Reforms in Serbia: Achievements Reforms in Serbia: Achievements and Challengesand Challenges

Danica PopovićDanica PopovićCenter for Liberal Democratic StudiesCenter for Liberal Democratic Studies

Sava Centar, September 20th, 2008Sava Centar, September 20th, 2008

South East Asia 1996

SEE Serbia

2006 2006 2006 2007

Fiscal deficit 1,1 -0,7 -1,5 -1

Current account deficit -4,4, -11,3 -12,4 -16,5

Foreign debt (total) 49 68 61 65,1

Public debt 24 31 39,6 37,6

Reserves/short term debt 59 167 717.3 729.7

Reserves/(sh.term d+cad) … 85 219 164.3

BDP growth 7 6,1 5,6 7,5

Inflation 5,9 7,4 12,7 10,1

Vulnerability indicators , Serbia, Vulnerability indicators , Serbia, 2007.2007.

2002 2003 2004 2005 2006 20072008  I-

III

GDP 1,020 1,171.6 1,431.3 1747.5 2,042 2,393.0

PUBLIC REVENUES , bil. Din 407 472.7 589.4 701.7 846.9 988.6  

Revenues, % BDP 39.9% 40.3% 41.2% 40.2%41.5

% 41.3%  

PUBLIC EXPENDITURES 438.6 485.3 576.5 665.4 811.8 977.7 238.2

Expenditures, % BDP 43.0% 41.4% 40.3% 38.1%39.8

% 40.9%  

Consolidated deficit/surplus -31.6 -12.6 13 36.2 35.1 10.9 20.7

Deficit/surplus according toMFIN, % BDP -3.1% -1.1% 0.9% 2.1% 1.7% 0.5%

Deficit/surplus according toIMF, % BDP -4.2 -3 0 0.7 -1.5 -1*)

*) procena

Izvor: Konsolidovani prihodi i rashodi države, 6.5.2008. godine, sajt MINFIN, IMF Country Report No. 08/55

Consolidated public consumption in Serbia, 2001-2008.

The Problem:The Problem:

The existing share of public spending of over 40% of GDP is too high and unsustainable

and the internal balance in the medium-term critically depends on fiscal sustainability.

The expansionist fiscal policy from the previous years led to an accelerated increase in real wages – Wages grew (15.3% per year on average in the last

five years, – while the annual GDP growth in this period was

about 5.6% on average).

Problem +Problem +

In recent years, budget capital In recent years, budget capital expenditure increased its GDP expenditure increased its GDP share share – from 1.9% in 2005 from 1.9% in 2005 – to 3% in 2006 to 3% in 2006 – and to 4% in 2007, and to 4% in 2007,

which relates to the National which relates to the National Investment Plan. Investment Plan.

Real growt of gross wages, 2004-Real growt of gross wages, 2004-20072007

95

100

105

110

115

120

125

2004 2005 2006 2007

Health

Public enterprizesAverage

Education

total

Local public companies

Administration

Gross Wages 2004-2008Gross Wages 2004-2008

All SectorsAll Sectors 2626

InsturanceInsturance 5555

HealthHealth 4242

Post and TelecomPost and Telecom 4242

EnergyEnergy 3939

ConstructionConstruction 3434

Air traficAir trafic 3030

EducationEducation 2828

BankingBanking 2626

ManufacturingManufacturing 2020

0

10000

20000

30000

40000

50000

60000

javna

drž

adm

inist

racij

a

obra

zova

nje

javna

lok

zdra

vstv

o

Srbija

2004 2005 2006 2007 2008

Pre-election wages growth,

may 2006-may 2007.

Realn growth of gross wages, 2004-2008.Realn growth of gross wages, 2004-2008.

