Serbia's Economic Policy Blockage

A deepening political crisis and the populist economic measures taken by the government are blocking key reforms in Serbia and jeopardising its economic prospects, leading economists say.

They say the widening trade deficit and growing foreign debt burden - the results of government intervention in the currency market - are compounding existing structural problems, and threaten to plunge the country further into economic gloom.

The economic reform process is currently stalled by a mounting political crisis which threatens to topple the government. The latter no longer has a clear majority in parliament, and faces a no-confidence vote which - if it loses - would mean an early election.

A member of the present cabinet, finance minister Bozidar Djelic, went so far as to suggest on October 27 that a parliamentary election would be the only way out of the impasse if the his government was unable to regain a majority. The government's economic team last week threatened to resign if there was no parliamentary majority to pass badly-needed reforms.

Jurij Bajec, a professor of economics at Belgrade University, told IWPR that the political wrangling is slowing down the reform process and could carry a high economic price. He too thinks an election is the only way to unblock the process. That is a low-risk option, he says, because whoever wins, there is no danger that anti-reform forces will come to power.

Influential economics professor Ljubomir Madzar told IWPR that Serbia missed a major opportunity for economic revival after the fall of Yugoslav president Slobodan Milosevic in 2000, when for a short time it became the darling of the West. Since then, Serbia has been promised 4.1 billion euro to support economic transition - and officials say most of this has already been received. But critics say some of the money has been poorly spent, for example on propping up doomed state industries.

The government has been reformist from the start, but critics say it's been too timid to tackle the unpleasant but necessary tasks that face it.

The current deterioration in the economy, experts agree, dates from the end of 2002 when the authorities started investing money in short-term economic measures to appease voters, instead of in unpopular reforms. For instance, it has expanding the number of people eligible for welfare benefits, and imported electricity to ensure constant supplies.

"After a convincing start, the government has lapsed into economic populism and has in this way destroyed many of the initial positive results," said Dana Popovic, a professor of economics at Belgrade University.

Unemployment is certainly a major problem, with official statistics putting the rate at 30 per cent of the workforce, and independent economists saying it is in fact nearer to 40-45 per cent. The dilemma for the government is that it must at some point restructure and sell off insolvent industrial giants that employ thousands of workers - but that will inevitably mean big job losses. So far the firms that have been privatised have been mainly the more solvent ones, leaving the government with a lot of problem cases that one day it will have to tackle.

Spending to support large state-owned concerns, as a means of holding unemployment down, may buy social peace in the short term. But some economic experts believe that resorting to populist economics will only push up the price of transition in the mid term.

And Popovic warns that the government has a bad habit of giving way to anyone who threatens to go on strike, a practice which will in the end "lead to the rise of unemployment, and cost it its mandate".

The policy of directly subsidising state companies is a significant drain on the government's budget - and one that liberal economists warn is leading nowhere. Worse still, they say, it wastes precious revenues accrued from privatisation.

The government has earned more than a billion dollars from selling off hundreds of state-owned companies this year. But while the money is a welcome supplement to the budget, much of it is then given away in subsidies to loss-making firms that the government still owns. As Boris Begovic, a law professor at Belgrade University, told IWPR, "Privatisation has been used to plug gaps in the budget.

"There is no sign that the government has started thinking seriously about ways to reduce budget expenditure, for example by cancelling subsidies to insolvent companies which have been kept afloat artificially."

Critics of the government also allege that it is partly responsible for a worrying slowdown in the economy.

If current trends continue, economic growth will be a measly one per cent this year - well below target. The industrial sector is in recession. Opponents of the government's policies say its failure to move away from supporting state-sector firms and promote new private businesses - which are far more likely to attract foreign investment - is just storing up trouble.

The cumbersome state bureaucracy remains a deterrent to private enterprise. According to influential economics professor Ljubomir Madzar, "The state and its administration are a threat to business and entrepreneurs. You'd wear out two pairs of shoes going round collecting all the documentation you need to start a business."

But in Madzar's view, the greatest threat to Serbia's economic stability comes from the country's growing trade deficit and its unmanageable debt burden - and again he blames government policies for contributing to the problem.

A central plank of government policy has been stabilising the dinar, a key objective after years of currency depreciation and price inflation. The government points to the results of its interventionist policy: a stable currency and an inflation rate expected to come in below even the nine per cent forecast this year.

But other economists warn that the dinar is overvalued against other currencies, and that although price stability is important, it is not the only concern. Madzar says that government intervention to support the dinar has hit foreign trade and domestic growth. Imports have risen sharply because the foreign currency needed to buy them is cheap.

"Local trade could not compete with such large-scale imports," said Madzar. "The excessive availability of foreign currency caused imports to choke the market, strangling along the way a few successful companies that had survived Milosevic."

Trade figures show a 2.8 billion US dollar deficit for the first eight months of 2003 - an alarming 35 per cent increase on the same period last year. Although exports also rose during this period, the increase was not so fast because the dinar's high rate made Serbian goods less competitive abroad.

Madzar says the resulting trade deficit is affecting the overall balance of payments, or current account. The current-account deficit, which at the start of August was 45 per cent higher than it was the previous year, will need to be financed by inward investment - which is not forthcoming because industry is still unattractive to investors - or out of Serbia's foreign currency reserves, which Madzar believes could become badly depleted.

An alternative is to seek further foreign loans. But while Serbia's existing debts are not growing too rapidly, Madzar says the government is already having serious trouble paying them off. He believes the country is now close to a debt crisis, claiming that in the first six months of this year Belgrade managed to pay only 50 million out of the 450 million euro it is scheduled to pay this year to service its foreign debt. As well as pushing up the amount of money Serbia has to find next year, this repayment failure will undermine investor confidence, thus harming overall growth.

And again, it all comes back to the economy - domestic economic growth and a rise in foreign-currency-earning exports are needed if the debt is to be repaid. But the policies of this government, at least, are unlikely to make that happen.

As Begovic said, "Under these circumstances there are no incentives for deep, radical and comprehensive reforms. It is a time of populism."

Zeljko Cvijanovic is IWPR regular contributor.