Regional Approach to the countries of South-Eastern Europe ... file1 6 INTRODUCTION On 26 February 1996, the EU Council adopted a Regional Approach to the countries of South-Eastern

EUROPEAN COMMISSION Directorate General IA External relations: Europe and the New Independent States, Common Foreign and Security Policy, External Service

Brussels, 19.10.98 SEC (98) 1727

COMMISSION STAFF WORKING PAPER

Regional Approach to the countries of South-Eastern Europe:

Compliance with the conditions in the Council Conclusions of 29 April 1997

Bosnia and Herzegovina, Croatia, Federal Republic of Yugoslavia, former Yugoslav Republic of Macedonia and Albania

TABLE OF CONTENTS Introduction 1 Section 1 1 Bosnia and Herzegovina 2 1.1 Democratic principles 2 1.2 Human rights and rule of law 3 1.3 Respect for and protection of minorities 4 1.4 Market Economy Reform 5 1.5 Regional Cooperation 6 1.6 Compliance with PIC deadlines 7 2. Croatia 8 2.1 Democratic principles 8 2.2 Human rights and rule of law 8 2.3 Respect for and protection of minorities 9 2.4 Market Economy Reform 10 2.5 Regional Cooperation 11 2.6 Compliance with obligations under the Dayton and Erdut Agreements 11 3. Federal Republic of Yugoslavia (FRY) 14 3.1 Democratic principles 14 3.2 Human rights and rule of law 15 3.3 Respect for and protection of minorities 16 3.4 Market Economy Reform 16 3.5 Regional Cooperation 17 3.6 Compliance with obligations under the Dayton Agreement 18 Section 2 4. Former Yugoslav Republic of Macedonia 20 4.1 Democratic principles 20 4.2 Human rights and rule of law 20 4.3 Respect for and protection of minorities 21 4.4 Market Economy Reform 22 4.5 Regional Cooperation 23 5. Albania 24 5.1 Democratic principles 24 5.2 Human rights and rule of law 24 5.3 Respect for and protection of minorities 25 5.4 Market Economy Reform 25 5.5 Regional Cooperation 26

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INTRODUCTION On 26 February 1996, the EU Council adopted a Regional Approach to the countries of South-Eastern Europe1. This was followed up by a Commission report on common principles for future contractual relations with certain countries in South-Eastern Europe2. On 29 April 19973, the Council established political and economic conditions to be fulfilled by these countries, as the basis for a coherent and transparent policy towards the development of bilateral relations in the field of trade, financial assistance and economic cooperation, as well as of contractual relations. As in the Commission’s earlier reports in this series4, this report monitors compliance by Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia (FRY), the former Yugoslav Republic of Macedonia, and Albania with these conditions. For each, compliance has been monitored under the following headings: democratic principles; human rights and the rule of law; respect for and protection of minorities; market economy reforms; regional cooperation5; and compliance with obligations under the Dayton and Erdut Agreements and PICs. Section I deals with Bosnia and Herzegovina, Croatia and the Federal Republic of Yugoslavia (countries with obligations under the peace agreements) while the former Yugoslav Republic of Macedonia and Albania are treated under section II. The conditions are both general, applying to all of the countries covered by the Regional Approach, and specific (e.g. obligations arising under the Dayton Agreement). General obligations cover areas such as democratic reforms, respect for human and minority rights, return of refugees and displaced persons to their place of origin, economic reforms and regional cooperation. In Section I, compliance with specific obligations which must be taken into account for the countries’ eligibility for PHARE or the negotiation of Cooperation Agreements, include inter alia cooperation with the International Criminal Tribunal on former Yugoslavia, undertakings to make agreements with the entities of Bosnia and Herzegovina compatible with Dayton, establishment of functioning institutions in Bosnia and Herzegovina, pressure on Croats, Serbs and Bosniacs to cooperate in the functioning of the Federation, the reintegration of Eastern Slavonia (Croatia), and a credible solution to the Kosovo crisis (FRY). Compliance by the countries with the relevant conditionality will be judged in the light of this present factual report (which covers, in particular, the period to early October 1998) and which is accompanied by Operational Conclusions6. The next possible steps in relations with the various countries would be full PHARE and contractual relations in the case of BiH, reactivation of PHARE in the case of Croatia, autonomous trade measures in the case of FRY, further development in contractual relations in the case of the former Yugoslav Republic of Macedonia or Albania, as well as the inclusion of states concerned in the 1999 autonomous trade regime. These steps will be assessed on the basis of this present report. The next report in this series will be prepared in March/April 1999.

1 Conclusions of the General Affairs Council of 26 February 1996 2 Report from the Commission to the Council and the European Parliament, COM(96)476 final of 2.10.96 3 Conclusions of the General Affairs Council of 29 April 1997 4 Commission Services Report (03.10.97): Regional Approach to the countries of South-Eastern Europe: Compliance with the conditions set out in the Council Conclusions of 29 April 1997, which covered the period to October 1997; Commission Staff Working Paper Regional Approach to the countries of South-Eastern Europe: Compliance with the conditions in the Council Conclusions of 29 April 1997 SEC (1998) 586 of 30.03.98 and Operational Conclusions COM (98)237 of 15.04.98 which covered the period to March 1998 5 See the Commission Staff Working Paper : Second Report on Economic Relations between the countries of SouthEastern Europe concerned by the EU’s Regional Approach SEC(98)381 of 27.2.98 which covers developments during 1997 6 COM (98) xxx of .10.98

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SECTION 1

CHAPTER 1: BOSNIA AND HERZEGOVINA7

1.1 Democratic Principles The democratic situation in Bosnia and Herzegovina continues to be marked by slow progress in promoting and implementing democratic principles and lack of an active commitment by the authorities as a whole to fulfilling the requirements of the General Framework Agreement for Peace in Bosnia and Herzegovina. Whilst progress has been achieved in some areas, it is regrettable that this has often only been possible with significant pressure from the international community, and in particular the High Representative. This indicates that Bosnia and Herzegovina is still heavily reliant on the international community in the absence of a government structure that is ready to take full responsibility for the country and its future. Democratic and economic reform is still obstructed by nationalist sectarian forces, in particular where implementation falls to the responsibility of local authorities. Continued use of the High Representative’s mandate to make interim binding decisions (under Annex 10 of the Peace Agreement) has been necessary. The division of competence between the State and the Entities judicial authorities is still unclear. The pace of judicial reforms is too slow and the means to address them insufficient. Bosnian and Herzegovinian citizens should be better informed on the rights and the prerogatives enshrined in the Constitution. On the other hand, progress in return of refugees and the restructuring of the police force has been disappointing. Progress is being made on implementing the targets set in the Conclusions of the Luxembourg Peace Implementation Council for the full establishment of the services of the Council of Ministers and the Parliamentary Assembly. But they are not yet fully operational. In addition, adequate government structures are still not in place to guarantee a fully functioning and representative government. The institution building process as a whole has progressed slowly, largely due to insufficient cooperation among officials. Nevertheless, progress during the reporting period has been achieved in certain areas. In Republika Srpksa, before the recent general elections, the position of the former government showed signs of a tendency towards a greater degree of separation of powers between the government, administration and judiciary. However, fundamental laws still need to be adopted and implemented to pave the way for the establishment of an independent and functioning judiciary, notably laws on judicial appointment in both entities and a criminal code in the RS. At the central Federation level, the Executive and the Parliamentary Assembly are now working and the ministries based in Sarajevo have started to include Croat officials but integrated staffing remain unsatisfactory in the Ministry of Interior and in the ministries based in Mostar. In Mostar, HDZ hard-liners still refuse to reintegrate the city as agreed under the EU administration. The degree of co-operation is still very low in Municipalities with split territories such as Herzegovina-Neretva, Central Bosnia, Zenica-Doboj and Livno-Tomislavgrad. From the 1997 municipal elections, out of 136 Municipalities, Srebenica was never certified by the OSCE. Since then, three more Municipalities were decertified by the OSCE on grounds of obstructionism (Tomislavgrad, Zvornik and Gornji Vakuf). Real participation in local administrative structures is not well-balanced between the different ethnic groups. In addition, there is still a strong need to strengthen the administrative structure at the local level. On 12-13 September 1998 the second general elections were held. There were also elections in twelve new municipalities created since the 1997 elections. Although some serious technical problems occurred on the first election day, the course of the election was peaceful and orderly. In the absence of a permanent election law, the rules and regulations for these elections have been adopted by the Provisional Election Commission with supervision of the registration and election process secured by the OSCE. Particular attention has been paid to ensure that out of country voters have equal voting rights and possibilities to in country voters. The high voter turnout (70.7%) confirmed the interest and 7 Throughout this report, BiH refers to Bosnia and Herzegovina; FBiH to the Federation; and RS to Republika Srpska.

