CHALLENGES IN TRANSITION AWAITING SERBIA

1. CHALLENGES IN TRANSITION AWAITING SERBIA Lajos Bokros professor of economics and public policy senior vice president for research and international projects Central European University Belgrade, October 8, 2005

2. Matrix of structural reforms in transition

3. Serious distortions leading to an especially tough double legacy • Stabilization & liberalization only halfway implemented in the 1990s, creating an • unpredictable & 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

4. Struggling with 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

5. Successful demand management without supply side adjustment? • Evolution of SMEs still in an incipient stage • Privatization of insolvent socially owned firms leads to socialization of liabilities • SOEs keep fighting for privileged position • High wage/high tax environment creates incentives for tax evasion and avoidance • Overemployment in civil service and public utilities eases unemployment temporarily

6. 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 !

7. Reduced effectiveness for monetary policy • unstable environment for money demand • inflationary expectations rather volatile • downward pressure on the e/r from lax income (wage) policy and cost inflation • upward pressure from huge inflow of remittances despite low deposit i/r • managed float has proved successful so far • next: currency board or inflation targeting?

8. 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

9. Fiscal reforms to start soon... • Tax reform proved 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 & additional funds • Fiscal decentralization to be considered

10. Structural reforms to be completedrapidly • Restructuring and privatization of public utilities and SOEs to be completed quickly • Insolvent socially owned firms need to be privatized by bankruptcy and liquidation • Complete financial sector modernization • Legal and judiciary reform; anticorruption • Labor market reforms, faster job creation • WTO-accession and EU-accession

11. Conditions for high level and sustainable growth in Serbia • Creating a business- friendly environment • Promoting FDI & FPI and domestic savings • Level playing field for all enterprises • Simplification of tax administration • Labor market flexibility greatly enhanced • Free trade with EU and all Balkan countries • Smaller state providing high quality public goods and services in a user friendly way