The World Bank has declared Serbia a leader in Southeast Europe in terms of implemented reforms with the goal of attracting more foreign investments. However, a lot has to be done because when we compare Serbia with new EU member states at the same stage of transition, Serbia seems to be moving slower, despit the recent good results
In the coming year, the World Bank will be working closely with the Government on modernizing tax administration, which is one of the areas where Serbia is lagging. In addition, the Bank will support reforms on stateowned financial institutions and will help the government in their plans to strongly improve e-governance, says Mr. Stephen Ndegwa, World Bank Country Manager for Serbia, Europe and Central Asia Region. The Bank will also remain active in the areas it has been supporting for a long time, such as structural reforms, including on privatization and/or improvement of corporate governance of public enterprises. We spoke to Mr. Ndegwa about Serbia’s progress in reforms in the context of the major challenges lying ahead.
The World Bank has declared Serbia a leader in Southeast Europe in terms of implemented reforms with the goal of attracting more foreign investments. Why, do you think, Serbia attracts only 2-billion-euro worth of investments annually unlike Hungary or the Czech Republic, for instance, which are of similar size as Serbia?
— Importantly, countries like Czech Republic, Hungary, Poland, Slovakia, etc. started their transition a decade before Serbia, and they are further advanced with their reforms. This includes more progress in structural reforms, business environment, privatization of SOEs etc. These countries are now EU member states, meaning their business environment and regulatory framework are fully harmonized with the EU, so there is much more predictability for investors. So, it is not surprising that Serbia is lagging these countries. That said, although Serbia started late, when we compare it with new EU member states at the same stage of transition, Serbia seems to be moving slower, despite recent good results. An example is how Serbia’s pace of reform compares to new EU member states in their first ten years of reform as recorded on the EBRD transition indicator. Serbia’s pace of reform was better than these countries’ in their first three years but its pace falls behind after the third year.
Many experts in Serbia have been critical of this model because it draws in investors from work-intensive sectors that are on a lookout for cheap labour, and that generate small added value in Serbia, as well as negatively affecting the import segment of the country’s external trade balance. How realistic are these objections, and what would you say are positive features of the said model?
— We should keep in mind that until very recently Serbia had an unemployment rate of over 20 percent. In that context, it makes sense for any government to fully prioritize creating jobs. Our recent analysis shows that the incentives program has indeed helped create additional jobs which would most likely not have been created in the absence of the policy. However, we believe policy makers should now transition toward alternative means that rely less on direct subsidies to attract investments. A focus on strengthening the capacities for coordination and business development of relevant agencies (such as Serbia Development Agency at the national level, and regionally relevant agencies and institutions) should be included in this approach. Improving overall business environment should also be a priority. The presence of a well-coordinated local business enabling institution, guiding companies through the processes of investment, growth, and integration in a local economy, can make a big difference. The longer a company is successful in a location (that is, it remains competitive and grows) the higher are the possibilities to create positive linkages to local businesses and spillovers that have a real impact in the economy. Going forward, the authorities should put more emphasis on business development initiatives (for example, investor aftercare and supplier development programs) which aim to integrate investment firms through greater participation within the local economy and by incorporating a greater reliance on locally produced inputs.
Serbia has been constantly advancing on the Doing Business list, but this progress is recorded in only few segments. In which segments should our country make a more pronounced progress in the following period?
— Over the last three years, Serbia has implemented reforms related to a number of Doing Business indicators. Significant reforms have been noted in five out of ten indicators – Dealing with Construction Permits, Paying Taxes, Starting a Business, Registering Property, EnforcingContracts (more details:
http://www.doingbusiness.org/reforms/overview/economy/serbia). Serbia’s tenth position globally on reforms in dealing with construction permits indicates how much Serbia can achieve with focus and commitment. Going forward, and looking at the Distance to Frontier indicator, Serbia is still lagging good practices in the areas of Resolving Insolvency, Enforcing Contracts (despite improvements), as well as Protecting Minority Investors. In essence, these refer to strengthening the judicial system and rule of law, and these should be prioritized, in addition to continued improvements on all other indicators.
One of the obstacles that the World Bank says is hindering Serbia’s growth is lack of entrepreneurship. How much is this situation changing for better due to education reforms?
— Yes, the lack of an entrepreneurship spirit emerged as a constraint in one of the surveys we conducted a couple of years ago. Unfortunately, we haven’t done a follow up survey so we don’t have data to see if anything has changed.
In which areas could you cooperate even more with the Serbian government during this reform momentum?
— In the coming year, we will be working closely with the Government on modernizing tax administration – you will recall ‘paying taxes’ is one of the areas Serbia lags behind on the Doing Business indicators. We will also be supporting reforms on stateowned financial institutions and the government agenda on e-governance. In addition, we will continue our support to structural reforms, including privatization and/or improvement of corporate governance of public enterprises.
What is the current volume of NPLs in the country’s banking system, and how can we address this problem?
— The level of NPL decreased significantly after the adoption of the NPL Strategy, both in nominal as well as in relative terms, as a result of manifold activities undertaken so far by relevant institutions. At the end of April 2015, the NPL ratio in Serbia amounted to 23%. According to the latest official dana this has dropped to 15.6%, which is the lowest since February 2009. The World Bank Group has been providing support to the NPL Working Group, especially focused on improving the legal framework for consensual financial restructuring, enhancing performance of the bankruptcy administrator and commercial courts’ judges dealing with bankruptcy cases, and ultimately by improving the protection of secured creditors to reduce the average period of settlement through draft Amendments to the Insolvency Law whose adoption is expected soon.
PRIVATIZATION IS A BRIDGE TO SERBIA’S PROSPERITY
There have been announcements that Komercijalna Banka will be privatized soon. Why is important to complete this process, and how is the bank’s privatization going to affect the banking sector in the country?
— The World Bank is not involved in Komercijalna, so I am unable to comment. However, we think greater privatization of the economy is needed to make space for private sector to generate growth, jobs and fiscal revenues. Finalizing privatization is a bridge to Serbia’s prosperity