During the 1990s, Serbia was exposed to wars and economic sanctions. The political changes since 2000 have laid the foundation for making a clean break with the past decade of economic decline. They have done so by creating the basis for economic and social reforms as well as for increased donor support.

Strong economic progress has been achieved since 2001, particularly in expanding private sector participation in the economy. Macroeconomic stability, achieved swiftly in the first years of transition, has been broadly maintained although the economy has been hit by global downturn. Real growth of Gross Domestic Product (GDP) averaged 6.4 percent in 2007 and 2008. Growth was fueled by high demand linked to a significant credit boom, expansionary fiscal policy, increases in real wages, and rapid increases in exports. There have also been major improvements in the business environment that saw Serbia ranked as the top reformer globally in Doing Business 2006 report, for reforms carried out in 2004-2005. Still, further reforms to strengthen the environment for sustained private sector led growth, including continued structural reforms and privatization, will be vital to ensure that living standards continue to converge with those in Europe.

However, despite Serbia's strong growth performance, significant challenges remain. External debt is on the rise and increased from about 60 percent of GDP at the end of 2007 to a projected 75 percent at the end of this calendar year. Although policy action and fiscal restraint will be required to address external weaknesses, Serbia's reserves position is currently very comfortable as a result of strong private sector inflows including foreign direct investments (FDI) from past years. FDI averaged 7.2 percent of GDP over the last 5 years, resulting in Serbia being among the top countries in Europe and Central Asia with respect to attracting investment. FDI was especially strong in 2006, as a result of several large privatization deals, including the sale of a mobile telephone operator, but since then are more related to green-field projects and capital increases. Foreign currency reserves declined at the of 2008 but started to recover in recent months.
At over 40 percent of GDP, public expenditures remain high. While a fiscal adjustment occurred between 2003 and 2005, with expenditures falling from almost 44 percent of GDP to just over 40 percent, those gains have been reversed with recent wage rises and spending pressures as a result of parliamentary election promises, and a deficit has again emerged. The budget for 2009 has been prepared in close cooperation with the IMF (as part of the Stand-By Agreement) and there was a significant fiscal adjustment embedded in the program. The reason for this was that the impact of the international economic crisis on Serbia became more and more visible thus reflected on collection of public revenues as well. Inflation in the past several years was stubborn and stood at levels close to 10 percent. Only in recent months there has been a decline in price levels.

Unemployment, poverty, and poor inclusion of the vulnerable remain concerns in Serbia. During the past decade, a long period of instability, international isolation, and economic turmoil adversely affected living standards of the vast majority of the population. The country's poor economic performance over that period led to a decrease in real earnings and was accompanied by deterioration in social protection and health services. As a result, poverty rose sharply in the 1990s. Although currently around 6.6 percent of the population falls below the poverty line (according to Living Standard Measurement Survey), one third of the country's people are barely above the poverty line and remain in danger of slipping into poverty if any adverse economic developments occur. The unemployment rate (as per internationally comparable Labor Force Survey) is still high at 14 percent of the labor force despite the significant decline from a year ago. Unemployment is affecting young people and minority groups in particular.

Challenges Ahead

• Harmonizing the fragmented political scene. Despite major improvements, the fragmented political scene hinders the development of a more stable political environment.
• Accelerating EU integration. The Stabilization and Association Agreement with the European Union has been signed, but is still not effective.
• Maintaining macroeconomic stability. Due to fiscal deficit and the growing impact of the international economic crisis, macroeconomic stability remains vulnerable, particularly to external shocks.
• Improving governance and building effective state institutions. Building effective state institutions to improve governance and transparency, and implementing comprehensive legal and judicial reform are essential to improve government performance, increase foreign investment, and ensure sustainable growth.
• Improving the well being of the most vulnerable and building human capacity. The political sustainability of the reform effort will depend to a large extent on the government's success in shielding the vulnerable and building human capital. Improving social protection mechanisms and boosting the quality and efficiency of health services and educational system are the key challenges. In particular, efforts will also be required to alleviate poverty among minority groups, rural poor, and in depressed regions formerly home to large industries.
• Addressing environmental problems and mitigating disaster risks. Significant environmental issues will need to be addressed and managed. Also, recent floods, droughts, and fires have highlighted the need for effective regional disaster preparedness and response capabilities. These issues are also thrown into focus by the increasing need for climate change mitigation and adaptation measures.

