Country Brief 2003

Overview

Serbia and Montenegro is a lower middle income country with Gross National Income (GNI) per capita of US$ 1,900, in 2003. Agricultural land is fertile and arable, and the country is rich in natural and mineral waters. Serbia and Montenegro is also well positioned for development as a transportation hub due to its situation on the crossroads of land and air routes linking Europe from North to South and West to East. In 2002, services accounted for 40 percent of GDP, industry for 36 percent, and agriculture for 24 percent.

After a delayed start of transition, since 2001 Serbia and Montenegro is progressing steadily towards a market economy. Progress with structural reforms was impressive, despite the political turmoil of the past two years which included the assassination of Serbian Prime Minister Zoran Djindjic, numerous rounds of elections, new constitutional arrangement etc. Macroeconomic stability, achieved swiftly in 2001 and 2002, was maintained. The economy grew at 5.5 percent in 2001 and 4 percent in 2002, though growth is now slowing down. Thus in 2003 estimated growth achieved was 3 percent.

Poverty remains a major concern. During the past decade, a long period of instability, wars, international isolation, and economic turmoil adversely affected the living standards of a vast majority of the population. The country’s poor economic performance led to a decrease in real earnings and was accompanied by a deterioration in the social protection and health services. As a result, poverty rose sharply in the 1990s and remains widespread in both Republics. Although 10 percent of the population falls below the poverty line (10.6 percent in Serbia and 9.4 percent in Montenegro), one third of the country's people are precariously above the line, and remain in danger of slipping into absolute poverty should any adverse economic developments occur.

Events since 1991

Between 1991 and 1999, the country suffered a severe economic decline, due to external as well as domestic factors. The decade of decline left a daunting economic and human legacy with a collapsed economy, fragile institutions and increased vulnerability. In 1993, hyperinflation was acute, and one of the severest cases in the world. GDP declined by 16 percent in 1999 alone. By 2000, when the country began its transition to democracy and a market economy, GDP had fallen to less than half its 1989 level. Foreign trade volumes had fallen even more, with exports in 2000 down by 61 percent and imports down by 31 percent from 1989 levels. Debt climbed to unsustainable levels -- the foreign debt of around $12.2 billion represented 136 percent of GDP in 2000. The financial sector was in total ruin. In addition, the wars in Bosnia and Croatia, as well as the Kosovo conflict, that followed the break up of the Socialistic Federal Republic of Yugoslavia left Serbia and Montenegro with 450,000 refugees and 240,000 internally displaced persons, as well as other economically and socially vulnerable groups.

Recent economic progress

Since 2000, good progress with macroeconomic stabilization and structural reforms has been achieved. These policies were supported by an IMF programs: Stand By Arrangement of US$249 million equivalent, approved in June 2001, and a three-year Extended Arrangement (EA) of US$829 million equivalent, approved in May 2002). In July 2001, a US$4 billion, four-year comprehensive economic recovery and transition program was supported at a Donors’ Conference in Brussels, co-organized by the World Bank and the European Commission. Close to US$2.5 billion has been disbursed by the end of 2003. In 2001, an agreement was reached with the Paris Club that resulted in a 51 percent reduction of the outstanding debt to Paris Club creditors. A further 15 percent is to be reduced upon completion of a three year Extended Arrangement with the IMF. In July 2004 an agreement on debt restructuring with the London Club creditors was reached. This will result in a 62 percent reduction of the outstanding debt ($2.7 billion) to the creditors gathered in London Club.

In 2002, inflation fell to 14 percent, down from 113 percent in 2000, and 39 percent in 2001. In 2003 further disinflation continued, thus end-of-period inflation was 7.8 percent. The exchange rate remained stable during the first two years after many years of volatility. In 2003 slightly looser exchange rate policy was led, allowing some degree of dinar depreciation. Banking sector reforms that were initiated with the closure of the four largest banks, restored credibility and domestic foreign currency deposits rose from almost none to EUR 1.8 billion. Official foreign currency reserves reached $3.5 billion in 2003 from a mere $360 million in 2000.

Focus of World Bank Assistance

Assistance so far. Since Serbia and Montenegro rejoined the World Bank in 2001, the Bank has assisted the country in its efforts to move towards a market economy. A temporary, exceptional three year IDA -financed program of up to US$540 million supports policy based lending that assists the Serbian and Montenegrin authorities to implement policy reforms. By September all of these %540 million plus $30 million in grants were committed. The Bank is helping the economy to create jobs by developing the private sector, as well as by putting in place an effective financial structure and an honest judicial system. The power situation in Serbia has improved with Bank assistance and the focus has now shifted to tackling the critical power situation in Montenegro. 

The World Bank has helped the country to clear the backlog of arrears in pensions and social benefits which make a material difference to the lives of the most vulnerable. It is also financing programs that help people adjust to the changing demands of the country's labor market, and is equipping the younger generation to take on the challenges of a future in Europe by modernizing the education system.

