
Life Expectancy: male - 71.03 years; female - 77.16 years (2003 est.)
GDP Per Capita: $2,200 (2002 est.)
Infant Mortality: 16.9 deaths/1,000 live births (2002 est.)
Real Annual GDP Growth: 4% (2002 est.)
U.S. STRATEGIC INTERESTS
The primary U.S. interest in Serbia and 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, good 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 endeavors to fight terrorism and extremism; trafficking in persons, weapons, and drugs; and organized crime and corruption. In pursuing these goals, the U.S. Embassy in Serbia and Montenegro promotes the highest U.S. national objective, the security of the United States and its citizens.
OVERVIEW OF U.S. GOVERNMENT ASSISTANCE
In FY 2003, the U.S. Government (USG) allocated the $110 million appropriated as follows in Serbia:
- $69.17 million in democratic reform programs (including Public Diplomacy exchange programs);
- $31.84 million in economic and social sector reform programs;
- $4.36 million in security, regional stability, and law enforcement programs;
- $1.25 million in humanitarian programs;
- $3.38 million in cross-sectoral and other programs; and
- Privately donated and U.S. Defense Department excess humanitarian commodities, valued at $0.25 million.
U.S. ASSISTANCE PRIORITIES
Democratic Reform Programs: The Embassy's democracy programming emphasizes support for civil society and more effective governance at all levels. SEED-funded USAID democracy and governance assistance for Serbia in 2003 totaled $67,624,000. USAID's flagship Community Revitalization through Democratic Action Program (CRDA) and related Serbian Local Government Reform Program (SLGRP) are now entering their third year. They focus on increasing citizen participation at the grassroots level and the transparency and management capacity of local governments. Through its democracy and governance strategic objective, USAID also supports civil society (NGO, media, trade union, and anti-trafficking programs), a more democratically oriented political process, and the rule of law. The Embassy's SEED-funded Public Diplomacy programming promotes democratic reforms through media training, NGO support, and educational exchange programs. Democratization programs are particularly needed in southern Serbia, where as recently as two years ago, ethnic tensions flared violently.
Economic and Social Sector Reform Programs: In FY 2003, the USG provided $31.57 million in economic-related assistance to Serbia. This supported overall U.S. policy objectives by addressing critical 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 integration with the rest of Europe. USG assistance focuses on strengthening the institutions required to sustain economic reform and support the development of a market economy. USG programs provide assistance in a wide variety of areas, including macroeconomic policy reform, fiscal reform (including tax policy, tax administration, development of Treasury functions, and debt management), bank supervision, non-bank financial sector regulation, strengthening the central bank, anti-money laundering, preparation for WTO accession, customs reform, agriculture, restructuring and privatization of troubled banks and enterprises, enhancement of the business and investment environment through commercial law reform, and developing real estate and mortgage markets. USG assistance activities are conducted in close coordination with the programs of multilateral and other bilateral donors. The USG's highest social sector priority is poverty reduction through lowering barriers to private sector development, helping communities to help themselves through infrastructure and income generation projects, and pension reform. Programs will increasingly focus on job creation in southern Serbia, where unemployment rates hover at 30 percent.
Security, Regional Stability, and Law Enforcement Programs: In FY 2003, the U.S. shifted a significant amount of its law enforcement assistance to Serbia to address the related issues of war crimes and organized crime. The Department of State, Bureau of International Narcotics and Law Enforcement Affairs (INL) administered SEED funding for programs focused on criminal justice sector reform, criminal investigative skills development, combating trafficking in persons, and police reform. The newly established Resident Legal Adviser (RLA) Program in the Embassy serves as a linchpin for U.S. efforts to bolster Serbia's domestic capacity to prosecute war crimes cases and to combat organized criminal activities. A U.S. Marshals Service (USMS) judicial and witness security assistance project directly complements the work of the RLA. In addition, INL procured and donated communications equipment for the VIP Protection Directorate within the Ministry of Interior. FY 2003 SEED funding is also being employed to develop Serbia's capacity to use forensic lab and examination results as evidence in organized crime and war crimes trials.
USAID has helped the Serbian Government to build and equip a Special Court for War Crimes and Organized Crime. It used SEED funding to put together an international expert team to help Serbia prepare a Law on Prosecuting Perpetrators of War Crimes. In addition, the U.S. has devoted a significant portion of its law enforcement assistance in Serbia to promoting police reform, with a particular focus on training. The most tangible achievement of U.S. assistance in this area is the training of a multiethnic police force in southern Serbia, which has proven to be a key source of stability following the adoption of a peace plan in this volatile area two years ago. INL used FY 2003 SEED funding further to institutionalize achievements in multiethnic, democratic policing by seconding U.S. law enforcement personnel to the OSCE for training and monitoring activities. Training topics include human rights, codes of ethics and conduct, and modern law enforcement techniques. Also in southern Serbia, legal aid in the conflict-prone region resulted in two successfully resolved human rights-related court cases, including a decision against the (then) Yugoslav Army.
SECTORAL ASSESSMENTS
Democratic Reform
The year 2003 saw the assassination of Serbian Prime Minister Zoran Djindjic, on March 12; accelerated, chaotic, and paralyzing political infighting in its aftermath; three failed presidential contests; preparations for major organized crime and domestic war crimes trials in the wake of the assassination; and the parliamentary elections held on December 28, 2003, as a last-ditch effort to break the stalemate between leading parties. In the run-up to those elections, support for Serbia's nationalistic Radical Party (SRS) was increasing, and the SRS secured the largest number of seats in Parliament, though democratically oriented parties garnered a thin majority from which a coalition might be formed. Coalition negotiations began the next month. Progress in legal reform may be characterized as two steps forward, one back, with positive developments in the passage of new laws that provide prosecutors and judges with more effective tools to pursue organized crime and domestic war crimes cases, and the establishment of a Special Court to serve as the venue for these high-profile trials. In other areas, however, the Serbian executive reversed direction on legal reform in asserting greater control over the judiciary and rolling back key elements of a package of laws on the courts that established the framework for reform in this sector.
Against this backdrop, Embassy support for democratic development at all levels of government and society is more critical than ever. USAID takes the lead in this area, with SEED funding of $67.6 million in related programming in FY 2003. State Department Public Diplomacy activities augmented USG democracy and civil society efforts with $3.045 million in SEED-funded programming. USAID's program includes the flagship U.S, assistance activity, the Community Revitalization through Democratic Action Program (CRDA) and the related Serbian Local Government Reform Program (SLGRP); a civil society program designed to support NGO, independent media, trade union, and anti-trafficking efforts; political process and elections support activities; and initiatives focused on strengthening the rule of law.
Begun in 2001, CRDA is the U.S. Government's most visible and popular initiative in Serbia. By the end of FY 2003, CRDA's five American Private Voluntary Organization (PVO) partners were active in 348 communities with a population of 4 million. Of 2,270 community projects initiated to date, over 1,300 have been completed. A thousand new projects will be started during the third year. The scale and rapidity of CRDA's implementation exceeds that of any other program of this type in the world; over 90 percent of CRDA funding is expended within a year of obligation. The response of the communities has been extraordinary; they have contributed over 45 percent of project costs. Although the communities highly appreciate and desperately need the CRDA-funded schools, clinics, roads, bridges, water supply systems, and income-generating activities, citizens consistently report that the program's most important aspect is that for the first time they are being heard. An August 2003 survey conducted in selected CRDA communities found that the program had improved attitudes toward democracy, community involvement, and the U.S. By providing citizens with a means to voice their concerns and priorities, CRDA has motivated citizens to work together to achieve common community goals and contributed to strengthening grassroots democracy in Serbia.
The Serbia Local Government Reform Program (SLGRP) is working in 40 municipalities and is about to expand operations to another 47, including those in the metropolitan Belgrade area. The 87 participating municipalities will cover over 70 percent of Serbia's population. During the first two years of operations, 1,022 training sessions, attended by 26,363 participants, were held to improve the management capacities of local government staff. More than half (58 percent) of the participants were women, reflecting the important role women play in local government. The training includes financial management, public services management, information technology applications, and citizen participation. As a result of these efforts, transparent and accountable budgeting and financing systems have been established in 38 municipalities, and all 40 participating towns have held public budget hearings for the first time. Public-private partnerships to create business improvement districts have been established in four municipalities. Municipal information centers and/or one-stop permitting centers have been set up in five municipalities and will be extended to other municipalities. The Association of Municipalities and Towns is receiving technical assistance and support to enable it better to represent and provide services to its membership. At the national level, SLGRP has been providing the Ministries of Finance and Local Government with technical assistance on decentralization. This work has included assistance in identifying appropriate policy approaches and assistance in drafting related legislation.
USAID and Freedom House-supported achievements in 2003 include NGO campaigns that resulted in productive collaboration with government on the passage of a federal decree on conscientious objection, a draft freedom of information act, and the initiation of meaningful dialogue with the Ministry of Interior on police reform. Media support via the International Research and Exchanges Board (IREX) helped leading independent Radio/TV B92 realize its national expansion plans -- the station now covers all major municipal markets, has a modern, well-designed studio facility, and runs the second most-watched news programming in Serbia. USAID support also helped establish an investigative reporting training program that has trained eight journalists monthly, created a web-based forum for exchange of information on regional anti-corruption efforts, and trained reporters on covering trafficking stories. A USAID partner, the American Center for International Labor Solidarity (ACILS), helped leading independent union Nezavisnost increase participation by women and youth in its activities, contribute to four pieces of economic legislation, and foster ties among Serbia's leading unions to ensure a more coordinated voice in tripartite dialogue with government and business. USAID's anti-trafficking-in-persons grant to the International Organization for Migration (IOM) supported counseling and return/reintegration assistance to 56 victims through Serbia's only trafficking shelter, supported new services to domestic victims, and helped facilitate NGO-government linkages, transfer of lessons learned, and data collection through a regional clearing point in Belgrade.
Political process activities helped stabilize Serbia's chaotic political scene in FY 2003 through their emphasis on helping democratically oriented parties develop more effective organizational structures, gauge citizen concerns better, and mobilize both volunteers and voters. Individual consultations with parties have reinforced these efforts and provided (prior to the initiation of a 30-day pre-elections freeze on such assistance) more specific advice on tailoring messages for specific elections and building more effective electoral and governing coalitions. Regular polling and focus groups conducted by USAID's partners inform training and consultations with parties. In addition to work with parties at the national level, the International Republican Institute (IRI) has stressed support to selected local governments in improving services for citizens. An IRI-supported one-stop municipal services shop in Indjija municipality continues to draw excellent reviews from citizens surveyed, owing largely to IRI-conducted customer service training for local government employees. Municipal activities are coordinated with and complement USAID's larger SLGRP program. The National Democratic Institute (NDI) also achieved significant results. Together with USAID's implementing partner IBM and the Embassy's Public Diplomacy Section, NDI helped establish a resource and information center in the Republic-level parliament that will increase MP and staff research capacity. Sixty parliamentary interns were trained on subjects ranging from legislative procedures to organizational and management skills. "Mobile parliaments" connected citizens, NGOs, and MPs at the grassroots level and contributed to concrete changes, including progress in addressing water quality issues in the Vreoci municipality. Women and youth leadership development activities have helped participants gain more prominent roles within their parties. Several have been elected to office after applying their new skills to their own campaigns.
