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July 5, 2017

Local Public Finances: Issues, Risks and Recommendations

Fiscal problems of local governments put the national public finances at risk, but they also slow down economic growth and lower the quality of life of Serbian citizens. The budgets of many cities and municipalities are unsustainable, while the majority of public enterprises and other institutions under local governance (e.g. pharmacies) show very poor performance. Together with their enterprises, cities and municipalities owe a debt of almost 1 billion Euros; in addition, they are late with payment of outstanding liabilities to suppliers, in the amount surpassing 300 million Euros. The failure of local governments and their public enterprises to pay their liabilities spreads the problem of the local administration to the rest of the economy, especially to public enterprises (which frequently ends up being covered from the national budget), slowing down the country's economic growth. An additional way in which poor local financial management slow down GDP growth is a systemic lack of investment - the annual gap in public investments of local governments comes to about 250 million Euros. Instead of going towards the necessary investments, these funds are mostly redirected to cover the losses of local public enterprises, which receive enormous subsidies in the total amount of about 200 million Euros per year. Perhaps the most devastating effect of disordered finances of cities and municipalities is the fact that the services that local levels of government offer to citizens are at a disconcertingly low level. In terms of access to clean drinking water, waste treatment, wastewater treatment, percentage of children enrolled into pre-schools and numerous other indicators, Serbia is lagging far behind not only developed EU countries, but also behind comparable countries in Central and Eastern Europe. Due to all of the above, we deem that the Government of Serbia would have to get involved more directly into the resolution of the local governments' largest issues - i.e. to prepare and implement a credible set of measures.

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22.12.2016.

Assessment of the Law on Budget of the Republic of Serbia for 2017 and Fiscal Strategy for 2017-2019

The Budget of the Republic of Serbia for 2017 brings some improvements to the public finances of Serbia: a relatively low fiscal deficit of 69 bn dinars (1.6% of GDP) will lead to a slight decrease of public debt in terms of GDP, the budget revenues and expenditures have been credibly planned in general, while the inclusion of large infrastructural projects made the budget of the Republic of Serbia more comprehensive and transparent. Even though all these are undisputed and important improvements that the Fiscal Council supports, they are still not sufficient. The public debt of about 74% of GDP is still very high and dangerous; unsuccessful public and state-owned enterprises represent an enormous expenditure for the budget, but also a future fiscal risk. In addition, there are numerous other structural issues with public finances reflected in excessive current expenditures and low public investments, incomplete budget transparency, frequent takeover of unplanned expenditures, unsustainable position of a large number of local governments and others. The Fiscal Strategy in principal envisages good medium-term objectives for the recovery of public finances (fiscal deficit of about 1% of GDP in 2019), but does not comprise all the measures necessary for their fulfilment. Namely, the Fiscal Strategy, as the most important medium-term fiscal plan of the Government, should comprise strict reform measures to bring the public finances to order, as well as precise deadlines for their implementation. In addition, this document would have to encompass a qualitative and quantitative analysis of the largest fiscal risks, together with measures that would be enforced if any of these risks were to materialise.

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14.11.2016.

Evaluation of Fiscal Trends and Structural Reforms in 2016

The budget part of fiscal consolidation is going well so far and results achieved indicate that the realization of quantitative fiscal objectives has been adequate and, in many ways, faster than planned. However, the reform part of initiated fiscal consolidation is running considerably late. Successful reforms should improve the structure of public expenditures, decrease future fiscal risks and provide support for a high and sustainable economic growth in the medium term - in other words, allow for a sustainable recovery of Serbian public finances. It is thus very dangerous that a part of the broader, and even expert public, is forming the opinion that the fiscal consolidation is practically completed, i.e. that the problems of national public finances have been resolved by the significant decrease in the general government deficit. While not diminishing the importance of the budget improvements achieved, the Fiscal Council emphasizes that the achieved fiscal result of 2016 should be observed in the light of the overall status of national public finances, which is not even close to good yet. Proper interpretation of the fiscal consolidation results achieved is all the more important when put into the context of the announced salary and pension increase in 2017, as this growth of expenditures, with all the unresolved structural problems of public finances in Serbia, could very well turn out to be premature.

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28.06.2016.

