LAZAR ŠESTOVIĆ, Economist World Bank in Serbia: Concern About the PossibleSlowing Down of Reforms

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The World Bank’s recommendation is to focus on four broad areas of reforms: human capital, government effectiveness, development of the financial sector and regulatory quality

Serbia has great potential to accelerate economic growth, and in order to succeed, it needs a new strategy, that is, a new growth agenda to catch the countries of Central and Eastern Europe, pointed out during a recent visit representative of the World Bank in Serbia. How really can GDP growth be, how fiscal consolidation and what are the biggest risks to our economy DC asked the World Bank economist in Serbia Lazar Šestović.

 

The World Bank has estimated that Serbia could have an econom-ic growth of 7% annually in the long run. What should we do to make this happen?

— The World Bank is just about to publish the new Country Economic Memorandum (titled the New Growth Agenda) in which the central question is exactly that – what Serbia needs to do in order to grow faster. We also think that Serbia needs to adopt ambitious plans because growing at current rates of around 3-4 percent will not help us to reach income levels in the EU in a reasonable time. Also, it is important to mention that newer EU member states that came from theEastern Block are growing 5-6 percent a year, so we are starting to lag behind them, too. Finally, we will most likely only this year reach the level of real GDP that we had 30 years ago before the wars started. Growth of 7 percent a year is not impossible, but it could be reached only after serious reforms are completed and that requires time. For the purpose of the above-mentioned report, we compared Serbia and Germany – Germany being a role model for a successful economy and society where institutions and rule of law prevail. Based on this analysis, the World Bank’s recommendation is to focus on four broad areas of reforms: human capital (which relates mainly to reform of the education system); government effectiveness (which is about implementation of legislation); development of the financial sector (which is about making access to finance easier) and regulatory quality (which is about the work of institutions that set rules for market competition and operations, including in trade).

For this year, economic growth of 3.5 percent is projected. Do you see the risks of not achieving this?

— Yes, for this year we keep the projected growth unchanged at 3.5%. Preliminary results for the growth in the first quarter were in-deed somewhat disappointing, but not completely unexpected. This was to some extent an effect of the base from the same quarter of 2018 when growth was high. However, there are some structural concerns. First, the industry is underperforming for three quarters already. Problems that started last summer are present still and industrial output continue to decline. Second, the import is growing much faster than exports. This causes two problems – first, it lowers the growth of the economy, second, the trade deficit continues to widen rapidly which will inevitably lead to an increase in external debt.

What are the biggest risks to the Serbian economy?

— There are several risks that might impact the growth outlook for the Serbian economy. All these risks can be internal and external. On the internal side, the main source of concern is a possible slowdown with reforms, in particular, those related to the EU accession agenda. EU accession needs to remain on the top of the government agenda and the country should do whatever is in their mandate to open additional chapters of negotiations and to show tangible progress toward closing those already opened. External risks are much more diverse. Most importantly, there are signs that economies of some of the main trading partners of Serbia are slowing down. This will certainly affect the demand for Serbian exports and reduce the inflow of FDI. Also, there are chances that international prices, as well as interest rates, might go up which will again affect performance in tradeable sectors.

Serbian Finance Minister announced an increase in salaries and pensions in the public sector this year. In your opinion, how realistic is it?

— It is realistic, and it is already budgeted for. Serbian budget is in a much better situation and can afford these increases. Pensioners and public sector employees paid a high price for the fiscal adjustment and now it is time to reward them. Still, it is important to have good management of both the wage bill and spending on pensions. Therefore, any future increase and introduction of regular adjustments need to be well thought through and all fiscal implications carefully calculated. The government is right now just about to complete the complete overhaul of the wages system. The new modern way of setting and paying individual wages is supposed to be implemented as of2020. A related issue to this question is the introduction of the rule-based system for any new hiring in the public sector. The hiring-freeze should be lifted and at the same time, the new rule introduced.The Fiscal Council recently calculated that corruption reduces economic growth by almost one percent. How to look at the corruption problem here?— Unfortunately, most of the surveys show that corruption, and governance in general, still represents a significant problem for many individuals and businesses. This is certainly pushing back some investors from Serbia (in particular foreign investors) and causes a loss in revenues for the government. The sooner we address this problem, the better is for all economic entities which will immediately reflect on the higher growth of the economy.

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