Embassy Belgrade's SEED-funded Public Diplomacy programming promote democratic reforms through media training, support for NGOs, and educational and exchange programs. Media training programs, in cooperation with local journalists associations and U.S.-based participants, help Serbian journalists and media owners to learn basic skills, improve professional standards, and assist in reforming the media sector, advancing and developing independent media outlets. Education programs, particularly civic education and school connectivity projects, help in reforming the country's educational system while programs at the university level, i.e., junior faculty development, English language training (pedagogical), and Ron Brown fellowships, are reforming higher education by giving new perspectives and training to future generations of Serbia's students and professors. Exchange programs, whether those that send young Serbians to the U.S. or Freedom Grants, which expand the traditional International Visitors program to allow a greater number of Serbs to travel to the U.S., help to implement democratic norms and standards in many fields once the participants have returned. Finally, the Embassy Democracy Commission, working closely with indigenous NGOs, helps to develop a key sector that had been mostly unknown previously, namely, citizen involvement and volunteerism, empowering the average citizen to have a voice and participate in the reform process.
Economic and Social Sector Reform
The IMF projects the Serbia and Montenegro State Union's GDP growth at about 3 percent for 2003. Since Serbia's share of the Union economy is about 92 percent, its growth is similar. Growth slowed in FY 2003 from 4 percent in 2002, and remains slower than expected, given the low starting base in 2000. The IMF reduced its growth forecast twice during FY 2003 -- first, from 5 to 3.5-4.5 percent after the March 2003 assassination of PM Djindjic, due to expectations of lower FDI linked to perceptions of increased risk, and then again in September, as a result of persistent declines in industrial production. In a July 2003 survey, 66 percent of respondents cited the economy or unemployment as Serbia's most urgent problem.
Macroeconomic stability continued in FY 2003, with inflation declining to 8 percent from 14.5 percent in 2002. The Serbian dinar remained stable, as a result of the central bank's continued policy of virtually pegging the dinar to the Euro. However, in line with IMF and OECD recommendations, the central bank increased flexibility in its exchange rate policy to counter a trend of real appreciation, resulting in a gentle nominal depreciation of 8.6 percent. The success in reducing inflation and maintaining currency stability are still the most visible benefits of reform for Serbs. Despite strict IMF controls on public wages, real wages rose by nearly 15 percent in FY 2003. While Serbs are generally dissatisfied with the pace of improvement in their economic conditions, the reform program has shown results. Per capita GDP has increased from less than $1,000 in 2000 to about $1,940 in FY 2003, but remains at half of the 1989 level. Macroeconomic stabilization has arrested a dramatic rise in poverty during the 1990s under Milosevic, but 10 percent of Serbs live below the poverty line, with another 10 percent just above it. Official statistics put unemployment at about 30 percent, but more accurate measures estimate it at 16-20 percent. The discrepancy is due to the still large informal economy, estimated at 30-40 percent of GDP.
Serbia has made progress on economic reform. However, the initial vibrant pace of reform slowed during FY 2003, due to political distractions and a poorly functioning parliament. The IMF program has been successful in stabilizing macroeconomic indicators and restoring fiscal discipline, while the enterprise sector remains dominated by loss-making, socially owned firms in need of drastic restructuring or liquidation through bankruptcy, hindering growth and export performance. Higher tax revenues and modest export growth indicate that the newer private businesses, particularly services and retail trade, are expanding, but the private sector is still not captured well by official statistics. Microeconomic weakness underlies Serbia's greatest macroeconomic risk -- a high current account deficit (11 percent of GDP) that could threaten medium-term stability and Serbia's capacity to service its large external debt.
The bulk of USG economic assistance is managed by USAID and directed by an interagency-approved three-year agreement, accepted in early 2002. U.S. Treasury advisors continued to be a key component of the USG economic assistance program. In FY 2003, $2.3 million of SEED resources were used to fund four resident and two intermittent advisors. These advisors assisted the Government on reform of tax policy and administration to develop a more effective tax and revenue collection system; debt management in Serbia's fledgling Treasury; budget issues; bank bankruptcy and privatization; and money laundering and other financial crimes. The USAID CRDA program also includes substantial additional activities conducted at the community level in support of improving economic conditions and employment.
The microeconomy and development of SMEs is a prime focus of USG economic assistance activities. Analysts agree that greater foreign and domestic investment is the key to economic growth in Serbia. Investment and SME development are principally constrained by a poor business environment and a lack of sufficient financial intermediation, both of which are linked to the need for legal/regulatory reforms.
The Government of Serbia (GOS) passed some important commercial laws in 2003, including laws on concessions, leasing, and secured transactions. However, political wrangling and poor functioning of the parliament left a backlog of over 80 draft reform laws pending parliamentary action. This pipeline includes critical new laws on bankruptcy, execution of legal judgments, and company registration. Significant further legal/regulatory improvement is needed to drive private sector growth and fuel increased FDI. In cooperation with other major donors, the USG has been actively engaged in the development of numerous key economic laws and institutions. It is through these efforts that such a large body of modernized legislation stands ready to be enacted and implemented.
Privatization has been one of the most successful elements of the reform program. The Privatization Agency (PA) sold 940 enterprises by the end of FY 2003, for 1.2 billion in revenues and 700 million in future investment. USAID advisors, working with the PA, registered substantial progress in the restructuring of Zorka Sabac, a complex holding comprising 22 subsidiary companies. The initial project term was extended by several months to accommodate delays imposed by the courts. All of the subsidiaries should be offered or prepared for privatization by the end of 2003, completing this project.
In July 2003, USAID initiated a three-year project, following on the successful one-year pilot Serbian Competitiveness and Economic Efficiency project. The follow-on Serbia Enterprise Development Project promotes growth, jobs, and prosperity by providing guidance to a National Competitiveness Council comprising public, private, and civil society representatives, and through focused assistance to target industry groups. The pilot succeeded in increasing sales and exports in the furniture and fruit/fruit juice industry clusters. It also developed a strong understanding among government and business leaders of the need to cooperate in order to increase Serbia's economic competitiveness, and thus prosperity. Under the new project, additional industry clusters were evaluated for focused engagement.
USG programs in support of trade and investment, such as those of the Overseas Private Investment Corporation (OPIC), Export-Import Bank (Exim), and the U.S. Trade and Development Agency (TDA), operated on a limited basis in Serbia in FY 2003. The Embassy used $200,000 of FY 2003 SEED funds to support activities with the U.S. Department of Commerce's Central and East European Business Information Center (CEEBIC). USG programs in support of trade and investment are promoting potential opportunities to attract more business interest in Serbia and Montenegro. Through CEEBIC, there is support for the Foreign Commercial Service (FCS) operations that work directly with Serbian companies to facilitate business. During FY 2003, OPIC organized an investment conference in Belgrade, recruiting more than 60 U.S. companies. Participants in the conference later consummated important investment deals and now form the base of American investment in Serbia, catapulting the U.S. into the leading investor role in 2003. TDA assistance has been leveraged in the energy, civil aviation (airport, air traffic management), and IT/telecom sectors, helping not only with improvements in the legal/regulatory framework in, for instance, the telecom sector that assists in moving Serbia along the development curve, but positioning U.S. companies for the project implementation stage. Similarly, ExIm is identifying a pipeline of projects that could lead to U.S. equipment exports. The pipeline consists of not only local companies (e.g., Serbia's leading pharmaceutical company, Hemofarm), but also of U.S. investors that need to import new equipment/materials (e.g., Ball Corporation). There has been a healthy synergy among these four programs in coordinating and cooperating in order to be more effective in Serbia.
The Ministry of Finance has made solid progress on consolidating control of GOS spending and reforming the tax system. The fiscal deficit has dropped from 10 percent of GDP in 2000, to 3.62 percent for 2003. Revenues are up in 2003 by about 30 percent in real terms. Fundamental policy weaknesses, however, must still be addressed. The complexity and opacity of the current fiscal regime imposes substantial burdens and costs on business at all levels and encourage evasion. Significant challenges remain in increasing the Tax Administration's weak capacity to implement reformed laws and regulations.
In order to use resources and expertise most efficiently better to promote integrated fiscal reform, the U.S. Treasury tax advisor and a USAID contractor teamed up on a new Tax Policy and Tax Administration project for FY 2003. With Treasury overseeing technical issues and engaging in policy dialogue, USAID advisors focused on policy implementation, and legal and regulatory change. USAID advisors delivered technical assistance to the Serbian Tax Administration in collections, audit, taxpayer service, IT, communication, and other key areas. Progress has been satisfactory in each area. USAID contracted with a local NGO, the Center for Liberal and Democratic Studies (CLDS), for an exhaustive tax policy study that is serving as a platform for further reform. As a result of the study, the GOS began drafting a new Property Tax Law that will radically overhaul the current system. The recommendation by CLDS to abolish a tax on financial transactions was accepted, which will free up financial and capital markets.
In FY 2003, USAID advisors also began working to address broader fiscal reform associated with the substantial employee benefits costs that are a major disincentive to increasing registered employment. USAID advisors initiated work with the Ministry of Social Affairs and the Ministry of Finance and Economy on legislation that will transform the current under-funded and fiscally burdensome single pillar pension system to more sustainable multi-pillar model.
Serbia made limited progress with banking and financial sector reform in FY 2003. The focus of financial sector assistance has shifted from initial assessment of the depth of problems in the banking sector and stabilization-related initiatives to technical assistance in strengthening supervision and regulation and reorganization of the National Bank of Serbia (NBS). The NBS slowly began to improve practices and procedures, notably in supervision, which contributed to better safety and soundness of the banking system. Starting in July 2003, USAID began assisting in the wholesale reorganization of the NBS, including supervision, debt and currency management, accounting, information technology, and human resources management.
USAID has also invested in two credit facilities -- Opportunity International (OI) and ProCredit (previously MicroFinance Bank). Both have been important facilitators of SME development, targeting mainly micro-entrepreneurs in agriculture, production, services, and trade. At the end of FY 2003, OI's savings and loan, known as Opportunity International Stedionica (OIS), had disbursed nearly 2,000 loans valued at 3.3 million. In the process, OIS created 945 jobs. OI's portfolio performance is sound, with only 0.63 percent of outstanding loans past due more than 30 days and with no write-offs. Together, OI and ProCredit have worked actively with other USAID projects, including CRDA, to multiply their impact. In northern Serbia, for instance, OI and ProCredit originated more than $1 million in agriculture-related loans to CRDA beneficiaries.
With SEED support, three former U.S. Customs officers continued serve in Belgrade as advisors with the SECI/World Bank's Trade and Transport Facilitation in Southeast Europe (TTFSE) project. They maintained important efforts on improving border crossings and customs systems to facilitate more efficient flow of legal trade and to combat smuggling.
Agriculture represents 25 percent of Serbia's economy. In FY 2003, $1.7 million of SEED funds supported USDA technical assistance activities in areas critical to the development of Serbian agriculture, such as compliance with WTO agriculture-related requirements, biotechnology, food safety, improving market information systems, and exchange programs. The animal health program centers on diagnosis and prevention of critical diseases. All senior official veterinarians successfully completed training programs on public health reporting and outbreak management. The Faculty Exchange Program expanded its curricula development from agricultural economics to providing new university courses in applied agricultural sciences. USDA continued to support development of the Serbian food sector through its young scientist research grants and agricultural extension service projects, all of which are linked to U.S. land grant universities. Due to strong local demand, USDA undertook special training programs in eradication of selected plant diseases, introduction of new fruit varieties, and food processing pathogen reduction programs. USDA's market information service project began to produce price bulletins in Serbia and will expand to more comprehensive collection and distribution in 2004. Through the CRDA program, USAID extended more than $2.75 million in technical assistance, training, and grants to 118 agricultural cooperatives and associations. Over $3.5 million was provided to agricultural producers and processors to enhance production and quality, expand agri-businesses, and improve agricultural marketing systems. This produced an increase in agricultural sales in 2003 of at least a $2.5 million, even though many producers had lost crops due to drought.
In the social sphere, USAID's CRDA Program implemented 30 projects worth $1 million in FY 2003, with community groups, local governments, and the Ministry of Social Welfare, to assist vulnerable groups, such as the elderly and those with special needs. Projects included equipping and renovating special education facilities and homes for the elderly, as well as helping communities create barrier-free urban environments.
