Download Serbia`s Reform Experiences

Serbia’s Reform
Experiences
Vesna Arsic, Deputy Minister of Finance
February 2005
1. Macroeconomic conditions for reform
 Public Finance’s reforms started in 2001
 The overall economic and social situation inherited from
the years of mismanagement, was devastating
 The economic output was in the level of one-third of the
late ’80s
 Recorded real growth in the range of 4,5-5,5 per cent
annually from 2001 to 2003, and 7 per cent in 2004
 GDP per capita increased from USD 829 in 2000 to USD
2880 in 2004
GDP per capita and Real Growth
Rates
3,500
3,000
10
GDP per capita
GDP growth rates (right scale)
2,880
8
2,569
2,500
7
1,933
6
2,000
5
1,375
1,500
1,000
9
4
829
3
2
500
1
0
0
2000
2001
2002
2003
2004 estimate
1.1.Inflation rate and Public debt
 Stabilisation of prices and restoration of trust in the
national currency
 Annual inflation fall from 111,9% in 2000, to 7,8% in
2003 and 13,7% in 2004
 The relatively stable exchange rate has been
underpinned by strong foreign reserve growth from less
then USD 500mil in 2000 to 4,5bil in 2004
 Foreign and public debt had fallen from 169% of GDP in
2000 to 55% in 2004
Foreign and Public debt (% of GDP)
180.0
169.3
160.0
132.1
Public (total)
140.0
120.0
Foreign
117.6
100.0
90.0
89.6
71.9
80.0
55.3
55.2
60.0
49.5
43.7
40.0
32.3
28.2
20.0
0.0
2000
2001
2002
2003
2004
2005 estimate
1.2.Fiscal and Foreign Trade deficit
 Fiscal performance has been relatively good (from a low
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base)- improved revenue performance and hardened
constrains for public enterprises
Consolidated general government budget deficit was
below 2% of GDP in 2004 (more then a half lower
compared to 2003)
Trade and current account deficit remain large, with
latter currently running at more than 10% of GDP
C/A deficit has been covered by capital inflows and
remittances
In 2004 exports recorded better performance as a result
of restructuring enterprise sector and foreign investor
shareholders
Budget Deficit: Balance excluding
Donations, in % of GDP
0
2001
-1
-2
-3
-4
-5
2002
2003
2004
2005
Foreign and C/A Deficit
(millions of US$ and % of GDP)
8,000
16
Trade Deficit (millions)
Current Account Deficit
C/A Deficit in % of GDP
7,000
14
6,000
12
5,000
10
4,000
8
3,000
6
2,000
4
1,000
2
0
0
2000
2001
2002
2003
2004 est
2. Public Finance legislation and preparation
2.1. Budget planning and preparation
 Public finance legislation in 2002 was outdated and not
in line with international practice and standards
 The quality of budget planning and preparation was
generally poor
 Budget was incomplete and did not include all revenues
and sources of funds, all expenditures nor all public and
enterprise debts
 Insufficient time was allocated to the preparation of the
budget and its consideration and approval by Parliament
2. Public Finance legislation and preparation
(cont’)
 The basic public finance laws prepared and enacted in
2002, enabled sharp initial progress in the development
of the public finance in Serbia
 In 2004 Serbia adopted 87 laws, including the law of
V.A.T.
 The Law of Budget System defines clear roles and
responsibilities in area of public finance, budget
preparation, execution and reporting
 It has enabled high transparency of public finance and
gross principle budget with no existence of extrabudgetary funds
2. Public Finance legislation and preparation
(cont’)
 Medium-term Economic Memorandum is regularly
prepared and published, describing main characteristics
of the public finance policy in the next 3 years
 Law on tax procedures and administration created
modern tax administration entity, clear procedures,
duties and rights of tax payers, and better collections of
taxes
2.2. Budget execution and reporting
 Overall budget management was ineffective and
ministries did not comply with the requirement to submit
a spending plan
 By focusing on cash controls, the system was inherently
weak because it couldn’t control past commitments
coming due, making efficient cash management virtually
non-existent
 Budget execution was improved with modern treasury
system
 For the first time, budget was adopted two months
before new fiscal year in 2004
2.2. Budget execution and reporting
(cont’)
 Reports on budget execution were incomplete, limited in
coverage and did not provide useful or relevant
information for decision making or budget management
purposes
 Timely and accurate reporting on budget execution has
been achieved in 2004, including monthly reports on
revenues and expenditures
 As of September 2004, the monthly Bulletin on Public
Finance has been published offering the detailed insight
into public finance structure and trends
2.3. Transition to a modern Treasury
system
 In 2002, the Treasury was created as a new department
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of the Ministry, responsible for cash management,
budget accounting and reporting and budget control
In 2003, payment transaction system was transferred to
commercial banks and Public Payment agency was
created
Single treasury account was introduced in 2003
The coverage of budget beneficiaries’ inclusion in STA
has been gradually increased, reaching the full coverage
in 2004
The Treasury still relays heavily on the PPA
2.3. Transition to a modern Treasury
system (cont’)
 Further development of Treasury IT system, enabled
high standards of the transparency of all budget plans,
expenditures, commitments and receipts
 Integration of Treasury and PPA will improve cash and
debt management
 GFS 2001 Standard was implemented
2.4. Financial Controls
 Financial control functions have been weak during the
last decade and needed development and straightening
 Elements of financial control have been carried out by
the Mutual Services Agency and MOF
 These controls were limited to basic documentary
checks of the accounting and reporting of spending units
 MOF has small budget inspectorate to take forward
introduction of internal audit and to establish modern risk
based IA functions
2.5. Internal/External Audit
 IA is done by Budget Inspectorates, which only check
whether internal control procedures are being properly
followed
 BIs are characterised by inadequate mandate and staff
insufficiency, at the same time they are poorly equipped
 There is no Supreme Audit Institution (SAI) to carry out
external, ex-post audit in the public sector
 SAI Law is in preparation whereby limited technical and
human capacity infrastructure needs to be undertaken
3. Conclusions
 Even thought Serbia achieved remarkable results on macro and
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fiscal level and in banking sector, structural problems are still
present and there is an urgent need for faster privatisation to
achieve sustainable growth
Public debt has been significantly reduced and reprogrammed but
exchange rate risk might be a problem in coming years
Public expenditures, reduced by 2% in 2004, are still high (45% of
GDP) and influence competitiveness
Although in 2004, export recorded faster growth compared to
previous years as a result of strategic partners’ presence in
privatised companies, the risk of high trade deficit still exists
Restructuring of public companies is in initial phase and requires
more government devotion
Public administration reforms and its efficiency improvement are
also required