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the participation of the voters in the fourth election held since 1996. In comparison to the previous elections, the behaviour of the different political parties was more responsible. However, some parties have been fined and some candidates have been removed from the list following violations of the ban on political activities 24 hours before the polls opened. Few serious human rights violations were reported during the polling period. The majority of the Bosnians again voted along ethnic lines and the nationalist parties remain the main political formations. In the RS, Poplasen (a radical with strong links with Vojislav Seselj) defeated the moderate Bilijana Plavsic for the RS Presidency. At BiH level, in the context of the Federal Presidency, Ante Jelavic defeated Kresimir Zubak as the Croat member of the Collective Presidency. Zubak had outlined his intentions to accelerate the peace implementation process and to build a multi-ethnic and democratic state whereas Jelavic, in his political platform, put more emphasis on the preservation of the Croat nation within BiH and on the need to establish a special parallel relationship with Croatia. Alija Izetbegovic has been confirmed as the Bosniac member of the Collective Presidency. The election of Zivco Radisic might be a move forward in compliance with Dayton. Nevertheless, some political pluralism is emerging, particularly in the Republika Srpska but also in the Federation. The RS National Assembly seems to be split into three major groupings, none of which will control an absolute majority. For the time being, it is therefore difficult to speculate on the composition of the new RS government. In the FBiH, the SDA-led coalition remains the most influential party but the Social Democratic Party has made visible progress among the traditionally SDA electorate. The House of Representatives at the State level will be more fragmented. In particular, the Serb nationalist parties have lost the possibility to block legislation in the House. 1.2 Human Rights and the Rule of Law While key laws have being passed to ensure that the legal framework is in place to protect human rights and incorporate internationally recognized standards into national law, implementation remains the stumbling block. Although the GFAP entrenched the fundamental right of people to return to their place of origin and key legislation was passed in the Federation (Property laws were passed in April), the overwhelming majority of human rights violations are related to property. The endorsement of property and housing legislation, presented by OHR, in the RS and implementation in both Entities is expected. Progress in securing funding has enabled the Dayton institutions to deal more effectively with a growing caseload. Unfortunately this comprehensive effort is hampered by a serious lack of cooperation with regard to the implementation of the decisions. This lack of compliance and obstructionist behavior of authorities at all levels requires constant political intervention by the OHR. The introduction of the new car number plates has been instrumental in facilitating freedom of movement at a critical time for the return process. Though decreasing, under international pressure, illegal checkpoints are still being placed in strategic locations. Police restructuring in the RS in particular has been slow and should be accelerated. With regard to freedom of expression and free press, media legislation in the Federation and in the RS still needs to take fully account of the Constitution of BiH, professional media regulations, and European experiences and standards concerning the organization of public transmission in complex multi-nationality. Positive developments that can be reported came too late to have a significant impact on the September elections and the current reform and development of TV networks at the Entities level has not had any political impact yet. This was largely due to the strong resistance to change by national and media authorities, whose interest was to maintain the status quo. However, the Independent Media Commission has now been established as the regulatory regime for broadcasters and other media in Bosnia and Herzegovina. In the FBiH, a Memorandum of Understanding on the restructuring of RTV BiH has been signed. A truly public and independent country-wide TV broadcaster has not been developed. More generally, the establishment of a pluralistic and independent press at the State, Entities and local level is still lacking. Of concern is the continued aggressive policy of HDZ politicians and media. Repeated inflammatory anti-Dayton statements have been recorded, and

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this is exacerbated by the continued HRT direct transmissions from Croatia into Bosnia and Herzegovina. The HRT heavily interfered with the electoral campaign and often took a clear position against the NHI (New Croatian Initiative). More generally, Zagreb still exerts an undue influence on BiH internal affairs through its links with HDZ BiH. In the RS, the restructuring of the SRTV station is now well underway having been initiated much earlier with significant involvement by the international community. Of note, however, was the decision of the previous Government to change the management at 16 municipal radio stations. Whilst this action was aimed to remove SDS loyalists from these positions, the manner in which this was carried out was controversial. Finally, concerning the written press, certain difficulties remain in the distribution across Inter Entity Boundaries Lines (IEBL). The strengthening of the rule of law has taken a more strategic outlook under the guidance of the OHR and the Council of Europe. Recent developments have been encouraging. A memorandum of understanding on judicial cooperation was signed between the Federation and Republika Srpska in May. Substantial progress is still needed in the fields of civil society (adequate legal framework for Non-Governmental Organizations) and reform of primary, secondary and higher education. Finally, the explosive growth of organized crime, fraud and related corruption is recognized to have considerable potential as a destabilizing factor. This has triggered a more comprehensive response from the international community with inter alia the setting up of an Anti-Fraud unit within the OHR. The fight against fraud, corruption, deviation of funds, tax evasion and organized crime needs to be intensified. A more convinced co-operation from the BiH authorities is expected. RS politicians and, in the FBiH, HDZ have until now resisted the establishment of an effective new police force. 1.3 Respect for and protection of minorities 1998 was deemed to be the year of minority return. Although return to majority areas has stepped up during the summer, minority return has fallen short of the most conservative expectations (UNHCR estimates put minority return at a mere 10,000). Despite gradual consolidation of the legislative framework for return8, shortcomings in the implementation of the rights of minorities and deliberate obstruction on the part of authorities have made it virtually impossible to ensure sufficient protection of minorities. Despite recent commitments by the authorities in the Banja Luka Conference and Sarajevo Declaration, the attitudes and practices of authorities have demonstrated that there is no political will to promote minority return on a significant scale and thus, in upholding minority rights9. This situation is epitomized in the poor results on the implementation of the Sarajevo Declaration: according to the OHR, by early August less than 2,000 minority refugees returned to Sarajevo. The implementation of the Banja Luka Declaration has been even more disappointing (only 1,000 refugees returned to the Republika Srpska). During the summer return movements have intensified and incidents related to population movement have increased. Incidents of destruction of property and physical violence against returnees and minorities have been reported almost daily, for example in Drvar, Stolac, Brcko and Travnik. Allegations of human rights violations by local police are a continuing feature in both Entities. Blatant violations have been met by vigorous responses from the International Community including the suspensions of staff and inquiry by the international police task force (UNIPTF). Misallocation of existing housing space and multiple occupancy still blocks refugee return.

8 Four new laws regulating property and housing issues passed in the Federation, citizenship legislation, legislation on Displaced Persons and Repatriates currently being considered in both Entities, Immigration and Asylum Law, and Amnesty Laws (RS law still not in compliance with annex 7 of the GFAP). 9 Most minority return to the RS has taken place in the Zone of Separation and remains marginal.

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1.4 Market Economy Reform10 Some developments have taken place in the context of the economic policy reform agenda since the last report. The Luxembourg PIC Declaration stressed the importance of an integrated market economy. While some important progress has been made in building common institutions and a coherent legal framework, the implementation of reforms in economic management remains particularly difficult. A major positive development was the adoption by the Bosnian authorities of a structural reforms and macroeconomic stabilisation programme supported by a one-year IMF stand-by credit. Following the approval of the loan by the IMF Board in May, the World Bank approved, on 4 June, a Structural Adjustment Credit (PFSAC) to support key economic reforms of the public finance. Progress was made in this particular area with the adoption of the first common State Budget which will ensure that a revenue transfer mechanism and budgetary links are established between the central state and the two entities. The establishment of an independent Central Bank, which will operate as a currency board for its first six years consistent with the Dayton accord, paved the way for the introduction of a new unitary currency in late June 1998. In this context, a finalisation of the liquidation of the former National Bank of BiH, the NBBH, which has been overdue, is urgently called for as foreseen by the IMF programme as well as the PIC. The convertible marka (KM), which is pegged at a ratio of 1:1 to the D-Mark, will standardise the settlement of transactions throughout the country by creating a unified payment system. However, public promotion is essential to ensure country-wide use of the KM as the monetary unit of BiH. The Kuna remains in frequent use in some parts of the Federation, and the Dinar in RS, while the DM is frequently use throughout both entities. An essential part of the establishment of a fully independent CBBH is the liquidation of the former national bank, the NBBH. On 28 May, the Presidency of BiH approved the liquidation plan for the NBBH. An experienced liquidator is now carrying out the plan. However difficulties are being caused by the refusal of the ZPPs11 to freeze the NBBH accounts. The Luxembourg PIC deadline for completion of this is end 1998. Some progress has taken place with regard to a unified trade regime as a common tariff scheme with an unweighted average tariff rate of 7% is applied since April. In the context of the economic unification of the country, the legal framework concerning all aspects of customs for BiH is nearly completed. A new Law on Customs Policy for Bosnia and Herzegovina was approved by the Council of Ministers in June. As of 1 January 1999, BiH should have modern customs procedures compatible with EC practice. The Customs and Fiscal Assistance Office (CAFAO), funded by the EC, is helping the local authorities to ensure proper implementation of the customs regime and to improve the administration in all relevant fields and to increase customs revenues. However, there continues to be considerable difficulties with fraud and related corruption that need to be vigorously addressed in both Entities. In addition to a unified customs practice, internal trade without barriers is a second essential component of a unified economic space. The Entities have started a constructive dialogue on issues concerning trade within BiH. Even though many barriers are still to be removed, some initial results have already facilitated increased trade. On 18 August the Entities signed an agreement on harmonisation of sales tax and excise duty laws. In particular, the RS has amended its system of sales taxes and both Entities are moving towards the removal of restrictions to inter-Entity trade. 10 There is no State level body that compiles countrywide statistics. The circulation of different currencies, the existence of parallel exchange rates and the methodological insufficiencies affect GDP estimates. The lack of a Central Statistics institute also results in coordination shortcomings between the Entity Institutes. The State budget is still very dependent on the Entities and it lacks of taxing power. Whereas in the FbiH the government system is very decentralized, with substantial powers devolved to the cantons, the RS system is very centralized, there are no cantons and the economic responsibilities of the local authorities are more limited. 11 The payment system as currently operated by ZPP (Zavod za Platni Promet - Bureau for Payment Transactions) provides the means by which value is exchanges between businesses (as represented by their giro accounts maintained by ZPP) as well as taking deposits and withdrawals of cash from the business accounts. For control purposes, all legal entities must have one and only one giro account held by ZPP. This leads to inevitable problems with bank liquidity management including the controls that CB considers it should exercise especially in the area of settlement at the end of the day.