In the health sector, the CRDA Program expended over $4 million in FY 2003 to equip and rehabilitate health facilities and initiate community-based programs focused on such topics as reproductive health and breast cancer prevention in 83 communities throughout Serbia. The reproductive health activities included education and information projects on sexually transmitted infections, including HIV/AIDS. As a result of those activities, over 230,000 people have better access to modern reproductive health diagnostic tests and treatment.
During FY 2003, the CRDA Program undertook projects worth over $4.5 million to improve access to potable water. Some 400,000 people benefited from the resulting improvements to their drinking water supplies. Another 125,000 people in CRDA communities benefited from improved electrical supply projects. The combined value of USAID's contribution to these projects was $2.4 million.
Security, Regional Stability, and Law Enforcement
The March 2003 assassination of PM Djindjic spurred the GOS to conduct a major offensive against the organized criminal gangs believed responsible for the murder. This effort included a major roundup of organized crime figures in "Operation Saber," as well as an effort to strengthen the legal framework for combating organized crime and prosecuting and trying war crimes cases in Serbia. These two categories of crime are linked by new legal procedures to be used in investigating and prosecuting such cases, the use of a shared Special Court to try them, and connections between the perpetrators themselves.
The U.S., via USAID, has devoted $800,000 to support the building and equipping of this Special Court, and another $250,000 for training trial participants and court staff on all aspects of handling high-profile, high-security cases. The Court has already begun to try organized crime cases and is expected to host another 10 organized crime trials and perhaps three war crimes proceedings over the next year. Federal judges, court administrators, and U.S. Marshals have visited Belgrade to provide advice for the interior layout, security modifications, equipment, and personnel staffing at the Court. The U.S. Marshals have also begun to extend technical assistance on the development of a successful witness protection program, including promoting a regional dimension to the program. The U.S. plans to provide ongoing assistance to boost the Court's capacity to handle these types of trials.
At the same time, the RLA program is focusing on enhancing Serbia's war crimes prosecution capacity by implementing a training program for the new Special Prosecutor for War Crimes and his 10-member team, as well as for the war crimes investigation unit in the police. Such assistance will become increasingly critical as the mandate of the International Criminal Tribunal for the Former Yugoslavia (ICTY) expires in 2010, and the burden of war crimes prosecution shifts to domestic courts in the region. The RLA also provided technical assistance and training to the Special Prosecutor for Organized Crime as he prepared for several high-profile trials, including the Djindjic assassination trial.
USAID-supported ABA/CEELI assistance to the Judges Association of Serbia led the association to adopt a progressive code of ethics. Support for legal aid in conflict-prone southern Serbia resulted in two successfully resolved human rights-related court cases, including a decision against the (then) Yugoslav Army. USAID has recently initiated a donor working group to coordinate rule of law assistance more effectively. An Embassy working group on organized crime/war crimes assistance is chaired by the RLA.
One of the Milosevic era legacies that the GOS has sought to address is the vast web of financial crimes and money laundering that underpinned his 13 years in power. The U.S. has helped the nascent Serbian Administration for the Prevention of Money Laundering to make major progress in developing Serbia's anti-money laundering regime, despite significant institutional and financial obstacles. The Treasury Department administered a series of training seminars for Administration officials, police, prosecutors, judges, tax administration officials, commercial banks, and bank examiners. SEED funds were used to purchase critical computer equipment and software necessary for the Administration to process suspicious transactions and for its cooperation with commercial banks and other government agencies. The U.S. efforts were instrumental in helping the Administration gain membership in the Council of Europe's MoneyVal Committee and, most importantly, the Egmont Group, a global network of Financial Intelligence Units. In its first 18 months, the Administration forwarded eight cases of possible money laundering to the prosecutor's office, with four still being investigated and two now in court proceedings.
For FY 2004, SEED funds will be used to continue support for police reform. Aside from advanced police training, funds will be allocated to train police in the use of VIP Protection equipment that the U.S. has already provided to help Serbian officials prevent any recurrence of the Djindjic assassination. Additional money will support the continuing activities of the RLA program and further initiatives to help Serbian officials bolster domestic capacity to prosecute war crimes and combat organized crime.
COUNTRY PERFORMANCE MEASURES
Economic Policy Reforms and Democratic Freedoms in Serbia and Montenegro (includes Kosovo), 1991-2002
Sources: EBRD, Transition Report 2003 (November 2003); Freedom House, Freedom in the World 2003 (2003); and (various years).
Economic Structure and Human Development in Serbia and Montenegro (includes Kosovo), 1991-2002
The Human Capital Index is based on an average rating of four variables, scored on a 1 to 10 scale: per capita income; secondary school enrollment; health, as measured by life expectancy and under 5 mortality; and public policy, as measured by public expenditure on health and education as % of GDP. World Bank, World Development Indicators 2003 (2003); and UNICEF, Social Monitor 2003 (2003).
MEASURES OF PROGRAM EFFECTIVENESS IN FY 2003
DEMOCRATIC REFORM
Performance Indicator: USAIDNGO Sustainability Index (1 = highest; 7 = lowest)
|
FY 1997 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
5.4 (early transition) |
3-5 (mid-transition) |
4.0 |
FY 2003 Results: Serbia's average ranking on the USAID NGO Sustainability Index for 2003 has risen from 5.4 in 1997 to 4.0 in 2003 (draft ranking), up from 4.1 in 2002. This reflects a sector in "mid-transition," inching ever closer to a "consolidation" ranking of three or higher. Factors rated include the legal environment, organizational capacity, financial viability, advocacy, infrastructure, and public image. In all but two areas -- legal environment and financial viability, little changed from last year -- the sector scored modest gains. USAID activities contributed to NGO successes in advocacy and in increasing organizational capacity.
Performance Indicator: USAID Media Sustainability Index
|
FY 2001 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
1.86 (unsustainable) |
2-3 (near sustainability) |
Data not yet available |
FY 2003 Results: Media index figures for 2003 are not yet finalized. Serbia's average index rating in 2002 was 2.416, indicating a media sector "near sustainability," up from an "unsustainable" 1.86 in 2001. Areas assessed include free speech, professional journalism, plurality of news sources, business management, and supporting institutions. The independent media climate has suffered considerable setbacks this year, amid extralegal government maneuvering to stack the deck on upcoming licensing processes in behalf of state-favored private media established during the Milosevic period. This will be reflected in lower than desirable "free speech" ratings for 2003, and will bring down the 2003 average. SEED assistance helped strengthen media performance in "professional journalism" and "business management."
Performance Indicator: CRDA communities mobilize at least 25 percent of project costs. (Source: CRDA PRS, USAID)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
0 |
25% |
45% |
FY 2003 Results: The ability and willingness of the CRDA communities to mobilize 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 this is the target stated in the cooperative agreements. To date, the target in Serbia has largely been exceeded (43 percent in Year One, 45 percent in Year Two) and is expected 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 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
0 |
30% |
30% |
FY 2003 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 features of the budget, including how it was formulated, community participation was solicited, priorities were identified and decided, and how 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 2003, the 30 percent target was reached, even though work was not yet ongoing in all 50 of the initial SLGRP municipalities.
ECONOMIC AND SOCIAL REFORM
Performance Indicator: Foreign Direct Investment (millions of USD, Source: IMF and National Bank of Serbia)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
475 |
623 (IMF revised July 2003) |
1,200 (est.) |
FY 2003 Results: Higher than expected receipts from the successful privatization of two tobacco companies and Serbia's second largest gasoline distributor to foreign strategic investors were the main contributor to the inflow of twice the projected amount of FDI in 2003. Acceleration and efficient conduct of Privatization Agency auctions of over 900 small and medium-size companies made for great success in FY 2003, but netted limited interest from foreign investors. FDI remains concentrated in industries with dominance of the local market and, in some cases sectors, granted significant domestic market protection through GOS trade policy. Greenfield FDI remains very limited, and a still poor business environment hinders efforts to increase FDI.
Performance Indicator: EBRD Economic Reform Index (Source: EBRD)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
2.29 |
2.50 |
2.44 |
FY 2003 Results: The GOS passed some important commercial laws in 2003, including the Concessions Law, the Law on Leasing, and the Secured Transaction Law. However, political wrangling and the poor functioning of the parliament left a backlog of over 80 draft economic reform laws pending parliamentary action. This pipeline includes critical new laws on bankruptcy, the execution of legal judgments, and company registration. Significant further legal/regulatory improvement is needed to drive private sector growth and fuel increased FDI.
Performance Indicator: EBRD Financial Sector Reform (unweighted average of EBRD banking and non-bank financial indicators)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
2.00 |
2.5 |
2.17 |
FY 2003 Results: Serbia continued to make progress in banking and financial sector reform in 2003, but with many fewer results than in FY 2002. The National Bank of Serbia (NBS) has slowly begun to improve practices and procedures, notably in supervision, which has contributed to generally improved safety and soundness of the banking system as measured by progress in compliance with the Basel Core Principles. The share of state-owned assets in the banking system has plummeted from 95 percent in 2001 to less than 42 percent in 2003. Non-bank financial sector regulation, however, remains weak, and capital markets are underdeveloped.
SECURITY, REGIONAL STABILITY, AND LAW ENFORCEMENT
Performance Indicator: Judicial Reform Index (Source: ABA/CEELI)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
% rated "positive" = 10 |
20% positive |
Data not yet available |
FY 2003 Results: The2003 ratings for the Judicial Reform Index are not yet available -- 2002 was the baseline for this Index. In 2002, across 30 factors rated, only 10 percent rated "positive." Factors assessed include quality, education, and diversity; judicial powers; financial resources; structural safeguards; accountability and transparency; and efficiency. It is unlikely that the 2003 figures will reflect major gains in any of these areas, as progress on advancing reforms in this sector generally slowed or stalled over the past year. Exceptions are the passage of organized crime and war crimes legislation and the creation of a Special Court to try high-profile cases in these categories. Nonetheless, rule of law assistance programs were able to achieve notable results, as discussed in the Democracy and Security sectoral assessments.
FY 2003 Support For East European Democracy (SEED)
Funds Budgeted for Assistance To:
Serbia (In millions $, as of 12/31/03)
USAID - Democratic Reform $67.27
USAID - Economic Prosperity & Security $3.00
USAID - Private Sector $25.00
USAID Total: $95.27
State - DRL/Int'l Commission Missing Persons $1.10
State - ECA Exchange Programs $2.37
State - EUR Democracy Programs $0.23
State - EUR Public Diplomacy $0.45
State - EUR Social and Economic Programs $0.18
State - Humanitarian Programs/HPD $0.15
State - IIP Public Diplomacy $0.18
State - INL Law Enforcement Activities $0.40
State - War Crimes - ICTY $2.96
U.S. Department of State Total: $8.01
Broadcasting Board of Governors - Public Diplomacy $0.05
CDC - Balkan Investment Promotion Initiative $0.10
DHS/Customs - Law Enforcement Activities $0.50
TDA - Balkans Development Initiative $2.00
U.S. Department of Treasury - Advisors $2.35
U.S. Department of Agriculture - FAS $1.72
Other Agencies Total: $6.72
GRAND TOTAL: $110.00
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 Eastern 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 endeavors to fight terrorism and extremism; trafficking in persons, weapons, and drugs; and organized crime and corruption. In pursuing these goals, the U.S. Embassy in Serbia and Montenegro promotes the highest national objective, the security of the U.S. and its citizens.
