ZSUZSANNA HARGITAI, EBRD Director for Western Balkans: It is Time to Focus on Serbia’s SMEs

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Serbia has considerable potential for further private sector development, contributing to sustainable economic convergence. However, business environment and access to finance remain major obstacles. On the top of that the financial performance of stateowned enterprises is below regional standards and suggests the need for further reforms, says Zsuzsanna Hargitai EBRD Director for Western Balkans. We spoke with Ms Hargitai about the reforms process in detail.

How do you assess the current pace of reforms leading to the full-fledged market economy?

— The EU accession process is a key driver of reforms as Serbia has to show significant progress in all areas of negotiations with the EU in order to prepare for the accession at a later stage. We have seen this with other EBRD countries which became EU members, and there is no reason to think Serbia will not be able to step up efforts to implement all the necessary reforms as well. Serbia made big steps ahead during the previous IMF programme, improving fiscal sustainability significantly by cutting the general government deficit from 6.6 per cent of GDP to a surplus in 2017 and 2018. The country also stepped ahead in the World Bank Doing Business Index substantially between 2015 and 2017 from 91st to 47th place, mainly due to the introduction of the electronic construction permitting. However, reforms have since then slowed down as stagnating rankings also show. The EBRD, together with the EU and other donors and partners, is assisting Serbia to improve in many areas covered by EU negotiations chapters. We do this by investing in projects which have strong development impact, projects that help increase competitiveness, enhance corporate and economic governance and improve regional infrastructure.

According to some assessments Brexit might weaken perceived prospects of EU accession for candidate and potential candidate countries. A slower reform momentum would then weigh on growth. What different scenarios may mean for Serbia?

— The EU should remain Serbia’s anchor for reforms, main trading partner and the leading source of foreign direct investment and development funding, whatever the Brexit scenario will be. The Western Balkans will also remain an important political partner for the EU and investment destination for EU companies, regardless of Brexit. Also, the European Union’s Western Balkans strategy provides an assessment framework for the progress and timeline for the potential accession for Serbia and other Western Balkans countries. Our forecast for Serbia’s GDP growth is 3.5 per cent in 2019 and around 3-3.5 per cent for the medium term. This growth will not be enough to provide meaningful convergence to EU income levels so Serbia will need further significant reforms to speed up the catching-up process. It seems that both the internal and external incentives will remain strong enough to keep up or rather accelerate necessary reforms.

Where do you see the major sources of growth for the country and what do you see as major obstacles which are still holding back the GDP (?) and the industrial production?

— Private sector productivity growth will be the most important driver of long-term economic growth as the working age population is expected to shrink in the medium-term. Serbia has considerable potential for further private sector development, contributing to sustainable economic convergence. The private sector accounts for around 70 per cent of total employment and its profitability (with SMEs constituting 90 per cent of total number of registered enterprises) is relatively low. Large and medium-sized companies often lack behind in terms of corporate governance, while SMEs face a still difficult business environment. Business environment and access to finance remain major obstacles. The danger is that many young, dynamic and innovative enterprises cannot develop according their potential because of lack of funding – banking and non-banking, like seed capital and venture capital, or through capital markets. When we ask companies what holds them back, they say tax rates, access to financing, inefficient government bureaucracy, corruption and policy instability. Another challenge for Serbia is the reform of the state-owned enterprises (SOE). Although there was some good progress in privatisation, the SOEs still represent a significant part of the Serbian economy and operate with low economic efficiency. Their financial performance is below regional standards and low profitability suggests that more professional management and a reduction in political interference could bring more efficiency.

ANNUAL MEETING AND BUSINESS FORUM

This year the EBRD will hold its Annual Meeting and Business Forum in Sarajevo on 8-9 May. This is the single most important event in the yearly cycle of the Bank and it combines the reunion of the Board of Governors, the EBRD’s highest decision-making body, and the Business Forum. The EBRD Annual Meeting and Business Forum, organized by the Bank together with the host country, traditionally attracts more than 2,000 delegates from governments, businesses, institutions, civil society, think-tanks and media. It provides unique networking opportunities as well as a platform for the host country to present itself to an international audience.

Which state and public companies will be in your focus in 2019?

