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Economic Reforms in Serbia and Prospects for Economic Recovery and Growth

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Western Balkan Economies in Transition

Part of the book series: Societies and Political Orders in Transition ((SOCPOT))

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Abstract

Economic reforms have been relaunched under the SNS-led government that came to power in 2014. The priorities have been fiscal consolidation, financial sector resilience and structural reforms designed to boost productivity, employment and growth. The diagnosis of Serbia’s economic ills has been that poor investment and growth performance has been due to an oversized public sector, a high level of employment in state bodies, and over-regulated labour markets. This chapter questions whether this diagnosis is the whole story and whether reductions in public sector pay and pensions will translate into higher levels of private sector investment. It argues that other factors may be involved, including a high level of banking sector deleveraging, capital flight as foreign investors repatriate profits rather than reinvesting in the Serbian economy and tax treaty shopping and round tripping in pursuit of aggressive tax planning. An equally serious problem has been the collapse of the credit system following the onset of the economic crisis as non-performing loans have accumulated, reducing banks’ ability to provide new credit to the business sector. The chapter concludes that a boost to public investment is needed in support of private sector growth, rather than the continuation of a potentially futile effort to shift the costs of adjustment onto low-paid public sector workers and pensioners.

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Notes

  1. 1.

    The index of industrial production is based on 2010=100 (Statistical Office of the Republic of Serbia, online data).

  2. 2.

    Eurostat online data, variable code [nama_10_gdp].

  3. 3.

    The validity of the unemployment data has been disputed by the Fiscal Council, which has argued that “it is not very likely that such favourable trends have actually occurred, i.e. that the fast growth of employment and drop of unemployment, registered from the end of 2012, are most likely the consequence of unreliable data of the SORS describing the labour market and not the true improvements in economy” (Petrović et al. 2016, p. 5). This was met with a furious response from the Statistical Office which issued a rebuttal of the claim on its website (see SORS 2016, 2017).

  4. 4.

    National Bank of Serbia online data, “Osnovi makroekonomski indikatori” (Basic macroeconomic indicators).

  5. 5.

    Interview on Prva TV, reported by Gordana Filipović and Misha Savić, Bloomberg, 7 October 2013. Actually, 2013 was a rather good year for the balance of payments, which allowed a build-up of foreign reserves—quite the opposite of going “bankrupt”.

  6. 6.

    “UAE signs $1 billion loan pact with Serbia”, Gulf News, 6 March 2014.

  7. 7.

    See “Serbia’s independent media faces ongoing smear campaigns”, International Press Institute, 22 April 2016.

  8. 8.

    See Ilić, M. (2015) “Serbian judges removal ‘threatens judicial independence’”, Belgrade: BIRN. http://www.balkaninsight.com/en/article/serbian-judge-s-removal-threatens-judicial-independence--12-21-2015

  9. 9.

    Eurostat online data variable code [cpc_ecgov].

  10. 10.

    Interview by the author with Fiscal Council, March 2016. The 2017 budget envisaged targeted increases in public sector wages and in state pensions (see “IMF Staff Completes Review Mission to Serbia”, Press Release No. 16/474, Washington: International Monetary Fund).

  11. 11.

    Eurostat online data, variable code [nama_10_gdp].

  12. 12.

    The Russian company Gazprom owns 56% of the shares in NIS, and a further 30% are owned by the Serbian state. NIS is one of Serbia’s largest companies with its own representative office in Brussels in support of Serbia’s EU integration. See http://www.nis.eu/en/about-us/company-information

  13. 13.

    Personal communication to the author by the Fiscal Council staff.

  14. 14.

    EBRD structural change indicators, online database, 2016.

  15. 15.

    In 2014, 21 out of the 29 banks active in Serbia were under foreign ownership. One quarter of bank assets are owned by affiliates of two Italian banks. There are also four Greek, three French and three Austrian banks.

  16. 16.

    National Bank of Serbia, online data file “2014_II-1_bankarski_sektor_e.xls” Chart II.1.7. See also EBCI (2015).

  17. 17.

    Bank for International Settlements online data: http://stats.bis.org/statx/srs/table/A6?c=RS&p=20154

  18. 18.

    Almost 75% of NPLs are overdue for more than 360 days, while more than 50% are overdue for more than 2 years. Loan restructuring is exceedingly slow due to cumbersome insolvency proceedings and weaknesses in the enforcement of creditor rights (IMF 2015d).

