Dušan Vujović, Serbian Finance Minister

Strong Consensus On Further Reforms Needed

It is today abundantly clear that fiscal consolidation produced tangible economic results. They can only be sustained through structural reforms, the success of which depends on renewed political and social consensus among key stakeholders, as well as our ability to put aside short-term, partybased and vested interests and enable the improvement of general welfare


This year’s highest accolade ‘Reformer of the Year 2018’, organised by NALED, was awarded to Dušan Vujović at a ceremony in the Belgrade City Hall.

NALED’s Board of Directors made the award to Dušan Vujović for the results achieved in 2017 in the struggle against the grey economy, reform of parafiscal charges and creating of an environment of incentive for developing entrepreneurship.

Serbia has demonstrated its relentless determination to address its dire economic situation over the past three years. The results achieved were rewarded and recognised by international financial institutions, rating agencies, financial markets and national actors. The government has no intention of changing its course in pursuing structural reforms, but in order to achieve sustainable results, it needs support from the political and economic elite.

Here we discuss the new IMF agreement, as well as the challenges ahead for the government, with Serbian Finance Minister Dušan Vujović.

What has changed in the way finances are managed since there is no arrangement with the IMF?

– Almost nothing has changed.

The fiscal consolidation program supported by a three-year precautionary IMF stand-by arrangement has been completed substantively with the approval of the eighth and final review by the IMF Board on December 20, 2017. The program received superlative reviews both in terms of comprehensive program design and macroeconomic (fiscal and monetary) performance which consistently exceeded expectations. Formally, the program will conclude on February 20 with the acceptance of final documents which include macroeconomic data, as well as laws and Government decisions passed as of December 31, 2017.

The fiscal consolidation program supported by a three-year precautionary IMF stand-by arrangement has been completed substantively with the approval of the eighth and final review by the IMF Board on December 20, 2017

You once said that “in the context of reforms, it would be good if we had a programme that puts us all in the situation to plan well and realise those plans.” What are your thoughts about cooperation with the IMF today?

– Going forward, the Government will certainly continue regular professional dialogue with the Fund on macroeconomic policies and pending structural and institutional reforms, as well as to conduct periodic Article IV consultations mandatory for all member countries. Although informal dialogue may sound appealing, formal IMF programs have many advantages albeit with some strings attached.

Dusan VujovicOne such program is the new Policy Coordination Instrument (PCI) which appears to be a very good fit for Serbia. It allows full coordination of fiscal and macro-monetary policy and enhanced focus on structural reforms. At the same time, PCI has fewer performance criteria as it does not provide access to financing which Serbia does not need given its strong fiscal balance position and continuously declining debt-to-GDP ratios.

I hope that the scope and format of future collaboration with the IMF will be agreed soon enough to sustain the strong positive message sent to international financial markets at the end of 2017, as well as provide reliable parameters for the timely preparation of the 2019 budget which should gradually converge to the EU semester system.

How does the Economic Reform Programme for the 2018-2020 period respond to some of the obstacles hampering growth?

– Economic reform programme (ERP) is a specific instrument of the European Union designed for candidate countries to evaluate and monitor the progress of economic reforms. The first part of the report focuses on recent macroeconomic developments and provides detailed forecasts for the next year (2018) and less detailed projections for the subsequent two years (2019-2020).

In format and scope, it coincides with the Fiscal strategy and, thus, conveys the same key assumptions and projections contained therein. The second part of the ERP report deals with 18 sectoral priorities across 9 thematic areas set by the EC. Specific priorities are identified by the leading ministries responsible for physical and social infrastructure based on their impact on future sustainable growth and development.

Special attention is paid to cross-cutting themes that can create a breakthrough and get the economy on a sustainable higher growth path. Most vivid examples are projects expected to enhance the competitiveness of Serbian companies by providing easier access to the EU markets through better infrastructure and trade facilitation as well as “soft” programs aimed at tax administration reform, public finance and investment management, improved education system and more efficient labour markets.

In short, ERP provides a standard tool to evaluate macroeconomic policy choices and select a limited number of priority programs. These programs have critical importance in enabling the country to better respond to external and domestic challenges and generate stable, sustainable, and inclusive medium-term economic growth.

You have for years announced the intensifying of structural reforms, but they are not happening at pace anticipated. You once claimed that strong resistance exists. Does it still exist, or is something else now slowing them down?

– Although the first stage of economic reforms focused primarily on fiscal consolidation, it devoted considerable attention to initiating important structural reforms. The legacy of structural problems included more than 500 problems SOEs held in the portfolio of the Privatization Agency, inefficient public utility and transport companies, state-owned and private banks with a large share of NPLs, and, last but not least, inefficient public administration at all levels of government.

