Download eu-serbia: key dates

SERBIA
DEVELOPMENT CHALLENGES
&
WORLD BANK PROGRAM
ECONOMIC CONTEXT
Serbia was doing rather well
before the crisis … but
Summary of pre-crisis conditions





High growth, but unbalanced
Economy dependent on foreign capital
inflows
In general, companies not competitive
Vulnerable to sudden stops in capital inflows
and rapid depreciation
Pro-cyclical fiscal policy
Aftermath of the crisis /1
GDP and employment
105
105
100
100
80
80
seasonally adjusted GDP
2010:Q1
85
2009:Q4
85
2009:Q3
90
2009:Q2
90
2009:Q1
95
2008:Q4
95
2008:Q3

2008:Q2

Loss of output was relatively moderate, but drop in employment was
dramatic
Resumption of growth but still no “escape velocity” to generate
employment gains
Currently employment rate in Serbia less than 50%
– EU target: was 70% (Lisbon strategy), now 75% (Europe2020)
2008:Q1

5
employed persons
Aftermath of the crisis /2

Fiscal adjustment mainly
through expenditure control
– Deficit increased, but due to
collapse in revenues
– Expenditures were
contained


Range of spending controls
Most effective: freezes of
pensions and wages
(coming on the back of large
ad-hoc increases in pensions in
2008)
General government, in % of GDP
50.0
0.0
45.0
-1.0
40.0
-2.0
35.0
-3.0
30.0
-4.0
25.0
-5.0
20.0
-6.0
– Mid-term fiscal policy
anchored by recently
adopted Fiscal
Responsibility Legislation
Source: Ministry of Finance, WB estimates
Revenues
Expenditures
Balance (rhs)
Aftermath of the crisis /3

Dinar depreciated significantly
 Negative impact since many loans denominated in EUR
 But this creates preconditions for growth of exports
135
130
125
120
115
110
105
100
95
90
103,4
107.3
M
ar
.0
5
Se
p.
05
M
ar
.0
6
Se
p.
06
M
ar
.0
7
Se
p.
07
M
ar
.0
8
Se
p.
08
M
ar
.0
9
Se
p.
09
M
ar
.1
0
Average of 2004=100
Real Unit Labor Costs in Euro Terms, in
manufacturing industry
7
Aftermath of the crisis /4
8.00
4.0
4.00
0.0
0.00
Source: National Bank of Serbia
CPI (year-on-year)
Oct-10
8.0
May-10
12.00
Dec-09
12.0
Jul-09
16.00
Feb-09
Increased inflation – higher
fiscal cost of wage and
pension unfreeze
16.0
Sep-08

20.00
Apr-08

Driven by food price
spike
…and pass-through
from depreciation
20.0
Nov-07

Inflation and NBS reference rate (in %)
Jun-07
Inflation is re-appearing
– Drop in economic activity
brought the inflation
down
– But recently inflation is
increasing again
Jan-07

reference rate
Aftermath of the crisis /5



Poverty is on the increase
Crisis is reversing recent
gains
Two main channels:
– Unemployment
– Increase in rural poverty
(before crisis largest gains
were there)
Serbia: Poverty rate
14
12
10
8
6
4
2
Source: Statistical Office of Serbia
Latest Economic Results




GDP growth of +1.8% for the entire year, slightly better
than earlier estimates (1.5%)
Exports continue to perform very well, up 43% year-onyear
Trade deficit for 2010 at EUR 5.2 billion, down from
EUR 5.5 billion in 2009 and sharply down from EUR 8.1
billion in 2008
Higher than expected inflation rate in the second half of
2010. NBS reference rate now stands at 12.0%,
following six consecutive increases since the summer
for a total of 400bp
Post-crisis: jobless growth &
fiscal constraints
Real economy
Fiscal situation
120.0
120.0
110.0
110.0
100.0
100.0
90.0
90.0
80.0
80.0
GDP
industrial output
employment
50.0
0.0
45.0
-1.0
40.0
-2.0
35.0
-3.0
30.0
-4.0
25.0
-5.0
20.0
-6.0
Revenues
Expenditures
Balance (rhs)
Financial crisis halted the recent
downward poverty trend