OVERVIEW OF U.S. GOVERNMENT ASSISTANCE
In FY 2003, the U.S. Government (USG) allocated the $40 million of SEED assistance appropriated as follows in Montenegro:
- $24.69 million in democratic reform programs (including Public Diplomacy exchange programs);
- $9.0 million in economic and social-sector reform programs;
- $4.23 million in security, regional stability and law enforcement programs; and
- $2.08 million in cross-sectoral and other programs.
In FY 2003, a total of 89 Montenegrins traveled to the U.S. on USG-funded exchange programs.
Democratic Reform Programs: USG democracy programming through USAID emphasizes support for civil society and more effective governance at all levels through three pillar programs -- Community Revitalization through Democratic Action (CRDA), Good Local Governance (GLG), and the Judicial System Reform Project (JSRP). CRDA is well into its second year, and GLG and JSRP are just commencing. These programs 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 the structure and operations of the judicial system at the Republic and local levels. USAID also assists independent media, NGOs, political parties, and trade unions to develop competence and effectively to represent citizens. It also provides support for victims of trafficking in persons.
Public Diplomacy (PD) supported democratic reform through over 15 education, media training, and exchange activities. The exchange programs -- mainly the International Visitors Program, which in FY 2003 sent 30 Montenegrins to the U.S. through SEED funding -- expose Montenegrins to Western democratic standards and practices through tailored study tours. PD media training programs and other activities teach Montenegrin journalists and editors basic and advanced job skills, and promote journalistic self-regulation and media reform implementation. Education programs provide civic education, regional cooperation, and applied economic skills to school students, in addition to scholarships for graduate-level study in economic reform-related areas at U.S. universities, in order to increase the limited capacity of the Government of Montenegro (GOM) and other key partners.
Economic Policy Reform and Private Sector Development Programs: In FY 2003, the USG, through USAID and U.S. Treasury assistance, continued to work with the GOM to implement a comprehensive economic reform program. The program's primary goal is to transform Montenegro's state-driven economy, battered by a decade of war and sanctions, into a stable, market-driven system buoyed by private-sector growth. The initial focus was drafting a new legislative infrastructure governing most key areas in the economy. In the last year-and-a-half, it has shifted more toward the implementation of that legislation and the capacity building in key institutions necessary for the functioning of a modern market economy.
Security, Regional Stability, and Law Enforcement Programs: In FY 2003, the USG directed the lion's share of its law enforcement assistance in Montenegro to border security. This change was guided by the establishment of the loose state union of Serbia and Montenegro, which transfers border security functions from the Army to republican authorities. It also reflected an assessment of significant shortfalls in Montenegrin border security that makes it susceptible to cigarette, narcotics, and human smuggling operations. In addition, the U.S. provided SEED funding to OSCE for police training in Montenegro to raise overall professional standards and, in particular, to combat trafficking in persons, partly in response to a trafficking scandal allegedly involving Montenegrin officials. Meanwhile, the establishment of a Resident Legal Adviser (RLA) program provides the U.S. with an additional mechanism to facilitate training and provide equipment to law enforcement and judicial bodies in response to new investigative techniques made possible by revisions to the Law on Police and the Criminal Procedure Code. These amendments form the basis for the ongoing reorganization of the Montenegrin police that is being supported by an additional $330,000 in USG assistance. Finally, SEED funding has been used to help Montenegro adopt a Law on the Prevention of Money Laundering that regulates the establishment of a Montenegrin financial intelligence unit and strengthens Montenegro's actions, taken in 2002, to criminalize money laundering for the first time.
Democratic Reform
Unlike most of the former Yugoslavia, Montenegro escaped the devastating ethnic, nationalist conflicts of the 1990's, mainly due to its long tradition of ethnic co-existence. Montenegro's political system, however, still functions largely on Milosevic-era principles of party patronage and central control. Although the ruling coalition has an absolute majority in Parliament, fractious politics at the Republic and local level is a potential source of instability. The population remains sharply divided over whether Montenegro should remain in the union with Serbia or become independent. This could generate tension closer to 2005, when Montenegro plans to hold a referendum on it. In January 2003, Milo Djukanovic stepped down as the President of Montenegro in order to become Prime Minister. After several failed attempts, Filip Vujanovic, the previous Prime Minister, was elected as President, after Parliament dropped the 50 percent turnout requirement from the electoral law. Driven by the goal of European integration, the new administration launched a substantial Economic Reform Agenda (ERA), adopted by the GOM in March 2003. The ERA has been the key tool the PM and his cabinet have used to drive and track economic reforms. The ERA contains 13 components, including reform agendas for 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 transparent, fair reform process and closer cooperation with civil society. The opposition sporadically participated in parliamentary sessions until May 2003, when it began a boycott to protest the decision under the new media law to limit live TV broadcasts of parliamentary sessions. Despite opposition tactics, substantial reform legislation has been passed. For the democracy sector, this includes the Laws on Local Self Government, Public Administration, Local Government Finance, and on Direct Election of Mayors. Key draft laws such as the Parliamentary Rules of Procedure, Law on the Prosecutor, and the Laws on Criminal and Civil Procedures were ready for adoption by Parliament at the end of 2003.
Against this backdrop, SEED support for democratic development at all levels of government and society through USAID was $14.7 million in related programming in FY 2003, with an additional $2.3 million of Public Diplomacy assistance under SEED. In addition to its major activities -- CRDA, GLG, and JSRP -- USAID also undertook smaller civil society programs designed to support the NGO sector, independent media, trade unions, anti-trafficking efforts, and political process and elections support activities that incorporate assistance to make the work of Parliament more efficient and transparent. Public Diplomacy programming supports democratic reform through more than 15 education, media training, and exchange programs.
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 participation of and benefits for women, minorities, youth, and vulnerable populations, such as pensioners. The program has energized communities Republic wide into active dialogue and partnership among citizens, 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 to collaborate on development. By the end of FY 2003, Montenegrin citizens had elected democratically and were operating 112 community councils, representing the majority of the Republic's population. Also, 61 cluster councils had formed to facilitate collaboration among multiple communities. Two-thirds of these have an economic development focus, mainly in agriculture and tourism, and partner with business support associations. There has been extensive hands-on training of councils and interaction of citizens through a variety of forums. Collectively, the councils have selected, designed, and carried out 356 economic and social development projects, worth $17 million, over 17 months.
Poor and deteriorating basic infrastructure throughout Montenegro directed community selection of priority project expenditures on infrastructure investments during FY 2003. Investments included $3.3 million in transport, $2.2 million in sanitation/waste management, $1.9 million in school rehabilitation, and $702,790 in energy. Economic activities generated 4,792 person months of employment and increased the income and economic output of enterprises. Communities are required to provide a 25 percent cost share, but on average have contributed 41 percent of project costs to achieve a larger impact. Communities and their local partners who have benefited from significant capacity building and awareness raising under CRDA are expected to serve as a foundation on which democratic governance reforms mandated by new local government laws may be implemented. A new element of the CRDA program -- municipal development assistance -- was created during this fiscal year to bring the community development decision-making process to bear on municipal-scale issues, by mobilizing key stakeholders and formalizing citizen participation in local government decision making.
During FY 2003, USAID designed a new project, Good Local Governance, a three-year, $12 million effort to assist the Republic to implement the core local government laws passed by Parliament in July 2003. The project is designed to structure a transparent, equitable, inter-governmental fiscal transfers system, a local treasury function for municipalities to transition from a centrally-controlled, socialist payments system to one that complements the new Republic Treasury function. It also helps municipalities to implement new own-source taxing authorities, such as property taxation, and better to manage budgets and expenditures with their citizens for improved service delivery. At the micro level, the project aims to assist municipalities to develop citizen participation and awareness tools and processes mandated by new local government laws through a stakeholder-driven development decision-making process that improves local service delivery by engaging citizens in public service accountability and improvement, particularly for water and wastewater management services.
The rule-of-law activity under ABA/CEELI ended June 5, 2003. ABA/CEELI was instrumental in assisting in the drafting of the Law on Courts and facilitating the adoption of that Law, which establishes the foundation for an independent, efficient judiciary. Working with the Ministry of Justice, Supreme Court, subordinate courts, Judicial Training Center, and other Montenegrin counterparts, the JSRP is providing technical 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 is also working to streamline the processing of cases, improve caseload management and reduce backlogs at all levels of the court system, and improve the physical infrastructure of the judiciary, including the computerization of the courts. The new judicial activity will help Montenegro's judiciary meet the realities of a market economy, enabling judges to make independent, reasoned judgments on an increasing commercial caseload.
The Montenegro Independent Media Program (MIMP) provides technical assistance to the media to improve professional journalism, supporting institutions, the legal and regulatory framework for the media, and efficient business management. In FY 2003, MIMP has concentrated on advancing the implementation of Montenegro's innovative media legislation. While 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 teaching skills and imparting knowledge to about 500 media professionals through 53 seminars and workshops, including a six-month diploma course with international certification.
The Montenegro Advocacy Program (MAP) has been providing NGOs training and technical assistance to strengthen NGO institutional capacity and develop the skills, expertise, and credibility required to advance public policy. In FY 2003, the MAP established three Regional Advocacy Centers in Montenegro. The MAP's first round of Core Partner Advocacy NGOs achieved several successes, including the adoption by Parliament of the new Law on Higher Education that included amendments proposed by a MAP core partner. MAP assistance will continue through FY 2004. Montenegro still has a hierarchical political system, where political leaders maintain closed decision-making processes. To address this challenge, USAID's political processes activity worked in FY 2003 to strengthen internal party reform and modernization, and assisted Parliament in drafting new Rules of Procedure to make its work more efficient and transparent. The labor reform activity cooperated with the Confederation of Independent Trade Unions (CITUM) in educating nearly 1,100 union members on workers' rights and major economic and social reform legislation. As in other Southeast European countries, Montenegro is experiencing the problem of trafficking in women and girls for purposes of sexual exploitation. To address this, a USAID grant in FY 2003 provided operational support for a shelter for victims of trafficking in Podgorica and assistance to carry out a preventive public awareness campaign targeting young women and minors.
The Public Affairs Section's media training programs function in both directions -- bringing American trainers to Montenegro to reach large numbers of participants and sending smaller numbers of Montenegrin journalists to the U.S. for more extensive training. These programs, in FY 2003, covered areas as diverse as basic radio journalism; media management training (for owners and other executive staff); and anti-trafficking, economic-commercial, and investigative journalism. Special emphasis was placed on moving U.S.-based training to smaller cities and media outlets in order to be more in line with Montenegrin capacities. Programs used SEED media training funds allotted by the Broadcasting Board of Governors (BBG) and Department of State's Bureau of Educational and Cultural Affairs (ECA). In addition, the Working Group for Media Reform and the Journalistic Self-Regulatory Body each received Democracy Commission grants. SEED Coordinator of International Information Programs (IIP) Speaker funds were used to bring an American journalism professor to help revive the dormant Montenegrin journalistic code of ethics. The results of these efforts have been overwhelmingly positive. For example, the media management training was singled out by media owners as the most useful ever in Montenegro, and certain outlets immediately changed some of their basic business practices. The anti-trafficking training led to a series of articles in the main daily, "Vijesti," in cooperation with other journalists in SEE. The Journalistic Self-Regulatory Body has created an awards program for journalistic excellence and has enforced the code of ethics through public censure of several figures and outlets.
