Serbia strategy overview

Full strategy  (0.4Mb) Approved 20  Feb 2007

Strategija za Srbiju  (0.6Mb)

Summary of public comments  (0.1Mb)

The Republic of Serbia is an independent state that meets the conditions specified in Article 1 of the Agreement Establishing the Bank. It is a parliamentary democracy, with a President elected by universal suffrage. The current President is Boris Tadic, who was elected on 27 June 2004. The government is headed by a Prime Minister, responsible to parliament. Since 3 March 2004, the Prime Minister is Vojislav Kostunica, leader of the Democratic Party of Serbia (DSS). The country’s single-chamber Assembly has 250 seats.

Constitutional charter

In March 2002, with the active involvement of the European Union (EU), Serbia and Montenegro signed a Constitutional Charter creating the State Union of Serbia and Montenegro as the official successor of the Federal Republic of Yugoslavia. The Charter came into force on 4 February, 2003. On 21 May 2006 Montenegro took up the option, envisaged in the Charter, of a referendum reviewing the future of the Union three years after it officially came into being. On a turnout of 86%, 55.5 per cent voted in favour of independence. On 5 June 2006 Serbia’s parliament declared that Serbia was the successor of the Union. On 15 June 2006 Serbia officially recognised Montenegro as an independent state. The two governments have agreed on a procedure for the division of assets and financial obligations. On 1 October 2006 the Serbian Assembly unanimously adopted a new Constitution. The new Constitution, which refers in the Preamble to Kosovo being ‘an integral part of Serbia’, was submitted to a referendum on 28 and 29 October 2006. On a turnout of 54.19 per cent, 52.31 per cent of registered voters voted in favour. Kosovo’s ethnic Albanians were not registered and did not take part in the referendum. The parliamentary elections were held on 21 January 2007 and the presidential elections are due to be held in May 2007.

Economic growth

The Serbian economy has been growing strongly over the past couple of years. Real GDP growth in 2005 was around 6.3 per cent and the economy is on track for similar or even higher growth in 2006. Industrial output in the first half of the year rose by more than 6 per cent. Several industries that have benefited in recent years from substantial foreign investment, such as tobacco and base metals, are growing particularly strongly. On the demand side, the continued expansion of credit is fuelling domestic demand, while export growth has also been strong, reaching 30 per cent in 2005 and more than 20 per cent in the first half of 2006. High inflation and current account deficits remain significant macroeconomic problems but annual inflation has fallen from 17.5 per cent at the end of 2005 to around 7 per cent by end- 2006, while the nominal exchange rate has appreciated slightly during 2006. The risk profile of the country has improved and several ratings agencies have upgraded the country over the past year. Foreign direct investment (FDI) continues to arrive in record levels, and is projected to be in excess of €3 billion in 2006, mainly as a result of some large privatisations in the telecommunications and banking sectors.

Transition progress

Serbia’s transition to market economy started much later than in the other countries in the region, after a lost decade of the 1990s. Serious reforms began after the formation of a broad coalition government in January 2001, under the late Prime Minister Zoran Djindjic. Since then, the pace of reform under successive governments has generally been rapid, but delays have occurred along the way and the scale of the transition challenges ahead is still daunting. Overall, the business environment is much improved relative to a few years ago, but surveys continue to reveal significant barriers to doing business, including corruption. The privatisation programme has advanced significantly in recent years, particularly in the banking sector. The biggest single privatisation since reforms began took place in August 2006 in the telecommunications sector, with the sale of the mobile company, Mobi63, to Telenor of Norway for a sum in excess of €1.5 billion. Further reforms have continued in the roads and railways sectors. However, many medium-size and large companies are loss-making and likely to be unviable in the long-term.

Key transition challenges

The key transition challenges are to:

• Accelerate the privatisation and restructuring programme for medium and large companies in order to attract much-needed investment and boost the competitiveness of these industries.
• Implement important new laws to promote enterprise performance, including in the areas of competition policy and bankruptcy that have been passed in recent years
• Promote competition, commercial orientation and an enhanced role for the private sector in critical infrastructure sectors such as roads, railways, energy, municipal infrastructure and telecommunications.
• Manage the development of the financial sector, by ensuring that credit growth within the banking sector is monitored carefully and that non-bank financial institutions are developed to full potential.