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Concerning privatization of enterprises and banks, a State Framework Law, imposed by the High Representative on 22 July following Serb obstructionism in the House of the Peoples, recognizes the right of the entities to privatize enterprises and banks and to dispose of the privatization proceeds. In order to ensure that the privatization process is in compliance with the GFAP and with this law, a Privatization Monitoring Commission is being established which will oversee that the principles of transparency, non-discrimination and accountability are adhered to in the privatization process. The new RS legislation is, by and large if not entirely, consistent with the State Level Framework Law. The Federation had already adopted enterprise privatization legislation in 1996 and a bank privatization law in April this year. Strengthening the financial sector remains a key priority. The banking system is burdened by imprudent lending and damages from the war period. An adequate legal framework will have to be developed, encompassing rules on bankruptcy, accounting standards, mortgages and collateral insurance in particular. As far as the legal and institutional framework is concerned, reforms to promote private sector development have been modest so far owing to the lack of a uniform commercial code and differing tax treatment of companies in the two entities. Notably the non implementation of the Law on the Policy of Foreign Direct Investment (adopted on 29 May) and the non adoption of the sub-legal requirements has so far discouraged foreign capital inflows. A large part of the GDP still comes from direct or indirect external assistance. Some of the benchmarks and deadlines laid down at the Luxembourg PIC remain to be met in both Entities. In the area of taxation, for instance, illegal Entity legislation needs to be repealed or amended. The EU/BiH Consultative Task Force (GAC of 8 June 1998) held its first meeting in Sarajevo, on 30 June and focused on two items: conditions for foreign investments and refugee return. The BiH was fully represented at the State level but the Entities' representation was not satisfactory. The BiH authorities underlined their need for the technical expertise that the C.T.F. could provide. The Fourth Donors' Pledging Conference, held in May 1998, heard pledges totalling $1.25 bn, exceeding the 1998 target. 1.5 Regional Cooperation Bosnia and Herzegovina and Croatia concluded an Agreement on Establishment of an Inter-State Council for Cooperation on 30 March 1998, superseding the Agreement on the Establishment of the Council for Joint Cooperation between the Republic of Bosnia and Herzegovina, the Federation of Bosnia and Herzegovina and the Republic of Croatia (Washington, December 1995). A proposal for an Agreement on Special Parallel Relations between the Federation of Bosnia and Herzegovina and Croatia has been mooted. The original draft proposed was inconsistent with the Constitution of Bosnia and Herzegovina and with the division of competencies between the common institutions and the Entities. Work is continuing with the OHR on this subject. Further to the deadlines and benchmarks of the Luxembourg PIC, there has been no agreement with Croatia or FRY on determining official border crossing, mainly because there has been no agreement in the BiH Council of Ministers. However the Council of Ministers adopted a draft agreement with Croatia on navigation on the Sava river and cross border railway traffic that needs to be signed by both countries, and an agreement has been initialled (September 1998) on Ploce / Neum. There have been no major developments, in the last six months, in relations with other countries in the region. 1.6 Compliance with other PIC deadlines12

12 OHR Report on the State of Peace Implementation, 15 September 1998 (requested by Steering Board in Article 198 Luxembourg Declaration)

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Implementation of the Law on the Council of Ministers (CoM) is proceeding. The integrated Federation Ministry of the Interior was inaugurated on 1 July and the operational annex regarding minority police officers was signed on 9 July. The Federation House of the Peoples and House of Representatives enacted new criminal codes and new criminal procedure code in July. In the RS draft criminal laws are ready to be presented to the RS National Assembly. The Law for State Border Police and for BH Institutions drafted by OHR/IPTF will be submitted to the Council of Ministers and should be adopted by the Council of Ministers and the BiH Parliamentary Assembly by early 1999. The issuing of passports started in the RS in 23 July and in the Federation on 17 August. Difficulties have been met in the implementation, especially in the Federation. The core staff of the common services of the Council of Ministers has been hired and their offices have been established. The principles for the hiring of additional staff have been agreed. An EC financed major institution-building programme for the services of the common institutions, including that of the the CoM, has commenced. Two working sessions of the Commission on Inter-Entity Legal Cooperation have taken place since its establishment. An MoU on a mechanism assuring full access to personal documentation is proceeding. The deadline has been missed. With regard to the obligation of the RS Ministry of the Interior to hire at least 400 minority police officers, there has been substantial progress in Brcko. Implementation of the new license plates and registration documents is progressing well in all Cantons of the Federation and in the RS. With regard to weapons amnesty legislation, no working draft has yet been circulated. Cooperation with International Criminal Tribunal for the former Yugoslavia (ICTY) continues, with more arrests of indicted war criminals by SFOR. Over two years after the signing of the GFAP, only one half of the persons indicted for war crimes are in custody.

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CHAPTER 2: CROATIA13 2.1 Democratic principles The HDZ retains overwhelming dominance of whole spheres of Croatian life, and its concentration of power continues. The negative effect on representative government and accountable executive due to this dominance continues, and the authorities still do not act in a manner consistent with the constitution or the law. Nor is there respect for the principle of separation of powers - the independence of the judiciary remains a concern, exacerbating problems with the exercise of fundamental rights (e.g. freedom of the press) and in property disputes. There is also a continuing influence by the ruling party on the command structures of both army and police. The recommendations of the Council of Europe and OSCE / ODIHR relating to the 1995 and 1997 elections, a precondition for free and fair elections, have not been implemented, although the Government has committed itself, vis-à-vis the Council of Europe, to examining all of these issues. As parliamentary elections should take place by end 1999, it is increasingly urgent that the current electoral law should be reformed. It should be noted that a constitutional challenge has already been launched against this law, and that opposition parties have presented draft amendments to the law. The main areas where reform is necessary14 are: that voting rights are on an ethnic basis (unacceptable in itself, this results in a situation where ethnic Croats abroad can vote while many Croatian Serbs resident abroad can not do so); that seats are reserved for "out of country" voters (while ethnic minorities within Croatia have difficulty in fully obtaining or exercising their own citizenship and voting rights); the role of the media in the electoral process (HRT has shown extreme partiality during previous Croatian elections - which led to the OSCE's assessment of "free but not fair" - and, most recently, in the context of the BiH elections); the electoral process itself (the need for multi-party representation on electoral commissions, accreditation of domestic non-partisan observers, and regulations on campaign financing and transparency).

2.2 Human Rights and Rule of Law There have been minor improvements in certain areas, but the overall human rights record remains unchanged. While the Constitution and derived legislation provide for a broad range of human rights, these laws are implemented in a selective manner. Notably, key provisions of the 1991 Constitutional Law on Human Rights and Freedoms, the adoption of which was a precondition to Croatia's international recognition, remain suspended. The Government has not kept its commitments, made on entry to the Council of Europe in 1996, to revise these suspensions. Freedom of expression, particularly freedom of the press continues to be infringed, with courts and administrative bodies used to selectively shut down or muzzle print and electronic media which criticises the Government. Criticisms in previous reports of HRT, of the harassment and intimidation of journalists, particularly by use of provisions of the already-criticised civil and criminal laws; of difficulties for print media in collecting distribution-revenue from distribution companies with close ties with HDZ remain valid. HDZ still controls the only national state-wide electronic media (HRT) and also many local stations, thus controlling the main information source in the country, and continuing to stir up public opinion on sensitive issues. HRT is effectively under HDZ control, as is the Telecommunications Council whereby HDZ manipulates the granting / revoking of concessions (the procedures for which are neither transparent, consistent or objective). Despite recommendations by the Council of Europe in March 1998, and various political commitments in the intervening months that HRT would be transformed into a true public service broadcaster, little progress has been made either in terms of structure or editorial policy. In particular, the draft amendments to the HRT law have been criticised on the grounds that the proposed reforms do not adequately separate HRT from political structures, and do not convert it into a public service broadcaster. Reform is needed regarding the constitution of the Telecommunications Council, the HRTV Council and HRT management - the

13 Report of the OSCE Mission to the Republic of Croatia on Croatia's progress in meeting international commitments since May 1998, 8 September 1998 14 Recommendations of OSCE / ODIHR Statement on the Presidential Elections in the Republic of Croatia (June 15 1997) and Statement of 16 June 1997 by Senator Paul Simon, Special Co-ordinator for Monitoring of the Croatian Presidential elections.

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resignation of the last Director-General took place in circumstances which revealed the "real" source of control, and the appointment of Mr. Vrkic, from the moderate wing of the HDZ, has not yet proved to be a genuine renewal. Furthermore, the procedures for the grant of concessions are neither transparent, consistent nor objective. A new law on public assembly is scheduled for adoption by Parliament shortly but the draft has been severely criticised for being too restrictive. While, in practice, the Government generally respects the freedom of assembly, and numerous protests have taken place due to trade union and pensioners' discontent, the necessary permits (under the Law on Peaceful Assembly and Public Protest) are not equitably issued. Reviews by the Council of Europe of draft laws on Citizens' right to association and on Humanitarian Organisations are ongoing. Fears have been expressed in the past, with regard to draft laws in these areas, that the supervisory powers granted to the Government would enable excessive interference in the operation of associations. Some initial positive steps have been taken in relation to respect for the right to property, notably with the rescinding of two discriminatory laws - the 1995 Law on Temporary Takeover of Specified Property (provisions of which were already declared unconstitutional by the Constitutional Court in September 1997) and the 1995 Law on Lease of Apartments. Other discriminatory laws and decrees, also passed during the war, continue to affect property rights, notably through the arbitrary abrogation of tenancy rights in "socially-owned" apartments (most of the holders of which have not yet regained occupancy or substitute accommodation, or fair compensation). Property rights are of particular importance in the context of returns (2.6 infra). There has been little improvement in access to courts and the right to fair trial - rulings (particularly those calling for eviction of persons occupying (Croatian Serb) property) are not enforced. There is still no effective right of appeal or judicial review of administrative decisions by the authorities. The legal system as a whole remains heavily overloaded, with non-transparent rules on prioritisation of cases. Excessive fees, and their discriminatory application, also dissuade people from pursuing civil claims. There are numerous instances of failures to respect constitutional provisions on equality before the law and equal protection by the law e.g. in the context of returns and, in particular, in Eastern Slavonia where numerous inequalities, detailed in the previous report, persist. While the Government has committed itself, in the June 1998 Return Programme, to amending all discriminatory and incompatible legislation, no steps have yet been taken. 2.3 Respect for and protection of minorities Minority rights are technically protected by the Constitution and various international commitments. However, as a result of the suspension of certain provisions of the Constitutional Law on Human Rights and Freedoms, the political representation and social and cultural rights of minorities, particularly the Croatian Serb minority, are not fully protected. Croatian Serb minority rights are also, in principle, specifically regulated by the Erdut and other Agreements reached through international mediation, but insufficient compliance with the relevant agreements continues to result in discrimination. The main discrimination is in regard to citizenship (including the consequences of the non-provision of key documentation) and property rights (where, even after the repeal of certain discriminatory legislation, implementation at local level is lacking) and equality before the law (see 2.1 and 2.2 infra). Discrimination is also evident in the distribution of reconstruction assistance (see 2.6 below) and in the economic regeneration of minority areas. The right of minorities to establish and maintain their own educational, cultural and religious institutions, organizations and associations exists but problems, which the State authorities could resolve, remain. Schools with a significant number of minority students have their own special curriculum in addition to standard ones, designed to teach subjects (e.g. history, geography) in students' own languages. The Minority Languages Act has not been adopted, nor has the Law on the use of minority languages in education. The most uncertain issue in the former Act, which is presently being debated in Parliament, is whether the official use of a minority language, which is ensured in units of self-governed towns and municipalities - and which is the normal practice in Istria at county level - should be confirmed by the law. In Eastern Slavonia, special curricula were agreed with UNTAES for the 1997/98 school year, incorporating various subjects into the main curriculum, with Serbian-

