Highlights of the past year
• Serbia has made major progress in the EU approximation process. An Opinion on Serbia’s application for EU membership, issued by the European Commission (EC) in October 2011, recommended that Serbia be granted formal candidate status. Ratification by the member states of the existing Stabilization and Association Agreement (SAA) is advancing.
• Investments in infrastructure are ongoing but privatization is lagging behind. Major projects are under way or in preparation in the roads and railways sectors, but several large-scale privatizations have either failed or are behind schedule.
• Macroeconomic stability has been preserved. The Serbian economy has shown some signs of recovery from the crisis and the economy is expected to grow in 2011. However, inflation remains significantly above that of regional peers.
Key priorities for 2012
• Preparing for EU accession talks is the main priority. Acquiring official EU candidate status and the challenges stemming from the accession talks, once they start, would give a further push to implementing EU-compatible reforms.
• Further fiscal reforms are needed. A new programme with the International Monetary Fund (IMF) will help safeguard macroeconomic stability, but further efforts are required to reduce public spending and start to put pension commitments on a more sustainable footing.
• Policies to encourage local currency use should be intensified. Recent efforts by the National Bank of Serbia (NBS) to encourage greater use of the dinar are already having positive results and should be advanced further, particularly in light of the volatility of foreign exchange markets.
Macroeconomic performance
The economy has recovered slowly from the crisis. Real gross domestic product (GDP) grew by 1 per cent in 2010, following a drop of 3.5 per cent in 2009. Exports have gained momentum and increased by 13 per cent, while imports rose by just 4 per cent in 2010, reflecting a modest rise in domestic demand. Foreign direct investment (FDI) fell by more than 30 percent in 2010, while the current account deficit remained constant at 7.2 per cent of GDP. Unemployment remains a major problem and increased to 19.2 per cent at the end of 2010. Inflationary pressures have increased significantly amid rising food and energy prices and exchange rate depreciation, and the rate of inflation reached 14.7 per cent on an annual basis in April 2011. It declined in the second half of 2011, reaching 9.3 per cent in September. The banking sector remains liquid and annual private sector credit growth began to pick up slowly, supported by the government’s loan subsidies programme. However, the ratio of non- performing loans (NPLs) in total loans continued to deteriorate in the first half of 2011 and stood at around 17.4 per cent in April 2011.
The government’s fiscal policies were anchored by a Stand-By Arrangement (SBA) with the IMF, which expired in April 2011. In September 2011, the IMF Board approved an 18-month €1.1 billion successor agreement, which is precautionary. In 2010 the general government deficit stood at 4.6 per cent of GDP (on a cash basis), and the government is targeting a similar deficit in 2011. Under the proposed new SBA, the authorities have committed to cut spending by between RSD 15 billion and RSD 20 billion in order to cover the deficit that has been created partly by an economic slowdown but also by a new decentralization law, passed in June 2011, which envisages major transfers from central government to local municipalities. The NBS has pursued tightening monetary policies since August 2010, and gradually increased the key policy rate to 12.5 per cent. However, in June 2011 the trend was reversed and the NBS has since then reduced its policy rate to 10.75 per cent (as of early October 2011). In addition, it has intervened occasionally on the foreign exchange market to smooth out currency fluctuations.
Serbia’s ongoing recovery is supported by the strong performance in the external sector. A slow-down in the pace of reform may become evident in the short term in light of upcoming elections, but the successful adoption of a new IMF programme and a possible move to the next stage of the EU accession process would support further progress. However, potential contagion effects from the euro zone and reduced FDI flows could endanger the economic recovery.
Major structural reform developments
Serbia has taken decisive steps in the EU approximation process. The ratification process of the SAA, which started in June 2010, is advancing. With the arrest in May and July 2011 of the last two remaining fugitives wanted by the International Criminal Tribunal for the Former Yugoslavia (ICTY) in The Hague, the country has overcome a major political obstacle for gaining EU candidate status. An Opinion by the European Commission on Serbia’s application for EU membership, published in October 2011, recommended that Serbia be awarded candidate status, and will be followed before the end of the year by a decision from the European Council.
Large-scale privatization is making little progress. Two planned flagship sales – Telekom Srbija and JAT Airways – did not materialize in the past year. In late-2010, the government announced it would sell a 51 per cent share in Telekom Srbija, which remains 80 per cent state-owned, for a minimum asking price of €1.4 billion. The process failed in May 2011 when the government rejected the sole offer, from Telekom Austria, as the bid was significantly below the asking price. The privatization of JAT Airways resumed in late 2010 when the government established a new company to take over JAT’s operations and some assets, which became active in April 2011. A public tender was announced in early August 2011, requiring potential investors to have at least 5 per cent of their investments directly linked to an airline, to have transported at least 1.5 million passengers and to hold a minimum of €200 million in assets.
A new energy law has been approved. The new law, approved by parliament in July 2011, aligns Serbian legislation with the EU acquis communautaire and will immediately lead to a complete opening of the gas and electricity market for all consumers except households, for whom the market will be opened in January 2015. It further envisages strengthening the role of the energy regulator, who will have the power to set regulated tariffs from October 2012. The law will also facilitate investments in energy efficiency and encourage the use of renewable.
Significant investments are being made in the roads and railways sectors. In January 2011 a Spanish consortium, together with an Italian company, won the public tender to reconstruct the Zezlje Bridge in Novi Sad. In addition, a tender for the completion of the pan-European Corridor X was called in June 2011. Lastly, in March 2011 the authorities agreed with Russia a US$ 800 million loan to modernize Serbia’s railway sector, the details of which remain to be negotiated.
Operations in the water and wastewater sector are becoming more efficient. Continued operational improvements from investments and corporate strengthening, together with improved bill collection and minor tariff increases, are moving the sector towards more cost-reflective pricing and a better managed water sector overall. There have also been initial attempts of signing better contractual arrangements in the form of public service contracts between municipalities and water utilities in at least one city.
Implementation of the competition law is proceeding. There have been two reported cases of direct fines imposed by the Serbian Competition Commission (CC) in the retail and dairy sectors in 2010 and 2011, but the fines are currently being appealed.
Various measures to promote use of the dinar are being implemented. The NBS has introduced a variety of policy tools to provide incentives for local currency lending as part of its “dinarisation” strategy. In the past year, the NBS has abolished mandatory collateral deposits for household loans by raising the borrowing limit from 30 per cent to 40 per cent of personal income if a minimum of 80 per cent of the debt is denominated in local currency. In addition, the ratio of dinar reserve requirements was gradually abandoned and reserve requirements for foreign exchange increased. In June 2011 the NBS further imposed a compulsory 30 per cent deposit for corporate loans denominated in, or indexed to, the euro, and it increased the required downpayment rate from 10 per cent to 20 per cent for foreign exchange-denominated household loans. It has also prohibited loans indexed to foreign currencies other than the euro.
Source EBRD
