EUROPEAN COMMISSION Brussels, 9.11.2016 SWD(2016) 361 final COMMISSION STAFF WORKING DOCUMENT Serbia 2016 Report

Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions 2016 Communication on EU Enlargement Policy {COM(2016) 715 final}



Table of Contents 1. INTRODUCTION 1.1. Context 1.2. Summary of the report 2.POLITICAL CRITERIA 2.1. Democracy 2.2. Public administration reform 2.3. Rule of law 2.4. Human rights and the protection of minorities 2.5. Regional issues and international obligations 3. NORMALISATION OF RELATIONS BETWEEN SERBIA AND KOSOVO 4. ECONOMIC CRITERIA 4.1. The existence of a functioning market economy 4.2. The capacity to cope with competitive pressure and market forces within the Union 5. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 5.1. Chapter 1: Free movement of goods 5.2. Chapter 2: Freedom of movement for workers 5.3. Chapter 3: Right of establishment and freedom to provide services

5.4. Chapter 4: Free movement of capital 5.5. Chapter 5: Public procurement 5.6. Chapter 6: Company law 5.7. Chapter 7: Intellectual property law 5.8. Chapter 8: Competition policy 5.9. Chapter 9: Financial services 5.10. Chapter 10: Information society and media 5.11. Chapter 11: Agriculture and rural development 5.12. Chapter 12: Food safety, veterinary and phytosanitary policy 5.13. Chapter 13: Fisheries 5.14. Chapter 14: Transport policy 5.15. Chapter 15: Energy 5.16. Chapter 16: Taxation 5.17. Chapter 17: Economic and monetary policy 5.18. Chapter 18: Statistics 5.19. Chapter 19: Social policy and employment 5.20. Chapter 20: Enterprise and industrial policy 5.21. Chapter 21: Trans-European networks 5.22. Chapter 22: Regional policy and coordination of structural instruments 5.23. Chapter 23: Judiciary and fundamental rights

5.24. Chapter 24: Justice, freedom and security 5.25. Chapter 25: Science and research 5.26. Chapter 26: Education and culture 5.27. Chapter 27: Environment and climate change 5.28. Chapter 28: Consumer and health protection 5.29. Chapter 29: Customs union 5.30. Chapter 30: External relations 5.31. Chapter 31: Foreign, security and defence policy 5.32. Chapter 32: Financial control 5.33. Chapter 33: Financial and budgetary provisions Annex I – Relations between the EU and Serbia Annex II - Statistical Annex

1. Introduction 1.1 Context The European Council granted Serbia the status of candidate country in 2012. The Stabilisation and Association Agreement (SAA) between Serbia and the EU entered into force in September 2013. Accession negotiations were launched in January 2014. The first four negotiating chapters were opened during the reporting period, including chapter 35 dealing with normalisation of relations between Serbia and Kosovo * and the rule of law chapters 23 and 24. Serbia remained committed to its strategic goal of EU accession. It continued to implement the SAA, although a certain number of compliance issues remain. It is implementing an ambitious political and economic reform agenda. Serbia played a constructive role in the region. It remained committed to the normalisation of its relations with Kosovo. It has also played a very constructive role in managing mixed migration flows. 1.2 Summary of the report

As regards the political criteria, the early national elections, held in April together with provincial and local elections, took place in a calm atmosphere. The recommendations of international observers need to be followed up, including those on ensuring that campaign financing and the registration process are transparent. The new government programme included Serbia's EU accession as a priority goal. Involvement of parliament and stakeholders, including civil society, in the accession process, was further enhanced. However, the inclusiveness, transparency and quality of law-making and effective oversight of the executive need to be further enhanced, and the use of urgent procedures limited. Constitutional reforms are needed for alignment with EU standards in some areas. There is scope for improved cooperation between the executive and independent regulatory institutions. Serbia is moderately prepared in the area of public administration reform. Good progress was achieved with the adoption of the public financial management reform programme, strategies on e-government and on regulatory reform and policy-making, and of new laws on administrative procedures, public salaries and local and provincial civil servants. Serbia needs to implement its reform targets, professionalise and depoliticise the administration and make recruitment and dismissal procedures more transparent, especially for senior management positions. The judicial system has reached some level of preparation. Some steps were taken to promote a merit-based recruitment system, and harmonise the jurisprudence. Further steps are needed to tackle political influence. The quality and efficiency of the judiciary and access to justice remain undermined by an uneven distribution of workload, a burdensome case backlog and the lack of a free legal aid system. Serbia has some level of preparation in preventing and fighting corruption. Corruption remains prevalent in many areas and continues to be a serious problem. The anticorruption effort has yet to yield meaningful results. The institutional setup is not yet functioning as a credible deterrent for corruptive practices. A track record of effective investigations, prosecutions and convictions in corruption cases is required, including at high level. Serbia has some level of preparation in the fight against organised crime. Some progress has been made in adopting a new police law, reorganising the Ministry of the Interior and in adopting the first serious and organised crime threat assessment (SOCTA) using Europol methodology. A credible track record in the fight against organised crime still needs to be established. The legal and institutional framework for the respect of fundamental rights is in place. Consistent implementation across the country needs to be ensured, including as regards protection of minorities. No progress was made to improve conditions for the full exercise of freedom of expression, where Serbia has achieved some level of preparation. Serbia was the first enlargement country to introduce the EU Index of Gender Equality. Further sustained efforts are needed to improve the situation of persons belonging to the most discriminated groups (Roma, lesbian, gay, bisexual, transgender and intersex persons, persons with disabilities, persons with HIV/AIDS and other socially vulnerable groups). Serbia participated constructively in regional initiatives and worked to improve its bilateral relations in a spirit of reconciliation, good neighbourly relations and establish a climate conducive to addressing open bilateral issues and the legacies of the past. The signature in June of a joint declaration with Croatia tackling certain bilateral issues was a positive development. Such an approach is key for reconciliation, peace and cooperation in the region, and should be pursued consistently. Regarding the normalisation of relations with Kosovo, Serbia remained committed to the implementation of the agreements reached in the EU- facilitated dialogue. Progress was limited, also due to the electoral process in Serbia and the domestic situation in Kosovo. However, momentum was regained in August 2016 with the start of the work on the Mitrovica bridge and freedom of movement. Continued efforts are needed to implement the agreements already reached with Kosovo. The steps taken should have a positive and concrete impact on the everyday life of citizens in both Serbia and Kosovo. As regards the economic criteria, Serbia is moderately prepared in developing a functioning market economy. Good progress was made to address some of the policy weaknesses, in particular with regard to the budget deficit and restructuring of publicly-owned enterprises. Economic reforms have brought clear results in terms of growth prospects and reduction of domestic and external imbalances. In view of the still high level of government debt, fiscal consolidation needs to be sustained. The restructuring of large state-owned utilities is still to be completed. Credit activity is recovering but the high level of non-performing loans remains an issue. Unemployment remains high, particularly among youth. Further expansion of the private sector is hampered by weaknesses in the rule of law. Serbia is moderately prepared to cope with competitive pressure and market forces within the Union. Public and private investments increased, though the level of investment activity remains below the economy's needs. The quality, equality and relevance of education and training do not match societal needs. Some progress was made concerning support to SMEs and entrepreneurship but SMEs face a number of challenges, including an unpredictable business environment, a high level of para-fiscal charges, and difficult and costly access to finance. As regards its ability to assume the obligations of membership, Serbia has continued to align its legislation with the EU acquis across the board. Adequate financial and human resources and sound strategic frameworks will be crucial to maintaining the pace of reforms. Serbia has a good level of preparation in areas such as company law, intellectual property, science and research, education and culture and customs. Serbia needs to further improve investment planning and prioritisation of strategically important and mature infrastructure projects through its Single Project Pipeline and National Investment Committee, notably on energy and transport. In the areas of public procurement, statistics, monetary policy or financial control, Serbia is moderately prepared. Serbia will need to align its foreign and security policy progressively with the European Union's common foreign and security policy in the period up to accession. Serbia needs to address, as a matter of priority, issues of non-compliance with the SAA, in particular on safeguard measures on some agricultural products, State aid control, and fiscal discrimination. Serbia continued to be affected by the migration crisis. This created a substantial burden on its asylum and migration system. Serbia continued to cooperate with neighbouring countries and Member States, ensured the effective screening of refugees and migrants, and made substantial efforts to provide shelter and humanitarian supplies, with EU support as well as the support of others. It is important that Serbia remains engaged. Serbia should also maintain its efforts to decrease the number of unfounded asylum applications lodged by its nationals in EU Member States. 2.Political criteria 2.1.Democracy Elections Serbia held elections at national, provincial and local levels on 24 April in a calm atmosphere. The assessment and recommendations of international electoral observers need to be followed up, in particular those on ensuring that campaign financing and the registration process are transparent. Following a government decision, early parliamentary elections were held in April, together with provincial elections in Vojvodina and municipal elections. The turnout was 56 %. Seven lists passed the 5 % threshold. The list led by the incumbent Prime Minister maintained a majority, with 131 seats out of 250, and the list of its main coalition partner, the Socialist Party of Serbia (SPS), obtained 29 seats. The opposition is fragmented. The Democratic Party (DS) has 16 seats. The ‘That’s Enough’ party (DJB) of former Minister of Economy Saša Radulović entered parliament for the first time, also with 16 seats. The coalition of the Social Democratic Party (SDS), the Liberal-Democratic Party (LDP) and the League of Social Democrats of Vojvodina (LSV) obtained 13 seats. Parties opposing Serbia’s EU integration re-entered parliament: the Serbian Radical Party was in third position, with 22 seats, and the Democratic Party of Serbia (DSS) in coalition with the Dveri movement secured 13 seats. Five parties representing national minorities, which are exempt from the 5 % threshold, obtained 10 seats. Women continue to comprise a third of all MPs. The opposition chairs 2 out of 20 standing committees, including the committee on European integration. International observers were deployed at the Serbian authorities’ invitation. The OSCE’s Office for Democratic Institutions and Human Rights (OSCE/ODIHR) and the Council of Europe Parliamentary Assembly found that the elections offered voters a variety of choices, were in general conducted in line with the law, and upheld fundamental freedoms. However, they noted biased media coverage, undue advantage taken by incumbent parties at official events during the electoral campaign, and a blurring of the distinction between state and party activities. A number of previous recommendations of the OSCE/ODIHR remained unaddressed, in particular those on ensuring that campaign financing and the registration process are transparent. OSCE/ODIHR noted further shortcomings in the legislation concerning the dispute resolution mechanism and the processing of results. Claims of irregularities during elections should be properly investigated. Parliament