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language education outside school hours. In practice, however, a pattern of ever-present and occasionally open discrimination continues against Croatian Serbs and, at times, other minorities (e.g. Italian) in areas such as administration, justice and employment. The double standard of treatment by the Government, based on ethnicity, has hindered the implementation of much of the progress towards integration which was made at higher levels. The obligation to provide minorities with adequate opportunities to use their own language before courts and public authorities is respected, and media broadcasts in minority languages (both independent and on HRTV 2) occur. There is, however, inadequate protection of refugees and displaced persons returning to areas where they represent an ethnic minority, with attacks on and harrassment of returnees and domiciled Croatian Serbs in Eastern Slavonia and former Sector North and Knin, though the frequency of such attacks has lessened. This is confirmed by the UNSG Report on the UN Police Support Group which, however, points out that the severity of ethnically-related incidents has increased. 2.4 Market economy reform The Croatian authorities have continued their stabilization efforts, while maintaining the growth momentum (industrial production in July 1998 was up by 6.1% on an annual base). They have succeeded in keeping the rise in inflation relatively low (in July, the year-on-year increase in prices reached 5.8%), in spite of the introduction of VAT at 22% in January 1998. The Croatian authorities are pursuing an exchange-rate policy which takes the DM as an anchor and is very conducive to a favourable development of prices. Still, the current account deficit remains high at close to 10% of GDP. Its financing is highly dependent on medium and long term loans. Budgetary policy has been quite tight in the past (1997 consolidated central government deficit was 1.3% of GDP and the 1998 budget is expected to be balanced). Against a background of social tensions and a relatively high unemployment rate, the Croatian government decided to use the much higher than expected VAT revenues not only for debt repayment (USD 312 million), but also for spending on pensions and disability insurance and infrastructure development. Concerning the trade regime, Croatia maintains import tariffs ranging from 0 to 25% with a trade weighted average of about 9%. Import tariffs are especially high on agriculture, food and beverages and relatively high on manufacturing products. In July, tariffs on some products (bitumen, aluminium products and electronic motors) were lowered. Payments and transfers for current international transactions are free of restrictions. As far as the establishment of a legal and regulatory framework is concerned, the most important issue is banking supervision. A new banking bill has been introduced to Parliament, strengthening the jurisdiction of the National Bank (HNB). Concerning the implementation of the legal framework in general, there is, as recognized by the Croatian authorities themselves, an impermissible gap between the existing legal norms and their implementation. The previously announced swift privatisation of banks and hotels has not occurred, but a thorough revision of the crisis-stricken banking sector is expected - the National Bank intervened in April to rescue the country’s fifth biggest bank, which had accumulated non-performing loans corresponding to three times its registered capital, highlighting not only a network of cronyism, serious corruption and malpractice in several banks, but also weaknesses in banking supervision. Following this scandal, further audits have been commissioned (results expected by end 1998). There may be further serious political implications due to the likely involvement of senior politicians, as well as economic implications, both budgetary and on Croatia's position on international financial markets. There has been some further progress in the privatization of enterprises. The bill on the privatization and division of the Post and Telecommunication Company HPT has been passed. Voucher privatisation is taking place, but the often opaque circumstances of the privatization procedures of the past have led to a lack of good corporate governance in many privatised enterprises. There is also a de fact exclusion of Croatian Serbs from privatisation as they are not registered for voucher privatisation, and are also excluded due to the loss of their jobs and the lack of money to participate in "cash" privatisation. After

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HPT, the next candidates for privatisation are the electricity company (HEP) and the oil company (INA). Regarding foreign investments, there has been a considerable inflow of foreign capital e.g. the sale of the remaining 14% stake in Pliva (May 1998), agreement on the acquisition by EBRD and an Austrian bank of a 35% stake in Slavonska Banka, the 50m DM subscription by the EBRD of convertible preference shares of Podvrovka, and the award in September 1998 of a second mobile telephone license to VIP-net, a consortium of Austrian, American and Croatian firms. 2.5 Regional Cooperation The state of political relations with neighbouring states is largely positive. Relations with the FRY are progressing towards complete normalisation, with regular meetings of Foreign Ministers, the opening of consulates (Kotor in Montenegro, Rijeka and Vukovar in Croatia), ongoing negotiations on the Prevlaka issue (where the UNMOP mandate has been extended until 15 January 1999), as well as agreements on prisoner exchanges, but no agreement on a visa regime. A major breakthrough in relations with Bosnia and Herzegovina was achieved with the initialling, in September 1998, of an agreement on transit rights and the free and unrestricted use by BiH of the Croatian port of Ploce / Neum. Visas are no longer required for holders of the new BiH passports. Regular contacts between Croatia and RS have continued, with the opening of a Croatian consulate in Banja Luka, and the opening of all agreed border crossings. Relations between Croatia and the BiH Federation (FBiH), notably the existence of the Croat Republic of Herceg-Bosna (see infra 2.6) continue to be in breach of Dayton obligations. Work has continued, with OHR assistance, on the development of an Agreement on special relations with FBiH. Relations with Slovenia were marked by the culmination of various outstanding differences (border disputes, Ljubljanska Banka debts to Croatian depositors, maintenance of the jointly-owned Krsko nuclear plant, and Slovenian property in Croatia), but these are being addressed. Economic relations with neighbouring states continue to develop. A trade agreement, giving MFN status, was signed with FRY in August 1998. There are indications that economic relations with RS may be improved. A FTA with Slovenia is in operation but talks on FTAs with other CEFTA members will depend on the overall development of relations with the EC. A FTA with the former Yugoslav Republic of Macedonia is in place since November 1997. Trade and commercial relations with other regional states continues to develop. 2.6 Compliance with obligations under the Dayton / Paris and Erdut Agreements Dayton / Paris and Refugee Return Despite pressure from the international community, Croatia still interferes in BiH. During the recent BiH elections (September 1998), demarches were made to both the Government of Croatia and HRT concerning the installation of HRT equipment on BiH territory and their use of RTB BiH equipment and frequencies. Furthermore, the inflammatory, biased, misleading and one-sided broadcasts in support of HDZ-BiH violated rules and regulations on unbiased reporting, equal access to media and equitable treatment of all political parties during the election campaign. President Tudjman also openly supported the HDZ-BiH threat to boycott the elections due to the exclusion of a number of their candidates due to irregularities, and openly threatened to block the positive results of the Ploce-Neum negotiations. Such statements and behaviour were clearly designed to undermine the legitimacy of both the elections and the government and institutions of BiH. A key Dayton obligation is that agreements between Croatia and FBiH should be compatible with the BiH Constitution. The Government of Croatia has still not taken steps to dismantle the Croat Republic of Herceg Bosna (CRHB). The situation is further complicated by the fact that Croatian political and military involvement in BiH reflects the domestic Croatian political scene, where there is a power-struggle between BiH Croats and other HDZ factions. Progress has, however, been made with regard to the obligations regarding the customs border and agreements with the RS. In this connection, the Commission deployed in March 1998 a Customs Assistance Mission to the OSCE in Croatia (Eastern

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Slavonia, Baranja and Western Sirmium) with a view to contributing to the OSCE efforts in monitoring and confidence-building between the communities. Croatia is obliged, by its signature of the Dayton Agreement, to allow the return of displaced persons and refugees to places of origin, and to ensure an absence of harassment initiated or tolerated by public authorities, both of which are vitally important in a regional context. Rates of return, to date, have been fairly low, but improving15. Efforts to encourage and facilitate return finally culminated in the adoption of a framework for return: the Individual Return Procedure for persons who left the Republic of Croatia (adopted 27 April), the Mandatory Instructions (adopted 14 May) and the Programme for Return (adopted 26 June). While the Government is now publicly committed to the principle that "all Croatian citizens and all refugees will have the inalienable right to return", successful implementation will depend on urgent resolution of obstacles to return (e.g. property, documentation, security, equal allocation of social benefits…). The repeal of the 1995 Law on Temporary Takeover of Specified Property (LTTO) and the Law on the Lease of Apartments in Liberated Areas is therefore a positive step, although this repeal must be supported by reform of other discriminatory property-related laws and new legislation to deal with legal and practical consequences - legislation which was promised by 26 September but has not yet materialised. There is an urgent need to deal with the issue of tenancy rights in socially-owned property. Many of the Housing Commissions, key to the success of the programme, are not functioning satisfactorily due to: their composition and ethnic make-up - some of the minority representatives appointed by the authorities are not representative while others have been obstructive e.g. Bosnian Croats with little interest in returning to BiH or vacating Croatian Serb property; the variety of interpretations of Government instructions - while there have been officially organised information sessions, the Government Instructions contain some inherent ambiguities which have caused confusion; political infighting; a lack of payment for members, a lack of infrastructure and equipment, the part-time nature of certain Housing Commissions; and the fact that people have been required to resubmit applications previously submitted. There is also an inability, in practice, to stick to the very tight deadlines set by the programme, a lack of alternative accommodation to house those vacating occupied property, and there have been problems with local courts interpreting the Programme in different ways. The Government has still not launched the announced public information campaign to inform returnees of their rights. While steps have been taken to facilitate applications for return, further resources are needed e.g. in the consulates. The defective implementation of the Amnesty and Convalidation Laws also prevent some Croatian Serbs from returning and leave others without employment or social support. Media coverage of the returns process has generally improved, but the Government still fails to publicly urge the media to promote reconciliation. The Programme for the Reestablishment of Trust (Reconciliation Programme) has, despite noises from Zagreb, ground to a halt at local level and needs to be re-started and publicised, particularly due to its link with the return process. Despite an initial positive assessment of the Return Programme in June 1998, as a major step forward in itself, and start-up efforts by the Government of Croatia, the return process is moving very slowly. It is too early to assess progress, which will depend on the numbers of returns - including the "difficult" cases - and the quality of their "reception"; on statutory equality for all the different categories of "returnees" and on the creation of a legal framework for the implementation of the Return Programme. It will also require monitoring by the international community. Returnees are also still confronted by extreme difficulties on their return, including bureaucratic impediments, lack of access to necessary social benefits etc. Progress in organised returns has not met international expectations, though