  19. 19.

    The NBS hosted a 2-day conference “Belgrade Initiative—Resolution of Non-Performing Loans in Serbia” held in April 2015 on this issue: http://www.nbs.rs/internet/english/15/mediji/vesti/20150429.html

  20. 20.

    See the Vienna Initiative website on NPLs: http://npl.vienna-initiative.com/countries/serbia/

  21. 21.

    The rank position for construction permits improved from 178th place to 139th place and paying taxes from 165th place to 143rd. See http://www.doingbusiness.org/data/exploreeconomies/serbia

  22. 22.

    The rank position worsened from 52nd to 59th place.

  23. 23.

    These are among the largest employers in the country. The electricity company EPS employs 38,000 workers and the railway company Zeleznice Srbije employs 18,000 workers.

  24. 24.

    The European Commission requires guarantees that Hesteel will only export products manufactured in Serbia to the EU. It also requires proof that the state has not subsidised the company since February 2015, when new EU rules on state aid to the industry took effect (“Sales contract for Zelezara Smederevo to be signed on April 18”, In Serbia, 12 April 2016).

  25. 25.

    It includes job matching services, career counselling and training for pre-redundancy and the unemployed, employer subsidies targeting disadvantaged job seekers, employee subsidies, self-employment support, public works, active measures for employees with disabilities and cofinancing of active labour market policies.

  26. 26.

    Alexander Vučić (2016) “The future of Serbia’s economy”, Davos: World Economic Forum.

  27. 27.

    National Bank of Serbia online data.

  28. 28.

    Remittances had fallen from a peak of 3.1 billion euros in 2009, from 10.1% of GDP to 7.3% of GDP (see Gligorić and Janković 2015).

  29. 29.

    The Community Common Customs Tariff was applied from the date of signing the agreement, with the exception of some agricultural products.

  30. 30.

    Data on net primary income from National Bank of Serbia online data “Balance of payments 2007–2016”.

  31. 31.

    Direct investment income is income earned on equity, dividends, reinvested earnings and interest on loans. Income from portfolio investment is mainly interest payments on company bonds. These earnings are classified as primary income within the current account of the balance of payments statistics.

  32. 32.

    Portfolio investments differ from direct investments in that they do not involve control rights over an enterprise above 10% of total shares.

  33. 33.

    Foreign affiliates are enterprises in which the share of foreign capital is 50% or more.

  34. 34.

    SORS (2015) “Foreign affiliates in the Republic of Serbia in 2014 (inward FATS)”, Belgrade: Statistical Office of the Republic of Serbia.

  35. 35.

    Three tenths (31%) of Serbian migrant workers abroad live in Germany and 23% in Austria (OECD online migrant database).

  36. 36.

    Data on net direct investment from National Bank of Serbia online data “Balance of payments 2007–2016”.

  37. 37.

    For a general outline of the phenomenon, see IMF (2003).

  38. 38.

    Portfolio investments in the form of shares are distinguished from direct investments in that they account for less than 10% of ownership of an enterprise.

  39. 39.

    Eurostat online data variable code [cpc_ecmny].

  40. 40.

    World Bank World Development Indicators.

  41. 41.

    The highest level is found in Albania.

  42. 42.

    As the Fiscal Council has noted: “…the poor realization of public investments, which has become a chronic issue of Serbian public finances, is a cause for concern. In the first four months of 2015, according to Fiscal Council’s estimates, the implementation of public investments is already about 10 billion dinars behind schedule—which, simultaneously, is one of the major contributors to such a low fiscal deficit at the beginning of the year” (Fiscal Council 2015, p. 3).

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Authors and Affiliations

  1. LSEE, European Institute, London School of Economics and Political Science (LSE), London, UK

    Will Bartlett

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  1. University of Applied Sciences, Emden, Germany

    Reiner Osbild

  2. European Institute, London School of Economics (LSE), London, United Kingdom

    Will Bartlett

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Bartlett, W. (2019). Economic Reforms in Serbia and Prospects for Economic Recovery and Growth. In: Osbild, R., Bartlett, W. (eds) Western Balkan Economies in Transition. Societies and Political Orders in Transition. Springer, Cham. https://doi.org/10.1007/978-3-319-93665-9_11

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