Outside the electoral period, parliament’s legislative activity was intensive and reflected increased involvement in the accession negotiation process. Consultation and transparency improved. However, the inclusivity, transparency and quality of law-making and effective oversight of the executive need to be further enhanced, and the use of urgent procedures limited. Due to early elections in April, parliament’s legislative activity was suspended from March. Outside this period, parliament’s legislative activity continued to be intensive. Further efforts were made to improve transparency and consultation processes, including through public hearings, the holding of the first ever parliament week in October 2015, the constitution of an Informal Parliamentary Group for an Open Parliament, and regular meetings and consultations with the National Convent on European Integration, which brings together civil society organisations involved in the accession process. However, frequent use of urgent procedures, last-minute changes to the parliamentary agenda, limited support for independent regulatory bodies and a lack of pro-activeness in oversight of the executive, combined with a lack of genuine cross-party debate, undermines parliamentary effectiveness. The adoption of parliament’s code of conduct and annual work plan remains pending. Governance The new Serbian government programme included Serbia's EU accession as a priority goal. Involvement of parliament and other stakeholders, including civil society, increased further. Understanding and acknowledgement of the remit of independent bodies, including the Ombudsman’s Office, needs to be improved. The legal framework for local self-government still needs to be improved and further implemented. Constitutional changes are needed to address issues of importance for the accession negotiations. Following the early parliamentary elections, the new government of Prime Minister Aleksandar Vučić took office in August, renewing the coalition between the SNS, SPS, their respective junior partners, and the Alliance of Vojvodina Hungarians. Some other minority parties voted in favour of the new government. The government has 20 members, including the Prime Minister and 3 ministers without portfolio, one of them being in charge of European Integration. It comprises 5 women and 8 newcomers. The new government remained committed to reforms, EU integration and to the EU-facilitated dialogue with Kosovo and identified economic recovery and attraction of foreign investments as other key priorities. The core negotiating team and the Serbian administration continued to demonstrate a high level of preparedness and professionalism in the accession negotiations process. Involvement of parliament and civil society in the accession process was further improved. Greater coordination of sectoral policies and anticipation of their financial implications remain crucial in the negotiations. Further efforts are needed to communicate the benefits of joining the EU to Serbian citizens more effectively. Public consultations need to be wider and deadlines more realistic to enable all interested parties to provide qualitative input. This is especially needed for draft legislation with major economic and social impact. More effective monitoring of the implementation of enacted legislation and strategic documents is needed. The welcome practice of regular meetings with the Prime Minister needs to be built upon with a view to improving within the public administration the understanding and acknowledgement of the essential role played by the Ombudsman's Office and other independent authorities and regulatory bodies in ensuring that the executive is accountable. It is important in this respect that all their recommendations, and in particular those related to issues of significant public concern, are responded to, as appropriate. As regards local self-government, the law on Vojvodina’s resources still needs to be adopted as prescribed by the constitution. Implementation of the laws on local self-government and on municipal finance remains limited. A positive step forward was the adoption of the law governing the civil service at provincial and local level. Local administrative capacity is weak and significant disparities between municipalities persist. Responsibilities continue to be borne at local level without proper analysis of the capacity or resources required. Transfers earmarked by line ministries need to be allocated in line with the law on municipal finance. Consultation with local authorities on new legislation with local implications has improved but it remains a discretionary practice. The constitution has yet to be revised to reflect fully the recommendations of the Venice Commission, particularly on parliament’s role in judicial appointments, the political parties’ control over the mandate of Members of Parliament, the independence of key institutions and the protection of fundamental rights, including data protection. No outcome was reported on the work of the Parliamentary Action Team established in 2015 to address matters including changes to the constitution. Civil society Some progress was made towards establishing an enabling environment for the development and financing of civil society. However, further efforts are needed to ensure systematic inclusion of civil society in policy dialogue and help develop its full potential. An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by state institutions. Civil society organisations (CSOs) and human rights defenders, who play a key role in raising awareness of civil, political and socioeconomic rights, continued to operate in a public and media environment often hostile to criticism. A new Director of the Government Office for Cooperation with Civil Society was appointed in March, one year after the resignation of his predecessor. The Office continued with initiatives aimed at improving cooperation between the state and the civil sector and at enhancing the legal, financial and institutional framework for the development of civil society. It published the first study of the status of civil society organisations, based on official records and statistics, providing a valuable overview of their operation and functioning, together with data on the institutional and legal framework for cooperation with the public administration. Cooperation between civil society and parliament in the area of EU negotiations has improved, notably through the National Convent on European Integration, as evidenced in the public consultations on chapters 23 and 24. Guidelines for Cooperation between the core negotiating team, representatives of civil society organisations, the National Convent and the Chamber of Commerce were adopted in April, aiming to improve the level of inclusion of civil society in the negotiations. In March, local civil society organisations presented the initiative ‘Vojvodina for the EU’, with the aim of representing the interests of Vojvodina’s citizens in the process of EU integration. However, civil society struggles to exert influence on policy-making and faces obstacles from parts of the public administration. At many levels, civil society participation in policy-making is still to a large extent ad hoc, which means that the full potential of the sector is not being realised. The national strategy for an enabling environment for development of CSOs in Serbia 20152019 (produced in 2015) has still not been adopted and the Council for Civil Society Cooperation remains to be set up. Corporate donations to non-profit organisations that are licensed providers of social services are now exempt from VAT (this type of exemption previously applied only to donations to state-owned service providers). The legal framework for volunteering needs to further encourage voluntary work, including as part of co-financing projects. Civilian oversight of the security forces Parliament needs to continue to perform its oversight role. The remit of the Ombudsman’s Office in this field needs to be better understood and defended. Serbia’s legislative framework needs to be strengthened. The parliamentary committee for oversight of the security forces met only occasionally to review and report on the activities of the Security-Information Agency, the Military Intelligence Services and the Inspector General of the Ministry of Defence. The Ombudsman’s Office’s recommendations on illegal data collection by the Military Intelligence Agency on political parties’ activities need to be followed up. The potential for abuse of interception of communications needs to be addressed. A law on access to state security communications still needs to be adopted.