15 Of the 84 000 persons of Croat nationality displaced from Eastern Slavonia to other parts of Croatia, between 17-20 000 have returned, of which only half are full-time returnees. Of the 46 000 displaced Croatian Serbs in Eastern Slavonia in 1996, between 10-15 000 have returned to other parts of Croatia. Some 28 000 Croatian Serbs have left Eastern Slavonia for other countries, mostly FRY, since 1996. Some 16 000 of the 67 000 Croatian Serbs domiciled in Eastern Slavonia before 1996 have left the country - again mostly to the FRY. Of the 350 - 400 000 Croatian Serbs who left Croatia during the war, less than 23 000 have returned from abroad. Of the 140 000 Bosnian Croats and 40 000 Croats from e.g. FRY, very few have returned to BiH or FRY. [Source: OSCE Report 8 September 1998]

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spontaneous returns have increased (except of Bosnian Croats and Kosovo Croats to their places of origin in RS and Kosovo). It is clear that, with the approach of winter, 1998 has not been the much-heralded "year of return". The proposed Conference on Reconstruction and Development, postponed from May 1998 as a result of the lack of progress in developing a returns programme, is now foreseen by end-1998. International participation16 in such a Conference depends on the swift implementation of the Return Programme adopted in June 1998 and also on the presentation of a Reconstruction and Development plan acceptable to the international community. A draft Reconstruction Plan was only presented in mid-September 1998 and discussions are presently ongoing with a view to meeting the international community's expectations that it be coherent (outlining state-wide reconstruction needs and plans), non-discriminatory (in terms of geographical or ethnic coverage) and should show a clear and transparent link to the return process. Erdut The Erdut commitments - and those contained in the January 1997 Letter of Intent and numerous other agreements concluded with UNTAES - are permanent in nature. Despite the "institutional" integration of Eastern Slavonia into Croatia, the population has not been integrated. Many of the criticisms made in the previous report concerning e.g. the sense of insecurity, the discrimination (in many fields, including property rights, access to reconstruction assistance), and the inefficiency of or obstacles posed by local authorities, remain valid. The UN Security Council, in July 1998, reiterated the continuing obligations of the Government of Croatia under the Erdut Agreement as well as under international conventions and other agreements. While noting that most obligations regarding public services and employment in the public sector had been met, it also warned that other obligations remain unfulfilled e.g. the implementation of the Convalidation and Amnesty Law, the functioning of local municipalities, finalisation of the legal framework for and permanent funding of the Joint Council of Municipalities17. A positive development was the agreement that OSCE would assume the police monitoring role after the expiry of the UNCIVPOL mandate in October 1998. While the security situation has improved, the psychological sense of insecurity remains and is a factor, together with economic hardship, in continuing departures. Economic problems result from the destruction of infrastructure and the lack of employment opportunities (especially for returning displaced persons and refugees), as well as the need to de-mine agricultural land. Discrimination in employment and benefits is rife - registered unemployment in Eastern Slavonia is 35% (as compared to the national average of 17%), but many Croatian Serbs are not registered as they are not "eligible" for benefits and have little hope of re-employment. In some municipalities, the unemployment rate exceeds 90%. Obstacles to Croatian returns to Eastern Slavonia are largely economic whereas obstacles faced by Croatian Serbs seeking to return to their homes elsewhere in Croatia are administrative and social, including the loss of tenancy and property rights, the lack of employment and social support, and general discrimination.

CHAPTER 3: FEDERAL REPUBLIC OF YUGOSLAVIA

3.1 Democratic principles Developments within the FRY over the last six months have been largely overshadowed by the conflict in Kosovo, which – at least in Serbia – has absorbed much of the country’s political energy. In terms of democratic principles, the trends identified in the previous report have persisted, in particular with regard to the constitutional rift between Serbia and Montenegro over federal versus republican competencies. These difficulties are amplified by the vague or ambiguous formulation of

16 The EC has already given over 311 mECU in humanitarian assistance, reconstruction assistance (Eastern and Western Slavonia, and Krajina), and support for democratisation / human rights / civil society and independent media. 17 A point also mentioned in the UNSG Report of 23 September 1998

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many constitutional provisions and other legislation, which often contain escape clauses allowing authorities to act arbitrarily. More generally, the comments in the previous reports with regard to the principles of democratic governance (separation of powers, representative government and accountable executive) remain valid. The gap between theory and practice is as large as ever, and the symbiosis between state and party structures is still pervasive. At the Federal level, the government of PM Kontic was dismissed on the eve of the Montenegrin parliamentary elections (31 May), and replaced by a new one headed by Momir Bulatovic, whose election by the Federal Assembly, specifically its upper chamber, was made possible only by disregarding decisions taken a few days earlier by the Montenegrin parliament. Montenegro has therefore refused to recognise the federal government which, purged of the DPS (Djukanovic’s party), has dismissed a substantial number of high-ranking federal officials who were members or alleged DPS supporters. As the federal parliament has not verified the election of the new Montenegrin delegation to the upper federal chamber, the capacity of the federal parliament to function is in question. The dispute between Montenegro and the Federal / Serbian authorities continues, with on-going disputes relating i.a. to contributions to the federal budget, authority to issue import licences, the establishment of a federal criminal code, and the licensing of electronic media. In Serbia, there was no evidence of a commitment to democratic reforms. On the contrary, a new University law was adopted on 26 May, which has given the authorities absolute authority to nominate and dismiss members of the professorial corps, thus allowing them to gain complete control over an institution that played a major role in the 1996 – 97 demonstrations that forced the government to reverse its municipal election fraud. Although there were no elections in Serbia during the period under review, a referendum on foreign mediation in Kosovo was held on 23 April. According to a report by a reputable NGO which analysed the results, there were “serious irregularities up to and including suspicion of the veracity of the official results”, with voting numbers in Kosovo implying a large Albanian vote against foreign mediation. The reported manipulation ensured that the authorities were able to claim massive popular support for their approach in Kosovo. In Montenegro, the positive impulsion towards reforms and democratic changes has broadly continued, in spite of the continuous pressure from the federal level, which does not contribute to an environment propitious to reform. Republican and parliamentary elections took place on 31 May and were assessed by the OSCE as generally well conducted and representing a significant improvement over previous elections. These elections, whose results were accepted by the main opposition party led by Bulatovic, have significantly strengthened the reformist coalition led by President Djukanovic, and led to the formation on 16 July of a republican government including members from Djukanovic’s DPS, the National Party, the Social Democratic Party and the Democratic Union of Albanians.

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3.2 Human rights and rule of law In the field of media, disagreements between Montenegro and the Federal/Serbian authorities have been pervasive. Last April, the newly-founded Yugoslav Radio-Television (JRT) started broadcasting its experimental programme, but Montenegrin authorities refused to authorise its broadcasting in their territory. A federal decree of 10 July on founding JRT was dismissed by the Montenegrin government. Similarly, Montenegro has not taken part in the “federal” frequency tender whose results were announced by the federal telecommunications ministry in mid-May. Under the final decision, frequencies were not granted to 21 radio and 17 TV stations belonging to the independent ANEM network, while at the same time stations managed by members of the President Milosevic’s family and other stations considered to be close to the authorities were allocated one or more radio and TV channels. More generally, the authorities have pursued a destabilising process of creating bureaucratic impediments for frequency applicants and prescribing excessive fees (then reduced by half following sharp protests), which place the independent media in Serbia in a state of continuous legal and financial insecurity. The media situation in Serbia has not improved. Although announced by the Information Minister, a new media bill has not been presented yet (a previous draft, now shelved, was used to distract the international community over a period of many months). The independent electronic media continue to find themselves in an unstable position in relation to the results of the federal frequency tender. More generally, independent media have been under sometimes virulent attack from the authorities for their reporting on Kosovo, some editors have been called in by police for “informative discussions”, and foreign journalists and media experts have been refused visas. As noted in the previous report, the situation in Montenegro with regard to media freedom differs from that in Serbia. Liberalisation in the field of frequency distribution and fees, which gained an impetus in the election period, was confirmed by an agreement signed on 22 May between the Montenegrin government and private RTV stations. It is valid until the end of this year and reduces license fees to a half of previously agree amounts. This liberal policy has allowed independent electronic media currently to cover more than 70% of the population in the republic, in an on-going process of expansion. Out of 21 municipalities in Montenegro, only three are at present not covered by private electronic media. The position of the state RTV, which still shows some bias in its reporting in favour of the ruling party and President Djukanovic, is regulated by the new Information Law. Its transformation into a public broadcasting company has been announced by the government. The positive and liberal steps which have been taken have, however, been on an ad-hoc and short-term basis: although the new media law was adopted almost seven months ago, the legal obligation to appoint new managing boards and to call a competition for new directors and editor-in-chiefs of the publicly funded media has not yet been fulfilled by the Montenegrin Parliament (which can only partly be justified by the fact that elections took place in the mean time). The new Information Law was indeed adopted, but the independent electronic media have, in fact, been repeatedly requesting adoption of legislation which would on a long-term basis regulate the distribution of frequencies and fees (their main criticism of the current practice is that the charging basis should be revenue instead of viewership level). There have also been complaints from independent media over unfairly low advertising tariffs adopted by the state media and their monopolistic position on the market. The right of peaceful assembly was again violated in Serbia during student protests in reaction to the new university law. On two occasions, 26 May and 2 June, the Serbian police used force against several thousand students, professors and citizens who were protesting in front of the Serbian parliament. During the second protest, around 50 students were arrested. Although it has been noted in previous reports that the right of association does not pose serious difficulties, a recent NGO report on workers’ rights points to the difficulties for new trade unions to register, since in every case they must obtain their enterprise director’s consent in writing. With regard to property rights, there is no change - Albanians are still prohibited from purchasing property from Serbs in Kosovo. The previously-reported shortcomings regarding the right of free movement and on administrative and judicial proceedings persist - judicial machinery continues to be used for political purposes, arbitrary detention is common and there is evidence of the systematic use of