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Landmark Projects Pension reform Energy community of Southeast Europe Irrigation Transport rehabilitation Read more

The Bank's current portfolio consists of 12 projects under implementation with a total commitment value of $845.8 million (including IDA, IBRD, and GEF).

Investment support is provided in the following areas: (i) transport and energy infrastructure aimed at rehabilitating the road network, completing the Corridor 10 highway and encouraging regional integration; (ii) agricultural, environmental, and irrigation investments to improve production and help Serbia meet EU standards; (iii) pension and health sector reform to strengthen the quality of service and improve financial sustainability and social services; (iv) strengthened land administration; (v) energy efficiency; (vi) regional development activities in the depressed former mining region of Bor; (vii) improved delivery of local social services; and (viii) reducing pollution of waters connected to Danube River from selected Serbian enterprises.

In addition to lending projects, the World Bank has a wide-range of analytical and technical assistance activities in Serbia. The Bank’s flagship report in FY09 was a Public Expenditure Review (PER), following a request from the Minister of Finance in September 2008 on where she could cut costs. Other analysis identified measures that would make the pension system financially sustainable while ensuring adequate benefits into the future, and others that would strengthen capital markets and domestic savings through the issuing of longer term public debt, given that Serbia increasingly needs to look to local funding as external sources dry-up. With an eye to the longer-term competiveness agenda the Bank is providing technical assistance for education reform (a long neglected sector in Serbia), strengthening Research and Innovation (key obstacles to successful completion of transition) and to improve efficiency in Municipal Enterprises. The Bank has also been asked to coordinate support for better governance in the justice sector through a multi-donor trust fund. Broader academic and public dialogue is assured through a series of roundtables and policy notes.

IFC and MIGA investments and guarantees have particularly helped to strengthen the financial sector and the availability of capital for SMEs. Since 2001, IFC has invested over $325 million in Serbia, and MIGA has provided guarantees of over $400 million. Investments have helped to encourage entry by significant foreign banks, and have supported strong credit growth (from 20 percent to 80 percent of GDP between 2003 and 2006). After the financial shock in September 2008, IFC disbursed US$30 million of existing commitments to two financial institutions to boost their liquidity. In February 2009, IFC’s committed portfolio was over US$268 million comprising US$61 million in equity and US$207 million in loans. Since November 2007, IFC provided investments of US$36.7 million, including US$21 million in capital to a bank supporting small and medium enterprises (SMEs) and mortgage financing, and US$15.7 million to a leasing company focusing on SMEs and agribusinesses. In addition, IFC financed about US$200 million to support a few strategic investors, including two regional funds, to catalyze development of projects in infrastructure, commercial property, and SME support in Serbia and neighboring countries. As of June 30, 2009, MIGA’s portfolio in Serbia contained four contracts supporting one project in the financial sector, totaling US$158 million and US$73 million in gross and net terms respectively. However, in the context of the current global financial crisis, where such cross-border capital flows from parent banks to their subsidiaries will be critical to stabilization in Serbia, MIGA expects exposure in Serbia to increase.

Going Forward

Future World Bank cooperation with Serbia will be built on the successes of recent strong economic performance. This cooperation is outlined in a new Country Partnership Strategy (CPS) that was approved by the World Bank Board of Executive Directors on December 13, 2007. The CPS envisages base case IBRD lending of $600 million over the period of 2008-2011.

The World Bank has helped Serbia restructure the banking sector and privatize enterprises to foster growth. Read more

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For general inquiries on the World Bank in Serbia, please contact:

Vesna Kostic, External Affairs Officer

Phone: +(381-11) 30-23-700
Fax: +(381-11) 30-23-723
Email: vkostic@worldbank.org
Website: http://www.worldbank.rs

For questions and comments about this website, please contact:

Vamsee Kanchi
ECA Web Editor
Email:vkanchi@worldbank.org

Website:http://www.worldbank.rs