2.2. Public administration reform Serbia is moderately prepared with the reform of its public administration. Good progress has been achieved with adoption of the public financial management reform programme, egovernment strategy, a strategy on regulatory reform and policy-making, new laws on general administrative procedures, public salaries and civil servants at provincial and local government level. However, implementation of the public administration reform action plan has been slow in some areas, and no progress was made with amending the legal framework for central government civil servants. In the coming year, Serbia should, in particular: → align the National Plan for the Adoption of Acquis (NPAA) with the medium-term budget plan, provide costing for actions, and update it with a view to setting a legislative programme that promotes better regulation based on impact assessments and timely inter-institutional and public consultations; → amend the civil service law through an inclusive and evidence-based process to guarantee the neutrality and continuity of the public administration and ensure merit-based recruitment, promotion and dismissal procedures, notably by eradicating exceptions and transitional arrangements in appointments; → ensure systematic coordination and monitoring and regularly report on the implementation of the public financial management reform programme 2016-20. Policy development and coordination The legal basis and the necessary institutions to ensure coherent policy-making are in place. Policy coordination continues to focus more on formal, procedural issues than on substance. The adoption of the strategy for regulatory reform and public policy management represents a positive step forward. However, a consolidated policy planning and monitoring system still needs to be put in place, streamlining the roles and responsibilities of leading institutions in charge of policy making and coordination, linking policy and medium-term fiscal planning, clarifying sources of funding and streamlining overlapping strategies. As part of the policy-planning system, coordination structures for European integration have been established. The National Plan for the Adoption of the Acquis (NPAA) is being implemented. However, there is a consistent backlog in implementing the NPAA commitments, and many laws are adopted by urgent procedure without appropriate public consultations. The NPAA needs to be regularly monitored and a revision for 2016-2018 is expected. The administration needs to further strengthen its capacity for inclusive and evidence-based policy and legislative development, including on the acquis. Public and inter-ministerial consultations on proposals are often conducted formalistically and at too late a stage of the process, not enabling all interested parties to provide qualitative input. Decision-makers are not systematically informed about the outcome of public consultations. More effective monitoring of the implementation of enacted legislation and strategic documents is needed. Regulatory impact assessments are usually carried out, but their quality varies considerably. The Ministry of Finance has started to check the quality of compulsory financial impact assessments for all legislation, but further resources need to be devoted to this to ensure appropriate quality. The government publishes annual monitoring reports on key strategic documents. This enables public scrutiny of government work. However, the reports do not measure achievements against objectives. Parliamentary scrutiny is conducted by specialist legislative committees, but their assessment of the implementation of laws and strategies remains limited. Public financial management Serbia made progress with the adoption of a comprehensive public financial management reform programme (PFM) 2016-2020 which covers all the relevant PFM sub-systems. A monitoring framework has been set up, but its efficiency still needs to be assessed. The first implementation report due in July 2016 is still to be published. Among the key short-term reform priorities are to improve macroeconomic forecasting, to align the medium-term budgetary framework and annual budget processes with strategic planning, to enhance programme budgeting, to enhance tax collection and voluntary compliance, to improve debt management, and to strengthen public investment and capital project planning. The programme envisages stepping up practical implementation of internal control (see chapter 32). The Ministry of Finance is implementing a functional review, which will support the reorganisation of the ministry. As concerns ongoing PFM reforms, the tax administration is implementing a programme to enhance compliance and reduce the administrative burden of the tax collection process. Courts, public prosecutors and the judiciary are included in the financial management information system for budget execution. The legal framework for public procurement was developed further. External audit is well established and the State Audit Institution has continued to expand audit coverage. The Parliamentary Budgetary Office set up in November 2015 provides professional support to the Members of Parliament on formulation and execution of budget policy. Serbia is committed to improving budget transparency. It has made the executive’s budget proposal and the enacted budget more informative. Furthermore, a Citizens’ Budget, a prebudget statement, and a mid-year report are to be produced and published. The executive’s budget proposal and the year-end report should be made more comprehensive. Public participation in the budget process is weak and budget oversight by the legislature needs to be improved. Public service and human resources management Serbia made limited progress with enforcing and amending the current civil service framework to guarantee the neutrality and continuity of the public administration and to ensure merit-based recruitment, promotion and dismissal procedures by eradicating exceptions and transitional arrangements in appointments. The merit principle is undermined by the excessive discretion allowed for the political level to choose the final candidates and the lack of clear criteria for organisation of the selection tests and composition of selection committees. Also, exemptions from the normal recruitment procedures are allowed for temporary staff, which makes up around 10 % of the civil service. The legal separation of political and public service positions is not clearly enforced. Political influence plays a key role in filling senior management posts, and more than 60 % of senior civil servants are not appointed in line with legal provisions. Turnover of senior civil servants continues to be an area of particular concern. The legal framework allows room for abusive practices with dismissals. Termination is allowed legally on grounds of ‘serious disturbance’, but without any formal definition of this provision as well as following the abolishment of the management post during an internal reorganisation. A positive step was the adoption of the law on provincial and local government employees in March 2016. The law extends the existing state civil service framework to the local level and introduces a system of merit-based human resources management. Human resources management is not well developed in the state administration; it focuses mainly on legal compliance. The performance appraisal system remains inefficient, with inflated appraisal grades. The Ministry of Public Administration, responsible for central coordination of human resources management, lacks capacity to coordinate and harmonise the work of human resources units. A separate agency, not directly accountable to the ministry, maintains the human resources management information system, which does not interact with other national databases such as the treasury payroll registry and is not regularly updated. On the civil service remuneration system, a positive step was the adoption of a new law on the salary system in February 2016 based on the principle of equal pay for equal work. The law covers all public sector employees and is expected to enter into force from 2017. Professional development is neither promoted consistently nor monitored properly for any category of civil servants. There is still no link between the provision of training and the performance appraisal system. No progress has been made with the implementation of the national strategy for professional development or the planned establishment of a national training institute for public servants. Integrity in public service is promoted by means of the 2015 code of ethics for civil servants. Its impact remains to be assessed. Accountability of administration

Rightsizing of the state administration is a key government priority. Since 2015 the number of public employees has been reduced by more than 16,000. The structure of the state administration is, however, a key outstanding issue that the country should address in order to maximise the impact of rightsizing efforts. Lines of accountability between agencies and parent institutions are blurred within the current organisation, contributing to overlapping functions, fragmentation and increased politicisation. The political commitment to improve managerial accountability and ensure more systematic delegation of responsibilities within institutions has not yet delivered results (see chapter 32 — Financial control). Citizens’ right to good administration is protected through internal and external oversight mechanisms. The Ombudsman’s Office plays a key role, and public authorities are obliged to report on implementation of its recommendations (see under Governance). The right to access public information is regulated in the law on access to public information, which is not fully in line with European standards. Administrative silence is a major issue, as highlighted by the Commissioner for Free Access to Information of Public Importance, who oversees implementation of the law. That office still lacks resources. The law needs to be further strengthened to ensure enforcement of the Commissioner’s decisions. Progress has been made as regards the right to administrative justice with the adoption in February 2016 of a new law on general administrative procedures, whose implementation will start in mid-2017. A continuing backlog of administrative disputes to be resolved by the court system undermines public confidence. The right to seek compensation is often not enforced, partly due to the lack of a specific law on public liability. Service delivery to citizens and businesses Creating a more user-oriented administration is a key government priority. Some progress has been made with the adoption of an e-government strategy and action plan and provision of a certain number of integrated e-services to citizens and businesses through one-stop-shops. Citizen satisfaction with the delivery of public services is still not regularly measured. Even though an important step towards simplifying administrative procedures was taken with the adoption of the law on general administrative procedures, Serbia will still need to address a number of special administrative procedures, regulated in different pieces of legislation, which hinder transparency and legal certainty. Strategic framework for public administration reform Serbia is implementing its public administration reform strategy (PAR) and the related action plan for 2015-2017. Political support for PAR is ensured through regular meetings of the PAR Council, chaired by the Prime Minister. The first annual monitoring report shows some delays with implementation, especially in the area of public service and human resources management. Some progress has been made with adoption of the PAR sub-sector strategies and three laws governing the civil service at provincial and local level, on general administrative procedures and on the public salaries system. Delays are partly caused due to insufficient resources in the lead ministry. The government needs to better ensure financial sustainability and allocate sufficient resources for implementation of the reform in the annual budget and the medium-term expenditure framework. 2.3.Rule of law Functioning of the judiciary Serbia’s judicial system has some level of preparation. Serbia has partially fulfilled last year’s recommendations. Some progress has been made in the last year by further promoting a merit-based recruitment system and by pursuing the national programme to reduce the backlog of court cases. Some steps were also taken to harmonise jurisprudence. However, judicial independence is not assured in practice. The legal framework is not yet in line with European standards thus leaving scope for political influence in the recruitment and appointment of judges and prosecutors. Public comments on investigations and ongoing cases, even at the highest political levels, continue to hamper judges’ independence. Administration of justice remains slow. Serbia has still not adopted a new law on free legal aid. In addressing the shortcomings outlined below in the coming period, Serbia should in particular: → urgently adopt a new law on free legal aid and enable its efficient implementation in cooperation with the main stakeholders; → amend the constitution provisions related to the system for recruitment and career management in line with European standards related to the independence of the justice system; → further step up measures to reduce the backlog of cases and standardise court practice. Strategic documents The strategic framework is defined by the national judicial reform strategy and action plan (2013-2018) which have been brought into line with the action plan for chapter 23. Management bodies The High Judicial Council (HJC) and the State Prosecutorial Council (SPC) are responsible for judicial appointments and dismissals and, in part, for management of the judicial budget. They share responsibility for court and prosecution budgets with the Ministry of Justice, the latter being responsible for court staff, expert assistants, infrastructure and investments. This division hampers the efficiency of financial management and creates scope for additional political influence. The HJC and SPC need adequate support to prepare them to take over independent management of the justice system in good time. This is critical to secure judicial independence and improve the functioning of the judiciary in line with the requirements and timeframe of the action plan for chapter 23. Independence and impartiality