Dusan VujovicSeparate privatization, restructuring and reform programs were prepared for each subset in the earnest (late 2014 and the first half of 2015). Unfortunately, the implementation was often delayed and the success was, at best, partial due to complex economic, technical, managerial, legal, and political economy issues involved.

Three years later, it is abundantly clear that fiscal consolidation produced tangible economic results which can only be sustained through structural reforms. The success of these reforms hinges on renewed political and social consensus among key stakeholders: political parties, labour unions, professional and non-government organizations, as well as the elite and opinion-makers. Short-term partial and vested interests will have to give in to enable general welfare improvement.

Presently this is still not the case. Small interest groups are stalling the reform process in order to preserve their privileged positions and entitlements. These are often misaligned with the market and democratic outcomes and, hence, unsustainable in the medium run. More effective social and political dialogue is needed to identify and resolve these issues and, thus, unlock the much-needed continuation of economic and social change.

I hope that the scope and format of future collaboration with the IMF will be agreed soon enough to sustain the strong positive message sent to international financial markets at the end of 2017

Why has the government not yet mastered the task of planning and managing major investment projects?

– We are almost there. Establishing a transparent and efficient system for investment project management is a comprehensive multi-year task. Over the last few years, we have developed a “log frame system” spanning all steps of the investment project cycle: from identification, via preparation and appraisal, to implementation, monitoring and evaluation.

In mid-2017, after a long professional debate, the Government approved a Decree on capital investments which came into force at the beginning of this year. Detailed instructions for the implementation of the Decree, manuals and hands-on training programs are currently being finalized.

Admittedly, the first stage took longer than anticipated, but this can easily be compensated if the new methodology is implemented without delays and in line with the best international practice followed by OECD countries and IFIs (such as the World Bank, EBRD, EIB etc.).

Going forward, all investment projects will be scrutinized at an early identification stage to establish their relevance for the longer-term development strategy. Next, all projects will be tested through pre-feasibility and feasibility studies, and formally appraised to ensure that project components guarantee the achievement of development objectives (efficacy) and efficient use of limited public resources.

Finally, best financing will be secured from available long-term sources: IFIs, bilateral sources, and financial markets.

Serbia’s credit rating has improved again. How will that influence you in decisions to borrow on the internal or external markets?

– After years of consistent and sustainable macroeconomic and growth performance Serbia has earned the trust of rating agencies and financial markets through significantly lower interest spreads on all (especially longer-term) maturities. This will have a positive influence on our decision where and when to raise financing.

Dusan VujovicDuring the past two-three years, Serbia did not issue large long-term bonds in international markets for three reasons. Firstly, our actual gross borrowing needs were markedly (one-two billion Euros) lower than the originally planned stage due to significantly better fiscal performance: Actual fiscal deficits were two-three per cent of GDP better than planned.

Secondly, interest costs declined much faster in the domestic market, on smaller bond issues, and on shorter-to-medium term maturities. Thirdly, we had access to abundant low-cost long-term financing for budget support from the World Bank and bilateral sources.

As a result, during the past few years we opted for cheaper sources of financing (domestic issues, IFIs and UAE loans) and, thus, significantly lowered the interest cost both in absolute (by 250 million Euros) and relative terms (by 1 per cent of GDP).

Over time and with improved credit rating, Serbia can now raise longer-term financing in international financial markets at below two per cent. This makes large international markets equally attractive and, thus, increases the probability of issuing large ten-year bond(s) this year. The decision will depend on the evolution of market circumstances in the coming months.

More effective social and political dialogue is needed to identify and resolve structural reform issues and, thus, unlock the much needed continuation of economic and social change

Why hasn’t Serbia used a positive wind in its sails from the growth of demand in European economies, the supply of cheap capital, and favourable prices of its exports? Why, for example, is Slovenia recording strong economic growth precisely as a result of such factors

– Before answering this question it is important to recall our starting macro-fiscal position and the status of reforms.

Serbia entered the three-year fiscal consolidation program at the lowest point of combined fiscal and debt crisis, protracted recession and exogenously caused growth slowdown (floods). In July 2014 the projected fiscal deficit for the year was 8.8 per cent of GDP. Fiscal liquidity was at the minimum threatening to reach the point of bankruptcy in 78 days. The third-quarter GDP fell by 3.7 per cent.

Dusan VujovicThe situation was equally worrisome on the real side. Economic reforms were stalled. Privatizations and restructuring of SOEs were halted by the legal protection of distressed companies to prevent landslide bankruptcies.

Public utility companies were directly tapping budget resources (through budget financing and/or guarantees) to cover their chronic losses while avoiding the much needed managerial, organizational and financial restructuring. Public administration was burdened with excess employment and wages higher than in the private sector.

