Bleak prognosis for the Serbian economy

Belgrade, Serbia (Serzhile, CC BY-ND)

Without several reforms Serbia will not be able to develop its economy. The rule of law and control of corruption are one of the biggest economic problems.

In May 2018, Serbia’s Minister of Finance Dušan Vujović, decided to resign from his post. It seems that the reason was disappointment in the Serbian economic development. Officially he resigned due to personal matters. He also said that during his post Serbia achieved significant results in the macroeconomic stabilization, fiscal consolidation and structural reforms. “The acknowledgments of prominent domestic and foreign international financial institutions confirm these results,” he wrote in a letter to the Serbian PM.

Recently, for the first time since he resigned, Mr. Vujović talked about his estimates and forecasts of the economic situation in the country. In an interview in the weekly newspaper NIN he said that Serbia will need lots of time to reach the standards of the European Union. He estimated that, in the absence of full institutional reforms and, as he wrote, adequate economic policies, the country would face limited space for economic growth in the coming period.

The former finance minister said that all economic and political actors agree that faster growth is necessary, but differences appear as soon as the question arises of how to provide it. “If the GDP continued to grow at the same pace as in the past 10 years, since the beginning of the global crisis, it will take us 185 years to reach the real purchasing power of the 15 old EU members,” Vujović said. “Institutional weaknesses,” Vujović added, “do not only relate to the financial sector but also to the rule of law — due to insufficient independence of the judiciary and the state and public sector management system due to non-transparency and corruption.”

Serbian Prime Minister Ana Brnabić is not sharing his opinions. “I do not think that someone who has been a member of the government for four years, until recently, is acting as an independent expert who can say that we will need somebody for this or that,” Ms. Brnabić said. She pointed out that Mr. Vujović’s estimate was “gross, irresponsible and unfair to the people he worked with all the previous years”. The PM stated she never said Serbia was doing great “because it cannot be great until we have the basic order in state administration and finance. We are doing it just now and only afterwards we can count on a sustainable growth and a normal economy”. She added “There are many things we need to do because we do not yet have an economy that is capable of sustainable growth, but it is important that we know and do what we are doing on that issue.”

Current Finance Minister Siniša Mali said that Serbia has done more in the last couple of years than it has been for the past 30 years, and stabilized public finances are the basis for further growth. He regretted that the Serbian economy had been affected by wars, bombardment, sanctions, reduction in GDP, and estimated that in 2013 the country was a small step before bankruptcy, but after heavy fiscal consolidation, the economy has been able to stabilize. “The growth rate last year was above 4 per cent, and this will be 3.5 per cent,” Mali said and stressed that the Serbian economy has a growth rate higher than the EU average.

Mali argues that the current government does not blame the fact that the country has collapsed for 30 years and announced that the budget surplus at the end of 2018 was RSD32.2bn (about EUR271.7m). Serbia’s public debt in December 2018 was EUR23.01bn or 53.6 per cent of GDP. By the end of 2017, public debt was EUR23.22bn, which was 57.9 per cent of GDP.

Serbia’s economic growth is below its potential level due to weak institutions, especially the rule of law and control of corruption, are the biggest economic problems, according to the Fiscal Council. The next factor that hampers economic growth is, as noted in the analysis of the Fiscal Council, “Why Serbia’s Economic Growth lags behind”, low investments, especially private, which are insufficient, primarily due to weak rule of law and high corruption.

The Fiscal Council noted that economic growth is slowed down also due the disadvantages in the education system. “The Serbian economy is currently growing at almost two percentage points below its potential, i.e. something above 3 per cent, instead of the potential 5 per cent, ” the Fiscal Council wrote in one of its analysis. Half of the lagging or one percentage point, according to that analysis, can be explained by the weak rule of law and high corruption, while the other half is driven by low investment (0.7 percentage points) and disadvantages in the education system (0.2 percentage points).

“Reforms in the rule of law and curbing corruption, as well as education reforms are the basic prerequisites for Serbia to realize its potential growth,” said Fiscal Council. Still, the economic growth in 2018 was above 4 per cent, thanks to the strong investment effect. However, growth may slow down if EU demand will weaken. Imports may grow faster as consumption and investment growth dependent on imports will continue and, in parallel, will weaken the recovery effect from 2018. Growth in Serbia was weak (about 1 per cent) and unstable in the last 10 years.

Approaching the levels of EU revenues would require, above all, a stable macroeconomic and fiscal environment and a stronger rule of law. Additional structural reforms are needed to improve the business environment and attract more investment. There is also a need for much greater public and private investment to improve infrastructure and increase productivity. Serbia has received large sums of FDI, mainly in the manufacturing, over the past four to five years, as foreign investors receive attractive support packages, as well as a qualified workforce with competitive salaries. In order to keep these investors after government support expires, Serbia needs to focus on providing a stable and reliable business environment. Serbia needs to plan ahead and prepare investment in constantly improving the skills of workers so they are productive and their salaries reach the level of other EU countries.

According to the economic development and standard of living Serbia is at the very bottom of the European countries. “GDP per capita is a half lower than in Central and Southeast European (CSE) countries and only one third of developed Western European countries,” the Fiscal Council assessed. It added that “Serbia should gradually overcome these backlogs with faster economic growth, but that does not happen. It is emphasized that the CSE countries in the previous decade had a much faster economic growth than Serbia, so they moved further away from economic development. GDP per capita at the beginning of 2010 was about 62 per cent of CSE countries, and in 2017 it fell below 55 per cent,” the Fiscal Council said.

On one hand, there are tangible results of fiscal consolidation after the IMF program: in 2014, Serbia had a budget deficit of 6.6 per cent of GDP, while in 2017 and 2018 there was a surplus with a fall in public debt. On the other hand, the necessary structural reforms that would make the economy resistant to future shocks and enable long-term growth are slow and often delayed. Public administration capacity needs to be strengthened. Preparing and adopting subordinate legislation is often overdue, making the legal and regulatory environment unpredictable. Implementation of public investment is often slow, so the benefits are materialized with significant delays. Procurement procedures are complicated and do not always result in the most optimal solutions. Unfortunately, the complete list of necessary structural reforms is still long.

Generally, Serbian public companies are among the most inefficient in the region. Many of them deal with losses or linger on barely zero, although they often have a competitive edge over private companies (access to subsidies, tax incentives, or preferential prices for certain services). Their services are of poorer quality compared to their competitors in other countries (e.g. the railway line is in poor condition and the train speed in Serbia is about 40 km/h, making them uncompetitive compared to other types of transport). All this is closely related to poor management: directors are regularly politically appointed as temporary agents, corporate boards are often not fully operational or have no independent members, and there is a lot of political interference in corporate affairs.

If Serbia wants to become more competitive, managing state-owned enterprises and their efficiency must improve. The reform of state-owned enterprises would also have a positive impact on the public finances, as non-formalized, state-owned enterprises continue to burden fiscal resources. Further improvement of the business environment is a key to improving Serbia’s competitiveness and attractiveness as an investment destination.

In addition to the above-mentioned, reforms should strengthen independent institutions that ensure a fair and transparent business environment. The administration should be facilitated with electronic procedures. The judicial system operates slowly and unpredictable, resulting in long-lasting processes and hindering the efficient operation of private companies. Inspections should be better coordinated and less burdensome for legally operating entities, and more efficiently dealing with the illegal ones.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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