The Public Affairs Section funds education reform initiatives at all levels, from elementary through post-graduate professional training. In schools, programs in civic education, applied economics, and school connectivity (regional understanding through the Internet) are funded by SEED and executed in cooperation with NGO partners. In FY 2003, SEED university linkage funds developed substantive relationships between the Law Faculty and the University of Nebraska, and between the Economic Faculty and the University of Pittsburgh, exposing departments that have been isolated for more than a decade to international contacts. English Language monies were used to provide fellows to the English Department and Economic Faculty; these efforts will improve the English-speaking abilities of the leaders of future reforms, as most key GOM agencies and other partners lack sufficient English-speaking officials. The Ron Brown and Humphrey programs have placed another cadre of Montenegrins in graduate education programs in the U.S. that will assist with democratic reforms (journalism, public administration, and business administration). Finally, the new Junior Faculty Development Program has put six young Montenegrin professors under American mentors at U.S. universities. Upon their return, they will be able to promote concepts of interactive education and professor-student cooperation that are almost unknown at present. Although it is often hard to identify immediate results from education programs, the enthusiasm for them is clear. Elementary school pupils taking part in after-school civic education classes developed excellent awareness of their ability to make changes in the local community through democratic processes and grassroots efforts. The Law Faculty and Economic Faculty have made significant strides in implementing Western-style teaching and re-connecting with their peers in the U.S.
Montenegrin participation in the International Visitors Program nearly doubled, to 30 visitors. These participants went individually or in groups on tailored programs that allowed them to see first hand how their U.S. counterparts face obstacles and succeed, within a democratic society. The PM's economic advisor went to study the making of American economic policy and wrote a positive appraisal of his visit for a Montenegrin newspaper. Three mayors and a government official went together to see decentralization in action in the U.S., and the leading newspaper prominently printed an interview with them about their experiences. Many Montenegrin officials have literally only seen democratic practices as conducted in the former Yugoslavia. Exposing them to how their area of work, be it education, economic policy, environmental policy, or partisan political work, is performed in a thriving democracy has changed their goals and understanding of their peers.
Economic Policy Reform and Private Sector Development Programs
Macro-Level Reform and Indicators: Due to severe problems with data reliability and current capacity within the Republic-level Bureau of Statistics, basic national accounts information is controversial and likely 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 and, accounting for growth, these calculations peg 2003 GDP at around 1.32 billion, or just under 2,000 per capita. Inflation is expected to be around 7.5 percent for 2003, down from 9.4 percent for 2002. This continuing inflation belies the official current account figures, which indicate a decreasing supply of Euros in the economy. Montenegro does have a high current account deficit, but this gap appears to be more than made up by unrecorded financing flows or from tourism receipts that fall into the "gray" economy. Given that credit cards are not widely accepted, and most tourists bring cash into the Republic, this is not surprising. Inflation may also be driven by the ongoing practice of automatic wage indexation and continuing inflationary expectations. The last official release of an average wage figure put the net monthly wage at about 118. More recent, but not officially released data, including those from household-level surveys, indicate that income is significantly higher and may approach 250 monthly.
The GOM fairly consistently slates more for expenditure than it collects in revenues. However, since there is no ability to print currency and limited ability to borrow (outstanding T-bills total less than 10 million), budgets balance on a cash basis, limiting macroeconomic spillover effects. Also, deficits are not high by international standards, generally coming in at under 3 percent of GDP. The structure of expenditures, both realized and unrealized, is the main problem. The GOM typically under-budgets for capital expenditures and related recurring expenses. Given that public sector wages receive priority, the budget deficit largely creates a further deterioration of this situation, resulting in an expenditures structure that does not support long-term growth objectives. It is also a bad fiscal discipline practice, since such arrears lead to discretionary final allocations. The USAID treasury system and procedures, and U.S. Treasury budget efforts, have done much to limit this phenomenon.
The financial sector has improved considerably over the past three years. With Montenegrobanka's sale to a Slovenian bank, only one bank with majority state ownership remains, and it is expected to be tendered by the end of 2003. After nearly three years of USAID assistance, bank supervision is much improved, with a recent Basel II Core Principles assessment showing the Central Bank of Montenegro to be mainly in compliance. As bank competition intensifies, interest rates are finally beginning to drop. One of the largest remaining problems is the low level of deposits, leading to low levels of financial intermediation and an over-reliance on expensive international sources of capital for on-lending. The seizure of all foreign currency deposits in the mid 1990s still leaves consumers wary. A deposit insurance scheme slated to come on line in mid-2004 may help restore confidence.
Following passage of a USAID-assisted set of commercial laws, implementation is moving at a satisfactory pace. The Business Organization Law, among the most progressive of its kind in the Balkans, is largely implemented. The Secure Transactions Law was effectively implemented, and following one-on-one training with credit officers, the on-line collateral registry is now used by all banks in Montenegro. Following passage of the Bankruptcy Law, a number of companies elected to use its voluntary restructuring provision, modeled after the U.S. "Chapter 11." However, initial implementation efforts have not been as smooth as hoped, due to a lack of sound administrative practices in the courts, insufficient experience and knowledge among bankruptcy administrators, poor preparation by participating companies, and lingering training needs for the judges. USAID is working to address these weaknesses on several fronts. A new Licensing Law, currently being fast-tracked, and a new Mortgage Law in the final stages of development, both created with USAID assistance, will complete the core legislation.
Montenegro's precarious energy system suffers from over a decade of poor maintenance and related below-cost recovery rates. Rates were increased in the spring of 2003, however, largely due to USAID conditionality, although the entire benefit was absorbed into a worsening collections situation. This will be difficult to improve heading into the winter season. The GOM risks squandering the political capital it expended on energy rate increases if collections do not improve. Related to this, the payables situation has also deteriorated, with arrears building up largely to the coal mine, which supplies a thermal plant that produces about a third of the Republic's total electricity. Continuation of the current situation could lead either to load shedding this winter or to the need for transfers from the budget to finance energy imports.
Private Sector: Despite progress on reforms in the macroeconomy, Montenegro's private sector remains depressed. Unemployment and underemployment are high, and lack of local production contributes to a high dependence on imports and consequent trade imbalances. Employment is heavily oriented toward the public sector, both in administration and production. Much of the production in the key sectors has been ravaged by the types of problems that have characterized other economies in transition: weak management, especially in marketing and financial management; remaining regulatory burdens; lack of low-cost capital; and a restrictive, inflexible labor regime.
Widespread corruption continues to impede private sector growth. Many citizens do not trust the courts, with their reputation for venality, to give them a fair hearing on contractual and property rights issues. Similarly, though there has been some progress in removing bureaucratic discretion from simple procedures, administrative rules can still allow for rent seeking and long delays in basic licensing and other tasks. Since the market lacks a sound set of competition laws and practices, new entrants also fear that entrenched players will receive preferential treatment from regulatory and tax administration bodies. This also drives entrepreneurs into the gray economy, where they remain outside the tax regime. USAID continues to target these areas, but for reforms to take hold, time and additional GOM action to confront labor unions, complete the privatization process, remove residual barriers to business, and improve the judiciary will be needed.
The key sectors in Montenegro are tourism, agriculture, and metallurgy. Previously, the wood processing industry was a major exporter, and the GOM is working with donors in an effort to revive companies in that sector. Metallurgy is currently critical for maintaining export levels, but it is not a high value-added industry and requires considerable implicit subsidies to survive.
Security, Regional Stability, and Law Enforcement Programs
In March 2003, the Federal Republic of Yugoslavia was replaced by the new State Union of Serbia and Montenegro, resulting in a dramatic devolution of functions to the constituent republics. This exposed Montenegro's limited institutional capacity in key areas, including border security. Montenegro spent most of 2003 preparing for the accelerated transfer of all border security functions previously performed by the Yugoslav Army. To support Montenegro in these efforts, the U.S. Department of Homeland Security (DHS) assessed Montenegro's current customs and border security procedures, capabilities, and facilities, and recommended steps to help modernize them.
Based on this assessment, the U.S. is providing $4.5 million in border security improvements. This includes $1.2 million for a USAID-implemented project involving physical upgrades of 10 critical border crossings with Albania, Bosnia-Herzegovina, and Croatia, and three administrative checkpoints with Serbia. The purpose is to construct fully functional buildings with associated infrastructure suitable for conducting border-crossing operations, as required by Montenegrin law. Construction is scheduled to conclude in February 2004, with completion of the entire upgrade project slated for mid-2004. The European Agency for Reconstruction agreed to perform the upgrades on two other major border crossings. In addition, with about $3.3 million of FY 2003 funds, the U.S. is providing training and procuring and delivering equipment identified by DHS for border and customs personnel and the maritime control unit.
Serbia and Montenegro has begun to transfer border security functions to republican authorities and hoped to complete the process by the end of 2003. However, because both the Serbian and Montenegrin Border Security and Customs Administrations are not yet ready to shoulder their full responsibilities, the transfer will carry over into 2004. The performance of Montenegro's border security service could be adversely affected by a planned cut in the Ministry of Interior's 2004 budget. Low wages, among other things, leave border security personnel open to corruption.
At the same time, U.S. law enforcement assistance seeks to help Montenegro to restore its international reputation following a scandal provoked late last year by the arrest of a deputy state prosecutor for involvement in sex trafficking. A tangible U.S. response to this scandal was the allocation of $400,000 to OSCE to carry out police training, including instruction focused on the fight against trafficking in persons. Political and bureaucratic foot-dragging on reestablishing a special anti-trafficking police unit, as well as inadequate training facilities, has hindered progress, although the GOM has given assurances that it will form this unit after it completes a review of police functions.
On financial crime, after helping Montenegro pass its new Law on the Prevention of Money Laundering, U.S. assistance now focuses on the setting up of the Republic's new anti-money laundering agency, regulated under the law. U.S. aid is being used to provide computer equipment and technical assistance to the new agency. In addition to making the new agency operational and compliant with international standards, a primary objective of U.S. assistance will be to prepare it for membership in the Egmont Group, a 100-member international organization for financial intelligence units. Egmont membership will enable Montenegro to assist local police and other authorities in money laundering investigations where activities involve other jurisdictions.
Enforcement falls under the judicial process and criminal law. There are unresolved questions or differing opinions as to whether or not the criminal law provides an effective process for the conviction those engaged in money laundering activities. During U.S. discussions with Central Bank attorneys, they agreed that the existing criminal law would need to be revised to charge an attempt to launder money. The GOM has forwarded new laws on the Criminal Code and Criminal Procedure to Parliament, which was expected to adopt the laws by the end of December 2003.
For FY 2004, the second phase of the $4.5 million border security program in Montenegro will be implemented. SEED funds also will be used to continue support for the GOM's anti-trafficking efforts and police reform. Additional money will support the continuing activities of the RLA program.
MEASURES OF PROGRAM EFFECTIVENESS IN FY 2003
DEMOCRATIC REFORM
Performance Indicator: NGO Sustainability Index (Source: USAID); (1 = highest; 7 = lowest)
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 4.6 (mid-transition) | 3-5 (mid-transition) | 4.7 |
FY 2003 Results: Montenegro's average ranking on the USAID NGO Sustainability Index for 2003 declined to 4.7, from 4.6 in 2002. Factors rated include legal environment, organizational capacity, financial viability, advocacy, infrastructure, and public image. The 4.7 rating reflects a sector in "mid-transition" that is not yet sustainable; progress toward developing local capacity is hampered by a weak economy and a sector in which organizational development and advocacy skills are not fully matured. USAID's NGO development activities are addressing both areas. USAID/MAP-supported NGOs advanced multiple legislative and policy changes in 2003, and began to engage in partnerships with the GOM, including a successful civilian disarmament initiative titled "Farewell to Arms," which resulted in over 2,000 citizens turning in 34,000 pieces of illegal weaponry and ammunition to the police. In 2004-2005, the NGO program will assist these NGOs in triggering the next phase of their watchdog strategies, to include the enforcement and monitoring of legislation.
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 2.116(near sustainability) | 2 - 3 (near sustainability) | Data not yet available |
FY 2003 Results: Media index figures for 2003 are not yet finalized. Montenegro's average index rating in 2002 was 2.116, indicating a media sector "near sustainability," up from an "unsustainable" 1.58 in 2001. While the legal-regulatory framework for the independent media is well crafted, implementation of new legislation is moving more slowly than anticipated, as Montenegrin state media struggle to reform. Additional improvements occurred in the business management of media outlets, as seen in the increased commercialization of journalism with new TV networks, new print outlets, and foreign investment in the daily Vijesti.