Wages in Serbia, 1987-2008

0

50

100

150

200

250

300

350

400

450

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

dec. '90 - 752 DEM

dec. '93 - 21 DEM okt. '00 - 97 DEM

sep. '08 - 434 EUR

Twin damageTwin damage

Crowding out and slowing economic Crowding out and slowing economic growthgrowth

Too large share of privatization receipts Too large share of privatization receipts goes to consumption, as a typical case of goes to consumption, as a typical case of disinvestmentsdisinvestments

Privatisation receipts are drying outPrivatisation receipts are drying out

Fiscal deficit of 1% causes CA deficit in Fiscal deficit of 1% causes CA deficit in the same percentthe same percent

Official data indicate 2.488,800 employees 795,000 unemployed

 2000 2001 2002 2003 2004 2005 2006 2007

RZS 21.5 22,4 25.8 26.0 25,0 26.6 26.7 24.4

Survey 13,26 13,36 14,47 16,00 19,53 21,83 21,56 18,8

Source: RZS,.NBS i Anketa o radnoj snazi 2008

InflationInflation

Unlike most former socialist countries, Serbia did not Unlike most former socialist countries, Serbia did not succeed in maintaining a single digit inflation rate! succeed in maintaining a single digit inflation rate! A double digit inflation rate in A double digit inflation rate in 2007. 2007. of of 10,1%10,1% was was caused bycaused by – Electricity, public utilities, tobacco, oil –non coreElectricity, public utilities, tobacco, oil –non core– EExogeneous disturbancesxogeneous disturbances– – agflation, rise in oil pricesagflation, rise in oil prices– Growth in aggregate demand which accomodated these Growth in aggregate demand which accomodated these

shocksshocksBazna inflacija jeBazna inflacija je 5,4%, 5,4%, - - unutar predviđenog intervala 4–unutar predviđenog intervala 4–8%. 8%.

NBS was active in preventing the Dinar from nominal NBS was active in preventing the Dinar from nominal depreciationsdepreciationsAs a consequence, dinar appreciated in real termsAs a consequence, dinar appreciated in real terms

AppreciationAppreciation

Realni i nominalni devizni kurs, 2000-2008.

60

110

160

210

260

310

strong appreciation

realni devizni kurs

€/din

nominalni devizni kurs, dec.2000

And a BOP deficitAnd a BOP deficit Which rose from 10% to 16,3% GDP

  2001 2002 2003 2004 2005 2006 2007

Foreign trade deficit , bil.€       -5311 -4280 -4982 -6414

(% GDP) -24,5 -25,2 -23,6 -26.83 -20.39 -20.01 -20.91

BOP deficit       -2197 -1805 -3137 -4999

(% GDP) -4,6 -8,9 -7,3 -11.1 -8.6 -12.6 -16.3

Memo:Forex reserves, bil.€ 1320 2175 2840 3117 4935 9025 9369[1]

[1] Marata 2008. godine devizne rezerve iznosile su 9,553 milijarde evra.

Foreign trade deficitForeign trade deficit

The key source of large foreign trade deficit consists The key source of large foreign trade deficit consists of (still) low exports, of (still) low exports, – at the beginning of the transition were barely 15% of at the beginning of the transition were barely 15% of GDPGDP– In 2007 the exports reached a third, imports reached a half In 2007 the exports reached a third, imports reached a half

of GDP of GDP – normal values in the countries of similar size are between normal values in the countries of similar size are between

50 and 80% of GDP), 50 and 80% of GDP),

which means that the exports do not reach half the which means that the exports do not reach half the share in GDP that would be necessary in a growing, share in GDP that would be necessary in a growing, open economy. open economy. Growing deficit is financed by foreing savings, partly via Growing deficit is financed by foreing savings, partly via rise in indebtness, and the rest is covered by foreing rise in indebtness, and the rest is covered by foreing direct investments. direct investments.

Is this deficit OK?Is this deficit OK? The balance of payments current account deficit, which in the last

twelve months increased from 3 to 5 billion euros (from 12.6% to 16.3% GDP) is NOT an a priori ultimate sign of economic deterioration.

CAD=(Y*–Y)–(I*–I)–(G*–G), CAD=(Y*–Y)–(I*–I)–(G*–G),

Y Y is GDPis GDP (BDP), (BDP), asterisk – long term level of the variableasterisk – long term level of the variable promenljive (up. Obstfeld i Rogoff, 1996). promenljive (up. Obstfeld i Rogoff, 1996).

All three phenomena are related to the first phases of transition, where both domestic product, investments and public consumption stay above their long term level.