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torture in Kosovo. 3.3 Respect for and Protection of Minority Rights With the escalation of fighting in Kosovo, the question of minority rights has clearly become a dramatic one. The Serbian police and the army have pursued brutally repressive policies involving the systematically intimidation and killing of Albanian civilians in such a way as to prevent the KLA from receiving shelter or support from the local population. As these policies and their effects have been well documented, the present report will not duplicate the numerous and detailed reports already widely available. With regard to the problems faced by other minority groups in Serbia, there is little progress to report. The positive developments with regard to the Hungarian minority, noted in the previous report, have had only a partial follow-up. The only concrete positive development in the implementation of the agreement reached with President Milosevic has been the establishment of a Minority Council in the Assembly of Vojvodina, the president of which is a Hungarian. Minorities in Sandzak continue to experience problems. With regard to the position of minorities in Montenegro, the more favourable situation that has recently developed there may be called into question by the decision to close Montenegro’s borders to displaced persons from Kosovo, which has drawn a negative reaction from the Albanian party which is in the Montenegrin government coalition. 3.4 Market Economy Reform The federal authorities have not brought any changes to the status of macroeconomic institutions or to introduce macroeconomic stabilisation policies. With large fiscal and external deficits, expanding money supply and a depreciating exchange rate in the unofficial exchange market, macroeconomic stability in the FRY is coming under growing strain. The official target of 10% real Gross Social Product growth for 1998 is unrealistic in the wake of new economic measures introduced against Serbia and deteriorating indicators for industrial production. A restrictive federal budget was adopted in March, but budget implementation is loose. At the same time, delays in wage and pensions payments are continuing, and large arrears have accumulated in the pension and social security funds. Efforts to maintain tight monetary policy were abandoned soon after the 82% devaluation of the dinar (Apr 1), and annual consumer price inflation reached 31.2% in July (9.3% end-97). Exports have contracted and, due to the lack of foreign currency inflows, imports have also declined, maintaining the trade deficit in the first eight months of 1998 close to its level for the same period of 1997 (US$1.5bn). The only positive move since the last report in March was the agreement reached in July with the “London Club” on the outline of a US$1.7bn debt restructuring programme. However, the agreement will only come into force when the FRY becomes a member of the IMF, and thus its scope is greatly limited. The legal and regulatory framework is subject to ad hoc modifications, lacks transparency and is poorly enforced. The May 1998 Serbian taxation law reduced income taxes and increased contributions for social security and healthcare - with enterprises already burdened by excessively high labour costs, the measures appear motivated by short-term considerations (the need to cover the requirements of pension and social security funds) and increases the already heavy burden in terms of labour costs of Serbian enterprises. There has been no further liberalisation of prices and thee is no indication that any of the now strictly-controlled administered prices could be liberalised soon. Strategic agricultural products remain, in spite of land being predominantly privately-owned, under a considerable degree of state control. Most administered prices (basic foodstuffs, public utilities, energy) rose in the last six months, in some cases even doubled (telephone). The price of petrol increased by 40% in two steps.

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With regard to foreign trade, the system of non-equal treatment of economic agents (through a quota regime, system of foreign trade licences, monopoly over trade in strategic goods etc.) remained in force. In fact, it was strengthened in July when (in a reversal of previous policy intended to accelerate procedures for WTO accession) the Federal Government introduced a system of licences on import items that had previously been under a free trade regime (cigarettes, coffee, alcohol) and increased duties on a number of products (food staples). These measures were justified by the federal government as being necessary in a situation of a shortage of hard currency. However, the Montenegrin authorities saw them as a step towards further centralisation within the Federation and, as a result, they started issuing their own foreign trade licences (previously under the strict jurisdiction of the Federal Government). It is not yet clear how the system will function in the future, but this is an instance of the divergent approaches and interests of the two federal units. With regard to de-monopolisation and privatisation of state and socially owned enterprises, the paths in the two constituent republics have been diverging sharply. The Serbian Law on Privatisation (October 1997) has not yet become operational - not a single company in Serbia has been privatised according to its provisions. International "measures" against Serbia have effectively frozen the privatisation process. On the other side, the Montenegrins appear to be taking more decisive steps to privatise their economy (“voucher” privatisation of small & medium companies is expected to take place this autumn after adoption of amendments to the Privatisation Law, and tenders for privatisation of ten or so of the biggest companies are expected to be launched soon). The authorities expect the process to be completed within eight months, with the distribution of coupons to public sector employees. The troubled banking sector remains badly in need of restructuring. The Central Bank has announced stricter controls over banks, and new measures to tighten financial discipline, limiting the credit capacity of banks with a high proportion of non-performing loans. Since August, the Central Bank has also tightened its grip on payments operations and outflows of foreign currency. 3.5 Regional Cooperation The situation remains at an impasse with regard to the talks on SFRY succession, which have been frozen and postponed to September. Despite the fact that the FRY government on 16 April made a decision to allow the former Yugoslav republics access to archive materials created prior to 31.12.1990, and announced its interest in an immediate signing of a mini agreement on the humanitarian aspects of succession, its general standpoint to the succession issue has not changed. It was announced that, if negotiations in September failed, the issue would be settled by international arbitration. The Luxembourg PIC (June 1998) expressed concern at the lack of progress on substantive issues of succession and stated that these negotiations could not continue indefinitely. It supported the recommendation for a pause in the negotiations until end-September, to be followed by a further negotiating session on the basis of the November 1997 Draft Framework Agreement, after which the PIC Steering Board will revisit the question, including the option of referring key outstanding issues to arbitration and possible consideration of the distribution of relevant assets held abroad. In this context, a statement by the head of the FRY negotiation team that the FRY would accept the competence of the Hague based International Court of Justice, in case the succession issue came to court, is to be noted. The picture that has been emerging over the last months with regard to the co-operation of the FRY with countries in the region is a mixed one. While there have been positive developments in relations with Croatia, deterioration occurred with regard to Slovenia and Albania. Relations with the former Yugoslav Republic of Macedonia and BiH remained at a standstill. The unresolved question of borders remained the major obstacle to the development of co-operation with the former Yugoslav Republic of Macedonia. There was no record that measures had been taken further to the meeting between Presidents Milosevic and Gligorov in Crete last November, on which occasion an early settlement of the problem had been announced. FRY and Macedonian foreign ministers met on 2 August, to discuss co-operation between the two countries, regional problems and other issues, but no statement of an agreement on any of the pertinent issues was made.

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Some progress has been observed with regard to FRY relations with Croatia. FRY and Croatian Foreign Ministers met on 18 August and signed two economic agreements: a trade co-operation treaty and a treaty on mutual protection of investments. It is expected that this will enable gradual re-establishment of normal trade flows between the two countries (in 1997, trade in both directions amounted to about US$ 80 million, slightly over 1% of total foreign trade of the FRY). It was also agreed that both countries would start releasing and exchanging all prisoners of war, and that consular missions would be opened. Significant problems remain, however, unsolved, such as the Prevlaka issue, as well as the problem of return of around 600,000 Serb refugees to Croatia, the controversial question of war reparations and the issue of complete traffic normalisation (passenger rail traffic has resumed). Positive steps have been observed in the fields of traffic co-operation with BiH, as air traffic between Belgrade and Sarajevo was established last May. Montenegrin government representatives visited Sarajevo last April and discussed with the Bosnian government prospects for economic co-operation. This was followed by agreements on establishment of air traffic between Podgorica and BiH airports (Sarajevo and Banja Luka), with the first flights taking place last June. There was no continuation of the talks between FRY and Slovenia on the establishment of diplomatic relations, which had been launched last March. The President of the Committee for International Relations of the Slovenian Assembly has recently stated that his country had proposed unconditional establishment of diplomatic relations and opening of consulates and information offices, but that this had been rejected by the FRY. A deterioration of relations occurred at the end of June, as the FRY authorities stopped accepting until further notice documents on export-import arrangements between FRY and Slovenian companies. Although the Slovenian media attributed this measure by the FRY authorities to some statements by Slovenian officials on the Kosovo problem, it is more likely that this step was taken in the framework of strained relations within the FRY itself and that it was aimed at Montenegro (namely towards the loan arrangements between Slovenia and Montenegro worth DM 4.5 million). Montenegro and Slovenia have further developed mutual relations on a bilateral basis, and the Slovenian president of the parliamentary Committee for International Relations visited Podgorica at the end of July, stating that relations between the two countries “are excellent”. Air traffic was established between Podgorica and Ljubljana last April but suspended last week by the decision of the Federal Traffic and Communications Ministry. As expected, the escalation of the conflict in Kosovo cast a cloud over relations with Albania which had started to improve at the end of last year, following the meeting of President Milosevic and Albanian PM Nano in Crete. In the past months, mutual accusations have been made by the FRY and Albanian authorities on violations of air space and border areas. The FRY also made accusations of Albanian “support to terrorists”, while the Albanian officials have been making sharp statements accusing Yugoslav authorities of “ethnic cleansing” in Kosovo. 3.6 Compliance with Obligations under the Dayton Agreement Overshadowed by events in Kosovo, little attention has been paid to Dayton obligations. There has been no change in the FRY standpoint towards the obligation to co-operate with the ICTY in relation to the war crimes in Bosnia. Nor has there been cooperation with ICTY in the Kosovo context - after having concluded last June that an armed conflict was in progress in Kosovo and that ICTY was authorised to investigate crimes committed and to persecute persons responsible for violations of humanitarian law, a request was made to the FRY authorities for an official investigation. While the Tribunal’s teams were allowed to visit Belgrade and Pristina, practical co-operation remains to be established. Regarding the key issue of the status of Kosovo, the gap between the Serb and Albanian parties remains very wide. There has been no movement in implementation of the only existing CBM, the Education Agreement, since May. It should also be noted that an OSCE Technical Assistance Team visited the FRY (14-21.07.) upon the invitation of the FRY authorities. Re-establishment of missions of long duration in Kosovo, Sandzak and Vojvodina was discussed but no agreement reached (the FRY links this question with its re-admission to full-status member of the OSCE). The FRY has, in early

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October, offered that the OSCE can conduct a mission to Kosovo to verify compliance with USNCR 1199 but there have been no further developments at this time.