Poverty headcount increased from 6.1% to 6.9% in 2009, with further
increases expected for 2010
Pathways of crisis impact:
– Rural areas hit hardest: Incidence and depth of poverty increased
– Urban poverty incidence remained roughly unchanged
– Unemployment
 Increased sharply (by 4 percentage points) in 2009 according
to LFS panel data
 Largest increase in unemployment in the bottom quintile
 Re-entering employment remains difficult
Social safety nets were in place as crisis hit
– But the coverage and uptake of social assistance programs
(MOP) needs to improve
In urban areas crisis impact stronger
among lower middle-income groups
2007-2008
2008-2009
Urban
20
9 Urban
Growth-incidence
95% confidence bounds
Growth-incidence
95% confidence bounds
Growth in mean
Mean growth rate
Growth in mean
Mean growth rate
5
Annual growth rate %
15
10
5
1
-3
0
-7
-5
-11
1
10
20
30
40
50
60
Expenditure percentiles
70
80
90
100
1
10
20
30
40
50
60
Expenditure percentiles
70
80
90
100
Rural areas: pre-crisis gains and crisis
losses higher among low income
households
2007-2008
2008-2009
Rural
20
9 Rural
Growth-incidence
95% confidence bounds
Growth-incidence
95% confidence bounds
Growth in mean
Mean growth rate
Growth in mean
Mean growth rate
5
Annual growth rate %
15
10
5
1
-3
-7
0
-5
-11
1
10
20
30
40
50
60
Expenditure percentiles
70
80
90
100
1
10
20
30
40
50
60
Expenditure percentiles
70
80
90
100
Performance of Serbian social
protection programs compared to
those in the region
Targeting is good
Generosity is moderate
Share of benefits to bottom
quintile
Generosity
ECA average (unweighted)
ECA average (unweighted)
Serbia CA
Serbia CA
Albania NE
BiH CSW
FYR Macedonia SFA
FYR Macedonia SFA
BiH CSW
Montenegro FMS/MOP
Albania NE
Serbia MOP
Serbia MOP
Montenegro FMS/MOP
0
20
40
60
80
100
0
10
20
30
40
50
… but there is a need to do more
Coverage remains low
The way forward

Coverage of bottom quintile
ECA average (unweighted)
BiH CSW
Serbia MOP
Montenegro FMS/MOP
Albania NE
Serbia CA
FYR Macedonia SFA
0
5
10
15
20
25
30
35
Maintaining effective protection
within the reduced post-crisis
fiscal envelope
– reduce the spending on
rights-based or categorical
SA;
– improve uptake and
coverage of means-tested
LRSA benefits;
– make them incentive
compatible by reducing work
disincentives;
– make benefits more flexible
to respond to crisis and
policy shocks.
DEVELOPMENT CHALLENGES
GDP per capita: need to catch up
PPP GDP/capita, in % of EU average



GDP in Serbia is now around 11
thousand dollars in purchasing
power parity terms
Still only around a third of the
EU average … but equivalent to
that of Italy, Spain, Greece,
Ireland and Israel in mid to late
1960s, and Portugal in late 70s.
If GDP/capita in Serbia would
grow at 6%, it would double by
early 2020s. If it were to grow by
3%, it would double only by the
2030s
Priorities for post crisis:
Public Sector

Structural adjustment of fiscal expenditures
–
Pension and wages represent 53% of total consolidated expenditures
Serbia: Structure of consolidated general government expenditures in 2010
goods and services
pensions
social protection
and transfers
(excl. pensions)
capital
expenditure
wages and salaries
subsidies
Source: Ministry of Finance.
interest
payment
net
lending
Note: Size of boxes is proportional to estimated expenditures for 2010, in RSD billions
Priorities for post crisis: Real Sector

Put growth on more sustainable
footing
–
Doing Business 2011 Serbia’s rank
More reliance on exports and
(out of 183 countries)
investment

Improve infrastructure
–
Transport: European network
corridors but also sustainability of
maintenance
– Energy: Avoid looming “lights
out” & integrate in European
market

Create conditions for productivity
growth
–

Innovation & Education
“Create one million jobs”
–
Quantum jump improvement in
business environment
Overall Ease of Doing Business
89
Starting a Business
83
Dealing with Construction Permits
176
Registering Property
100
Getting Credit
15
Protecting Investors
74
Paying Taxes
138
Trading Across Borders
74
Enforcing Contracts
94
Closing a Business
86
Priorities for post crisis:
Living standards

Inclusion remains an
issue
– In 2009 overall poverty
rate 6.9%, but for HHs
with 6+ members 14.2%
– For HHs whose head has
no primary education,
poverty rate in 2009 is
14.8%, for those with
primary education 9.2%,
for those with secondary
or higher it is below 3%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Overall poverty
HH with no
primary
education
HH with primary
education only
HH with
secondary or
higher education
WB PROGRAM
Financial support to Serbia from
European donors and World Bank Group
Annual average (in million Euros)
432
450
400
350
300
250
238
194
163
200
150
89
100
50
0
EU-IPA
EIB
EBRD
WB
Note: In addition to IPA grants, EU has an MFA (loan) “window” of €100-200 mil. for 2010-2011
IFC
World Bank Group Program
IBRD
IFC
The current portfolio includes 12
operations totaling US$846 million
in commitments
The current portfolio includes 14
projects (loans and equity) totaling
US$369 million in commitments
Transport
9.40%
1%
Agribusiness total
Energy
12%
14%
20%
Agriculture and
Environment
8%
58%
76.60%
Financial Sector total
Health/Social Services
Finance and Private
Sector
General Manufacturing
total
Alignment of WB support with
Europe 2020 Strategy
“Smart, inclusive and sustainable growth“
Sectors & Projects
Themes
Private and financial sector (through policy lending, creation of
Business Registration Agency, Regulatory Impact Analysis, etc)
Smart
Reforms in public sector (policy lending, pension project,
education project and TA, health project)
Environment (Danube, Bor, Energy Efficiency)
Inclusive
Sustainable
Agriculture (Irrigation and Drainage, Transitional Agricultural
Reform)
Smart & Sustainable
Infrastructure (Corridor X : M-1 or E-75 to FYR Macedonia and
M1-12 or E-80 to Bulgaria; Transport rehabilitation)
Smart & Sustainable
Regional development (Bor, Delivery of Improved Local
Services)
Inclusive
Social Protection (poverty analysis, building capacity of the
statistical office)
Inclusive
All
EU Accession
Preparation of the next
“COUNTRY ECONOMIC REPORT”



