Country brief 2007Updated February 2008
Source: World Development (2007), except unemployment rate (2006)
*Most recent data available 2001—2006.
NB: Data, including lending data below, is for Serbia and Montenegro. More data
Serbia is a middle–income country with a population of around 8 million and great potential for fast economic development, as the country is endowed with natural and mineral resources and fertile and arable agricultural land. Serbia is also well positioned for development of a transportation hub, given its strategic location at the crossroads of major road and rail routes in Southeastern Europe. Most economic activity is concentrated in services (about 63 percent of GDP), industry (24 percent) and agriculture (13 percent).
After the turmoil of the 1990s, Serbia has made significant progress since beginning a wide ranging program of democratic and economic reforms in 2001. Macro–economic stability has been restored, and incomes have risen strongly. GDP per capita, estimated at $2,100 in 2002, is approaching $5,400 at the end of 2007. During the same time period, poverty has fallen from 14.6 percent of the population to about 8.8 percent (according to Household Budget Survey).
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Recent Political Developments
The past few years have seen a degree of relative political stability in Serbia, with pro–reformist parties, in various combinations, since the democratic changes in October 2000. Democratic institutions have been strengthened and progress with structural reforms has been impressive, despite brief periods of political turmoil.
The Government is based on a new Serbian Constitution, adopted by national referendum in November 2006, following the dissolution of the State Union of Serbia and Montenegro in June 2006.
Advancing European integration is a stated priority of the Government and major progress has been made with the initiation of a Stabilization and Association Agreement (SAA) in November 2007. European integration is an objective supported by almost two thirds of society. The starting of the SAA follows almost two years of negotiations, which started in October 2005. Nevertheless, the political situation and the EU accession process in Serbia remains influenced by recent history. While the SAA has been initiated, signing and ratification will still take time and requires that Serbia demonstrates closer cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY). Serbia's strong administrative capacity may allow quick progress towards candidacy status once political issues are resolved.
Economy
Recent Economic Developments
During the 1990s, Serbia was exposed to wars and economic sanctions. The political changes since 2000 have laid the foundations 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 made since 2001, particularly in expanding private sector participation in the economy. The reform program has helped to underpin the country’s strong economic performance and reductions in poverty. Macroeconomic stability, achieved swiftly in 2001 and 2002, has been broadly maintained. During the first five years of transition the economy grew on average 5.5 percent per annum, peaking in 2004 with 9.3 percent GDP growth, one of the highest growth rates among transition economies. In 2007, growth remained strong at projected 7.5 percent. 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 living standards continue to converge with those in Europe.
Poverty and unemployment remain concerns in Serbia. During the past decade, a long period of instability, international isolation, and economic turmoil adversely affected the living standards of a 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 (according to Living Standard Measurement Survey) percent of the population falls below the poverty line, 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 official unemployment rate is alarmingly high at around 20 percent of the labor force, especially affecting young people and minority groups.
However, despite Serbia’s strong growth performance, significant challenges remain. External weaknesses are apparent in double–digit and expanding current account deficit. External debt remains about 60 percent of GDP, despite past London and Paris Club debt write downs. Although public debt has declined significantly, private external liabilities continue to grow quickly. 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 investment. Foreign direct investments (FDI) averaged 6.7 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 such investment. FDI was especially strong in 2006, as a result of several large privatization deals, including the sale of a mobile telephone operator.
At over 40 percent of GDP, public expenditure remains 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 election promises in run–up to the parliamentary elections in 2007, and a deficit has again emerged. Fiscal loosening has also created inflationary pressures and pushed the annual average inflation rate close to 7 percent.
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 initiated.
Maintaining macroeconomic stability. Due to fiscal deficit and high current account deficit, 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 in building human capital. Improving social protection mechanisms and boosting the quality and efficiency of health services and educational system will be key challenges. Particular efforts will also be required to alleviate poverty among minority groups, rural poor and in depressed regions formerly home to large industrial and mining industries.
Addressing environmental problems and mitigating disaster risks. Significant environmental issues associated with the legacies from heavy mining and industrial industries 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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Program to Date
On May 8, 2001, the Federal Republic of Yugoslavia (later Serbia and Montenegro) succeeded to the World Bank membership of the former Socialist Federal Republic of Yugoslavia. After the referendum on independence in Montenegro on May 21, 2006, Serbia and Montenegro became two independent states. The Republic of Serbia continues the membership of Serbia and Montenegro in the IMF and the World Bank Group.
- Landmark Projects
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As of December 2007, total IDA credits and grants committed to Serbia since 2001 by the Bank amount to approximately $740 million, with an additional $145 million in IBRD commitments. Serbia has now graduated from IDA status and will borrow on IBRD terms in the future.
The Bank has assisted Serbia to make progress against key objectives set out in the Country Assistance Strategy (CAS) for Fiscal Years 2005-2007: (i) Streamlining the public sector; (ii) encouraging private sector growth; and (iii) reducing poverty.
At the end of 2007, Serbia has a portfolio of 10 Bank-supported projects under implementation with a total commitment value of $398 million (including IDA, IBRD and GEF). Investments support focuses on (i) transport and energy infrastructure aimed at encouraging regional integration and spurring economic growth; (ii) agricultural, environment and irrigation investments to improve production and help Serbia to meet EU standards; (iii) pension and health sector reform to strengthen the quality of service and improve financial sustainability; (iv) strengthened land administration; (v) energy efficiency; and (vi) regional development in the economically depressed former mining region of Bor.
In addition to lending projects, the World Bank has a wide-range of analytical and technical assistance activities in Serbia, most notably in privatization, regulatory reform and business environment strengthening. Recent analytical work by the Bank includes a set of Policy Notes for the new government submitted in July 2007, and reports on decentralization, poverty, labor markets and public expenditure and financial management. A country economic memorandum, public investment and expenditure management review are under preparation.
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). IFC currently has 11 investments in Serbia valued at $308 million, predominantly in the financial sector, but also in retail and manufacturing sectors. MIGA at present has 8 active guarantees valued at $82 million, mostly in the financial sector. Technical assistance from IFC, MIGA and FIAS has provided policy advice to strengthen the business environment, establish the export finance agency, and on privatization processes.
Going forward
The World Bank has helped Serbia restructure the banking sector and privatize enterprises to foster growth.
Read moreAt the time of Serbia's membership to the World Bank in 2001, support focused on the importance of breaking with the past. However, 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 $600 million over the period of 2008-2011.
World Bank Group support under the CPS will focus on three priorities, identified by the Serbian Government:
Encouraging dynamic private sector led growth to ensure incomes continue to converge with European levels.
Providing opportunities and broadening participation in growth.
Managing emerging environmental and disaster risks.
To support Serbia’s development goals, the CPS outlines a focused program of analysis, investments, and financing to support critical reform efforts under the above mentioned three pillars. In the CPS framework, the World Bank plans to support the Government’s reform program through a series of development policy loans to assist in further improving the business environment, completing the privatization process for socially–owned enterprises, and strengthening the competitiveness of the enterprise sector. Policy reform can also be supported by investments to strengthen key economic sectors, including road and rail transport and energy. Efforts to promote growth will include support for Serbia’s engagement in cooperative regional initiatives, including the South East Europe regional energy market.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for Serbia
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World Bank Office
Vesna Kostic, External Affairs Officer
Phone in Belgrade: +(381-11) 30-23-700
Fax: +(381-11) 30-23-723
E-mail: vkostic@worldbank.org
Website: http://www.worldbank.org/yu
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