Fiscal Trends in 2016, Consolidation and Reform 2016-2020

The fiscal trends in the previous year and a half, since the fiscal consolidation started, can be rated as satisfactory, as the general government deficit has been permanently decreased by over a billion Euros (over 3 pp of GDP). In addition, 2015 saw the beginning of economic activity recovery, now gradually accelerating in 2016 - additionally improving the fiscal stance. However, Serbian public finances are far from solid and the road to their complete recovery will be a long one. The greatest fiscal problem Serbia faces is the exaggerated public debt, which will amount to about 26 bn Euros at the end of 2016 (almost 78% of GDP). For a permanent recovery of public finances, the public debt would have to drop to well below 60% of GDP. In order to do that, Fiscal Council believes that a good overall goal for the new Government would be to decrease general government deficit to the level of 0.5% of GDP by 2019. Even though this goal may seem to be overly ambitious, it is achievable and can be reached mainly through structural improvements of public finances. The greatest risk to public finances, as well as the country's macroeconomic stability, stems from the three public enterprises with greatest fiscal significance (EPS, Srbijagas and Železnice) and large enterprises undergoing privatisation (RTB Bor, Resavica, petrochemical complex etc.) We thus believe that a decisive resolution of the problems/fates of these enterprises in the following six months to a year is the highest priority task for the new Government, as this could cause the public finances to cave in, undoing all the good results of fiscal consolidation in the previous year and a half.

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02.03.2016.

Assessment of the Fiscal Strategy for 2016 and Issues in the Implementation of Structural Reforms

To prevent a public debt crisis outbreak, the Government faced three main tasks: 1) decrease of a vast fiscal deficit, 2) reform of unsuccessful public enterprises and 3) resolution of the fate of enterprises undergoing privatization. In summing up the results achieved so far, we consider the success, at best, as partial. Most progress was made in the fiscal deficit decrease, primarily thanks to a necessary and inevitable pension and salary cut in the public sector. The deficit is no longer enormous, it has been decreased from 6.6% of GDP in 2014 to 3.7% of GDP in 2015, but it remains unsustainable as it does not stop the public debt growth and its further decrease will not be possible without new difficult and unpopular measures. At first glance, the resolving the statuses of enterprises in privatization looks impressive - in terms of the number of companies, the majority have had their status resolved in 2015. However, these were mostly enterprises with few employees, while about two thirds of the employees still remain in enterprises with unresolved status, so in this respect as well, the greatest challenges still lay ahead. Least progress was made in public enterprise reform. Only in the case of Železnice it has been somewhat more significant, but even their reform was slowed down as soon as it hit the first painful measures (redundancy of workers). In the reform of the remaining two enterprises with the largest performance issues, EPS and Srbijagas, there has been no progress and it can rightfully be questioned whether the state has sufficient control over their operations. All things considered, the danger of a public debt crisis outbreak has been temporarily postponed but not avoided, so the fiscal consolidation and further public sector reform will have to remain a priority.

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December 16, 2015

Assessment of The Law On Budget of The Republic of Serbia for 2016

The 2016 budget has been developed, in principle, in line with the three-year plan for reigning in the public debt increase, but without measures that would be strict enough to ensure fulfilment of the objectives planned for this year. The original plan for 2016 and 2017 envisaged the necessary savings primarily through two relatively powerful measures: 1) salary and pension freeze and 2) downsizing of the general state workforce. The Government, however, decided to partially suspend the first measure by unfreezing pensions and salaries in the majority of the public sector, while the second measure has been overly ambitious from the start and will not provide all the planned savings. This is why the budget for 2016 opted for some other, ad hoc measures, measures that are not optimal and/or are insufficiently well prepared - such as increase of oil derivatives excise and decrease in agricultural subsidies. In addition, unplanned fiscal expenditures for state- and socially-owned enterprises are still possible, as are expenditures from other, potentially dangerous problems that have not been put under complete control and that the state is not yet tackling head-on. It is the Fiscal Council's assessment, therefore, that the 2016 budget plan formally satisfies the requirements for permanent fiscal adjustments in this year, but that it is quite uncertain whether such a plan will indeed be realized and weather some exceptional expenditure will come up that the budget could have foreseen, if not already prevented, at the present time.

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June 17, 2015

Fiscal Consolidation in 2015 and Main Challenges for Reforms

The first step of fiscal consolidation, resting on salary and pension cut, resulted in the planned state deficit decrease in 2015. In addition, tax discipline has strengthened, so the public revenue and deficit in 2015 will be somewhat better than planned. However, the key public finance issues pertaining to public and state-owned enterprises, public administration (healthcare, education, local governments etc) have not been brought under control yet.  For this reason, this Fiscal Council report includes an analysis of the implementation of key public sector reforms, in addition to the analysis of current fiscal flows.