Supports the vision “Serbia 2020”
Accelerating growth through exports and higher
productivity: How to get there?
Will focus on selected sectors and cross-cutting
constraints:
– Agriculture & Manufacturing
– Trade & Logistics
– Skills
– Land & construction
– Energy
The vision for future growth:
more export- & investment-driven

Lots of catching up to do !!
Real Sector: The Challenge

Out of 90,000 companies in Serbia, 23,000 are with zero
employees! In addition there are 20,000 companies with
just one employee.

In the last ten years, enterprises in Serbia have
cumulatively recorded net profit in just two years (2006 and
2007). Although majority of companies record net profits,
these are offset by net losses in many other companies.

Out of 90,000 companies in Serbia, more than 23,000
have accumulated losses that exceed their own equity.
Agriculture: The Challenge

Value-added in agriculture in 2010 is just 4.5% higher
than in 2002. That means that the average annual
growth rate of agriculture was just 0.6%.

Although agricultural exports have been growing fast,
they are still comparatively low taking into account
Serbia’s potential. Agricultural exports by hectare of
arable land: Serbia 464 USD, Poland 950 USD,
Czech Republic & Slovenia around 1200 USD,
Hungary around 1400 USD.
Industry: The Challenge

Value added in industry in 2010 is just 3.3% higher than in 2002. If
we exclude 2009 and 2010 as very tough years for industry, average
annual growth rate was 2.3%, while the rest of the economy has
been growing more than twice as fast at 5.7%.

In 2008,share of industry in value added was just 21%, down from
27% in 2000. Compare this with 26% in Romania, 27% in Poland,
28% in Hungary, 30% in Slovenia, 37% in Czech Republic and 40%
in Slovakia.

Also, unlike in Serbia in most of these countries share of industry in
value added has been growing over the last decade. In Poland, it
increased from 23% in 2001 to 27% in 2008, in Czech Republic from
30% to 37% and in Slovakia from 30% to 40%.
Trade & Logistics: The Challenge

Average speed of trains in Serbia is around 34 km/h; in EU it is
around 80 km/h. Average train delay in Serbia is around 54
minutes/100 km in commercial transport.

In Logistics Performance Index Serbia scores only 2.69 out of a
maximum of 5, at par with many African countries and much worse
than Turkey at 3.22 and Slovak Republic at 3.24. Only two countries
of the region (Montenegro and Albania) are ranked below Serbia.

Improving infrastructure but also critically eliminating “non-physical
barriers” to trade is critical to reduce the economic distance to
markets and make Serbia an attractive destination to set up an
export-oriented factory.
Education & Skills: The Challenge




Only one third of employed people in Serbia who have tertiary
education work in the private sector. Two thirds of the university
educated employees work in the state sector.
At the same time, private employers report that they find it difficult
to find the top and middle managers they need to run medium-sized
and large-sized firms.
Is it possible that there are so few opportunities in the private sector
for highly educated people? Or does it say something about the
education system’s capacity to meet needs of labor market?
In Denmark, one of the leading innovators in labor market policies,
32% of the adults are engaged in lifelong learning. In other
Scandinavian countries this is true for around 20% of the adults. In
the countries of the region the figure is below 5%.
Land use: The Challenge

In obtaining construction permits, Serbia is ranked 176th
in the World. But in GDP per capita it is ranked 71st.
How is it possible that there is so much discrepancy?

According to Doing Business it takes 279 days to obtain
all of the necessary construction permits. But we know
that in some municipalities this can be done in a matter
of weeks, while in some other it takes years. Although
there will always be differences between municipalities,
why are we seeing such huge disparity?
Energy: The Challenge





Medium term projections show that if no significant new capacity is
built electricity consumption will outstrip generation capacity
sometime between 2015 and 2017.
No reassurance comes from looking at the structure of the current
generating capacity: 53% of generation facilities have been
operational since before 1979; further 42% of facilities have started
operating during the 1980’s. Only 5% of the facilities are younger
than 20 years.
As a country hoping to reindustrialize, this must be unnerving !
Economy remains hugely energy-inefficient
If every household in Serbia replaced one 75-watt incandescent
light bulb with a 20-watt compact fluorescent bulb, enough
electricity would be saved that a 500-megawatt coal-fired plant
could be retired … or not need to be built