We expected a milder recession in Serbia than in Central and Eastern Europe due to the latter region’s higher economic integration with strongly hit Western Europe. We plan to revise the forecasts by end-September as more data will be available
The EBRD is one of the largest institutional investors in the Western Balkans. To date, it has invested over €13 billion in more than 700 projects, including in key infrastructure, the SME segments and the green economy. In September issue of Diplomacy&Commerce magazine, we spoke with EBRD Regional Director, Head of Western Balkans and Serbia Office, Mrs. Zsuzsanna Hargitai. “EBRD’s policy activities and technical assistance targets improvements in many of the aforementioned areas: helping fight informality through enhanced business inspections, making public procurements more efficient, strengthening corporate governance of state-owned enterprises, supporting the institutional capacities of the competition authority and disseminating best practices of the Serbian business registry in the Western Balkans”, pointed out Mrs. Hargitai.
The level of capital investments in Serbia has been assessed as insufficient, although there has been an increase compared to previous years. How can the economic environment in Serbia be improved?
Indeed, investments in Serbia in percentage of GDP have been low compared to countries at similar or somewhat higher level of development. Gross fixed capital formation (investments and change in inventories) were below 20 per cent of GDP between 2009 and 2017 while in the more developed Central European and Baltic countries with higher income levels it was above 20 per cent of GDP. Some Western Balkans countries have also kept investments higher (e.g. Albania or North Macedonia at above 25 per cent of GDP). This might have contributed to faster average annual GDP growth in these countries (Central European and Baltic countries 2.9 per cent, Albania 2.7, North Macedonia 2.5) than in Serbia (1.7 per cent) in 2010-2018.
Investments in Serbia by now have reached a level above 20 per cent of GDP but they are still lower than that of fast growing countries. The government can influence investments through several measures: directly through raising public investment, indirectly through improving the investment/business environment. Both are important in Serbia.
More and better quality public investment is essential in order to close still large infrastructure gaps and accelerate growth. According to the Fiscal Council, an annual increase of public investment by half percent of GDP between 2020 and 2022 (from 3 per cent to 4.5 per cent of GDP) can raise growth by half percentage point annually. While public financing needs will significantly increase this year due to the epidemic, the expected economic rebound from 2021 will hopefully raise the fiscal space for public investments.
“More and better quality public investment is essential in order to close still large infrastructure gaps and accelerate growth”
Other desired improvements in the business environment should aim at improving public and corporate governance, enhancing the professional capacities of the public administration and strengthening independent institutions that ensure level playing field and transparency for competitors in the market. Reforms to increase the project implementation capacity of the public sector are also key to increase public investments as large public projects have been lagging.
One-stop shop electronic procedures should become more prevalent so that public administration becomes more user-friendly. The performance of private companies can be significantly strengthened by receiving better quality inputs from more efficiently operating state-owned enterprises.
The judicial system requires further improvements to make it work faster and in a more predictable way. Foreign exchange regulations can be also enhanced as in their present state they hinder more sophisticated investors and prevent them to choose Serbia as their regional financial and operational centre.
EBRD’s policy activities and technical assistance targets improvements in many of the aforementioned areas: helping fight informality through enhanced business inspections, making public procurements more efficient, strengthening corporate governance of state-owned enterprises, supporting the institutional capacities of the competition authority and disseminating best practices of the Serbian business registry in the Western Balkans. We put a strong emphasis on helping business environment reforms by building strong institutions and upgrading institutional capacities.
The Serbian government’s forecast for GDP growth for 2020 is somewhat more optimistic than the IMF’s estimate. What are the new forecasts regarding the Serbian and Western Balkan economies?
EBRD’s GDP forecast at -3.5 per cent for 2020 and 6 per cent for 2021 is similar to that of the IMF (-3 per cent for 2020 and 6 per cent for 2021). Economic data available up to now are broadly in line with our projections. We expected a milder recession in Serbia than in Central and Eastern Europe due to the latter region’s higher economic integration with strongly hit Western Europe. We plan to revise the forecasts by end-September as more data will be available.
“The EBRD welcomes the agreement and remains a committed partner of Team Europe supporting efforts and initiatives to address the economic impact of the coronavirus pandemic”
The Council of the EU has reached an agreement on a seven-year budget, covering the period by 2027, including an agreement on a mechanism worth 750 billion euro to be spent on the recovery from the consequences of the coronavirus pandemic. What is your view of the adopted budget?
The EBRD welcomes the agreement and remains a committed partner of Team Europe supporting efforts and initiatives to address the economic impact of the coronavirus pandemic. This agreement is very relevant for the EBRD, not only because the EU is an important shareholder, partner and donor, but also because it allows us to build on synergies between the Bank’s strategic directions including our transition mandate, and the priorities identified by the EU. Perhaps the most evident example is how the Bank’s Green Economy Transition approach chimes well with the European Green Deal and Just Transition Mechanism – priorities that are extremely relevant for the recovery phase of our countries of operation.
The COVID-19 pandemic has prompted countries to think more about their immediate environment. How do you think the crisis will affect the future distribution of production by world regions?
It is too early to tell. There are expectations that parts of long supply chains might be “near-shored”, i.e. relocated closer to the manufacturers in Western Europe and Western Balkans countries might benefit from this. It is not certain that this will happen as the location of those supply chain elements reflect existing competitive advantages. Nevertheless, Serbia might be in a good position to attract potential investors given its strong manufacturing heritage.
It is more and more important, however, that the country focuses on the overall quality of the business environment for all (domestic and foreign) investors and less on low wages and high subsidies provided for (mostly foreign) investors.
Ready to support Serbia
EBRD also has been and is ready to support Serbia with public investments both at the central and the local level. As a response to the epidemic, we have stepped up our infrastructure financing within the Vital Infrastructure Support Programme. Our on-going projects include financing of the roll-out of rural broadband, the bus purchases and working capital needs of the Novi Sad public transport company and energy efficiency improvements in several cities.