Despite constitutional guarantees on independence, the constitutional and legislative framework still leaves some room for undue political influence over the judiciary. Parliament appoints and dismisses the Supreme Court President and the State Prosecutor, who are also ex officio presidents of the High Judicial and State Prosecutorial Councils, together with court presidents and prosecutors. The parliament was involved in the election process of key high prosecutors in December 2015. In addition, the broad discretionary powers of court presidents and heads of prosecution offices over the work of judges and deputy prosecutors respectively create internal pressure which can have a negative impact on their independence. External pressure is exerted on the judiciary by the many public comments made about investigations and ongoing cases, some of them at the highest political levels, and without adequate protective measures being taken by the HJC and SPC. Court rules of procedure provide for random assignment of cases, but in practice not all courts apply this procedure. There is no technology for allocating files randomly in prosecution offices. Rules generally prohibiting withdrawal of cases from judges are in place, but in practice the removal of judges can be circumvented by recourse to the extensive powers of court presidents to transfer judges internally or to reassign cases. Accountability Codes of ethics are in place for judges and prosecutors. Disciplinary procedures are in place and operational for both judges and prosecutors. The number of disciplinary sanctions remained relatively small. Disciplinary reports were, however, increasingly filed for inefficiency or missed procedural deadlines. This deserves careful consideration, as it is connected to generally uneven (and in some cases excessive) workload. Judges and prosecutors have an obligation to declare their assets on an annual basis and to report possible conflicts of interest. Professionalism and competence Appointments, evaluation and dismissals are in the hands of the HJC and SPC. In the case of judges, appointments continued under the current rules. December 2015 elections for the State Prosecutor and general elections for heads of prosecution offices were organised under the new rules for selecting candidates adopted in 2015. However, shortcomings were noted in the selection process performed by the SPC. Rules for evaluating judicial assistants have been adopted. There is a need to clearly establish a systematic approach to judges’ and prosecutors’ careers based on performance criteria. The same applies to regular individual evaluation of judges and prosecutors. Quality of justice The Judicial Academy is the institution responsible for initial and continuous training of the judiciary. Further reform of the Academy is needed to improve its professional, financial and administrative capacity so it can become a proper independent and compulsory point of entry to the judicial profession. A quality review mechanism to evaluate the effectiveness of judicial training had yet to be established. In the reporting period the total budget for courts was EUR 23.12 per inhabitant, or EUR 164.5 million, representing 0.5 % of the Gross Domestic Product (GDP). Court fees fell further as a number of services have been delegated to notaries and enforcement agents. Frequent changes in legislation and insufficient training make the legal environment challenging for the judiciary, which leads to inconsistency in court practice. There is a strong need for practical in-service training for all categories of staff responsible for the quality of justice. Serbian courts currently use three non-interoperable applications for electronic case management which are not interoperable, so automated information exchange across the sector is limited; information and communication technology (ICT) remains underdeveloped. The statistical methods used need to be reformed for better analysis, management and policy decisions, to improve performance and the quality of justice. A case weighting system ensuring a more even distribution of cases must be put in place. There is no consistent or easily accessible body of case-law. A new law on mediation has been in force since January 2015 but has had little impact. Awareness of mediation and alternative dispute resolution is limited. A formal mediation programme needs to be introduced in all courts, in order to create incentives, inform the public and ensure intensive training among professionals. Efficiency A national backlog reduction programme is in place but has led to only limited results. The overall length of proceedings and the backlog of cases remain serious concerns. The law on enforcement and security, which came into force in July 2016, introduces new procedures, gives public enforcement agents a broader range of responsibilities and has had initial positive impact on resolving the backlog. The main challenges relate to inter-institutional coordination, the effects of delayed case migration (up to 12 November 2015) and the shortage of judicial staff. In 2015, the total backlog of court cases increased, with an overall clearance rate, i.e. the ratio of solved cases to newly received cases, of 98 %, compared with 102 % in 2014. As regards human resources policy, the planned reduction in the judicial administration by 1 300 will need to be carefully handled so that it does not further challenge courts’ efficiency. The fight against corruption Serbia has some level of preparation in the fight against corruption. No progress was made on meeting last year’s recommendations. Corruption remains prevalent in many areas and continues to be a serious problem. There have been limited results from the implementation of adopted legislation. Serbia has still not adopted the new law on the Anti-Corruption Agency nor the amendments to the criminal code in the economic crimes sections. The government still does not take the recommendations of its own advisory body - the Anti-Corruption Council - into account. No progress was made on improving Serbia’s track record of convictions or stepping up the implementation of the national anti-corruption strategy. As in 2015, in addressing the shortcomings outlined below in the coming period, Serbia should in particular: → establish an initial track record on investigations, indictments and final convictions as regards high-level corruption; → step up the implementation of the national anti-corruption strategy and action plan, including by providing effective coordination and ensuring that all key institutions have adequate capacity and resources to fulfil their remits effectively; → urgently amend and implement the economic and corruption crimes section of the criminal code (in particular Article 234 on abuse of position of a responsible person) with a view to providing a credible and predictable criminal law framework; → swiftly adopt a new law on the Anti-Corruption Agency to strengthen its role as a key institution for a more effective fight against corruption.

Track record There is a track record of successful investigation, prosecution and convictions in corruption cases. There are still very few final convictions for high-level corruption. In order to secure more final convictions, law enforcement bodies need to be more fully empowered to act effectively and impartially when investigating corruption allegations. Public enterprises remain particularly vulnerable to corruption. Independent supervision and capacity for early detection of wrongdoing or conflicts of interest in the management of stateowned companies, in privatisation procedures, public-private partnerships and in relation to strategic investment partnerships are underdeveloped. Internal control departments lack equipment, resources and competent staff. Financial investigations are not being launched systematically in cases of corruption and organised crime. Only in a few corruption cases have assets been effectively confiscated. Political influence on the police, judges and prosecutors is illustrated by frequent comments by politicians on ongoing corruption investigations and court rulings. Repeated leaks to the media about ongoing investigations, in breach of the presumption of innocence, continue to be an issue of serious concern. A number of high-profile cases, including some where evidence of alleged wrongdoing has been presented by the media, have still not been seriously investigated. The Anti-Corruption Agency continued to monitor the funding of political activities, and to report on oversight financing of political organisations. It continued to file requests for misdemeanour proceedings relating to the funding of political activities and to asset declarations and conflicts of interest. There is some track record of judicial follow-up to the Anti-Corruption Agency’s work. As regards free access to information, the legislation has not yet been amended to improve the effectiveness of the work of the Commissioner for Free Access to Information of Public Importance and Personal Data Protection. Analysis of requests refused for access to information shows that they mainly concern issues that have an impact on the budget. Institutional framework On the prevention side, the Anti-Corruption Agency enjoys a large degree of independence in carrying out its mandate, including control of asset and income declarations, conflicts of interest, political party financing and electoral campaigns. However, the Agency faces obstacles to playing its role effectively, in the form of imprecise and unclear provisions of the law on the Anti-Corruption Agency and the lack of legal access to databases and records of other state bodies. The Anti-Corruption Council continued to analyse cases of systemic corruption and to provide the government with policy advice. The Council remains underresourced and the government does not follow up and act on its recommendations systematically. Laws on access to information are in place, but they still do not ensure that the decisions of the Commissioner for Free Access to Information of Public Importance and Personal Data Protection are followed up. The Commissioner does not have the legal power to monitor outcomes. As regards law enforcement, police and prosecutors are conducting more proactive investigations but continue to lack specialised tools and training. There is still no safe and secure platform for exchanging sensitive information between them, which hampers investigations. Capacity to carry out financial investigations and confiscate assets in corruption cases remains limited. Legal framework The legal framework for the fight against corruption is broadly in place. The excessive recourse to the provision on abuse of office in the private sector in the criminal code is harmful to the business climate and legal certainty. Amendments to the criminal code are still under consideration to provide for a sustainable legal solution in order to prosecute criminal economic offences effectively. There has been a significant delay in amending the law on the Anti-Corruption Agency to enhance its role as a key institution in the fight against corruption. Serbia has ratified all major international instruments against corruption but more evidence is needed to demonstrate their effective implementation. Procedures for investigating corruption cases, especially cases of high-level corruption, remain lengthy due to an inadequate legal framework for financial investigations and asset recovery. The law on access to information does not ensure adequate enforcement of the decisions of the Commissioner for Free Access to Information of Public Importance and Personal Data Protection. Lobbying is not regulated. Laws on conflicts of interest need to be amended. Strategic framework Serbia is implementing an anti-corruption strategy and action plan for 2013-2018 but its effects are so far limited and a number of measures have been delayed. There is limited institutional capacity to steer the coordination of activities. Serbia has adopted a financial investigation strategy, but it still lacks an action plan and credible financial resources to effectively implement it. It has not yet achieved results. The fight against corruption in Serbia lacks both a long-term strategic vision and the political will to boost reforms. Fight against organised crime Serbia has some level of preparation in the fight against organised crime. Serbia has partially fulfilled last year’s recommendations. Some progress has been made in adopting a new police law, reorganising the Ministry of Interior and in adopting the first serious and organised crime threat assessment (SOCTA) using Europol methodology. However, the number of final convictions remains low. Efforts to investigate wider criminal networks and to process money laundering cases still need to be stepped up. Financial investigations and the concept of intelligence-led policing remain underused. Precautionary freezing of assets is rarely applied and the level of assets confiscated is low. Independent and transparent oversight of the police is not yet in place. In addressing the shortcomings outlined below in the coming period, Serbia should in particular: → based on the SOCTA, continue stepping up intelligence-led investigations with a view to developing a sustainable track record of final convictions and dismantling networks involved in organised crime, money laundering, people smuggling and trafficking in human beings;

