serbia development challenges & world bank program
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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
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