DEBTDEBT - m- mааyy 2008. 17 2008. 17..6 6 bil bil €€

o.w. private debt o.w. private debt 1111..66 bilbil..

Liquidity riskLiquidity risk

Serbian foreign reserves exceed manytimes the amount of short-term debt (the situation is at least threetimes worse in all other countries observed) and foreign reserves are higher by as much as 25% than the sum of the short-term debt andtotal current account deficit. Therefore, this risk may not be consid-ered significant in Serbia, although any further deceleration of foreign reserves growth would present a very serious signal of increase in vul-nerability of the Serbian economy.

Greenfield Greenfield FDIs could FDIs could

helphelp

Foreign Direct Investmentsin the Western Balkans, 1997- 2004

ALBBIHMAC

CRO

Serbia

0

500

1000

1500

2000

2500

3000

3500

1997 1998 1999 2000 2001 2002 2003 2004 2005

FDIs per capita and share in GDP

252 256479

350

1777

0

500

1000

1500

2000

ALB BIH CRO MAC Serbia

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

cumulative FDIper capita FDI/GDP

Key determinants for attracting FDIs

39%

42%

48%

49%

53%

57%

58%

61%

65%

68%

0% 10% 20% 30% 40% 50% 60% 70%

Price/quality of labor

Presence of competition

Business climate

Market size

Macroeconomic stability

Profit repatriation

Institutional framework

GDP growth

Political stability

Market size

Izvor: FDI Confidence Index, AT Kerney 2002

The experience of Portugal can be The experience of Portugal can be very indicative when discussing very indicative when discussing

vulterabilities of Serbian economyvulterabilities of Serbian economy

Investing in non-tradables – real estate,Investing in non-tradables – real estate,

High growth of wages, highly above TFPHigh growth of wages, highly above TFP

recession!recession!

Satisfactory growth rates Satisfactory growth rates

The Serbian economic policy seems to have adjusted the entire set of measures precisely

to populist goals : :

the overvalued exchange rate enabled higher imports of consumer goods and a higher standard of living, high public spending, which enabled to a great extent the wage increase to exceed by far the increase in labor productivity and delay in implementation of bankruptcy legislation enabled– a number of unproductive jobs, with unearned wages

received, to be kept.

Foreign debt crisis?Foreign debt crisis?

Public debt repayments, 2001-2010.

218 675 1076 1034 1658 2182 2609 2754656 745815

897960 1065

2970

Izvor: MMF, na dan 31.12 04. Iznos zavise od vrednosti kursa USD

milio

na U

SD interest

principal

total 107 183 451 972 1732 1779 2473 3079 3569 3819

interest 74 140 233 297 656 745 815 897 960 1065

principal 33 43 218 675 1076 1034 1658 2182 2609 2754

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Golden ruleGolden rule: : for keeping the same level of competitiveness for keeping the same level of competitiveness productivity growthproductivity growth = = growth in real wages + currency growth in real wages + currency

appreciationappreciation

Wages, productivity, appreciation, 2001-2007.

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2001 2002 2003 2004 2005 2006 2007

grow th in w ages

appreciation grow th

producitivity grow th

Conclusion IConclusion I

Macroeconomic imbalances in the economy of Serbia threaten to hinder further accelerated economic growth. For the purpose of lessening the key vulnerabilities, it is therefore necessary to: – (1) reduce public spending, especially current expenditure, which would

make room for an increase in capital expenditure at the expense of subsidies and wage increases in the state sector,

– (2) privatize public companies and, wherever possible, stimulate new entries in order forthe party-based management structure of these companies to be replaced with private owners, and for the competition to enable an increase in the quality of their products and services along with a price decrease,

– (3) continue attracting foreign direct investments to the tradables sector, primarily by controlling wages in the state-owned sector, by avoiding any further appreciation of the dinar and by continuing the reforms that will increase the competitiveness of the economic environment in Serbia

Conclusion IIConclusion II

In addition to reducing public spending, most of the conditions that should be met for the maintenance of macroeconomic stability are clearly in the area of microeconomy and reform of government administration.