Serbia

Serbia has passed through a period of dramatic change. Since 2008, a new, reform-oriented government committed to European Union (EU) accession confronted the politically sensitive issue of Kosovo’s unilateral declaration of independence and the unfolding of the global economic and financial crisis. Despite these pressures, the Government has by and large advanced reforms.

Serbia has sustained fiscal discipline, including implementing difficult wage and pension freezes beginning in 2009, which was supported by a 15-month IMF Stand-by Arrangement (SBA).  In September 2011, it secured IMF support for a new precautionary 18-month SBA with potential support of €1.45 billion. Most recently, in October 2011, the European Commission (EC) recommended “candidate” status, an important milestone toward EU membership. 

The authorities have also made tough political decisions, including the arrest and extradition of the last of the fugitive indicted war criminals. At the same time, the Government pursued its opposition to Kosovo’s unilateral declaration of independence peacefully and within multilateral legal fora. Despite an adverse ruling the Government continues to cooperate with the EU and United Nations toward the continuation of talks with Pristina.

Serbia has made significant efforts to reestablish its place in the international community.  However, continued tensions with Kosovo over a number of issues and the failure, to date, to secure a mutually acceptable negotiated solution, could affect the EC’s formal granting of candidacy status.

Serbia has pursued these reforms while struggling to recover from the impact of the international crisis, which led to a 50 percent spike in poverty and a similar jump in unemployment. As in many countries, the challenge is translating tenuous economic recovery into jobs and poverty reduction in a tight fiscal environment. Serbia needs to become more competitive and increase productivity.

As detailed in the 2012 Country Economic Memorandum (CEM), this will require attraction and adoption of new technologies, which will in turn depend on a supportive business environment, capable institutions, a skilled labor force and high quality infrastructure.

Growth in Serbia for 2011 is estimated at close to 2 percent, but is expected to go down to 0.5 percent in 2012, reflecting the recent deterioration of the economic outlook in the European Union. More robust growth rates of around 5 percent are forecasted over the medium term.

Serbia’s per capita GDP was approximately US$6,260 in 2011. The poverty rate stood at 9.2 percent in 2010, up from a low of 6.1 percent in 2008. Growing unemployment resulted with a record high unemployment rate of 24 percent in October 2011, up from 14 percent in April 2008.

Serbia’s main exports are steel and other metal products, food products, machinery and transport equipment, and chemicals. Automotive exports are expected to become an increasingly important sector due to significant investments from Italian carmaker FIAT, supported by the government. Almost 90 percent of Serbian exports go to Europe—55 percent to the EU and about one third to the Central European Free Trade Agreement (CEFTA) region.

Going forward, Serbia’s main challenge is to improve standards of living and tie economic recovery into jobs in a tight fiscal environment. Increasing exports, productivity, and competitiveness are recommended to propel the country’s economic growth.

The World Bank’s programs in Serbia are designed to advance the European Union agenda of Smart Growth, with its focus on education, skills, and innovation, as well as Inclusive Growth, especially emphasizing job creation for vulnerable groups and modernizing labor markets and welfare systems.

Serbia’s Country Partnership Strategy (CPS) FY 2012-2015 was approved by the World Bank in December 2011. The CPS will support Serbia’s EU accession and help the government strengthen competitiveness and improve the efficiency and outcomes of social spending in the context of severely constrained budgets. The focus is on:

• Competitiveness: Development policy loans (DPL) from the International Bank for Reconstruction and Development (IBRD) will focus on the reform of public enterprises, investments in road rehabilitation, reform of the judiciary, and a new partnership with the EC on innovation. These will build on the current portfolio of road transportation, cadastre, and irrigation projects. The International Finance Corporation’s (IFC) activities will support the investment climate, strengthen domestic financial markets, and facilitate private sector participation in infrastructure. The IFC will facilitate private sector involvement with fresh capital and know-how to improve productivity, energy efficiency and a focus on environment in the corporate sector.
  
• Improved Efficiency and Outcomes of Social Spending: Assistance in the next two years would come from a proposed public expenditure management loan, which will help reduce Serbia’s large public sector while strengthening social assistance to cushion the impact of the crisis. The current portfolio in health, education, and social protection services will continue with the addition of a new health project in FY2013. The European Commission has asked the Bank to support Serbia in strengthening its capacity to monitor and evaluate social spending. This is increasingly important in light of Serbia’s aging population and its commitment to reduce budget deficits.

