CHALLENGES IN TRANSITION AWAITING SERBIA Lajos Bokros professor

CHALLENGES IN TRANSITION AWAITING SERBIA Lajos Bokros professor Central European University Belgrade, May 22, 2005

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

Struggling with the 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 Big 4 • Privatization and FDI channeled into banks • Strengthening public trust and confidence

Successful demand management without supply side adjustment ? • Evolution of SMEs still in an incipient stage • Privatization of bankrupt socially owned firms is an exceptionally difficult process • SOEs keep fighting for privileged position • High wage/high tax environment creates incentives for tax evasion and avoidance • Overemployment in civil service and huge amount of gastarbeiter ease unemployment

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 !

Reduced effectiveness for monetary policy • unstable environment for money demand • inflationary expectations are rather volatile • downward pressure on the e/r coming from lax income and unclear fiscal policy • upward pressure from huge inflow of remittances despite low forex deposit i/r • managed float has proved to be successful • is it worth considering inflation targeting ?

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

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

Structural reforms to be completed rapidly • Restructuring and privatization of public utilities and SOEs to be completed quickly • Privatization of non-viable socially owned firms by pushing them into bankruptcy • Completing financial sector modernization • Legal and judiciary reform; anticorruption • WTO-accession; SAA for EU-accession

Conditions for high level and sustainable growth in Serbia • • Creating a business friendly environment Promoting FDI and FPI; domestic savings Level playing field for domestic firms Further simplification of tax administration Labor market flexibility seriously enhanced Free trade with EU and all Balkan countries Small state providing quality public services