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February 13, 2015

Opinion on Fiscal Strategy Draft for 2015 with Projections for 2016 and 2017

The programme presented in the Fiscal Strategy could bring a recovery of public finances, however, only if additional conditions are also met. The first one is for the fiscal consolidation to be extended to 2018, i.e. that a four-year programme replaces the three-year one. The second one is that the plan also includes contingency measures in case of a deadlock in the implementation of certain more risky parts of the programme. The third one is that it is necessary to conclude an agreement with the IMF which would monitor such a programme.The fourth one is that a more severe increase in public investments is necessary to prevent the ongoing recession jeopardize the fiscal consolidation.

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February 13, 2015

Public Investments In Serbia: Supporting Growth In Fiscal Consolidation

The forthcoming fiscal consolidation shall be carried out in an adverse recessionary environment, whilst the increase in public investments is a rare economic policy which can support growth. Therefore, it must not be permitted that in 2015 Serbia once again underperforms in executing public investments, as was the case in 2013 and 2014.. We suggest increase in investments in 2015 to approximately 3.5% of the GDP, instead of the currently planned 3% of the GDP – even at the cost of slightly higher fiscal deficit. Fiscal Council's analysis shows that the adequate financial resources are in place, as well as unquestionable projects, the implementation of which would significantly improve the quality of infrastructure in the country and prevent Serbia entering a prolonged recession.

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January 13, 2015

Assessment of the bill on the 2015 budget of the Republic of Serbia

The 2015 budget has introduced important measures for the permanent reduction of public expenditure by EUR 600-650 million. The most important measures involve public sector salary and pension cuts and suspended issuance of new guarantees for covering the losses of public and state-owned enterprises. However, there are still no precise plans for downsizing employment in the public sector, or for the reform of public enterprises, which may hinder the attainment of planned goals. The preliminary projections of the Fiscal Council indicate that the share of public debt to GDP will not decrease before 2018.

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December 31, 2014

Budget process in the Republic of Serbia: Deficiencies and recommendations

This document analyses the most important shortcomings and deficiencies of the expenditure of budget funds in the Republic of Serbia: insufficient transparency and accounting of expenditures “below the line” for certain public enterprises and state banks so that they are not visible in the Budget Law, the omission of a large number of (quasi)fiscal institutions and agencies from the regular budget procedures, lack of a monitoring system for employees in the public sector, arrears and commitments, budget planning, as well as the absence of a credible framework for managing the budget negotiations at the technical level. We conclude that the improvement of budget process demands reforms in accordance with the best international practice that will take into account specific circumstances in Serbia, as well as the political support and development of strong human resources capacities, primarily in the Ministry of Finance.

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October 27, 2014

Assessment of the bill amending the Law on the 2014 budget of the Republic of Serbia

The state-owned and public enterprises threaten to sink the public finances of Serbia. Their overall adverse effect on the public finances had been growing over the past five years and, in 2014, has reached 3% of GDP. For some companies problems can be observed even at the level of basic business results (core business is unsustainable). Liquidity of companies has been vulnerable, so the state has intervened at the cost of growth of deficit and public debt. The problems of public and state-owned enterprises are not simple and require comprehensive and long-term changes both in the enterprises and in the economy.

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July 31, 2014

Analysis of state-owned enterprises: Fiscal aspect

The state-owned and public enterprises threaten to sink the public finances of Serbia. Their overall adverse effect on the public finances had been growing over the past five years and, in 2014, has reached 3% of GDP. For some companies problems can be observed even at the level of basic business results (core business is unsustainable). Liquidity of companies has been vulnerable, so the state has intervened at the cost of growth of deficit and public debt. The problems of public and state-owned enterprises are not simple and require comprehensive and long-term changes both in the enterprises and in the economy.

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July 31, 2014

Fiscal developments in 2014 and basic recommendations for budget revision and medium-term adjustments 2015-2017

The danger of the outbreak of the crisis requires immediate implementation of fiscal consolidation. In 2014, the deficit will be approximately EUR 2.65 billion (8.3% of GDP), and the goal of fiscal consolidation should be reducing the deficit to below 3% of GDP in 2017 and reversing the growth of public debt. Fiscal consolidation is based on three pillars: 1) bringing in order public and state-owned enterprises, 2) reduction of unsustainable spending on pensions and public sector wages, 3) structural reforms.