Going forward. The World Bank is assisting the Serbian and Montenegrin authorities to continue implementing policy reforms in the next three years with $400-$550 million of a IDA - IBRD mix financing program. World Bank assistance has four key objectives:

Restoring macroeconomic stability by strengthening budget planning and execution, and improving public expenditure management and financial accountability.

Fostering economic growth by supporting private sector development; helping the development and modernization of comprehensive property registration and cadastre systems; improving the efficiency of the economy through restructuring of state owned companies; restoring confidence in the banking sector; supporting improvements in the legal framework of the financial sector; improving the supervisory work of the National Bank; reducing barriers to trade and the establishment of new businesses; improving infrastructure and energy supply; and protecting the environment.

Improving the well being of the most vulnerable and building human capital through reforms in education and health, as well as by promoting efficient social protection systems.

Improving governance and building effective institutions by increasing the transparency of government spending; strengthening accountability; and building the capacity of the judicial system.

For further details of the World Bank's Transitional Support Strategy Update for Serbia and Montenegro please click here.

Impact on the Ground

Social safety net improved.Pensions and social benefits are now paid on time and the backlog of arrears is rapidly being cleared. In Serbia, some 117,056 families receive social benefits and 1.3 million pensioners regularly receive pensions. A system of one-off payments of social benefits has helped shield the poorest families. This is a significant improvement from 2000, when arrears in pensions and social benefit payments were commonplace. In both Serbia and Montenegro, a number of steps have also been taken to bring entitlements to pensions in line with revenues, while protecting the standard of living of the poorest pensioners. Labor redeployment programs under the Employment Promotion Project are aimed at getting some of the 940,000 unemployed persons in Serbia back to work.

Innovative teaching started. Innovative teaching has started in some 208 schools in Serbia as a result of the Education Improvement Project. School Improvement Grants, the biggest component of the project,  are expected to be awarded to some 60 percent of all elementary schools and half of all general secondary schools by 2006.

Confidence in the banking sector being restored. Tighter bank supervision in Serbia has resulted in closure of 26 banks during the last three years. At the same time 9 new foreign-owned banks have opened for business. The process of bank privatization has also started under the Privatization and Restructuring of Banks and Enterprises Technical Assistance Project.

Private sector being developed.  Substantial progress has been made in revitalizing the enterprise sector, with the adoption of a new privatization framework and a new law on foreign investment. In addition, some restrictions on the entry and operations of SMEs have been removed, draft new laws on securities, bankruptcy and secured transactions have been prepared. Between 2001 and 2004 1,133 companies were privatized through tenders, public auctions and stock exchange. The Bank and other donors have facilitated these efforts through significant support to institution building.

Reliability of power supply improved.Electricity production has been restored in Kostolac 2 thermal power plant, power transmission facilities refurbished, and the stability of the transmission network improved. This has enabled Serbia to go through the winter without power cuts. Moreover, net electricity imports into Serbia have been reduced by 30 percent in 2001, as compared to the previous year. Although electricity supply in Montenegro remains critical, the Bank is working with other donors to reduce demand and system losses, and to improve the financial position of the electricity company.


Challenges Ahead

Implementing the new constitutional arrangement between Serbia and Montenegro. As the two republics are vastly different, implementing the new constitutional arrangement is a major challenge.Montenegro contributes to less then 10 percent of the country’s GDP and has a population of around 700,000, whereas Serbia has a population of a little bit below 8 million.

The economic systems of Serbia and Montenegro are different. Montenegro’s official currency is the Euro, whereas Serbia uses the Dinar. The two republics differ in foreign trade policy, particularly with respect to agricultural products. The European Union decided to give the two republics possibility of the two track approach so they will not have to harmonize the two separate economic systems in order to comple the Stabilization and Association Agreement with the EU.

Harmonizing the fragmented political scene.Despite impressive reform efforts and substantial donor funding, the fragmented political scene remains an obstacle to more comprehensive change.

Maintaining the fiscal sustainability of external debt in the medium term. This is one of the major economic challenges that lie ahead as economic recovery remains highly vulnerable, particularly to external shocks.

Improving governance and building effective state institutions. Weak state institutions, poor governance, inadequate legislation, and an inefficient judiciary are the main deterrents to foreign investment. Building effective state institutions and implementing comprehensive legal and judicial reform is, therefore, essential for a return to 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 most vulnerable from the negative effects of transition, and in building human capital. Efforts to restructure large enterprises will invariably strain social protection mechanisms and require better targeting of resources to the most vulnerable. Improving the sustainability of the health system and improving the quality and efficiency of health services will also be key challenges.


World Bank Partners in Serbia and Montenegro

	2001	2002	2003	2004	Total
Commitments	-	172	225	125	522
Disbursements	-	70	141	55	266

November 2004