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SECTION 2

CHAPTER 4: FORMER YUGOSLAV REPUBLIC OF MACEDONIA 4.1. Democratic principles The former Yugoslav Republic of Macedonia is a parliamentary democracy on the basis of its 1991 Constitution. The coalition government, led by the Social Democratic Union (SDSM) since September 1992, is accountable to the unicameral Parliament, in accordance with Article 92 of the Constitution. The Constitution provides for the separation of powers and the government generally respects this provision. A large number of new laws has been adopted during recent years, but there is still only limited implementing capacity by the country’s public administration, especially at local level. The judicial system is still developing and remains overburdened and slow which has a negative impact on citizens’ confidence to exert their rights. Judges are appointed by the Republican Judicial Council (an independent agency) and confirmed by Parliament. Past elections, both general and local, were conducted fairly according to international observers (OSCE; Council of Europe) despite some minor irregularities, mainly omissions in electoral lists. In view of the parliamentary elections to be held on 18 October (first round) and 1 November 1998 (second round), a new electoral law was established by large consensus of almost all political parties and adopted by Parliament in May 1998 providing for a new mixed voting system (85 seats majority vote; 35 proportional; 5% threshold). In July 1998, the corresponding law on electoral units (constituencies) was adopted and a State Election Commission established, in which six judges from the Supreme Court and all parties are represented. 4.2. Human rights and rule of law The country has been a member of the Council of Europe since 1995. The Constitutional Court has a mandate to protect some human rights of citizens and an Ombudsman to defend citizens’ constitutional and legal rights fully operates since May 1998. The constitution provides for freedom of expression which is generally respected. An outstanding problem is that one important conglomerate continues to largely dominate the printed press and a large part of the distribution network. Independent newspapers like ‘Dnevnik’ and ‘Fakti’ (a new Albanian daily) apparently still mainly rely on street vendors. With regard to the electronic media, the law on broadcasting of April 1997 has been fully implemented. The Government endorsed the applications for frequencies approved by the Broadcasting Council in May and July 1998. In addition to the public broadcasting corporation (MRTV), concessions were granted for one radio and two TV stations at national level and 80 radio and 57 TV stations at local level, judged by OSCE a satisfactory degree of pluralism in broadcasting. The extensive abuse of copyright has, however, become a concern. The right of assembly and demonstration is generally respected and opposition rallies normally take place without major incident (i.a. demonstrations on Kosovo organised by Albanian parties during summer 1998). The report of the Investigation Commission on the so-called Gostivar events in July 1997 was approved by Parliament on 31 March 1998. It reported abuse of authority by individuals and groups and non-respect of legal provisions by individual police members during these events and recommended several measures, namely organisational, functional and personnel reforms at the Ministry of Interior and training for members of the police. The government did not present a report within 60 days on the implementation of the proposed measures (as requested by Parliament) but action was taken since, in particular personnel changes in the Ministry of Interior and training for the police. Appeal and respectively Supreme Court confirmed the rather strong verdicts in the context of the Gostivar events against the mayors of Gostivar and Tetovo. Despite several requests by the international community no action was taken in either case.

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The right of association is assured; political parties must comply with a registration law. In view of the parliamentary elections, registration of the Albanian opposition party DPA was refused i.a. because its logo allegedly resembles the state flag of Albania. A Law on Citizens' Associations and Foundations was passed in July 1998 providing a legal basis for the development of NGOs and civil society in the country. The individual’s right to privacy is generally respected even if officials of the opposition (in particular from DPA) claim to be under security service surveillance (i.e. phone tapping). The right to property and inheritance which is basically guaranteed was recently underpinned by laws on denationalization (April 1998) and on agricultural land ownership (June 1998). A law on administrative proceedings which inter alia regulates the procedure of seeking redress is still under preparation. The constitution guarantees freedom from arbitrary arrest and detention. However, in practice, violations of due process standards are still registered including failure by the police to inform the detainee about his/her rights and the reasons for arrest, violation of the 24-hour requirement and denial of immediate access to a lawyer. In addition, the illegal practice of compelling citizens to appear at police stations by an invitation for so-called “informative talks” still exists. 4.3. Respect for and protection of minorities The constitution guarantees ethnic minorities protection of their ethnic, cultural, linguistic, and religious identity and they have the right to be educated in their mother tongue in primary and secondary education. A Council for Inter-Ethnic Relations was appointed by Parliament in 1992 but has not played an active role so far. Minority groups consider it important to appoint their own representatives to this Council. The government, which includes an Albanian party since September 1992, continued to show a cooperative attitude vis-à-vis the activities of the OSCE High Commissionner on National Minorities. An important minority issue remains the access to Albanian language education at school and university level. Despite some progress, the school system still faces difficulties due to limited resources, in particular shortages of secondary school teachers for education in the Albanian language (only about 50% of Albanians go on to secondary school). The number of Albanian students, therefore, is still disproportionately low, although a significant increase up to 14.1% in 1996/97 can be noted (1992/93: 7.2%). At the pedagogical faculty, the faculty of philology and the drama academy in Skopje, teaching is also conducted both in the Albanian and Turkish languages. Training of teachers in minority languages at the pedagogical faculty of Skopje University operates almost normally since spring 1998, although with a limited teaching staff; the authorities agreed to a Tempus project in support of this faculty. The issue of education in Albanian at university level in general remains to be addressed. The representation of minorities in public life (in particular administration and justice) remains disproportionally low, although acceptable figures (around 20%) exists for some ministries (i.a. Foreign Affairs; Education). The Albanian minority still represents less than 5% of staff in the police and army. The access of minorities to the media is globally satisfactory. Following the implementation of the broadcasting law, all minority groups have at least a local radio and/or TV. Regarding religious rights, ethnic Serbs are still confronted with problems due to the lack of normal relations between the Serbian orthodox church and the orthodox church of the former Yugoslav Republic of Macedonia. The 1995 law on local self-government has provided an opening for the use of minority languages at municipal level (if the minority concerned represents at least 20% of the population), but in practice application varies and its impact is rather limited given that local competence is quite small and issues of central government competence need to be addressed in the country’s official language. National minority members who do not speak the country’s official language have the right to an interpreter during trials. The law on the use of flags of minorities of July 1997 which permits limited use of minority flags and symbols was confirmed by a decision of the Constitutional Court on 24 June 1998. 4.4. Market economy reform

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The country continued to implement stability-oriented policies in the framework of the IMF supported Enhanced Structural Adjustment Facility (ESAF) programme. The inflation rate, which stood - despite a 14% devaluation in July 1997 - at 2.7% last year, is estimated at 3% this year. Budgetary policy is also appropriately tight at an estimated deficit of 0.7%. However, a number of structural problems pose a risk to fiscal sustainability. Current spending is relatively high compared to capital spending (especially high personnel cost in the budgetary sector and relatively generous pension and social benefits). Growth is estimated at around 5% during first half of 1998 while unemployment remains high at around 30%. With regard to the liberalisation of trade, some 96% of goods are traded without quantitative restrictions. For sugar, a system of “licensed companies” was, however, newly introduced in April 1998. Following the adoption of the new Law on Customs Tariff, compatible with the EC Harmonized System, the average weighted customs rate was reduced from 26% to 15.9%. On 19 June 1998, the country agreed to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. Hence the current account is liberalised. Price liberalisation remains essentially achieved. There has been some further progress in improving the legal framework. Apart from the Customs Tariff law, a new bankruptcy law came into effect on 6 May 1998. With the support of this law, the authorities have opened bankruptcy proceedings against two large metal processing enterprises which had record tax arrears. Moreover, on 30 April 1998, the Banks Act came into effect which includes provisions governing the share of fixed assets and equity in a bank’s founding capital and related lending. Draft laws on unfair competition, restrictions to competition, consumer protection and VAT are still being prepared. Taken overall, law enforcement remains a major problem, due to outstanding reforms in public administration and the limited capacity of the judiciairy. Privatisation is slowly approaching the final target in terms of the number of enterprises. However, a number of larger enterprises remain to be privatised. Moreover, often the privatisation was not accompanied by the necessary changes in management preventing measures of restructuring, nor by provision of new capital. Progress has also remained limited with respect to the break-up and privatisation of agro-industrial combinates. A number of important sales to foreign investors have boosted the hitherto extremely low direct foreign investment to some $70 million in the first nine months of 1998. Despite progress with regard to new prudential regulations (Banks Act of May 1998) and continued efforts to enhance the supervision of banks, the banking sector remains vulnerable as the bankruptcy law was only recenlty adopted and its implementation is still weak. Banks continue to mis-direct credits to loss makers and real interest rates remain high, thereby hindering the necessary recovery and investment. The Stock Exchange, which had lacked liquidity in the past, saw a clear increase in turnover in the first half of 1998. Given the lack of competence in the banking system and the above-mentioned credit policy, it has been decided to postpone by one year (for 1999) the elimination of direct credit controls. In May 1998, the sale of a majority share of the dominating Stopanska Banka to the Austrian bank Erste Sparkasse, the EBRD and the IFC, for a total price of $30 million, was agreed. It is widely hoped that this will be accompanied by the transfer of much-needed know-how.

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4.5. Regional cooperation Besides the normalization and further strengthening of its relations with Greece on the basis of the 1995 Interim Accord, the former Yugoslav Republic of Macedonia has established broad regional ties on the basis of several agreements on trade and economic cooperation concluded notably with FRY, Slovenia, Croatia and Bosnia and Herzegovina and, thereby has contributed to stability in the region. It continuously showed its readiness to maintain good-neighbourly and cooperative relations with all countries of the region and participated in all regional fora (CEI, Royaumont-Initiative, SECI and the Southeast European Cooperation Process). Relations with Albania have been enhanced since early 1998, namely by an important number of agreements on trade, economic and technical cooperation. Relations with Bulgaria have not been intensified, including the signature of several agreements, because Bulgaria has not recognized the constitutional designation of the country’s official language. Relations with FRY were marked by some minor border incidents by FRY during summer 1998 and the border delineation issue has not been solved despite formal undertakings by the FRY authorities in this regard at the Crete summit of November 1997 and all efforts by the former Yugoslav Republic of Macedonia to address this issue within the existing bilateral commission. Following the aggravation of the situation in Kosovo in early 1998, the government supported the policy of the International Community. Although the official position of the government is one of concern that a massive influx of Kosovo Albanians may significantly alter the ethnic composition of the country, the government has confirmed its readiness to comply with responsabilities stemming from their signature of relevant international agreements. An estimated 2 400 Kosovo Albanians have come as ‘visitors’ to the country, residing with host families in the country. The country’s regional economic cooperation remains relatively important (more than one third of its total foreign trade in 1997/98 is within the region) with FRY being the main partner.