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 0 | 25% | 42% |
FY 2003 Results: The ability and willingness of the CRDA communities to mobilize 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 it is the target stated in the cooperative agreements. The target has been exceeded in Montenegro (42 percent in Year 1), and counterpart contributions are expected to continue to remain above the 25 percent mark for the program as a whole.
Performance Indicator: Foreign Direct Investment (millions of Euro)
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 76.3 | 20.0 | 13.02 |
FY 2003 Results: Performance was mixed in attracting the levels of FDI needed to invigorate and transform Montenegro's economy. A key success was sale of a majority share of the Republic's largest bank, Montenegrobanka, to Nova Ljubljanska Banka of Slovenia. The privatization process continued in FY 2003, but foreign investors continued to show little interest, due to unattractive offerings and lingering weaknesses in the business environment. Foreign Investors bought two of 11 hotels offered. The GOM is placing great hopes on tenders set for release by the end of 2003 for the Republic's largest company, aluminum producer KAP, and the tobacco company and steel mill. These companies have substantial financial problems, so foreign investor interest is uncertain.
Performance Indicator: EBRD Economic Reform Index (Source: EBRD -- rates Serbia and Montenegro together)
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 2.29 | 2.50 | 2.44 |
FY 2003 Results: With substantial assistance from USAID, new commercial laws were passed in FY 2003. Implementation is moving at a satisfactory pace. The Business Organization Law is one of the most progressive in the Balkans and is largely implemented. Following passage of the Bankruptcy Law, a number of companies elected to take advantage of its voluntary restructuring provision modeled after the U.S. "Chapter 11." However, initial implementation efforts have not been as smooth as hoped. USAID efforts continue to target significant remaining shortcomings in the business environment, such as weak government capacity, corruption, and a poorly functioning judiciary. But for reforms to take hold, time and additional GOM action to confront labor unions, complete the privatization process, remove residual barriers to business, and improve the judiciary will be needed.
Performance Indicator: EBRD Financial Sector Reform (unweighted average of EBRD banking and non-bank financial indicators -- rates Serbia and Montenegro together)
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| 2.00 | 2.5 | 2.17 |
FY 2003 Results: With the privatization of the Republic's largest bank, Montenegrobanka, only one bank with majority state ownership remained. This bank should be tendered by the end of 2003. Bank supervision efforts improved significantly. A Basel II Core Principles assessment showed the Central Bank of Montenegro to be mainly in compliance. A Secure Transactions Law was effectively implemented and, following one-on-one training with credit officers, all banks in Montenegro now use an on-line collateral registry. Interest rates finally began to drop, as bank competition intensified.
SECURITY, REGIONAL STABILITY AND LAW ENFORCEMENT
Performance Indicator: Judicial Reform Index (Source: ABA/CEELI)
| FY 2002 Baseline | FY 2003 Target | FY 2003 Actual |
| % rated "positive" = 16.75% | 50% positive | 30% positive |
FY 2003 Results: Montenegro spent most of 2003 preparing for the accelerated transfer of all border security functions heretofore performed by the Yugoslav Army. To support the GOM in this, the U.S. Department of Homeland Security assessed Montenegro's current customs and border security procedures, capabilities, and facilities and recommended steps to help modernize them. Based on this assessment, the U.S. is providing $4.5 million in border security improvements. Political and bureaucratic foot-dragging on reestablishing a special anti-trafficking-in-persons police unit, and inadequate training facilities, constrained progress in FY 2003 in utilizing $400,000 provided to OSCE for police training. The 2003 ratings for the Judicial Reform Index (JRI) were unavailable. However, a 2003 update on judicial reform based on the JRI factors showed that there have been improvements. In 2002, across all factors rated, only 16.75 percent rated "positive," while the update revealed a 30 percent "positive" score. Positive developments in four factors (selection/appointment process of judges; minority and gender representation; objective judicial advancement criteria; and judicial conduct complaint process) can be attributed to the implementation of the flagship Courts Act, which establishes the independence of the judiciary.
FY 2003 Support For East European Democracy (SEED)
Funds Budgeted for Assistance To:
Montenegro (In millions $, as of 12/31/03)
USAID - Democratic Reform $20.69
USAID - Economic Prosperity & Security $2.00
USAID - Private Sector $9.90
USAID Total: $32.59
State - ECA Exchange Programs $1.53
State - EUR Democracy Programs $0.08
State - EUR Public Diplomacy $0.30
State - IIP Public Diplomacy $0.08
State - INL Law Enforcement Activities $0.93
U.S. Department of State Total: $2.91
Broadcasting Board of Governors - Public Diplomacy $0.10
U.S. Department of Commerce - CEEBIC $0.05
DHS/Customs - Law Enforcement Activities $3.50
U.S. Department of Treasury - Advisors $0.75
U.S. Department of Agriculture - Technical Advisors $0.10
Other Agencies Total: $4.50
GRAND TOTAL: $40.00
KOSOVO
U.S. STRATEGIC INTERESTS
The overriding U.S. interest is for all of South Central Europe to join a Europe whole, free, and at peace. In this vein, and in the context of encouraging Kosovo's smooth entry into Europe, U.S. goals in Kosovo are effective self-governance; adherence to the rule of law; rapid development of a dynamic, free-market economy; ensuring that the door to returns is effectively open; and deepening regional stability and integration. U.S. Government assistance is therefore targeted to promote progress in these areas, as the U.S. works to help Kosovo overcome its problematic history and the legacy of ethnic conflict in the Balkans.
OVERVIEW OF U.S. GOVERNMENT ASSISTANCE
In FY 2003, the U.S. Government (USG) provided an estimated $92.26 million in assistance to Kosovo:
- $12.80 million in democratic reform programs (including Public Diplomacy exchange programs;
- $17.65 million in economic and social-sector reform programs;
- $46.36 million in security, regional stability and law enforcement programs;
- $12.80 million in humanitarian programs (not including regional contributions for the Balkans);
- $2.55 million in cross-sectoral and other programs; and
- Privately donated and U.S. Defense Department excess humanitarian commodities valued at $0.10 million.
In FY 2003, a total of 98 Kosovars traveled to the U.S. on USG-funded exchange programs.
U.S. ASSISTANCE PRIORITIES
Democratic Reform Programs: In FY 2003, SEED funding and other USG assistance allowed the U.S. Office in Pristina to engage in a broad range of democracy-building activities. SEED funds were used to advance the interwoven objectives of building an independent, effective, and impartial system of justice; strengthening the role of the independent media and civil society; and developing a multi-party political system that is representative of and responsive to its constituents. A common thread running through all of the programs is that they build local capacity, cross ethnic lines, encourage participation, and foster an atmosphere of reconciliation and peaceful coexistence. These programs will take on new significance in FY 2004, as the U.S. seeks to encourage the transfer of authority to local institutions, as well as preparations for the 2004 Kosovo Assembly elections, in the context of progress toward fulfillment of the UN's "Standards for Kosovo."
Economic and Social-Sector Reform Programs: USG assistance in FY 2003 -- primarily through USAID -- provided help and support for an economic reform program to stimulate a private sector-led economy by promoting reforms in fiscal and monetary policy, financial markets, commercial law, and privatization. SEED funds also supported business and enterprise development and financial intermediation programs aimed at generating income and employment. Special emphasis was placed on the agricultural sector through programs that foster increased production, as well as business partnerships that allow Kosovo's farmers to sell their goods locally or abroad. In addition, much of the USG's social sector reform targeted community services and facilities, including activities supporting economic and social recovery at the community level, through infrastructure rehabilitation, restoration of essential services, and community development. Under these programs, communities and municipal governments took part in identifying, designing, implementing, and sustaining the infrastructure activities undertaken, thereby contributing to the dual program emphases of institutional strengthening and community infrastructure rehabilitation. As in the democracy-promotion activities, economic reform aid in FY 2004 will focus on training and developing Kosovar institutions to assume greater responsibility for day-to-day affairs, as well as long-term planning, while also fostering adequate commercial law protections and a network of business partners that can conduct trade with Europe, the U.S., and beyond.
Security, Regional Stability, and Law Enforcement Programs: During FY 2003, the U.S. contributed about $53.52 million in SEED funds to provide a U.S. police officer contingent and support the operations of the Kosovo Police Service School, plus an additional $3 million for the training and development of the Kosovo Protection Corps (the non-military successor to the Kosovo Liberation Army, now being reformed as a civilian disaster response unit). The Kosovo Police Service (KPS) is now 5,850 strong, with an expected end strength calculated by the UN Mission in Kosovo (UNMIK) at 6,500 to be in place by summer 2004. The transition of police authority from UNMIK's Civilian Police (CIVPOL) to KPS slowed somewhat during the year but remains on track, with four additional police stations handed over to KPS control, for a total of six police stations under KPS authority throughout Kosovo. UNMIK plans call for an additional three police stations to be handed over by the end of 2003, with the transition accelerating in 2004 to meet the goal of having all 34 stations in KPS hands by 2005. U.S. CIVPOL stands at 479 and will shrink by at least 25 percent by the end of 2004. There are about 96 international instructors at the KPS School, 15 percent of them from the U.S. CIVPOL is now introducing KPS to expanded investigative processes, including intelligence, organized crime, and covert operations.
SECTORAL ASSESSMENTS
Democratic Reform
Significant progress has continued since the end of the conflict in 1999toward establishing democratic institutions and good governance in Kosovo. Kosovar institutions -- primarily the Provisional Institutions of Self-Government (PISG) -- continue to build capacity and take on more competencies, but the weak economy, shortage of skills and experience in democracy and governance, and lack of clear responsibilities for PISG institutions all limit the extent of democratic reform. Municipal elections in early FY 2003 were deemed free and fair and marked the start of the transfer of significant competencies from UNMIK to local governments. Municipal governments have been granted more control over their budgets but are severely constrained in fulfilling many functions typically undertaken by local governments. Some basic services are UNMIK reserved powers, and the regulations and legislation pertaining to municipal government responsibilities are often vague or confusing. Municipal officials frequently lack the skills and resources to do their jobs effectively and to meet the municipalities' financial needs due to the poor economy, high unemployment, lack of investment, and an unfavorable environment for local economic development. As a result of the transfer of competencies to the local level in FY 2003, USG assistance in FY 2004 will include a new initiative focusing on improving the effectiveness of local governments while strengthening linkages to USG-funded civil society and media programs. The new initiative complements European funding for the nascent Association of Kosovo Municipalities and will complement local government reforms proposed by the Council of Europe.
Although there has been marked progress in reforming the justice system, an UNMIK-reserved power, significant problems remain. According to the UN Development Program (UNDP), a majority of Kosovars is dissatisfied with the courts. Insufficient salaries, lack of access to legislation, inefficient court administration, and low public trust all undermine the integrity and efficiency of the justice system. A major, new USG-funded rule-of-law assistance contract was awarded in FY 2003 to facilitate the transfer of judicial competencies to PISG, improve the administration of justice, and increase citizen access to and confidence in the legal system. Also during 2003, USAID continued activities to improve and advance the skills of legal professionals, judges, and prosecutors. The USG has improved coordination with the European Agency for Reconstruction and other donors in the judicial reform and court administration area.