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November 26, 2013

Summary of the report "Evaluation of the fiscal strategy 2014-2016 and draft 2014 budget"

The seriousness of the public finances situation in Serbia demands more decisive measures than those stipulated by the Budget Law and the Fiscal Strategy. The 2014 planned deficit of 7.1% of GDP (€2.4 billion) is too high, there are still no visible developments and a clear plan for solving the problems in the biggest money losers (Srbijagas) and the medium-term adjustment plan is not supported by the measures which could result in desired savings. Although the medium-term plan sets good goals in terms of deficit reduction in general, the measures to achieve this are unbalanced and, therefore, uncredible enough.

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July 04, 2013

Assessment of budget rebalance, structural reforms proposal and future fiscal trends

The Fiscal Council strongly supports the announced launch of structural reforms. However, the list of proposed reforms should include the pension reform which was unjustifiably omitted. The rebalance which reduces the budget expenditure was indispensable, but the Fiscal Council is somewhat sceptical about estimating its content. Limitation of pensions and wages indexation by the end of the following year is a fiscally responsible measure, but it will not be sufficient to reach the necessary deficit reduction in 2014.

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May 23, 2013

Budget implementation, assessment of Government’s measures and Fiscal council’s proposal for public finances stabilization

Public finances in Serbia are in a very bad position. The fiscal deficit will exceed 5.5% of GDP in 2013 instead of the planned 3.6% of GDP, even with the latest Government measures for deficit reduction. The public debt which has already reached more than 60% of GDP will continue growing in both 2013 and 2014. Strong Government measures should be implemented as early as in 2013 and a credible plan for deficit reduction in the medium run. In order to achieve the first target, it is indispensable to adopt the budget rebalance as soon as possible and the rebalance will also have to include the measures for the control of public sector pensions and wages. So as to meet the second goal, it is necessary to finally start the implementation of the planned structural reforms, but also to make an arrangement with the IMF.

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April 01, 2013

Assessment of Local Government Finances in 2013

Current misbalance between the resources and responsibilities at the Republican and local governments’ levels causes a deficit in the Republican budget of 25 billion RSD, i.e. close to 0.7% of the GDP at the annual level. It is necessary to eliminate this misbalance in the shortest possible time, so as to embark on a 2014 budget year with a balanced fiscal position between the Republican and local governments. The optimum approach to resolving the fiscal imbalance implies returning the excessive resources from local to Republican level.

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March 11, 2013

Assessment of fiscal trends in 2012 and challenges for 2013 and 2014

Preliminary data for January and February 2013 confirm the assessments of the Fiscal Council from November last year – the 2013 deficit will exceed the planned 3.6% of GDP. We expect certain improvements in the coming months, but these will still not be sufficient to fully reverse the current trends. So as to avoid the public debt crisis, the deficit has to be reduced significantly in 2014 and there is still no plan for this. In this Report, once again, we would like to remind of the reforms which have to be launched in the first half of 2013.

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November 13, 2012

Assessment of the Draft 2013 budget law

In 2013, strong state deficit reduction is planned – from 6.7% of GDP in 2012 to 3.6% of GDP (from around RSD 220 billion to RSD 132 billion). Planned expenditure reduction is not prepared well enough and the state deficit in 2013 may exceed the planned one by around RSD 25 billion (0.7% of GDP), with certain risks for further increase. It is necessary to define quarterly expenditure execution targets and adopt conditional measures which would enter into force automatically if these quarterly goals are not achieved.

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November 13, 2012

Opinion on Fiscal Strategy for 2013 with projections for 2014 and 2015

Planned deficit reduction in 2013 provides only for temporary macroeconomic stability, while the public debt crisis has not been avoided yet. Draft Fiscal Strategy envisages fiscal deficit reduction as of 2014 exclusively by public expenditure reduction, but there is no planned additional increase in public revenue. However, the given program on how to achieve the reduction is not good enough. The Fiscal Council proposes a more detailed and longer list of concrete measures to the Government.

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September 13, 2012

Assessment of the 2012 supplementary budget and draft laws including fiscal effects

The current alarming state of public finance in Serbia demands decisive fiscal policy measures. Unfortunately, the government’s first response to this alarming situation, the supplementary budget, is ineffective although the structural measures related to tax policy and reduction of pension and wage growth are essentially good. If Serbia is to avert a debt crisis in the next few years, deficit reduction (fiscal consolidation) must be dramatic. Of the three groups of measures that can help avoid a public debt crisis, the Government has launched two.

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May 30, 2012

Fiscal Consolidation

Serbia is approaching a crisis of public debt which may even occur by the end of this year. Prevention of the crisis requires immediate measures; first, for it to be halted, and second, for the rehabilitation of public finances. The program of fiscal consolidation as advanced in this document suggests measures for addressing immediate problems in 2012 and 2013 and contains policy reforms which in the mid-term period (2014-2016) enables the consolidation of public finances, yielding significant decrease of public debt and reduction of general government deficit practically to zero.

