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South East Europe Economy Shrinks in 2012, Faces Risks in 2013

December 18, 2012

More intensive policy reforms needed

Pristina, December 18, 2012 – The combined economies of the six South East European countries will shrink by 0.6 percent in 2012, and face formidable risks going into 2013 with expected growth of 1.6 percent, says a new World Bank South East Europe Regular Economic Report No.3 published today.

The South East Europe Regular Economic Report (SEE RER) covers six countries (SEE6) - Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia - and foresees that the road to sustained recovery will be arduous with sluggish growth in 2013 at best, and with significant risks. Among the clouds on the horizon for 2013 are the risks to recovery of the Eurozone and high commodity prices––risks to which all the SEE6 countries are highly vulnerable. The risk of a new food price shock could also exacerbate poverty and put pressure on the middle class.Image

In this uncertainty, Serbia, Albania, and Montenegro in particular will need to persevere in reducing fiscal deficits and bringing down public debt, even as they must continue to improve the investment climate and reform labor markets and the public sector. In all SEE6 countries, public sector arrears pose special challenges to fiscal management and the private sector, and there are unfinished, structural reforms agendas.

“In this fragile environment, Western Balkan governments need to pursue reforms that make a difference for long-term growth and jobs,” says Željko Bogetić, World Bank Lead Economist and Coordinator for Economic Policy for the Western Balkans and lead author of the SEE RER report, the third of a series of regular bi-annual reports.  “What is needed first and foremost is more intensive policy reform to reduce public debt and accelerate structural reforms, especially in public sector governance, the investment climate, and labor markets.” 

In 2012, deteriorating external conditions, the impact of the severe winter on economic activity, and a continuing rise in unemployment took a toll on consumption, investments, and exports, explains the report.  It also notes that credit recovery and fiscal consolidation are under threat, while non-performing loans are again on the rise. As a result, both within and outside the region the environment has become much more difficult to navigate, and the policy trade-offs necessary to stabilize economies and reignite growth are tougher.

The report highlights that, pressured by the external environment, more competitive global economy, and inadequate revenues, SEE6 governments are seeking ways to improve efficiency, strengthen infrastructure, reform labor markets, attract foreign direct investment (FDI), rebuild their export base, and ensure financing. Several countries improved their investment climates and moved up on the global Doing Business ratings. But without further labor market reforms and significant infrastructure investments, especially in energy, it will be difficult to reduce unemployment, improve competitiveness, and achieve robust growth. 

Intensifying the privatization process is one option (building on past lessons, good and bad) that governments are increasingly considering as part of “a second wave or privatization”––a general effort to ease the financing constraint and improve competitiveness. SEE6 governments are therefore looking for sources of capital not only in the OECD countries but also in such resource-rich and growing middle-income countries as Turkey, Russia, China, and Azerbaijan. To be successful, new privatizations should build on the lessons from experience, including the fundamental importance of transparency.

The report underlines that if such accelerated reforms materialize, external support—well-coordinated and targeting the region as a whole ––from the EU and global international financial institutions could help ease the transition to a more sustained growth in medium term. 

The report is divided in two parts. The first part, Recent Developments, Outlook and Policy Challenges, discusses a number of issues such as the external environment characterized by the Eurozone recession and new global risks, recent developments and policy issues in Western Balkan countries: labor markets, trade and external debt, fiscal policy, financial sector, business environment, privatizations, and energy infrastructure. The second part, Managing Vulnerability to Food Price Shocks in SEE6, discusses the impact on the region of possible increases in food prices. It also provides some specific recommendations for each country to better prepare for a possible new food price shock.

The Regular Economic Reports on South East Europe can be found at www.worldbank.org/eca/seerer.

Additional contacts:

In Skopje: Denis Boskovski +389 2 3117 159, dboskovski@worldbank.org

In Belgrade: Vesna Kostic, +381 11 3023 747, vkostic@worldbank.org  

In Sarajevo: Jasmina Hadzic, +387 33 251 502 jhadzic@worldbank.org

In Podgorica: Dragana Varezic, + 382 20 665 353, dvarezic@worldbank.org  

In Tirana: Ana Gjokutaj, + 355 4 2 280 655, agjokutaj@worldbank.org  

Media Contacts
In Washington
Kristyn Schrader-King
Tel : +1 (202) 458-2736
In Pristina
Lundrim Aliu
Tel : +381 38 224 454