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 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)

5

GDP and employment

80

85

90

95

100

105

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1 80

85

90

95

100

105

seasonally adjusted GDP 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)

– Mid-term fiscal policy anchored by recently adopted Fiscal Responsibility Legislation Source: Ministry of Finance, WB estimates

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

General government, in % of GDP

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

7

Real Unit Labor Costs in Euro Terms, in manufacturing industry

103,4 107.3

9095

100105110115120125130135

Avera

ge of

2004

=100

Aftermath of the crisis /4

Inflation is re-appearing– Drop in economic activity

brought the inflation down– But recently inflation is

increasing again Driven by food price

spike …and pass-through from

depreciation Increased inflation – higher

fiscal cost of wage and pension unfreeze Source: National Bank of Serbia

0.00

4.00

8.00

12.00

16.00

20.00

0.0

4.0

8.0

12.0

16.0

20.0

Jan-

07

Jun-

07

Nov-

07

Apr-

08

Sep-

08

Feb-

09

Jul-0

9

Dec-

09

May

-10

Oct

-10

Inflation and NBS reference rate (in %)

CPI (year-on-year) 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)

Source: Statistical Office of Serbia

2

4

6

8

10

12

14

Serbia: Poverty rate

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-on-

year 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

80.0

90.0

100.0

110.0

120.0

80.0

90.0

100.0

110.0

120.0

GDP industrial output employment

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Revenues Expenditures Balance (rhs)

Fiscal situationReal economy

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

Financial crisis halted the recent downward poverty trend

In urban areas crisis impact stronger among lower middle-income groups

2007-2008 2008-2009

-5

0

5

10

15

20

Annu

al g

row

th ra

te %

1 10 20 30 40 50 60 70 80 90 100

Expenditure percentiles

Growth-incidence 95% confidence bounds

Growth in mean Mean growth rate

Urban

-11

-7

-3

1

5

9

Annu

al g

row

th ra

te %

1 10 20 30 40 50 60 70 80 90 100

Expenditure percentiles

Growth-incidence 95% confidence bounds

Growth in mean Mean growth rate

Urban

Rural areas: pre-crisis gains and crisis losses higher among low income

households2007-2008 2008-2009

-5

0

5

10

15

20

Annu

al g

row

th ra

te %

1 10 20 30 40 50 60 70 80 90 100

Expenditure percentiles

Growth-incidence 95% confidence bounds

Growth in mean Mean growth rate

Rural

-11

-7

-3

1

5

9

Annu

al g

row

th ra

te %

1 10 20 30 40 50 60 70 80 90 100

Expenditure percentiles

Growth-incidence 95% confidence bounds

Growth in mean Mean growth rate

Rural

Targeting is good Generosity is moderate

Performance of Serbian social protection programs compared to

those in the region

Serbia MOP

Albania NE

Montenegro FMS/MOP

FYR Macedonia SFA

BiH CSW

Serbia CA

ECA average (unweighted)

0 10 20 30 40 50 60 70 80 90

Share of benefits to bottom quintile

Montenegro FMS/MOP

Serbia MOP

BiH CSW

FYR Macedonia SFA

Albania NE

Serbia CA

ECA average (unweighted)

0 5 10 15 20 25 30 35 40 45

Generosity

Coverage remains low The way forward 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.

… but there is a need to do more

FYR Macedonia SFA

Serbia CA

Albania NE

Montenegro FMS/MOP

Serbia MOP

BiH CSW

ECA average (unweighted)

0 5 10 15 20 25 30 35

Coverage of bottom quintile

DEVELOPMENT CHALLENGES

GDP per capita: need to catch up

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

PPP GDP/capita, in % of EU average

net lending

interest paymentsubsidies

capital expenditure

social protection and transfers (excl. pensions)

goods and services

wages and salaries

pensions

Priorities for post crisis:Public Sector

Structural adjustment of fiscal expenditures– Pension and wages represent 53% of total consolidated expenditures

Source: Ministry of Finance.

Note: Size of boxes is proportional to estimated expenditures for 2010, in RSD billions

Serbia: Structure of consolidated general government expenditures in 2010

Priorities for post crisis: Real Sector

Put growth on more sustainable footing– More reliance on exports and

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

Doing Business 2011 Serbia’s rank

(out of 183 countries)

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%

Overa

ll pov

erty

HH with

no pr

imar

y edu

catio

n

HH with

prim

ary e

ducati

on only

HH with

seco

ndary

or hig

her ed

ucati

on0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

WB PROGRAM

Financial support to Serbia from European donors and World Bank Group

EU-IPA EIB EBRD WB IFC0

50

100

150

200

250

300

350

400

450

194

432

238

163

89

Annual average (in million Euros)

Note: In addition to IPA grants, EU has an MFA (loan) “window” of €100-200 mil. for 2010-2011

World Bank Group Program

58%

8%

20%

12%1%

The current portfolio includes 12 operations totaling US$846 million

in commitments

Transport

Energy

Agriculture and Envi-ronment

Health/Social Services

Finance and Private Sec-tor

IBRD IFC

14.00%

76.60%

9.40%

The current portfolio includes 14 projects (loans and equity) totaling

US$369 million in commitments

Agribusiness total

Financial Sector total

General Manufacturing to-tal

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)

Inclusive

Environment (Danube, Bor, Energy Efficiency) 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