→ establish a secure platform to exchange intelligence between law enforcement agencies, devoting more attention to sharing data on cases with prosecutors and with the asset recovery directorate; → ensure coherence between the new law on the organisation of the police and the criminal procedure code; → reinforce the functions and independence of the internal control sector of the police. Track record The number of final convictions for organised crime remains low compared to the estimated value of the criminal market in the region. Criminal investigations are often narrow in scope and companies or organisations are very rarely investigated. In many cases, though, there has been no serious effort to investigate wider criminal networks. There was a substantial fall in the number of identified victims of trafficking in human beings in 2015 compared with 2014. There is a need to establish a proactive approach to identifying victims, including those among migrants, asylum seekers and unaccompanied foreign minors. There is no policy of systematically running serious financial investigations. The concept of financial investigation does not go beyond the seizure and confiscation of criminal assets of individuals and rarely focuses on tracing money flows. Serbia is not yet in a position to run complex financial (including money laundering) investigations alongside criminal investigations. This was confirmed by the Council of Europe’s Moneyval evaluation report on Serbia adopted in April 2016. Precautionary freezing of assets is rarely applied in investigations. So assets often disappear, which results in a poor track record of confiscating criminal assets on final conviction. Sanctions applied by judges are not sufficiently deterrent. There are frequent leaks to the press, violating the secrecy of the investigation. Serbia continued good international and regional cooperation in the fight against drugs. As regards the fight against money laundering, some progress can be noted in terms of the Administration for Prevention of Money Laundering detecting and acting upon suspicious transactions, despite its inadequate resources. Institutional and operational capacity Serbia has 31 951 police officers, or 445 per 100 000 inhabitants. The Ministry of Interior reformed human resources and created a centralised service, but its capacity needs to be reinforced. There is no progress in applying clear and transparent criteria in staff recruitment, promotions, dismissal, career paths and evaluation in the police; they remain vulnerable to politically motivated decisions. Serbia needs to take additional steps to exclude any political influence in police work. Command structures continue to be complex, with overlapping responsibilities. Specialised units are in place to combat terrorism, trafficking in human beings, synthetic drugs, and cybercrime and to conduct financial investigations. All these units are in need of further staffing and specialised training. A specialised department in the Criminal Investigations Directorate to prevent and fight domestic violence has been created, but needs to be reinforced. The general level of equipment varies across the ministry. There was no progress in establishing independent and transparent oversight of the police. The new law on the police does not represent sufficient progress to meet this goal. The internal control section of the police is not independent nor is it able to take special investigative action without recourse to the intelligence agencies. The operational capacity of prosecutors and the police is weakened by the lack of a secure platform for storing and exchanging information. Effective cooperation on operations between the various law enforcement agencies, such as the police and the tax and customs administrations, is hampered by a lack of smooth data exchange. An operational agreement with Europol is in place but there is no progress in appointing a liaison officer to The Hague. International cooperation is well established. The witness protection unit in the ministry lacks adequate staff, equipment and premises. The level of cooperation between the Serbian Witness Protection Unit and prosecutors needs to be improved. As regards crime statistics, a DNA database and profiling capacity are in place. There was no progress towards adopting a comprehensive, multidisciplinary and victim-oriented approach to the fight against human trafficking. Capacity for anti-money laundering action is weak. The lack of proactive financial investigations increases the risk of assets being taken out of the country. The Directorate for the Management of Seized Assets in the Ministry of Justice is under-equipped to carry out its remit to seize and confiscate property. The Serbian police’s secure database does not allow cases to be classified as international or domestic. It does not provide information received through asset recovery activities. Legal framework The February 2016 law on the police provides for better separation of tasks between the police and Ministry of Interior. Clear guidance on the implementation of this new law needs to be provided. The law on the confiscation of criminal assets needs to be aligned with EU rules, notably as regards third-party confiscation, extended confiscation and precautionary freezing of assets. Alignment is still required with various EU police cooperation and criminal law instruments. A number of shortcomings in the investigation phase need to be addressed through amendments to the criminal procedure code, notably as regards the timeframe and arrangements for using special investigative measures. The police’s dependence on the security and intelligence agencies to carry out certain special investigative measures in criminal investigations are not in line with good practice. Legal amendments are needed to broaden the investigative powers of the border police and customs. Strategic framework Serbia has national strategies for anti-money laundering activities, financial investigation and combating the financing of terrorism. Serbia adopted its first national serious and organised crime threat assessment (SOCTA) and should now start using it to set security priorities and roll out the concept of intelligence-led policing, based on a well-developed risk and threat assessment capacity, which still needs to be developed. Serbia needs to adopt strategies on cybercrime and trafficking in human beings. The fight against terrorism Serbia criminalised, already in 2014, the activity of foreign terrorist fighters in line with UN Security Council resolution 2178 (2014). The national strategy to prevent and fight terrorism was finalised in March 2016; its adoption is pending. It is in line with the ‘prevent, pursue and respond’ model of the 2010 EU counter-terrorism strategy. The role of local authorities and civil society organisations in identifying and preventing extremism and radicalisation should be emphasised. The protection of critical infrastructure needs to be addressed. Serbia is actively involved in international and regional police and judicial cooperation. The phenomenon of foreign terrorist fighters requires a tailor-made approach from the intelligence and law enforcement community. For developments in these areas, see chapter 24 — Justice, freedom and security.