Despite these starting difficulties and the likely prospect of facing the recessionary impact of the fiscal consolidation program, we managed to record both a significant fiscal improvement and an economic growth turnaround. From the fourth quarter of 2014 GDP continuously improved to reach 2.8 per cent growth in 2016 and a projected 3 per cent growth in 2017.

Given that the lower actual growth (2 per cent) was caused entirely by supply-side factors, and that the economy is projected to recover to 3.5 per cent in 2018 and embark on a sustainable 3.5-4 per cent growth path in the medium run, the economic revival embedded in the 2015-2017 fiscal consolidation program can rightly be considered a case of “expansionary austerity”.

Moreover, unlike the situation at the start of reforms in 2001- 2008 period, when demand-driven growth failed to generate sufficient domestic supply response and led to unsustainable increases in twin (fiscal and current account) deficits, we can now count on the positive impact of wage and pension increases on economic growth.

Now back to your question. Obviously, during the past three years, Serbia has spent an enormous amount of energy in addressing difficult legacy questions of the past and was not yet ready to quickly and efficiently respond to growth opportunities that you rightly mention.

With successful completion of structural reforms and ongoing infrastructure and soft reform programs (including but limited to vocational training, innovations, digital economy etc.), I expect that Serbia will be much better positioned to continuously benefit from EU integration processes, both in terms of job creation, economic growth and improved wellbeing for all citizens.

Moreover, I strongly believe that Serbia will open an entirely new chapter in its growth potential by completing institutional reforms necessary to attract large institutional investors and substantially revive the presently lethargic domestic capital market.

When can we expect para-fiscal charges to finally make the reform agenda? Why have we been waiting for several years for that?

– Improved treatment of para-fiscal charges went through several stages. The first stage was focused on identifying and compiling more than 500 fees and charges. In this multi-year effort, we greatly benefited from direct and indirect assistance provided by donors, academic researchers, professional alliances and organizations (including Serbian and many bilateral chambers of the economy), NGO’s etc.

The second stage was devoted to separating administrative fees (takes in Serbian) from charges, and to organizing, analysing and systematizing the enormous set of charges. The third stage developed a unified framework for equal treatment of all charges and produced a draft law which is presently being presented for public debate.

The fourth stage will consolidate all proposals and submit the final proposal (draft) for government approval and consideration in Parliament before the summer recess.

The fifth stage will be devoted to capacity building and preparation for the implementation starting, I hope, January 1, 2019.

The sixth stage, expected in a few years, will provide a basis to consolidate and simplify multiple related charges with considerable benefits for domestic and foreign investors, as well as favourable fiscal and growth effects.

Establishing a transparent and efficient system for investment project management is a comprehensive multi-year task. We are almost close to finish it

Serbia seemingly has the opportunity to become a member of the EU before 2025. What exactly does this mean for Serbia’s preparations in the area of finance?

– It is likely that the EU will aim to include all the Western Balkan countries by 2025. I am convinced that Serbia can meet all the criteria within the next 3-4 years and become a member much sooner.

There are a number of chapters that deal with broad financial and fiscal issues. In general, we made solid progress in preparing negotiating positions and are ready to open these chapters in the coming years. Pending adjustments needed to meet EU requirements vary across chapters and involve both policy and legal issues.

The movement of capital (Chapter 4) will require considerable liberalization on the capital account (especially short term capital flows), fuller integration of the payment systems, and full observance of the AML-CFT standards. In the area of financial services (Chapter 9) we will need to achieve full alignment with the EU in banking, insurance, financial markets, securities markets, and investment services.

Regarding taxes (Chapter 16) the main task is to align excise taxes on liquor based on alcohol content. In the area of economic and monetary policy (Chapter 17) the main pending task is to secure full independence of the central bank. For customs union (Chapter 29) the main issues are in the areas of aligning administrative procedures, IT systems, and in capacity building.

Regarding public financial control (Chapter 32) the main focus is internal financial control in the public sector, external audit, protection of the financial interests of the EU, and prevention of Euro counterfeiting.

Finally, in the area of financial and budget issues (Chapter 33), we do not expect a need for a major adjustment.

In December 2017, the Parliament adopted amendments to the Law on the Settlement of the Public Debt of the Republic of Serbia Arising from Unpaid Foreign Currency Savings which extended the deadline for the submission of claims until February 23, 2019. How much does this debt amount to in total and what will be the dynamics of payment?

– The exact amount of liabilities for the Republic of Serbia based on these claims will only be known upon the completion on the process of filing claims (by the extended deadline) and verifying the amount of claims submitted by eligible citizens of the former Yugoslav republics who had saving deposits in branches of Serbian commercial banks operating on the territory of SFRY. The maximum amount of claims (ceiling) has been set at 310 million Euros. The claims will be paid over five years in ten equal semi-annual instalments. The first payment is due on 31 August 2019, and the last on February 29, 2024.

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