Civil society has proven to be a dynamic, influential element of Kosovo's democratic governance. NGOs and informal citizens groups have successfully advocated for laws and regulations, influenced policy decisions, participated in public hearings, and demanded accountability of government institutions and officials. USAID support for specific advocacy efforts by NGOs and citizens groups had impressive results in FY 2003. Civil society advocacy has resulted in the adoption of laws, policies, and regulations; changes in government procedures; subsidized services for pensioners and the disabled; public discussion of municipal budgets; and other actions by public or elected officials. Also, FY 2003 saw an increasing trend of NGO coalitions to advocate at the central level on issues such as electoral law reform and equal gender representation in political processes, and assistance further strengthened women's NGOs, which have a long tradition in the Balkans.
Preparations for the 2004 Assembly elections began in FY 2003, with the current Assembly attempting to take responsibility for drafting new electoral laws. However, the UN Special Representative (SRSG) clarified that elections remain a reserved power. The OSCE is turning over some election administration responsibilities to Kosovars but maintaining responsibility for key areas such as voter registration, adjudication of disputes, and the vote count. In FY 2003, the USG continued to provide training to the major political parties and assistance to civil society organizations involved in election monitoring and voter awareness, all of which will continue into FY 2004. Issues remaining to be addressed include the type of electoral system to use, capacity building for Kosovar election administration bodies, and improving the transparency and responsiveness of political parties. USG training and assistance in FY 2003 to political parties led to the strengthening of local party branches, greater participatory policy development, fostering the involvement of youth and women party members, and more constituent outreach. As preparations continue for the 2004 Assembly elections, U.S. assistance will play a key role in developing adequate local institutions while also providing necessary political party training to ensure open and fair elections.
Kosovo enjoys a relatively good environment for independent media and freedom of speech, but key laws and institutions have not yet been established, and private media struggle to survive financially. Kosovo requires new legislation on an Independent Media Commission and on Public Broadcasting, and the public broadcast fee needs to begin being collected. Public and private media depend largely on international donors for financial survival, raising concerns about their ability to maintain editorial independence in the long run. Journalists and media still must raise their professionalism, and media organizations require assistance in business management. In FY 2003, audience surveys showed substantial improvements in ratings for the two USG-supported private TV stations, now accounting for a combined share of 58 percent of all viewers (compared to 38 percent for the once-dominant public broadcaster RTK). With USG support, the privates have gone from broadcasting just a few hours a day in 2000, to full programming schedules complete with a variety of news and information programs, and satellite broadcasts to the Diaspora in Europe. With USAID support in FY 2003, the three major independent daily newspapers introduced weekly supplements reporting on economic and business news. The amount of investigative reporting is increasing in both print and broadcast media, with some of the stories prompting authorities to launch investigations into alleged corruption, in customs and the public post telecom corporation, for example. The USG has worked closely with OSCE and other European donors to find compromises on draft legislation that affects the viability of both the public and private broadcasters. Signaling relative success in improving the climate for independent media, FY 2004 SEED support for media training initiatives will decline somewhat with a shift toward text translation programs.
A crosscutting issue affecting many of Kosovo's institutions is the effort to build a diverse, multi-ethnic society in which minority rights are fully protected. To accomplish this, the U.S. Office's Public Affairs Section awarded a number of Democracy Commission small grants to organizations that work, directly and indirectly, to promote the idea of a multi-ethnic society, with equal rights for men and women. Examples of the projects supported by such grants are a newsletter for rural women; a monthly women's magazine; a one-episode TV production highlighting women's rights; a women's wellness center; multi-ethnic English language classes; and a center for conflict management. Additional Democracy Commission funding combated domestic violence and violence against women, while also working to educate the public about the dangers of trafficking in persons. The Public Affairs Section also had several International Visitors programs aimed toward accomplishing these goals. In particular, "Managing Diversity in a Multi Ethnic Society" sent five people to the U.S. for three weeks; "Combating Violence Against Women" sent six people for three weeks; and "Islam in America" sent one Islamic scholar to the U.S. on a regional program with scholars from other nations.
Economic and Social Sector Reform
In FY 2003, Kosovo continued to make significant economic progress. Institution building and sound economic policies remained the top priorities of international assistance in the economic sector. The Ministry of Finance and Economy, successor to the previously UNMIK-administered Central Fiscal Authority, implemented reforms in many economic areas, most notably in revenue collection. Domestic revenues in 2003 financed 100 percent of the Kosovo Consolidated Budget (KCB); in 2000, donor funds contributed half of the KCB and 95 percent in 2002. The World Bank estimates GDP growth at 5 percent for the year, though a recent IMF study calls the sources of that growth into question.
At the same time, Kosovo had a low level of domestic production and relied heavily on imports. Exports were negligible, covering only 3 percent of imports. However, the privatization process, which began in May 2003, is expected to attract foreign investment. So far, five of the 23 tenders for privatized companies were awarded to entities from Macedonia, Belgium, the U.S., Albania, and Turkey, for over $9 million. Final transfer of these assets has been delayed due to legal concerns, but as of the end of CY 2003, these obstacles appeared surmountable. Partly because the privatization process started late and is advancing slowly, Kosovo's public sector is among Europe's largest, with the private sector accounting for only 28 percent of the official economy. Despite the rapid development of the banking sector, financial intermediation remains the lowest in Europe, with a 39 percent loan/deposit ratio, although this is up from the 2002 total of 29 percent.
Fiscal policy changes have resulted in notable progress in fiscal decentralization. After an independent audit, 29 out of 30 municipalities have been certified to manage their own revenues and expenditures. The Tax Authority now administers a number of taxes, including VAT, presumptive tax, profit tax, and wage tax.
In the financial sector, the Banking and Payment Authority of Kosovo developed and implemented comprehensive regulations and procedures governing bank licensing and supervision, pensions, and insurance company licensing. In 2003, 12 new commercial bank branches were approved, bringing the total number of branches, sub-branches, and offices to 147, with seven banks represented. Two of the seven are international banks. A major success in 2003 was the complete privatization of the American Bank of Kosovo (ABK). Funded by USAID, ABK was to start privatizing in 2003, with all shares in private hands by the end of 2004. Instead, USAID completed the final sale of its shares (24 percent) to Raiffeisen Bank, and ABK became Raiffeisen Bank of Kosovo. Sixty percent of registered businesses now comply with deposit requirements for the Kosovo Pension and Savings Trust, covering 70 percent of employees. The Department of Insurance Supervision performed annual financial audits on eight insurance companies and operational audits on another four companies, covering all registered insurance companies. The USG has provided technical assistance to the Kosovo Trust Agency (KTA) to assist with privatization, an area on which progress has been stalled due to legal and political issues surrounding the privatization of Publicly Owned and Socially Owned Enterprises.
In the commercial law area, legislation governing mortgages, immovable property rights register, external trade, and bankruptcy has been enacted, furthering the comprehensive commercial law framework crucial to the establishment of a sustainable, market-oriented economy. The procurement, competition, and copyrights laws were drafted and are currently under review.
A tender for a turnaround management team at the electricity company was issued, and three firms are conducting due diligence. The Kosovar Assembly is discussing comprehensive draft laws on energy, electricity, and the sector regulator and tenders for mobile telephony are expected shortly.
The business sector is growing slowly. However, import substitution for poultry, dairy, and medicinal herbs increased by 8 percent, partially due to USG support to these sub-sectors. The recently signed (October 1) Albania-Kosovo trade agreement should increase exports. For instance, a fruit juice manufacturer who received USG business development technical assistance exported 100 tons of juice to Albania after the agreement went into effect. In November, the U.S. granted Normal Trade Relations status to Serbia and Montenegro. NTR status will reduce tariffs on Kosovar products (which current USG regulations include in the Serbia and Montenegro products) from 37 percent on average to less than 3 percent. Further, Kosovo is diversifying its products to include juniper berry and mushroom exports, through export trials conducted with USG support.
The agricultural sector is using improved production technologies to expand production. USG assistance has led to 21 percent greater dairy sector production and a 40 percent increase in production in the vegetable sector. In the fruit sector, one of the most promising agricultural sectors in Kosovo, 57 orchard owners prepared for the adoption of improved technologies for commercial operations. Fruit production has been hampered by a serious drought, but farmers have reported favorable returns on adopted varieties/technologies vis-à-vis traditional practices. USG support also resulted in expanded institutional linkages. Linkages were developed across 21 farm associations and 20 private agribusiness processors in four sub-sectors. Twenty-three milk collection points throughout Kosovo began applying improved handling and business management practices. Forward contracts were arranged for 38 milk producers and processors, which required certifiable quality. The marketed diary sales of participating producers grew by 40 percent on average. Six feed mills signed agreements with 62 farmers for 6,900 metric tons of maize, sunflower meal, and soybean meal, valued at 1,260,000. These linkages are crucial to improving the coordination of the market chain.
Additional support for business development in 2003 came from Democracy Commission funding for a Women's Business Association, as well as for NGOs that seek to combine environmental activism with market principles. Other Public Diplomacy funds supported an International Visitors program on "Urban Environmental Issues," designed to introduce the local Ministry of Environment and Spatial Planning to U.S. concepts and practices in the urban planning and environmental protection fields.
Due largely to USG assistance, along with support from other donors, Kosovo has implemented sound economic policies. In 2003, the USG continued its technical assistance in the area of fiscal, financial, and commercial law. USG assistance helped Kosovar businesses to improve marketing skills, increase quality control, and substitute domestic products for imports on the local market. In addition, the USG supported accounting training for over 500 businesspeople and accountants.
In 2004, USG assistance will continue to support economic policy development and implementation. However, the focus will be on training Kosovars to take over the key positions in Ministries and Agencies that are currently held by foreigners. Commercial law support will focus on completing the framework, as well as training judges, lawyers, and the public in the new laws. Business development assistance will deal with quality control issues (including the new U.S. requirements on food safety and bioterrorism), increasing domestic and foreign sales, improving production, and strengthening agribusiness sector institutional linkages. The USG will also support and strengthen business advocacy organizations at both the sector and sub-sector levels. To address the serious problem of unemployment, USG assistance will tackle economic issues such as job creation and investment in order to both maintain political stability and encourage economic development in the Western Balkans. It will tackle small and medium enterprise development and the creation of a climate for business development - a working banking system with access to financing, a functioning judicial system and a streamlining of government regulations.
Security, Regional Stability, and Law Enforcement
Kosovo's law enforcement organs continued to develop in FY 2003, as the international community worked to transfer greater responsibility for law and order to Kosovar institutions. UNMIK's Civilian Police service (CIVPOL) stands at 3,757 officers, of which 479 are U.S. police officers with SEED-funded salaries. This reflects a 15 percent decrease from 2002 in both the overall size of CIVPOL and the U.S. contingent. In FY 2003, the international community sought to move day-to-day policing responsibilities from CIVPOL to the Kosovo Police Service (KPS), which is due to become the primary police force by 2005. Transfer of local police stations to KPS, begun in 2002, slowed somewhat due to a shortage of senior officers to command the stations. CIVPOL and KPS are addressing this by training and promoting a sufficient number of officers to appropriate ranks. Other legal institutions continued to improve with the training of judges and prosecutors, fostering the development of Kosovo's courts. While the Kosovo Protection Corps (KPC), the civilian successor to the former Kosovo Liberation Army (KLA), continued to broaden its capabilities and responsibilities in disaster relief and public works improvements, some issues remained regarding the possible criminal ties of KPC members and the publicly stated desire of the KPC leadership eventually to assume defense and security responsibilities.
During the year, UN CIVPOL transferred much of Kosovo's basic police work to the KPS, while keeping primary responsibility for sensitive and complex investigations, such as those related to inter-ethnic crimes, economic crimes/corruption, and trafficking in persons. Efforts began during FY 2003 to develop the capacity of KPS to investigate such complex crimes through specialized training and to bring KPS officers into the Kosovo Organized Crime Bureau (KOCB).