2.4.Human rights and the protection of minorities The legislative and institutional framework for observance of international human rights law is in place. Generally, the legal framework to uphold and protect minority and cultural rights is also in place. However, consistent implementation across the whole country is needed. Shortcomings particularly affect the following areas: → conditions for the full exercise of freedom of expression continue to be lacking. More consistent efforts are needed to ensure full implementation of the media laws; → strong and visible political support is needed to protect the rights of the groups facing most discrimination, including lesbian, gay, bisexual, transgender and intersex (LGBTI) persons, people with disabilities, people with HIV/AIDS and other vulnerable groups. Investigation, prosecution and penalties for hate-motivated crimes need to be stepped up; → a comprehensive approach to the integration of national minorities is needed through full implementation of the action plan on national minorities across the country; → full implementation of the new strategy for Roma inclusion needs to be ensured and the action plan needs to be adopted promptly. A detailed analysis of freedom of expression as a pilot area follows below. For a detailed analysis of developments on other human rights and the protection of minorities, see chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination policy and equal opportunities, see also chapter 19 — Social policy and employment. Freedom of expression Serbia has achieved some level of preparation concerning freedom of expression. However, no progress has been made in the last year. The overall environment is not conducive to the full exercise of this right. The legislative package in the media sector still needs to be fully implemented. Privatisation of state media outlets has not led to greater transparency of ownership or funding sources, including state funding. Co-financing of media content to meet public interest obligations needs to be implemented in line with the legislative framework, using transparent and fair procedures, and without interference by the state administration, especially at local level. Threats, violence and intimidation against journalists remain an issue of concern. Information leaks to media outlets, e.g. about ongoing investigations, threaten the personal safety of journalists and are an invasion of personal privacy. Investigations and final convictions for attacks on and intimidation of journalists are rare. In addressing the shortcomings outlined here, in the coming period Serbia should in particular: → create an enabling environment in which freedom of expression can be exercised without hindrance, while threats, physical assaults, instigation to violence and cases of invasion of privacy against journalists and bloggers are properly followed up by the judicial authorities and publicly condemned; → ensure the full implementation of media laws, and make the Regulatory Body for Electronic Media fully operational in order to support editorial independence in the media; → ensure adequate funding of public broadcasting services, and editorial independence, to support them in serving the public interest; → bring funding from state resources under co-funding for media content serving the public interest into line with the current legislation to ensure transparency and equal opportunities. Intimidation of journalists The number of recorded cases of threats, intimidation and violence against journalists remains a concern. Some criminal charges have been filed but final convictions are still rare. Prolonged police protection of several journalists and social media activists continues, with no tangible action taken to remove the reasons for these security measures, which seriously hamper the exercise of their profession. The commission tasked to look into unresolved cases of murdered journalists from 1999 and 2001 has not made further progress with investigating two murders, while the trial for the murder of one media publisher is in progress. Publication of personal data and assumptions that are detrimental to the presumption of innocence remain frequent. There has been no progress in investigating a series of cases of actions against websites that occurred from 2014 on. Serious efforts are needed to identify and prosecute those suspected of violating internet freedoms. Legislative environment Media legislation in place since 2014 has not yet been fully implemented. The privatisation of the State-owned media is not yet fully completed, and has not ensured transparency of ownership or an increase in the variety of information available to the public. Co-financing of media content in the public interest should be made more transparent, at national and local level. Defamation ceased to be a criminal offence in December 2012. As regards access to information of public interest from state bodies, state services often resort to paying fines rather than disclosing the information requested. Implementation of legislation/institutions The Regulatory Body for Electronic Media (REM) is incomplete since not all members of its council have been appointed. The appointment procedure for REM council members should be free from political influence. REM’s assessment of media compliance with legislative provisions during the election campaign in April 2016 is still awaited. The Press Council has stepped up its efforts to record and impose penalties for breaches of professional standards in the print media and has recorded a growing number of breaches of the Journalistic Code, primarily relating to the truthfulness of published information. Public service broadcasters The two public service broadcasters, Radio Television of Serbia (RTS) and Radio Television of Vojvodina (RTV), started being partially financed through a subscription fee in line with the law. Additional funds from the state budget will need to be allocated, according to clear criteria. Public broadcasters are entitled to commercial income, with less airtime devoted to advertising than that allowed for commercial broadcasters by law. The funds available for public broadcasters are insufficient to meet their legal obligations and the temporary nature of their funding model leaves them vulnerable to political influence. Public broadcasting services in minority languages need to be strengthened, especially as regards RTS. The way that widespread staff changes were made at RTV in May gave rise to concerns about ensuring the station’s commitment to editorial independence. Economic factors Unclear ownership structures and financing from state resources, especially at local level, continue to be a feature of the media environment since the privatisation of the state media. Political and economic influence over the media continues to be a source of concern, while informal pressure on editorial policy is exerted through the distribution of advertising funds. Professional organisation / professional conditions There are three main professional associations in Serbia. Journalists have little job security and the editorial environment, which favours ‘tabloidisation’ and the publication of unconfirmed and unchecked (or even completely fabricated) information, is not conducive to improving journalistic standards. Low salaries and a lack of job security continue to make media professionals vulnerable to pressure and influence. The overall media environment encourages self-censorship. Journalists’ job security should be enhanced and press associations need to strengthen their role in trade union and employment matters. 2.5.Regional issues and international obligations There are no outstanding issues concerning Serbia’s respect for the Dayton / Paris Peace Agreement. Serbia continues to support the sovereignty and territorial integrity of Bosnia and Herzegovina, while preserving special relations with Republika Srpska, as envisaged by the Dayton Agreement. Serbia also supports Bosnia and Herzegovina’s path to joining the EU. (Analysis on cooperation and on the domestic handling of war crime cases can be found under the relevant heading in chapter 23 – Judiciary and fundamental rights)