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March 30, 2012

An Assessment of the Program Measures to Maintain the Fiscal Deficit of the Republic of Serbia

Fiscal Council supports any effort by the government of RS to reduce the budget deficit, but we estimate that the planned Program of measures for stabilizing the fiscal deficit will not provide sufficient savings even if fully implemented; probably the effects of these measures will be smaller than anticipated.

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February 24, 2012

Proposal for Harmonizing Different Methodologies of Public Debt Coverage and Measurement in Serbia

Fiscal Council holds that it is necessary to harmonize the Public Debt Law and the Budget System Law with respect to different capture and measurement of the public debt, so that such single calculated value of public debt can be in official use by all relevant government institutions. For this reason, we have conducted a research the purpose of which was to offer a proposal for improving Serbia’s public debt capture and measurement methodology. The basic criteria used in forming the proposal were the economic justification and compliance with the current international standards.

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February 21, 2012

Assessment of Fiscal Rules Compliance in 2011

The Fiscal Council holds that: 1) the general fiscal rule concerning the public debt level was violated; 2) the general fiscal rule concerning the government deficit level was not fully accomplished; and 3) the special fiscal rule determining the pension and public sector salaries trend was accomplished. Violation of the fiscal rule concerning the public debt poses the greatest threat for Serbia’s public finance since the debt has not only exceeded the legal limit of 45% of GDP but it will continue to grow in the medium term. The 2011 fiscal deficit was by 5 billion dinars in excess of the limit permitted by the fiscal rules. The real problem is not the slight increase of the 2011 deficit level but in establishing unfavorable trends of fiscal revenues. It is for this reason that the Fiscal Council is assessing that further adjustment of 1% of GDP will be necessary.

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December 23, 2011

Evaluation of the fiscal strategy report and Draft 2012 budget law

The envisaged fiscal deficit of 4.25% of GDP (153 billion dinars) is in conformance with the fiscal rules; there are, however, pronounced risks of the planned deficit overshooting. The Fiscal Council’s assessment is that at the close of 2011 the public debt will most probably be above the legal limit of 45% of GDP. There are strong prospects for the real growth of GDP to be lower in the next year than the planned 1.5%. In the medium run, lasting sustainability of public finance requires fiscal adjustment by 4.5 to 5 p.p. of GDP.

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November 10, 2011

Fiscal Council Press Release on the Establishment of the 2012 Fiscal Framework

Bearing in mind slower pace of economic activity in the Euro zone and current economic trends in Serbia, the Fiscal Council reduced the economic growth projection for 2012 from 3% to 1.5%. In line with the fiscal rule on budget deficit, the given modification would result in the increase of the allowed 2012 deficit from 3.9% of GDP as originally planned to 4.5% of GDP. However, the consequences of the lower economic growth will for sure include the overrun of the public debt limit of 45% of GDP in 2012 which was defined by the law. For this reason, the Fiscal Council believes the 2012 deficit should be below 4.5% of GDP.

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September 29, 2011

Assessment of the Proposed Revised Republic of Serbia Budget for 2011

Fiscal Council assesses that the proposed Republic of Serbia budget deficit increase by 22 billion dinars is in accordance with Fiscal Rules and Budget System Law. We positively assess the fact that deficit increase is not driven by the increase in expenditures, but is driven by the drop in revenues due to slowing of economic activity. We negatively assess the change in the composition of expenditures – whereby current expenditures have been increased at the expense of capital expenditures, which had been reduced by 8 billion dinars, from 32 billion to 24 billion dinars. We confirm that expenditures for public sector wages and pension had been budgeted in accordance with the indexation formula prescribed by the Fiscal Rules and the Budget System Law. Fiscal Council has identified risks that revenues might underperform, due to possible additional slowing down of economic activity by the end of the year.

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June 8, 2011

Analysis of the Fiscal Effects of the Draft Decentralization Law proposed in the Serbian Parliament by “Ujedinjeni Regioni Srbije”

We assess that the proposed model of fiscal decentralization would annually increase the budget deficit by 1.1% of GDP, or by about 40 billion dinars in 2012. Thus, the proposed model is not fiscally sustainable and its adoption requires considerable fiscal adjustment of 1.1% of GDP at the central government level. Otherwise, adopting the proposed decentralization model would seriously breach the Fiscal Rules, budget deficit in 2012 would be by one third higher than allowed – which would disrupt fiscal sustainability and macroeconomic stability.

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