The KOCB received new surveillance equipment during the summer of 2003, enabling it to take advantage of new surveillance and investigation regulations allowing for the use of covert means to develop evidence against organized crime groups. Construction of a new forensics lab also began in 2003, with completion expected in 2004. Basic police training classes continue at the Kosovo Police Service School (KPSS), with classes being expanded from a 12-week basic course to 20 weeks starting in 2004, as the result of a Kosovo-wide needs assessment. KPSS is on track to meet the target of 6,500 trained basic recruits by summer 2004.
In FY 2003, USG SEED assistance continued to fund the KPC's primary training program, implemented by the International Organization for Migration (IOM). The KPC's primary missions are responding to disasters affecting the population and territory of Kosovo; conducting search and rescue operations; and assisting in rebuilding Kosovo's infrastructure. In close coordination with UNMIK/KFOR, the KPC engaged in operations requiring rapid reaction to emergency training scenarios, testing leadership and unit ability to meet internationally recognized standards of performance. Each quarter, KPC leaders and Zone-level Rapid Response Units participated in IOM-directed training, leading to the deployment of Rapid Response Units to training institutions in Turkey, South Africa, the Czech Republic, and Germany. As a result of intense development efforts by IOM over many months, the KPC Protection Academy, along with its higher headquarters (Training and Doctrine Command - TRADOC) were officially activated in November 2002, and began teaching its first professional development course in February of 2003. The KPC Simulation Center, developed and staffed by IOM and also subordinate to TRADOC, was activated on the same date and became the primary training tool in support of KPC collective training during phase IV. Using this assistance, the 5,052-member KPC broadened its activities to include public works and reconstruction support in areas with high numbers of internally displaced persons (IDP) and returnees.
In 2004, USG law enforcement assistance will continue to focus on providing a safe, secure environment for all of Kosovo's people, while further developing local institutions that can assume greater responsibility for that task. The rudiments of the rule of law are in place, including a judiciary and police force, to create a sense of fairness and justice. A capable, honest police force must work in harmony with a judiciary that is not only seen as independent and ethnically blind but also competent. The task ahead requires turning these rudiments of democracy into fully functioning and well-grounded institutions. The lion's share of planned assistance will go toward U.S. CIVPOL salaries, while reflecting the ongoing drawdown in the U.S. CIVPOL contingent. The Criminal Intelligence Unit (CIU) and the KOC are units that tackle serious crime. The KPS will continue to assume greater responsibilities from CIVPOL, reaching its full strength of 6,500 officers and becoming Kosovo's primary police force. Another important objective is the continued development of the judiciary, as reflected by improved competence of judges, lawyers, and prosecutors and rebuilt administrative capacity in the courts. Further support for the Department of Justice Office, Overseas Prosecutorial Development, Assistance and Training (OPDAT) criminal justice programs will play a key role in this effort.
Humanitarian Assistance
In FY 2003, USG humanitarian assistance to Kosovo focused on encouraging an open climate for returns and resolving outstanding humanitarian issues stemming from the conflict. Funding from the State Department's Bureau for Population, Refugees, and Migration (PRM) supported the activities of UNMIK's Office of Returns and Communities in its efforts to facilitate returns and encourage inter-ethnic cooperation. PRM's contribution to the region-wide activities of the UN High Commission on Refugees (UNHCR) and the International Committee of the Red Cross (ICRC) also gave substantial support to those organizations' efforts in Kosovo.
Additionally, PRM funding for NGO activities provided much of the direct assistance to returnees, as well as to communities faced with absorbing a high number of returnees. Many of these projects involved support for activities by branches of the same NGOs both in Serbia and Montenegro, where potential returnees are identified and briefed on their options, as well as in Kosovo itself. Project funding for the American Refugee Committee, the United Methodist Committee on Relief, and the International Catholic Migration Committee allowed those organizations to identify and educate potential returnees in Serbia and provide support for their return to Kosovo. Further support for the returns effort came from Mercy Corps International, whose program complemented the returns assistance of other implementing partners by providing agricultural inputs and assistance to returnees, thereby aiding their reintegration into their communities through meaningful employment and economic opportunities.
Kosovo's Housing and Property Directorate (HPD) and the Housing and Property Claims Commission (HPCC) have exclusive jurisdiction to receive and decide claims from individuals who lost residential property as a result of the apartheid-like discrimination in the 1990's, and the 1999 conflict. The work of the HPD and HPCC contributes to the restoration of property rights and return of refugees and IDPs; the ability of owners and legal occupants to use their property as collateral for investment, thereby reinforcing economic stability; and support for the rule of law through the enforcement of legal decisions. SEED funds facilitated the work of the HPD and HPCC during 2003, through support for general operating expenses.
During FY 2003, additional humanitarian efforts in Kosovo were supported by SEED funding for Save the Children, which focused on primary education assistance to communities through physical reconstruction of schools, as well as provision of school supplies and funding for pre-school programs.
A prominent humanitarian issue in Kosovo is the plight of those with family members whose whereabouts are still unknown. SEED funding in 2003 supported the activities of the International Committee for Missing Persons (ICMP), which sought to resolve outstanding missing-persons cases stemming from the 1999 conflict. The ICMP provided scientific and technical support to the identification of human remains found in Kosovo or in Serbia proper, using its relationships and formal agreements with UNMIK and the Serbian Government Coordination Center for Kosovo (the former agreement was signed shortly after the end of FY 2003). Beyond DNA matching and scientific identification of remains, ICMP also played an important role in the growth of civil society's capacity to deal with the issue of missing persons through NGO training and development and advocacy on behalf of the families of the missing.
One additional element of USG humanitarian assistance was the donation of $100,000 in Defense Department humanitarian commodities to schools and medical clinics in southeastern Kosovo. The primary recipient was an elementary school in the municipality of Gjilan that serves a Roma community, while a second school in the area also received donations of furniture and school supplies. Office and clinic furnishings were also provided to medical clinics in two other area towns.
MEASURES OF PROGRAM EFFECTIVENESS IN FY 2003
DEMOCRATIC REFORM
Performance Indicator: USAID NGO Sustainability Index (1 = highest; 7 = lowest)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
4.3 |
3.0 |
4.0 |
FY 2003 Results: The 2003 NGO Sustainability Index shows a gradual improvement of the NGO sector in Kosovo since 2000. While the improvement overall has been slower than initially anticipated, the most progress has occurred in sub-sectors in which USAID has focused assistance: advocacy and infrastructure. The past year saw a marked increase in the success of NGO advocacy, especially at the municipal level, and the NGO sector continues to benefit from a range of indigenous resource centers and grant-making foundations. On the other hand, international donors remain the primary source of NGO funding, and little progress has been made in finding alternative, longer-term funding sources. Similarly, the abundant availability of donor funding arguably provided little incentive for NGOs to improve their organizational capacity, another area of limited progress.
Performance Indicator: IREX Media Sustainability Index (1 = lowest; 4 = highest)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
2.3 |
3.0 |
Data not available yet |
FY 2003 Results: Kosovo enjoys a relatively good environment for independent media and freedom of speech, but key laws and institutions have not yet been established, and private media struggle to survive financially. Kosovo requires new legislation on an Independent Media Commission and on Public Broadcasting, and the public broadcast fee needs to begin to be collected. Public and private media depend largely on international donors for financial survival, raising concerns about their ability to maintain editorial independence in the long run. Journalists and media still must improve their professionalism, and media organizations require assistance in business management.
ECONOMIC AND SOCIAL REFORM
Performance Indicator: Kosovo exports as a percentage of GDP (Source: Riinvest Institute)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
2% |
4% |
3% |
FY 2003 Results: Kosovo's continued dependence on imports and difficulties in reaching trade agreements with neighboring states hampered the growth of exports. Some gains were realized from improved agricultural production and distribution within Kosovo (substituting domestic for imported products) and through limited progress in market penetration of Kosovo products. Significant further gains will depend on improvements in quality and the implementation of free trade agreements (such as that signed with Albania on October 1).
Performance Indicator: Number of state- or socially-owned enterprises privatized (cumulative) (Source: Kosovo Trust Agency)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
0 of 350 SOE's privatized |
10 of 350 SOE's privatized |
23 SOE privatization tenders awarded |
FY 2003 Results: Privatization moved forward swiftly during most of FY 2003, with two successful rounds of tenders producing buyers for 23 socially owned enterprises (SOEs). However, the process came to a halt at the end of the fiscal year, due to a number of legal concerns raised within the Kosovo Trust Agency (KTA), the body charged with liquidating SOE assets. As a result, none of the 23 SOEs was formally privatized during FY 2003, pending KTA Board approval of the contracts. As of the end of 2003, the KTA Managing Board voted to ratify the sale of four SOEs, authorize contract negotiations pending final ratification for another 14, and re-issue tenders for the remaining five. Further progress will depend on surmounting the legal and political obstacles in a manner swift and transparent enough to preserve investor interest.
Performance Indicator: Number of fixed and cellular telephone subscribers (Source: USAID/Post and Telecom of Kosovo)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
100,000 landlines / 200,000 mobile telephone numbers |
105,000 / 220,000 |
109,000 / 295,000 |
FY 2003 Results: The level of telephone line penetration in Kosovo is one of the lowest in Europe, with only an estimated 7 percent of households possessing a fixed telephone line. Mobile penetration continued to grow in FY 2003, but further progress on both fixed and mobile telephone access will depend on KTA, PISG, and Kosovo Assembly action on the creation of a Telecommunications Regulatory Agency (TRA) and issuance of telecommunications tenders. The picture will likely improve somewhat with the Assembly's approval of a TRA Board in December 2003.
SECURITY, REGIONAL STABILITY AND LAW ENFORCEMENT
Performance Indicator: Number of trained Kosovo Police Service officers (Source: UN CIVPOL/KPS)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
5,500 officers |
5,900 officers |
5,850 |
FY 2003 Results: KPS officer training and recruitment fell just shy of targets for FY 2003, reflecting the strong effort made by UN CIVPOL to bring in new officers and transfer policing authority during the year. KPS continues to assume greater responsibility for daily policing tasks and should reach its target strength of 6,500 officers in 2004.
Performance Indicator: Number of outstanding Internally Displaced Person claims resolved by the Housing and Property Directorate/Housing and Property Claims Commission (Source: HPD/HPCC)
|
FY 2002 Baseline |
FY 2003 Target |
FY 2003 Actual |
|
1,856 cases resolved during year 1,856 total cases resolved |
9,000 cases resolved during year 10,856 total cases resolved |
7,895 cases resolved during year 9,751 total cases resolved |
FY 2003 Results: Though HPD/HPCC processing of claims fell shy of targets, the FY 2003 results testify to an increasing speed of claim resolution and improved management of the property claim caseload. The work of HPD is critical to rule of law, minority returns, and economic revitalization -- continued improvement in case processing will be a key component of encouraging returns and achieving a stable, secure environment in Kosovo.
FY 2003 Support For East European Democracy (SEED)
Funds Budgeted for Assistance To:
Kosovo (In millions $, as of 12/31/03)
USAID - Democratic Reform $8.95
USAID - Economic Prosperity & Security $0.93
USAID - Humanitarian Response $4.80
USAID - Private Sector $17.15
USAID - Special/Cross-Cutting $1.49
USAID Total: $33.32
State - Bureau of Public Affairs $0.03
State - Criminal Justice System $1.50
State - DRL/Int'l Commission Missing Persons $0.40
State - ECA Exchange Programs $1.28
State - EUR Democracy Programs $0.05
State - EUR Law Enforcement Programs $5.50
State - EUR Public Diplomacy $0.30
State - Humanitarian Programs/HPD $0.35
State - IIP Public Diplomacy $0.20
State - INL Law Enforcement Activities $37.08
State - INL Police Training $5.00
U.S. Department of State Total: $51.68
GRAND TOTAL: $85.00
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