Serbia’s policy on the International Criminal Court is in line with the EU’s guiding principles and EU common positions on the integrity of the Rome Statute. Serbia does not have any bilateral immunity agreements. Along with Bosnia and Herzegovina, Croatia and Montenegro, Serbia has continued to cooperate closely under the Sarajevo Declaration Process, which aims to find sustainable solutions for some 74 000 people who became refugees or displaced persons as a result of the armed conflicts in former Yugoslavia in the 1990s. In Serbia, little progress has been made on implementing the upgraded plan for 4 725 housing units worth EUR 78 million; only 129 have been delivered. The issue of refugees’ pensions between Croatia and Serbia is still unresolved. The unresolved fate of missing persons who disappeared in the conflicts of the 1990s remains a humanitarian concern in the Western Balkans. In July 2016, according to the figures of the International Committee of the Red Cross (ICRC), close to 11 000 people were still missing as a result of the conflicts in the region. Of these, some 6 900 cases are related to the conflict in Bosnia and Herzegovina, 2 100 to the conflict in Croatia and over 1 600 to the conflict in Kosovo. The lack of information on gravesites and difficulties in identifying the human remains exhumed up to now continue to be the key obstacles to solving the remaining cases of missing persons in the region. After a temporary standstill, three sessions of the ICRC-chaired Working Group on Missing Persons in Kosovo have been held since November 2015. This is a welcome development, particularly in view of the fact that the four cases solved in 2015 represented the lowest number since the end of the conflict. The Serbian authorities gave an additional impetus to the process by beginning excavation at a hitherto unknown potential gravesite at Kiževak mine, in the municipality of Raška, in November 2015. A protocol on cooperation in tracing missing persons was signed with Bosnia and Herzegovina. As regards missing persons related to the conflict in Croatia, in October 2015 the Serbian and Croatian State Commissions updated the Book of Missing Persons on the Territory of the Republic of Croatia in line with the June 2015 agreement. Efforts must continue to find information on potential gravesites and clarify the fate and whereabouts of those still unaccounted for. Regional cooperation and good neighbourly relations form an essential part of Serbia’s European integration process and contribute to stability, reconciliation and a climate conducive to addressing open bilateral issues and the legacies of the past. Serbia has shown increasingly constructive engagement in regional cooperation initiatives such as the SouthEast Europe Cooperation Process, the Regional Cooperation Council, the Central European Free Trade Agreement, the Adriatic-Ionian Initiative, the Brdo process, the Western Balkan Six initiative and the Berlin process. In June, Serbia took the annual chair of the Migration, Asylum and Refugees Regional Initiative, and in July the six-month chair of the Organisation of the Black Sea Economic Cooperation. It continued to actively support the Coalition for Reconciliation Commission and Igman initiatives on regional reconciliation. The impetus given through the Berlin process and the Western Balkan Six initiative, notably regarding the connectivity agenda, has continued to foster increased regional cooperation. Building on the results of previous summits, the June 2016 Paris summit saw further advances on the connectivity agenda but also opened cooperation in new areas, notably through the establishment of the Regional Youth Cooperation Office to be established in Tirana. Serbia has participated actively. Serbia needs to implement the connectivity reform measures associated with the connectivity agenda such as aligning technical standards, formalising and simplifying border crossing procedures, strengthening road safety and maintenance schemes. The implementation of these connectivity reform measures remains crucial for the functioning of integrated transport and energy networks. Serbia remained constructively committed to bilateral relations with other enlargement countries and neighbouring EU Member States. Serbia needs to conclude bilateral conventions on regional cooperation under Article 15 of the Stabilisation and Association Agreement (SAA) with other partners with an SAA in force. It has concluded one with Montenegro and took steps to conclude similar conventions with Albania and Bosnia and Herzegovina. The demarcation of borders with Bosnia and Herzegovina, Montenegro and Croatia remains pending. Relations with Albania, which had improved overall in the previous year, remained stable. The Serbian and Albanian Ministers of Foreign Affairs took part in two trilateral meetings with their Italian counterpart. The Serbian and Albanian Prime Ministers opened together a business forum in Niš in October 2016. Bilateral ties were also strengthened in the framework of the Berlin process and the common connectivity agenda. Relations with Bosnia and Herzegovina remained overall good. The first joint session of Serbian and Bosnia and Herzegovina governments in November 2015 was a major step forward, followed by the signature of bilateral agreements, including agreements on missing persons, the environment and telecommunications. The Serbian Prime Minister took part in an investment forum in Srebrenica in November 2015. A Bosnia and Herzegovina Presidency member and the Minister of Foreign Affairs visited Belgrade at the end of 2015. In July, the Serbian Speaker paid her first visit to Sarajevo after her re-election. Relations with the former Yugoslav Republic of Macedonia remained good and continued to deepen. The Minister of Foreign Affairs of the former Yugoslav Republic of Macedonia visited Belgrade in November 2015. Relations with Montenegro remained good. A programme of scientific cooperation was signed in September 2015. Cooperation in the defence sector also continued, with the signature in April of an agreement on cession of submarines. The Montenegrin President visited Belgrade in July. There were no developments on issues related to citizenship rights in the two countries. Relations with Turkey remained stable overall. The Turkish Prime Minister visited Serbia in December 2015. The two countries agreed to establish a High Council for Strategic Cooperation. Relations with Bulgaria, Hungary and Romania continued to be good. The Serbian and Bulgarian Ministers of Defence met in March. The Speaker of the Serbian parliament visited Bulgaria in February and Hungary in November 2015. The Hungarian Prime Minister visited Serbia in April and September. The Romanian Minister for the Diaspora visited Serbia in December 2015. Serbian, Bulgarian and Romanian Prime Ministers, on one side, and Foreign Affairs parliamentary committees, on the other side, met in October 2015 in Sofia. Relations with Croatia regained momentum with the signature in June of a joint declaration tackling certain bilateral issues, but continued to be mixed. 3. Normalisation of relations between Serbia and Kosovo Work under the EU-facilitated dialogue has continued throughout the reporting period. Overall progress in the implementation of the 25 August 2015 agreement has been slow. This is partly due to respective internal circumstances, with parliamentary elections followed by a lengthy government formation process in Serbia and domestic situation in Kosovo. During the last high-level dialogue in January 2016, both sides had asked for political space to operate in, address these domestic challenges and consolidate government and governance. EU frequent bilateral contacts and discussions with both sides helped maintain the political engagement at highest level, and re-engage both sides to resume work on the implementation of past agreements. Since the formation of the Serbian government in August, both sides engaged in acceleration of the implementation of the 25 August 2015 Agreements. Implementation of the agreement on the Mitrovica Bridge commenced in August and works on and around the bridge, including turning the North Mitrovica municipality's main street (King Petar Street) into a pedestrian zone, are to be completed by January 2017. Progress has been made when it comes to bridging different views on the arrangement on telecoms, while final implementation is still outstanding. Little progress has been made on the Association /Community of Serb majority municipalities in Kosovo. After the official appointment of the management team, a mandate needs to be given to it by Kosovo to draft the statute of the Association/Community. Serbia needs to register and license the two Serbian energy companies to be established in Kosovo to allow progress in the field of Energy. Further progress has been made on the implementation of the April 2013 ‘First agreement of principles governing the normalisation of relations’. Kosovo Serb police and civil protection personnel are now fully integrated into the Kosovo system. The dismantling of the Serbian structures on justice continues as scheduled and all former Serbian judicial personnel are expected to be into the Kosovo system by autumn 2016. In the context of the liaison arrangements, official visits are directly arranged by Liaison Officers in line with the relevant agreement. Most agreements from the Technical Dialogue (2011-2012) are now implemented and functioning. In the field of cadastre, the scanning of documents pertaining to Kosovo was completed in June, as scheduled but the documents have not been delivered to the EU Special representative in Kosovo, in line with the agreement on cadastre. Both sides agreed on new modalities for the implementation of the University Diploma agreement in April. An agreement was reached in September on the implementation of the licence plate related remaining elements of the agreement on freedom of movement. Requests for Mutual Legal Assistance are being processed. Serbia needs to remain committed to the continued implementation of the agreement on representation and participation of Kosovo in regional forums. Serbian official statements have at times interfered with the judicial process led by EULEX. Serbia has yet to address the issue of re-located Serbian administrative customs structures with Kosovo denomination that operate from within Serbia, and to cease the issuance of documentation or affixing of stamps with denomination that contravenes to the related agreement. On IBM, while the interim crossing points are fully operational, there has been no progress in establishing the three permanent crossing points to be hosted by Serbia. Illegal crossing roads/ by-passes, in particular in the north of Kosovo, continue to be regularly used to smuggle substantial amounts of goods. Additional measures need to be taken by Serbia to close illegal crossings. Overall, Serbia has remained engaged in the dialogue and committed to the implementation of the agreements reached. However, Serbia needs to make further efforts and contribute to the establishment of circumstances conducive to the normalisation of relations with Kosovo. Further progress in this area remains essential for advancing the European future of Serbia.

4. Economic criteria Key economic figures 2014 2015 Gross domestic product per capita (% of EU28 in PPS) 37 36 GDP growth (%) -1.8 0.8 Unemployment rate (female; male) (%) 19.2 (20.3; 18.3) 17.7 (18.8; 16.8) Economic activity rate for persons aged 20–64: proportion of the population aged 20–64 that is economically active (female; male) (%) 68.0 68.1 Current account balance (% of GDP) -6.0 -4.7 Net Foreign direct investment (FDI) (% of GDP) 3.7 5.4 Source: Eurostat In line with the conclusions of the European Council in Copenhagen in June 1993, EU accession requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union. The monitoring of these economic criteria should be seen in the context of the central importance of economic governance in the enlargement process. Each enlargement country prepares an Economic Reform Programme (ERP) annually, which sets out a medium-term macro-fiscal policy framework and a structural reform agenda aimed at ensuring competitiveness and inclusive growth. The ERPs are the basis for country-specific policy guidance jointly adopted by the EU and the Western Balkans and Turkey at ministerial level in May each year. 4.1. The existence of a functioning market economy Serbia is moderately prepared in developing a functioning market economy. Good progress was made to address some of the policy weaknesses, in particular with regard to the budget deficit. Growth prospects have improved and domestic and external imbalances were reduced. Price stability has been preserved. The restructuring of publiclyowned enterprises has advanced. However, government debt is still very high. Credit activity is recovering but the high level of nonperforming loans remains an issue. Unemployment is very high, particularly among youth. The private sector is underdeveloped and hampered by weaknesses in the rule of law. In line with the ERP recommendations and in order to support longterm growth, in the coming years Serbia should pay particular attention to: → further lowering the budget deficit and reducing the high public debt level; → continuing the restructuring and privatisation of stateowned enterprises and addressing the non-performing loans (NPLs); → improving revenue collection in a systematic and business-friendly way by implementing the tax administration transformation programme and fighting the informal economy. Economic governance The government remained committed to creating a functioning market economy. It continued implementing the StandBy Arrangement with the International Monetary Fund (IMF). However, the Economic Reform Programme policy guidance has only been partially implemented. Strong fiscal consolidation measures led to a significant reduction of the very high budget deficit and provided room to lower interest rates. The restructuring and resolution of state-owned enterprises and the public administration reform advanced. Financial stability was preserved and the business environment improved. Macroeconomic stability Growth fundamentals and prospects have improved. The rebound of economic activity was supported by base effects, low oil prices, and increased confidence as a result of implemented reforms and strong fiscal consolidation. GDP growth was modest in 2015 before accelerating strongly to 2.9 % in the first half of 2016. Although the economy is still close to its precrisis level, there is a new growth momentum based on sounder fundamentals. It is driven by a robust and broadbased expansion of exports and investment. The new investment cycle that started last year should further support the rebalancing of the economy. The income gap with the EU remained broadly unchanged: in 2015, per capita GDP in purchasing power standards stood at 36 % of the EU average. Surging exports have reduced external imbalances. Serbia's solid export performance continued unabated and import coverage of goods and services increased from around twothirds 5 years ago to close to 90 % in early 2016. As a result, the trade and current account deficits were markedly reduced. In the four quarters to June 2016, the current account deficit fell to around 4 % of GDP, compared with an average of close to 8 % over the last 5 years, and was fully covered by net Foreign Direct Investment (FDI). Moreover, FDI inflows, which picked up already last year, have been broad-based, with a significant share going into manufacturing and tradable sectors. The level of external debt remains high and makes the economy vulnerable to external shocks. The debt ratio has crept up to around 80 % of GDP but, in view of shrinking external imbalances and a favourable term structure, does not raise immediate concerns. Over the last 5 years, the official foreign exchange reserves remained relatively high. Monetary policy supported growth. Inflation has been persistently below the central bank target of 4 % ±1.5 percentage points since February 2014. Price stability has been facilitated by a long period of low inflation in major trading partners and, in particular, by declining commodity prices, weak domestic demand, and a policy of maintaining a generally stable exchange rate. The low inflationary pressure and strong fiscal consolidation helped reduce inflation expectations and supported further reductions in the key policy rate of the central bank from 5 % in September 2015 to 4 % in July 2016. In an effort to improve lending conditions and spur credit growth, the central bank also gradually cut the foreign currency reserve requirement ratio. ERP policy guidance: Further strengthen fiscal consolidation by using any excess revenue and current expenditure savings, and take additional measures, if needed, in order to achieve a primary surplus in 2016 and reduce overall budget deficits in the following years. Fiscal consolidation has been very strong. After years of very high budget imbalances, the budget deficit fell from 6.6 % of GDP in 2014 to 3.7 % of GDP in 2015. Public wage and pension cuts, implemented at the end of 2014, and betterthanexpected collection of tax revenue contributed to a significant structural adjustment. In addition, the deficit reduction was also supported by oneoff revenue. The good budget performance allowed for a partial reversal of wage and pension cuts as well as unplanned oneoff payments by the end of last year. The strong revenue growth continued in 2016 and led to a small budget surplus by the end of August, despite a 36 % increase in capital expenditure. In view of this, the restrained spending on wages and pensions, and some oneoff receipts, the 2016 budget deficit is, therefore, likely to be significantly lower than the originally planned 4 % of GDP. Fiscal consolidation needs to be sustained. Despite an impressive deficit reduction, fiscal imbalances and risks remain high and fiscally important structural reforms have been only partially implemented. Interest payments are significant and the share of mandatory expenditure is still too large to allow for a sizeable shift towards a more growth-enhancing pattern of spending. In order to put public finances on a sound footing, the consolidation drive has to be supported by maintaining strict control over current expenditure and by further advancing public finance reforms and the restructuring of stateowned enterprises. ERP policy guidance: Support fiscal consolidation by taking steps to find a sustainable resolution of the remaining stateowned enterprises and continuing the organisational and financial restructuring of large utility companies. Advance the reform of the public administration as envisaged. Further improve revenue collection in a systematic and business-friendly way by implementing the tax administration transformation programme. There are ongoing efforts to strengthen the budgetary framework and governance. As fiscal consolidation advances, the importance of addressing institutional deficiencies is growing. In late 2015, the government adopted a Public Finance Management reform programme and action plan, which should now be implemented. The public administration reform has advanced. Dedicated efforts are also being made to strengthen the tax administration and reform local government finance. The Fiscal Council remained a prominent institution, supporting domestic debates on fiscal policy. However, the fiscal responsibility framework and, in particular the system of fiscal rules, is weak and needs to be strengthened.