IBRD financing during the first two years of the CPS is expected at US$340 million, with an additional US$200 million possibly available for budget support in 2012-2013, should the need arise. Serbia has requested US$800 million for the entire lending period.

The IFC expects to provide financing of US$600-800 million to the private sector during the CPS period. The program will depend on the Government’s support for private sector participation in the infrastructure sectors at the national and municipality levels, further improvements of the business environment, and the growth outlook in Europe.

The World Bank began supporting Serbia in 2001 as part of the Federal Republic of Yugoslavia, and since 2006 as an independent country. From 2001 to date, the World Bank has financed 39 projects with almost US$2 billion.

The Bank’s knowledge and financial support has played a critical role in reforming Serbia’s banking, education, energy, public finance and social sectors. It was instrumental in the privatization of a number of state and socially owned companies. It also assisted in the modernization of border crossings; reform of the judiciary; road rehabilitation; improving environment, health and employment services; and helped Serbia develop a more effective business environment.

The World Bank is supporting Serbia to make progress toward full European integration and promoting dynamic economic growth through the accelerated implementation of economic reforms, increasing employment and living standards, and promoting balanced regional development.

The Bank’s current portfolio consists of 12 investment projects under implementation with a total commitment value of US$845 million. Highlights of the Bank’s portfolio include:

Irrigation and Drainage Rehabilitation Project:
Around Serbia, more than 160,000 hectares of land have been protected from flooding, and over 300,000 people have directly benefitted from the Irrigation and Drainage Rehabilitation project, supported by a US$75 million World Bank loan. The project aims to reduce the chances of people losing their lives in floods, and cut down the risk of damage to land, crops, property and infrastructure.

Improved drainage has been completed on about 85,000 hectares, and in project areas farmers are joining resources to buy irrigation equipment to draw water from rehabilitated canals. Agriculture accounts for about 12 percent of Serbia's GDP, and slightly less than a quarter of its exports. To be more competitive, including in the European Union markets, farms need to increase productivity and yields. Reducing damage from flooding and increasing irrigation brings Serbian farmers one step closer to that goal. And it increases the safety of those living near riverbeds and dykes.

Corridor X Highway Project
Serbia’s geographic position puts it at the crossroads of the two important Pan-European transport infrastructure networks. One is connecting Budapest with the Bulgarian capital Sofia, the other linking Greece to the north. This network is known as Corridor X, and currently not all sections in Serbia are of Motorway Standard. To improve this corridor, the Government asked the World Bank to act as a lead partner and make a contribution of US$388 million, the largest ever World Bank loan to Serbia.

Serbia Health Additional Financing Project
Improving efficiency remains the main challenge facing Serbia's health sector. As in other European countries, changing the way healthcare providers are paid is crucial. A US$13.5 million loan from the World Bank has allowed communications and technology equipment to be updated in 20 hospitals around Serbia. Moving to a DRG (Diagnosis Related Groups) system has enabled more efficient financing of public health care providers, and ensures quality and access to public health care services. The Ministry of Health, Health Insurance Fund and other key national partners have initiated the implementation of reforms to move towards payment systems that reward productivity and quality, ultimately leading to more efficient public spending.

Reports from Serbian hospitals are promising, showing that a reduced number of hospital beds achieve higher occupancy rates and a shorter average length of stay.

Serbia Energy Efficiency Project
Despite high energy bills, people were going cold in many Serbian schools and hospitals. This is now changing thanks to the Serbia Energy Efficiency Project, supported by the World Bank. Improvements such as the installation of new windows, thermostatic valves, equipment for automatic temperature controls and efficient lighting have lowered average energy consumption by 40 percent in the project’s 18 schools and 10 hospitals. In many of these buildings old-fashioned boiler rooms were replaced with modern ones, lightening the load on the environment. Given the positive results and high demand for further support, the Government of Serbia requested additional financing to scale up the program. The ongoing second phase of the Energy Efficiency Project will include 64 public buildings to be retrofitted, including the NIS clinical center, which houses about 1,500 beds.