Serbia: On the Way to EU Accession

Challenge
Serbia is an upper-middle-income country. Economic growth was strong during the early and mid-2000s, with economic reforms helping to stimulate new export dynamism and significant domestic demand. However, the expansion was also fueled by domestic consumption, large capital inflows, and a credit boom, and the 2008 downturn left Serbia looking for new sources of growth. As in many countries in the region, the challenge for Serbia has been to translate tenuous economic recovery into jobs and poverty reduction in difficult domestic and regional environments. Both unemployment and poverty rates saw sharp reversals in the wake of the crises; unemployment increased from below 15 percent in 2008 to nearly 25 percent in 2012, increasing most among the lowest income earners, and poverty jumped from about 6 percent in 2008 (after falling by more than half since 2002) to more than 9 percent in 2009. To address these economic and social challenges, Serbia must become more competitive and improve the efficiency and outcomes of its social spending.

Solution
As did many of the countries of the former Yugoslavia, Serbia emerged from the conflict of the early 1990s with a daunting development agenda. The World Bank Group (WBG) has responded over the past decade with a mix of instruments to support EU accession, macroeconomic stability, competitiveness, and social inclusion. One particular emphasis has been helping Serbia take advantage of its strategic location in central Europe through investments in transport infrastructure. The WBG has also sought to help Serbia attract private investment through enhancing the business environment, strengthening financial discipline, and building a more stable and secure financial sector. Support has included a Policy-Based Guarantee (PBG), which enabled Serbia to access private capital markets at favorable terms and at a time of relatively scarce liquidity. The Bank is also supporting a Development Policy Loan (DPL) series to support the reform of nonprivate enterprises.

Results
The government undertook fundamental reform of social assistance programs and pensions, and strengthened the health and education sectors. WBG-supported interventions have directly contributed to the following results:

• the February 2011 mobilization of €292.6 million in international financial markets through a PBG created the groundwork for Serbia’s issuance of a US$1 billion Eurobond during an extremely volatile period, allowing it to double the maturity secured in its previous borrowing and reducing the cost of funding from 6 to less than 4 percent;
  
• adoption of a revised Social Assistance Law in 2010 contributed to more effective social spending through improved targeting. Last resort social assistance coverage reached 10 percent of the poorest quintile, up from less than 7 percent prior to the law;
  
• the poor’s access to education increased, with coverage of preschool education rising from 32 percent in 2007 to 45 percent in 2011, including a 10 percent increase for Roma;
  
• the merger of the three public pension funds into a single institutional structure in January 2008 improved the efficiency of the pension system, reducing the employers’ reporting burden (17 forms instead of 28) and improving client services (resolved cases increased from 1,500 to 1,800 per year per employee);
  
• progress made toward rationalization of the health system through productivity-based payments, reducing the number of unnecessary beds and staffing and increasing copayments.
  
• adoption of a new Law on Business Entities in 2012 strengthened corporate governance by harmonizing the rules for business entities with EU Directives;
  
• a 2010 regulatory review resulted in the elimination of 192 unnecessary regulations. The number of days required to register a business decreased from 23 to five;
  
• creation of a modern, integrated information system in the treasury in 2009 provided more secure and reliable communications with other state institutions;
  
• an organic Budget Systems Law was strengthened in 2009 and 2010 to incorporate improvements in budgeting, accounting, financial control, and debt management;
  
• 2009 adoption of a strengthened procurement law led to the adoption and publication of 10 essential bylaws;
  
• reform and strengthening of the nonprivate enterprise sector contributed by early 2013 to the privatization of nearly 2,500 companies and raised approximately €2.6 billion.
  
• improved energy efficiency through Bank support to energy conversion and modernization in public buildings began in 2004. Savings from the energy system rehabilitation are around €$2.5 million per year. About 40 additional public buildings have been retrofitted, reducing energy consumption on average by 47 percent.

Bank Group Contribution
As of January 2013, the World Bank’s International Bank for Reconstruction and Development (IBRD) lending portfolio consisted of six active projects with total commitments of US$622.3 million in various sectors, including roads, agriculture, irrigation, energy, environmental management, and local services delivery. In addition to the International Development Association (IDA)/IBRD portfolio, the Bank is implementing two large trust funds (TFs) in Serbia: a Multi-Donor Trust Fund Justice Sector Support Project of US$6.1 million, and an Innovations for Poverty Action (IPA)-funded Innovation Project of US$10.5 million. An active Global Environment Facility (GEF) grant has been programmed and implemented parallel to the Transitional Agriculture Specific Investment Loan. In addition, the TF portfolio includes five small grants totaling US$2 million.

The International Finance Corporation’s (IFC) portfolio in Serbia stands at roughly US$664 million, focusing on increasing access to finance by supporting the development of local financial institutions, especially those that concentrate on small and medium enterprises and agribusiness. IFC’s advisory services aim to improve the investment climate and performance of private sector companies, and to attract private sector participation in the development of infrastructure projects.

The net exposure of the Multilateral Investment Guarantee Agency (MIGA) in Serbia amounts, as of December 2012, to US$172 million in six projects, all but one in support of foreign banks’ loans to their Serbian subsidiaries, mainly in the aftermath of the 2008 global financial crisis. MIGA’s continuing support to these projects signals its efforts to underwrite projects in Serbia, encourage inward foreign direct investment (FDI), and add to the WBG’s strategy of encouraging private sector development in the country. The 2011 doubling of FDI in Serbia suggests that despite the deepening Eurozone crisis, these interventions are making a contribution.

Partners
The European Commission (EC) and the World Bank are cooperating in Serbia, joining forces to support (i) work on innovation and justice sector strengthening, (ii) a survey on income and living conditions, and (iii) the regional monitoring and evaluation of public spending. The EC is supporting the public expenditure management structural reform agenda led by the Bank with direct budget support, and continues to provide extensive technical assistance in the area of public financial management. It has also contributed to the Delivery of Local Public Services project and the Real Estate and Cadastre and Registration projects. 

Moving Forward
The Bank will continue to support the reform of nonprivate enterprises through a programmatic DPL, building on previous DPLs from the 2000s. In addition, the Bank will build on the considerable success of the Energy Efficiency Project with a new project to retrofit public buildings. The Bank will also continue its engagement in the health sector. The program for the final two years of the Country Partnership Strategy (CPS) will be defined at the CPS Progress Report stage in mid-2013; the World Bank Group and the Serbian authorities will then review progress of the current assistance strategy and indicate continued and new areas of partnership.