Professor Dejan Šoškić, PhD, Faculty of Economics, University of Belgrade

Reforms Have Begun – Toughest Yet to Come

Serbia made its last standby arrangement with the International Monetary Fund (IMF) in early 2015. With this programme our country committed to making significant progress in three important areas: (1) restoring the sustainability of public finances; (2) increasing the stability and resilience of the financial sector; and (3) implementing comprehensive structural reforms aimed at increasing employment and again achieving sustainable high economic growth.

Professor Dejan Šoškić, Faculty of Economics, University of Belgrade

The first job, i.e. the task of restoring the sustainability of public finances, is an activity aimed at stopping Serbia in its tracks and diverting it from the road to the public debt crisis, i.e. potential bankruptcy. It practically started last year with the reductions in wages and pensions, and its initial results are relatively encouraging – the budget deficit has reduced in the previous year. However, at the same time, part of this reduction is due to a lack of the realisation of the kinds of investments in infrastructure which, by definition, can raise economic activity.

What is very important to understand is that the job we started must continue in the coming years, because our debt to GDP ratio continues to grow. Since the beginning of 2012, it has increased from the level of around 45 per cent to over 75 per cent today, with a tendency for further growth. Hence, further streamlining budgetary expenditure is necessary, though with simultaneously greater investment in the country’s capital infrastructure.

In this area, we should implement the reorganisation and rationalisation of the public services, which is mainly still just being announced. However, in order to really redirect Serbia away from the path leading to a public debt crisis, it is necessary to create conditions and ensure higher economic growth, because it is only with higher GDP growth that we can expect a decline in the relative share of debt in GDP, and a gradual return to the zone of sustainably low public debt. And here we should have no misconceptions: the rationalisation of public expenditure does not, in and of itself, necessarily lead towards economic growth.

It is precisely in the interests of encouraging economic growth that serious work must be undertaken on two other elements of the programme with the IMF. The second part of the programme, as it was initially established, emphasises the resolving of problematic loans in the banking sector and reduction of the Euroisation of the domestic financial system, i.e. encouraging Dinarisation.

The aim of this part of the programme is to reduce banking sector risks and promote the growth of the crediting activity of banks, as the main motor of economic growth and employment. We started this part last year with the adoption of the Strategy for Resolving Problem Loans and special diagnostic testing of banks. Certain corrections were also made to tax regulations to encourage the writing off of non-performing loans.

However, unfortunately, almost nothing has been done in the area of Dinarisation. Much still needs to be done throughout this entire area, regarding activities linked to problematic loans and bank regulations, if we want to see higher rates of economic growth based on higher lending activities. And this is a serious job that still awaits our country in the future.

We should not exclude the possibility of a subsequent consolidated submission of the report to the Executive Board of Directors of the IMF relating to both this mission and the next, which can be expected in late spring, i.e. after the parliamentary elections

The third part of the programme relates mostly to structural reforms, and primarily concerns the reform and streamlining of public enterprises and improving conditions for doing business. This in itself also includes the comprehensive institutional strengthening of the economic system. This part of the job is probably the most difficult and takes time, but with the exception of improving labour legislation, which happened more than a year ago, little has been done to date in this area.

The current IMF mission has come to assess the results of the implementation of the agreed programme. It is certain to insist on results from all three areas, particularly from the Third fields, relating to the structural reforms that we have done the least work on so far. Difficulty in the implementation of this programme certainly lies in the fact that the political cycle is interrupted and that parliamentary elections are expected.

In such circumstances, the IMF, as a rule, refrains from extensive public communication regarding the implementation of the programme, in order to avoid the potential use of their views on the political election process. For this reason, it is realistic to expect that this visit of the IMF mission passed relatively quietly, but their findings will still certainly be important for our country.

We should not exclude the possibility of subsequent consolidated submission of the report to the Executive Board of Directors of the IMF relating to both this mission and the next, which can be expected in late spring, i.e. after the parliamentary elections. The reforms have been initiated, but the main reform tasks and the toughest are still ahead of us.