Tony Verheijen, World Bank Country Manager for Serbia: Cautious optimism

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The 2017 budget is a further step in the right direction toward sustainable growth, but a lot remains to be done. Completion of critical structural reforms is essential if Serbia wants to move on the firm growth trajectory that is needed for the country to converge economically with EU member states.

Tony Verheijen, World Bank Country Manager for Serbia prizes the Serbian government for moving the country from the debt cliff but underlines importance of other reforms crucial for securing further growth and attracting foreign investors.

verheijen

Does Serbia have to continue with tough austerity measures, or the current relaxation (rise of wages in the public sector, one off payment to pensioners etc.) is a reasonable response to somewhat improved situation in the budget?

Given Serbia’s current macro-fiscal performance, austerity measures are no longer as critical as they were 2-3 years ago, when Serbia was at risk of falling off a fiscal cliff. However, we are far from having completed critical structural reforms that are and remain essential for Serbia to move on the firm growth trajectory that is needed for the country to converge economically with EU member states. As long as these reforms remain to be completed, there needs to be continued prudence in public sector wage and employment policy. The most critical aspects of these structural reforms are the resolution of the remaining strategic commercial SOEs (which, due to their size, continue to pose a serious fiscal risk to the economy, and discourage investors from entering the sectors they dominate), the stabilization of the public utility and transport companies, the implementation of wage system reform in the public sector, and a significant reform in the way public funds are allocated in the education and health sectors. In the latter two in particular, a large adjustment agenda remains, which Government has only just started on.

2. Is the expected GDP growth of 2,8% in 2017, sustainable in the long run, given the pace and scope of reforms envisaged in the coming period?

This goes back to the previous question, where I noted one condition for growth to be sustained and accelerated. There are several other conditions. Continued attention for obstacles in the business environment is one. This is also an agenda were much progress has been made, but where significant implementation work remains. Getting Serbians to take economic initiative is another critical requirement. If especially the younger population continues to emigrate rather than establish enterprises in Serbia, sustaining growth levels will be impossible. Creating better conditions for higher female labor market participation (the lack of which costs Serbia an estimated 16 percent of GDP) is another one. For growth levels to top 4 percent, Serbia will need to work on its business climate, as well as convince its citizens to take economic initiative, and get its youth and women to participate more actively in the labor market. This, combined with longer-term policies to expand early childhood education, significantly reform education curricula and the structure of secondary education, and invest in infrastructure and better health care, would create the conditions that can make 4 percent growth possible.

3. How do you evaluate the proposed 2017 budget in terms of the long term stability of public finances?

The 2017 budget is a further step in the right direction, it has modest wage increases (and the reason why these need to remain modest I discussed before), keeps the ceilings on public sector employment in place, moves some more resources to investment projects and retains the low deficit levels that are critical for Serbia to reach a situation where interest payments on public debt as a percentage of GDP will be below growth levels, at which point debt reduction will become self-reinforcing. The budget also finances the essential further restructuring efforts in public enterprises (railways, EPS and Srbijagas) and a continuation of resolution efforts on high cost and high risk enterprises like MSK (which costs up to 100,000 Euro per job to keep operating), Azotara, RTB Bor and Petrohemija.

4. How the expected rise of dollar might affect debt position of the country and did the government set adequate buffers?

The government is making efforts to diversify its debt stock (including the issuance of dinar denominated bonds with EBRD support), but the risk of dollar appreciation remains. Continued efforts to rebalance the debt portfolio into instruments that pose lower volatility risks would be prudent. We have confidence in the Public Debt Administration’s ability to handle this risk

5. What are the major reform goals in Serbia the World bank is to support in the near future?

It is critical to keep legacy reforms on track and this will remain, at least in 2017, the most critical part of our work in the country. We will support the government through advice, budget support and result-based financing to continue reforms in public enterprises, to resolve issues in the financial sector (critical to get more capital to flow into investment and enterprise development) and continue the difficult agenda of public administration reform and the modernization of the judiciary. We will, however, also engage on more forward-looking efforts that build the Serbia of the future – which includes continued work on innovation and technology transfer, paired with reform of the R&D sector, investment in early childhood education and in critical infrastructure, including in energy efficiency in public buildings.

6. Are you satisfied with the reforms done in EPS and other state companies?

We have made progress but are far from the end of the reform process. EPS, in particular, is a huge potential asset to Serbia’s economy, but it can easily become also its largest liability. The full implementation of the financial consolidation and corporate governance reform program is critical to the long-term success of the company, and includes many more aspects than rightsizing, which is the element mostly discussed in the public domain. Diversification, the decommissioning of redundant facilities, more competitive offerings to the corporate sector, cutting distribution losses and improving collection rates are all critical, and we are at the start of most of these efforts. Having a final decision on the CEO appointment is equally important, as otherwise one cannot expect reforms to move forward. Srbijagas is a very different case as, unlike in electricity, the gas sector is unlikely to be a growth sector in Serbia; we don’t expect gas use to expand significantly in years to come. In this sense, making sure Srbijagas operates without losses is critical, so that the company supplies this important service at break-even cost. For this, it needs to withdraw from participation in loss-making enterprises like Azotara, MSK and others. Railways has so far been the most surprising in the sense that restructuring efforts have picked up speed and Serbia now has a cargo company that can run without subsidies. Here investment in infrastructure is important, as well as reducing passenger services to a sustainable level.

7. How the current pace of reforms affects rising inequality and the level of poverty in Serbia?

We are concerned about the development of pockets of economic exclusion that could become permanent, including older workers that were made redundant in SOE restructuring, youth that have never had a job, women that don’t sufficiently participate in the labor market, groups like the Roma that remain largely outside the formal economy and geographical areas that are isolated and not benefiting from the improving economy. That said, we also see plenty of examples where such groups that may overall be at risk of marginalization, actually drive economic revival. One example are parts of Stara Planina, where ecotourism and organic high-end agricultural production have taken hold, providing employment exactly to the kinds of segments of society that could otherwise be easily marginalized.

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