CHALLENGES IN TRANSITION AWAITING SERBIA

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CHALLENGES IN TRANSITION AWAITING SERBIA

• Lajos Bokros
• professor
• Central European University
• Belgrade, May 22, 2005

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Serious distortions leading to an especially
tough double legacy

• Stabilization liberalization only halfway
  implemented in the 1990s, creating an
• unpredictable and uneven environment with insider
  privileges, cronyism corruption
• widespread non-payment culture, growing
  intercorporate debt, total collapse of banks
• mass privatization with asset stripping and
  without new investment and management

3
Struggling with the double legacy

• Monetary and fiscal stabilization finally
  achieved after 2000 by new governments
• Successful rescheduling of foreign debt
• Restarting restructuring privatization of both
  socially and state owned enterprises
• Rehabilitation of banks after closing Big4
• Privatization and FDI channeled into banks
• Strengthening public trust and confidence

4
Successful demand management without supply side
adjustment ?

• Evolution of SMEs still in an incipient stage
• Privatization of bankrupt socially owned firms is
  an exceptionally difficult process
• SOEs keep fighting for privileged position
• High wage/high tax environment creates incentives
  for tax evasion and avoidance
• Overemployment in civil service and huge amount
  of gastarbeiter ease unemployment

5
Reduced scope of operation for domestic currency

• Widespread euroization after confiscation of
  forex deposits and hyperinflation
• Widespread indexation of corporate and household
  assets and liabilities
• New CSD plays a limited role as a currency for
  small everyday transactions
• 250 forex reserves in the banking sector
• much more trust in banks, than in dinar !

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Reduced effectiveness for monetary policy

• unstable environment for money demand
• inflationary expectations are rather volatile
• downward pressure on the e/r coming from lax
  income and unclear fiscal policy
• upward pressure from huge inflow of remittances
  despite low forex deposit i/r
• managed float has proved to be successful
• is it worth considering inflation targeting ?

7
Fiscal contradictions

• Deficit is small in central budget, unclear at
  subsovereign level and in Social Security
• Size of the central budget is large, LGs have
  small budgets (except Belgrade, Nis, NS)
• Intergovernmental transfers are obscure, their
  effectiveness efficiency is unclear
• Current expenditures with large wage bill
  overwhelming, public investment is little

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Fiscal reforms to start soon...

• Tax reform proved to be quite successful
• Serious efforts to set up treasury mgmt
• Civil service needs to be streamlined
• Pension reform with multipillar system should be
  introduced rather quickly
• Health care and education in need of serious
  restructuring substantial additional funds
• Fiscal decentralization to be considered

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Structural reforms to be completed rapidly

• Restructuring and privatization of public
  utilities and SOEs to be completed quickly
• Privatization of non-viable socially owned firms
  by pushing them into bankruptcy
• Completing financial sector modernization
• Legal and judiciary reform anticorruption
• WTO-accession SAA for EU-accession

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Conditions for high level and sustainable growth
in Serbia

• Creating a business friendly environment
• Promoting FDI and FPI domestic savings
• Level playing field for domestic firms
• Further simplification of tax administration
• Labor market flexibility seriously enhanced
• Free trade with EU and all Balkan countries
• Small state providing quality public services