The Bank is the largest institutional investor in Serbia. Between April 2001, when the Bank signed its first operation in Serbia, and 31 December 2006, the Bank achieved a cumulative business volume of €1,108 million. During the last strategy period, the Bank’s commitments grew by 97 per cent with new commitments of € 545 million. The portfolio is characterised by strong transition impact potential and the overall quality remains high. The portfolio currently consists of 69 projects, with the highest concentration in infrastructure and the financial sector. Since the last strategy review in 2004, the private sector share of the portfolio increased from 37 per cent to 47 per cent of total business volume. Given the pipeline of future business, this figure is likely to increase over the next strategy period and the Bank will continue to play a major role on the Serbian investment market.

Strategic priorities

The Bank’s strategic priorities for the next two years are as follows:

• Corporate Sector: The Bank will continue to provide financing for privatisation and post-privatisation restructuring to both local and foreign corporates. It will focus increasingly on large corporates in their consolidation and future expansion plans, including further regional penetration. The new EBRD-Italy Western Balkans Local Enterprise Facility enables the Bank to support smaller, fast-growing companies through debt, quasi-debt and equity finance, which is still relatively scarce in Serbia. The biggest number of transactions is expected to be generated in agribusiness, but opportunities should arise in other sectors undergoing privatisation and restructuring, particularly in natural resources and general industry. The Bank will continue its assistance and support to local enterprises provided through the TurnAround Management (TAM) and Business Advisory Services (BAS) programmes. The TAM Programme has operated in the country since 2001 and has carried out 86 projects successfully. Of these, 68 were funded by the European Agency for Reconstruction (EAR) and 18 by several bilateral donors. The BAS Programme in Belgrade has started its operations in July 2006 and has undertaken seven projects so far.

• Infrastructure: The Bank will continue to play a crucial role, together with the European Investment Bank (EIB), the EU and the World Bank, in developing the transport, energy and municipal infrastructure in the country. The majority of future Bank investments (in terms of volume) are expected in the Transport sector in order to complete the development of a modern highway and railway network on Corridor X. In the municipal sector the Bank expects to continue its successful cooperation with the city of Belgrade and work on completing signed projects. It will also seek to diversify its financing to medium-sized cities and regions, provided that their financial strength is adequate, in order to provide the substantial funds needed to improve local infrastructure in areas such as water and waste water management, landfills and waste management, district heating and urban transport. Finally the Bank will continue to support energy sector development particularly through the commercialisation of the energy utilities and possible future private sector participation and developing operational activities in the sustainable energy and energy efficiency areas.

• Financial Sector: Following a wave of privatisation over the past two years, the banking sector is now mostly in private hands and a total of 18 foreign banks have entered the Serbian market. A phase of further consolidation is likely in the coming years. The Bank will seek to assist banks with a strong presence looking for opportunities to develop new products and increase market share by assisting in further consolidation. The Bank will continue to work with local and foreign banks to provide Small and Medium Enterprise (SME) lines, thus fostering the emergence of a healthy SME sector in the Country. Furthermore, the Bank will increasingly look for equity and debt transactions in non-banking financial institutions, primarily in the area of insurance, private pension funds and mutual investment funds.

Kosovo

Regardless of the scope and nature of the international decision on its final status, expected later this year, Kosovo faces huge transition challenges over the coming years. Privatisation has advanced but fresh investment is limited. Reform of large public enterprises is at an early stage. There has been a progress in reforming publicly-owned enterprises (POEs). Eight main POEs, including the airport, the railways, the post and telecommunications, the energy utility (KEK), were incorporated in 2006. However, power sector reform is urgently needed. Following the signing of the Memorandum of Understanding between UNMIK and the EBRD in March 2005, the Bank will continue to focus on working with local banks and micro-lending institutions, including through the implementation of the Western Balkans SME Finance Facility and the newly established MSME Finance Framework for the Western Balkans and Croatia. The Bank will also focus on assisting the SME sector through the newly established EBRD-Italy Western Balkans Local Enterprise Facility, in close co-ordination with the TAM/BAS programme. The Bank will monitor progress in the transport, telecommunications and energy sectors in order to explore potential projects.