 BELGRADE, Serbia - In the decade following the breakup of Yugoslavia, Serbia suffered a near economic meltdown. The financial sector was in shambles, and people had little confidence in the banking system. Many state-owned companies were heavily indebted and lacked adequate corporate governance. These problems were combined with hyperinflation and high unemployment.
The World Bank has helped Serbia restructure the banking sector and privatize enterprises to foster private sector growth and job creation. Because of the interconnectedness of the two sectors, these challenges had to be tackled simultaneously. Support was channeled through two credits and matched by technical assistance. Restoring Confidence in the Banking System
Serbia’s state-owned banks were collapsing under the weight of years of mismanagement and economic distress. The Serbian government set out to privatize insolvent banks by selling them to strategic investors, local or foreign. The Bank Restructuring Agency (BRA) is responsible for these privatizations. The goal is to complete the process by mid 2007. Already, foreign banks control about 50% of total banking assets, reflecting growing investor confidence in the banking system. “Our banks are attractive to foreign investors because Serbia remains the last untapped market for international banks in the region,” explains Silvija Seizović, director of the Project Management Unit at the Bank Restructuring Agency. “In fact, foreign banks can no longer enter the Serbian market unless they buy one of our banks.” Panagiotis Vlasiadis, the Greek general manager of Jubanka, privatized in January 2005, had only positive remarks about his experience in Serbia thus far. “I have found the Serbians to be very professional and sincere,” he emphasizes. “They are not just paying lip service to privatization; they truly believe in it. They have recovered from their financial problems very quickly.” Insufficient protection of deposits through insurance mechanisms was also behind the former lack of confidence in Serbian banks. The Serbian Parliament recently passed a Law on Deposit Insurance to protect people’s savings. BRA will begin implementing the law in 2006. Ordinary Serbians already feel the impact of these reforms on their daily lives. “People are a lot more secure about banks now,” says Snežana Mandić, 24, of Belgrade. Improving enterprise efficiency
With the vast majority of Serbia’s companies in dire straits, privatization of state- and socially-owned companies—where each employee has specific ownership rights—became a top priority. Large companies likely to attract foreign investment were sold with tenders, and smaller companies were auctioned and allowed to set their own timetable for privatization. The World Bank provided technical assistance to the Privatization Agency to sell 46 companies by open, transparent, and competitive tender. The goal was for foreign and other "strategic" investors to rehabilitate them. “We were successful in privatizing 1,500 companies since 2002 because we had the support of the government, who was dedicated to finishing the job,” says Branislav Zec, assistant director of the Privatization Agency. The Privatization Agency also prepared auctions for over 1,100 small and medium enterprises, with the goal of completing privatization in 2006. Milorad Bakalović, project manager for the Public Auction Center at the Privatization Agency, attributes the ability to privatize companies so quickly to learning from the experience of others. “Serbia is the last country in the region to go through privatization, so we benefited from the lessons of neighboring countries.”  One of the most vivid examples of a thriving company sold by auction is Hotel Park, in Novi Sad, the second-largest city in Serbia. The hotel was nearly defunct just a few years ago but has now achieved five-star status. Blagoje Rižić, who has worked in security at the hotel for seven years, says the difference is like night and day.
“Previously the hotel was neglected, and employees did not want to do anything,” says Blagoje. “Now, I have gone through training on the new security equipment, and my job is clearly defined.”
Also in Novi Sad, Velefarm, a pharmaceuticals wholesaler, purchased Sanitarija in April 2004 and has since heavily invested in the struggling company with a whole warehouse of brand-new equipment. “Salaries have doubled since the privatization,” said Gordana Šljivančanin, deputy director of Sanitarija. “Jobs have become easier to perform because we have removed many obstacles.” Future of the Serbian economy
At present, the indicators look promising for Serbia: GDP grew at 7% in 2004, and the World Bank is continuing to help improve the business environment by simplifying registration and bankruptcy filing for businesses. However, there are always adverse effects when an economy undergoes such a profound change. The Serbian government has been trying to alleviate the pain of the transition by including clauses in the privatization agreements that require new owners to retain workers from one to three years, or offer them a fair severance package. Furthermore, the unions that began to operate in 2000 are gaining strength in protecting the rights of workers and are participating in negotiating severance packages. Overall, the future looks bright for the economy. Not only are privatizations increasing the efficiency of businesses, but the focus placed on improving institutional capacity should ensure stable progress in the future. * * * This progress was made possible thanks to the World Bank's Private and Financial Sector Adjustment Credits and Technical Assistance Project.
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