— I would like to highlight two projects: Vinča landfill and Nis-Merdare-Pristina highway. Our planned financing for Vinča landfill, will contribute to financing the development and environmental upgrade of the Belgrade’s Vinča) landfill in Belgrade and a waste-to-energy plant, improving solid waste management in and around Belgrade. This is in line with the forthcoming Serbian strategy for solid waste management and is a landmark project for Serbia, contributing to improved environmental standards. In addition to this, a highway between Nis-Merdare-Pristina will help improve the links between Serbia and Kosovo, connecting people and businesses. This project is also supported by the EU through Western Balkans Investment Framework

As one of the most prominent supporters of the modernisation of infrastructure in Serbia what do you see as priorities in this sector?

— All infrastructure in most Western Balkans countries – and this includes water, air, roads, railways – is outdated and is a priority. But infrastructre is not only roads and briges but also municipal utilities such as waste management, water supply and waste water treatment, health and education. We will also be looking into opportunities to invest in water infrastructure, as wastewater treatment remains the most underdeveloped subsector of water infrastructure in Serbia. Energy efficiency in public buildings or street lighing will also be in focus. Furthermore, under our partnership with the EU, over 30 municipalities in Serbia will implement energy efficient street lighting projects thanks to EU supported Regional Energy Efficiency Programmes.

To what extent has Serbia embraced the green economy as one of the engines of growth? Which projects you would mention as the prime examples of that policy?

— Serbia is increasingly investing in its green economic development, and the EBRD has been a reliable partner in this field. Since 2006 we have provided in total more than EUR 1 billion financing for ‘green’ projects, i.e. projects that reduce greenhouse gas emissions, enhance climate resilience, or have other environmental benefits (such as improved resource efficiency and reduced local pollution). In the energy sector, for example, the EBRD has a long-standing tradition to provide credit lines for energy efficiency and small-scale renewables through local commercial banks. Initially they targeted SMEs, and since last year our newest product (Green Enegy Financing Facility, GEFF – Residential) is dedicated to support energy efficiency imrovements in househoulds. Two flagship projects in the renewables sector are the Kovacica and Dolovo wind farms, where we co-financed with about EUR 100 million in total. Both are on track to start production this year, thereby supporting Serbia – a country that is still highly reliant on coal – in achieving its renewable energy target. On the municipal level, we are also looking into possibilities of promoting renewable energy in district heating as well as more energy efficient street lighting projects. Moreover, Belgrade joined the EBRD Green Cities in August 2018, and will develop a Green City Action Plan including strategic objectives, actions and investments to address its urban environmental challenges.

How do you assess the country’s prospects to transform its economy toward knowledge-based economy?

— The EBRD recently conducted a study about the knowledge economy across the 38 economies where it invests. The best performing EBRD countries are Estonia, Slovenia and Lithuania, in contrast, Turkmenistan, Egypt and Tajikistan were ranked lowest. Serbia was ranked as above average with innovation systems marked as the weakest point, but very strong ranking for ICT infrastructure. For Serbia to improve towards knowledge-based economy it should spend more on R&D and education and skills. Our latest Transition Report showed that manufacturing work is the easiest to replace by robots. Serbia should plan ahead and prepare by investing into constantly upgrading the skills of workers so that they remain productive and wages can catch up with other countries.

How EBRD supports this transformation?

— The EBRD is a big supporter of knowledge economy and above we support improving conditions under which people and businesses can prosper and have better access to knowledge and innovation in their countries. We encourage companies to innovate, including through technology transfers, to become more competitive and to move up global value chains. Our investments in broadband, fixed and mobile services, particularly in regional areas, helps reduce the digital dive within countries and across the EBRD regions. We also support the ability of traditional industries to innovate.

EBRD’S INITIATIVE TRADE READY SUPPORTS SERBIAN SMES

SMEs make up about 99 per cent of businesses in all countries across the region, including Serbia. On average, SMEs provide jobs for around three-quarters of the employment and add an estimated two-thirds of the region’s total value added – a proportion similar to the EU average. In that sense, it is always time to focus on Serbia’s own SMEs. From our work with Serbian SMEs, we see that the private sector is encountering new opportunities, however, in particularly small businesses face a number of obstacles that prevent them from reaching their full potential, including access to finance, trade and access to EU markets, corporate governance etc. The EBRD’s advice for small business team is focusing on exactly those SMEs and helping them overcome those obstacles. We are now extending this support to focus more on export-oriented companies. SMEs in Serbia often lack know-how about appropriate trade finance instruments avaiable, as well as about processes and market relationships for international and domestic trade. Trade Ready is a programme that should help such SMEs to obtain both know-how and finance so they can expand more internationally. The implementation of Trade Ready in Serbia is funded by the European Union and Luxembourg.

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