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CHAPTER 5: ALBANIA 5.1. Democratic Principles Events of September 1998 leading to the resignation of PM Nano underlined again the volatility and confrontational character of political life in Albania. Although the government is constitutionally accountable to the unicameral parliament, in practice, the role of the Albanian parliament has always been and remains limited, under the government in place since July 1997 mainly because of a boycott (renewed since early July 1998) by the main opposition party. The ongoing monitoring of Parliament by OSCE has recorded only minor irregularities and shortcomings with regard to legislative procedures which can in no case serve as a justification for this boycott. Political and parliamentary life in Albania remains dominated by extreme bipolarization and confrontation between the political parties. According to the major constitutional provisions and several laws adopted in cooperation with the Council of Europe, there is legal separation of powers but given the traditionally weak role of Parliament, the poor state of the judiciary and a largely inefficient administration, these principles are only partially applied in practice. A higher profile was assumed by the President as a result from the recent political crisis. A Draft for a crucially needed constitution to clarify the role of the different institutions was established by a parliamentary commission, in cooperation with the Venice Commission / Council of Europe, and transmitted to Parliament in early October. This draft got broad international support, but no political consensus could be reached on this draft in Albania, given that the major opposition party did not participate in the drafting process so far. The constitution is envisaged to be adopted by Parliament very soon (in principle during October) and endorsement by referendum is planned on 22 November 1998. With regard to institutional development and the reform of public administration, where substantial progress is still required, the establishment of a Supreme Audit Institution, the reform of the High Council of Justice, the adoption of a Law on the organization of the judiciary (drafted in cooperation with the Council of Europe) and a new organic law for the budget remain the main achievements since late 1997. Partial local elections held in June 1998 in order to fill the institutional vacuum resulting from the 1997 crisis in some areas, were marked by an unusually low turnout (less than 50%) thus reflecting a decreasing interest of the Albanian population in politics, but considered by the OSCE as globally free and fair. 5.2. Human rights and rule of law The country is a member of the Council of Europe since 1994. Freedom of expression, including for the printed media, is generally respected. Regarding the electronic media, national TV and radio seem to have established a more balanced coverage of events, even if media compromise between the Socialist Party and the Democratic Party on television time allocated to the opposition parties (reached after a hunger strike of former parliamentary speaker Mr. Arbnori (DP) in September 1997) is not always respected in practice. An enlarged private spectrum of electronic media exists which has also opened new opportunities of expression for opposition and civil society, but it continues to operate without a clear legal basis. The right of assembly and demonstration is generally respected. Opposition rallies, in particular those organized regularly by the Democratic Party in Tirana’s main square, normally take place without major incident, with the notable exception of the events of 14 September 1998 (following the killing of Mr. Hajdari) which led to temporary occupation of government buildings and TV. There has been increased police presence after this event, but normally almost no enforcement of demonstration bans issued on several occasions by the Ministry of Interior for public order reasons. The main difficulty remains that the Albanian police have generally little or no professional training; WEU/MAPE continued its training activities during 1998. The right of association is generally assured. Political parties must apply to the Minister of Justice for

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official certification. Several officials of the DP continue to claim, however, that there are attempts at intimidation by the police. The right to property is legally guaranteed and was to a certain extent also underpinned by the wide ranging privatization process in the past. It remains however ill-defined and frequently disputed. This constitutes a problem for the creation of a functioning market in real property. The property rights question is at the centre of the structural reform agenda within the medium-term economic programme agreed with the IMF. Albania remains marked by a lack of public order in large parts of the country and widespread crime and arms trafficking while judiciary and police operates generally under poor conditions. Against this background a right for seeking redress, a fair trial or protection against arbitrary arrest or detention, which legally exists, can not apply in practise. It should also be noted that Albania’s prisons remain in a very poor state, even if two were rehabilitated after the 1997 crisis. Since late 1997, all courts have reopened (40% had been completely destroyed during the 1997 crisis) but given the continuous lack of investigation by local prosecutors’ offices and the police, their functioning remains limited. A school for magistrates is in operation since late October 1997 to provide professional training of judges and prosecutors and a comprehensive programme in support of the judicairy is currently being implemented by the Council of Europe. In practice, two recent prominent cases highlight the current situation in Albania: the arrest of six high ranking officials of Democratic Party under questionable conditions (accusation of ‘crime against humanity’) in late August, transformed afterwards for most of them into a house-arrest by the General Prosecutor, and the investigation into the killing of Mr. Hajdari on 12 September. 5.3. Respect for and protection of minorities The rights of minorities in Albania (besides small communities of Vlachs, Montenegrins and Serbs, the main minority are ethnic Greeks) are guaranteed in the basic constitutional provisions. The Greek minority is organised by the Omonia Association and is politically represented by the Human Rights Party which has access to the media like other parties or associations. Almost all Greek schools affected by the 1997 crisis have been rehabilitated and building of four new schools for ethnic Greeks in Southern Albania has begun. There is, however, still a shortage of teachers in Greek. There is a legal right to use minority languages in court proceedings. 5.4. Market economy reform Albania continued to successfully implement stabilisation policies. In May 1998, the authorities agreed a three year Enhanced Structural Adjustment Facility (ESAF) arrangement with the IMF in support of the medium-term economic programme. Annual inflation was 16.9% in July 1998, down from 42% in January. This has allowed some easing of monetary policy. The implementation of the budget is broadly on track with the objective of a domestically financed deficit equivalent to 6.5% of GDP for 1998. (1997: 11%). Fiscal revenues collected by customs (VAT, duties and excises) in the first seven months of 1998 were almost twice the amount collected in the same period in 1996, before the crisis. The increase has been possible thanks to the assistance provided to the Albanian Customs Administration by the Customs Assistance Mission to Albania (CAM A) deployed by the Commission in June 1997. The Commission has also contributed to the bilateral agreement signed between the Italian and Albanian authorities, which provided for the Naval Assistance Deployment on the Guardia di Finanza in Albanian waters (CAM SEA) in order to assist the Albanian Customs Administration in the activities of monitoring and controlling the commercial traffic via sea, as well as preventing the illegal traffice of goods subject to customs control. The current account is expected to continue to deteriorate in 1998, as imports increase due to increased needs for reconstruction and investment, while exports will only rise gradually. Without significant intervention by the monetary authorities, the Lek has remained fairly stable during 1998. In early September, central bank reserves stood at US$ 240 million. Economic activity is picking up after the sharp contraction in 1997 (estimated at -7%). However, growth is highly vulnerable to continuing political instability and civil strife which discourage domestic and foreign investors, and the level of growth in 1998 may be lower than the

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official target of 8%. With regard to trade liberalisation, Albania has no quantitative restrictions on imports and maintains very few on exports. The new Customs Code was approved by the Council of Ministers and is expected to be submitted to the Parliament very soon. The third round of negotiations for WTO membership is scheduled to take place by late October. The liberalisation of prices is more or less complete, with the exception of public transport, rail fares, postal tariffs, electricity and the rural water supply. Capital movements are largely liberalised. A package of laws clarifying and simplifying the legal framework for land transactions was approved in May 1998, removing the main obstacles to the creation of a functional land market. A new Banking Law, a Law on Collateral and a Law on the Prevention of Money Laundering are expected within the next six months. The capacity to enforce legislation, in particular to repress widespread fraud and corruption, remains a crucial issue in Albania. In that context, further progress is also necessary in the reform of public administration. As foreseen under the privatisation strategy adopted by the Parliament in March 1998, which envisages the sale or liquidation of all remaining small and medium-sized enterprises by the end of 1998, in early September the Ministry of Privatisation decreed the sale of 193 enterprises. Progress in the liberalisation of the “primary importance sectors” (telecommunications, power, oil and gas, mining, transport and water resources) has so far been disappointing. The Government made progress in resolving the issue of the pyramid schemes and has taken a series of steps with a view to reforming the formal banking sector. The authorities are now liquidating the assets of the “investment companies” which had operated as pyramid schemes. With regard to the reform of the banking sector, one of the three state-owned banks was liquidated at the end of March. A decision on the liquidation or privatisation of one of the two remaining public banks is expected in the coming weeks. The third bank, the Savings Bank, has been placed under a governance contract, with its activities strictly limited. The Bank Asset Resolution Trust was set up and started operating in June. In early September a new foreign bank started operating in Albania, while two other foreign banks were granted preliminary licences and, pending conclusion of the necessary procedures, could start operating by the end of 1998. However, it will take some time before Albania will have a functional and efficient banking sector. 5.5. Regional cooperation Albania continued its policy in favour of enhanced relations with all its neighbours and participates in all regional fora (CEI, Royaumont-Initiative, SECI, Southeastern European Cooperation Process) despite the difficulty of establishing “normal” relations with the FRY for well known reasons. Substantial progress has been achieved in relations with the former Yugoslav Republic of Macedonia, namely by several high level visits since late 1997 and the conclusion of several agreements on trade, economic and technical cooperation. The Albanian government openly supports moderate political forces of the Albanian ethnic minority in the former Yugoslav Republic of Macedonia and of the Albanians in Kosovo/FRY and thereby contributes to regional stability. This policy did not change following the aggravation of the situation in Kosovo in spring 1998. The government supported the policy of the International Community while Albania was and remains confronted with an important refugee influx from there (around 25.000 by early October). Given its only limited control over certain areas in the North of the country, the government was and still is, however, unable to stop arms trafficking to Kosovo and other destabilising factors. The development of normal relations with the new authorities in Montenegro is hampered so far for the same reason. Economic cooperation with neighbouring countries (mainly the former Yugoslav Republic of Macedonia, Bulgaria) remained on a traditionally low level but is expected to develop with the former Yugoslav Republic of Macedonia on the basis of the new agreements.