The macroeconomic policy mix has been appropriate. The economy is still facing significant challenges but the authorities’ reformoriented policy stance has begun to bear fruit through improved growth prospects, a better sovereign credit rating and an improved business environment. The combination of restrictive fiscal policy and accommodative monetary policy stance has proven successful. Macroeconomic stability improved as a result and the economy returned to growth earlier than expected. Functioning of product markets Business environment Steps were taken to further facilitate market entry procedures. The procedure of registering business entities was improved, including by making it possible to apply for incorporation and VAT registration at the same time. Following the simplification of the process of issuing construction permits last year, a new electronic permitting system became ERP policy guidance: Improve the business environment and promote private investment by developing a more transparent and less burdensome system of para-fiscal charges, putting in place a guarantee scheme for loans to SMEs and re-launching the ‘regulatory guillotine’. operational at the beginning of 2016. The system allows for faster processing of applications for construction — in the first half of 2016 the number of building permits issued increased by 12.2 % and the anticipated value of works is 50 % higher in comparison with the same period the year before. The institutional and regulatory environment remains weak. Important laws continue to be adopted by emergency procedure, without proper consultations with interested parties, and there are delays in the adoption of secondary legislation. Courts are burdened with a substantial number of unresolved cases. Property restitution progressed, with about half of all claims being resolved. The informal economy is estimated at around 2030 % of GDP and leads to losses of budget revenue, a lack of labour protection and, along with corruption, is a major obstacle to fair competition. In December 2015, the government adopted a national programme for countering the shadow economy. The high number of loosely regulated nontax fiscal and para-fiscal charges, both at state and local government level, represents a costly burden on businesses. State influence on product markets The State presence in the economy and the level of state aid are high. The share of administered prices remains broadly unchanged at around 19 % of the consumer price index basket. The State has not issued new guarantees for liquidity support to SOEs or guarantees to companies from the portfolio of the Privatisation Agency. The government also committed itself not to give implicit guarantees in the future. However, in the context of restructuring SOEs, it continued taking over debt of some of these enterprises that were already beneficiaries of previous guarantees. The administrative capacity to manage subsidies at local and central level remains weak. In many cases, State aid continues to be granted to unprofitable public companies or in a nontransparent manner. Investment aid, in particular, is not granted on the basis of predictable criteria in line with the EU and SAA state aid rules. State support should be redirected towards horizontal objectives, such as support to SMEs and research and development. Privatisation and restructuring Bankruptcy and privatisation challenges persist. Following amendments to the law on privatisation, the Privatisation Agency ceased to exist in February 2016. Its activities were transferred to other institutions. By September 2016, the status of most of the companies in the portfolio of the Privatisation Agency has been solved through sale or bankruptcy procedures. The protection of companies of strategic importance from forcible collection of debts and bankruptcy was lifted in the beginning of June. With a few exceptions, like the sale of assets of the Smederevo steel mill, the resolution of these companies remains a challenge. The restructuring of large public utilities has advanced. In view of the significant economic and fiscal impact, improving their operational and financial performance remains a priority. In February, the government adopted a financial consolidation plan of Srbijagas. Although the payment discipline of the company’s major clients has improved recently, obligations from past arrears are high and financial restructuring is still due. First steps to reorganise Elektroprivreda Srbije, the state-owned power utility, were taken in 2015. Further measures, envisaged in its financial restructuring plan, to reduce costs, including staff reduction, and increase revenue have been implemented or are in the pipeline. In October 2015, the government adopted a comprehensive restructuring plan for the Serbian Railways until 2020, focusing on assets, network and staff reorganisation. Major steps were taken towards implementing this plan. Functioning of the financial market Financial stability Reducing the high level of nonperforming loans remains an important challenge. The banking sector maintained a strong liquidity position and capital adequacy ratio. The special diagnostic study conducted by the central bank last year did not identify capital shortfalls for any of the participating banks, representing 88 % of total banking system assets. ERP policy guidance: Continue to address risks to financial stability and the real economy by following-up on the NPL action plans which have been adopted, reinforcing the strategy already in place to promote the use of the local currency (‘dinarisation strategy’) in the financial system and shedding increased light on the asset quality of smaller banks that were not covered by the special diagnostic studies. Throughout this process, the central bank’s monetary policy stance may remain accommodative insofar as both inflation expectations remain anchored and a favourable fiscal consolidation path is maintained. However, despite declining in the first half of 2016, nonperforming loans (NPLs) stood high, at close to 20 %, and remain a significant burden for banks. Therefore, a continuous implementation of the NPL resolution strategy, adopted in 2015, is much needed. The profitability of the banking sector improved, although some of the small banks recorded losses. Despite increased dinarisation of household loans, the overall deposit and loan euroisation is widespread and represents a key financial stability risk. A privatisation advisor was selected for the second largest bank. Further measures, including also actions on the remaining small stateowned banks and the restructuring of other financial institutions, are needed in order to reduce risks. Access to finance

Lending activity is picking up but needs to be managed carefully. The financial system is dominated by commercial banks, mostly foreignowned, holding more than 90 % of all assets. State control of key entities in both the banking and insurance sectors remained unchanged. Commercial bank loans were broadly stagnant over the last few years at around 47 % of GDP but started to expand noticeably in 2016. Reduced interest rates and accelerating economic activity have been instrumental in reviving lending activity. Credit to households expanded steadily in the last few years and accelerated further in 2016. After a prolonged period of decline, lending to companies gained momentum as well. However, the credit expansion would need to be managed carefully in order to avoid excesses and accumulation of new vulnerabilities. Functioning of the labour market Labour market conditions improved but unemployment remains very high. The employment rate increased only marginally in 2015. Registered private sector jobs rose strongly by close to 10 % due to stricter labour inspection, while the public sector shed some 34,000 jobs. The unemployment rate fell to 17.7 %. Labour market indicators improved further in 2016, to a large extent driven by rising informal, in particular agricultural, employment. Although in decline, unemployment is still particularly high among young people — around 40 % of youth has no job and close to one in four is not in employment, education or training. Women’s position in the labour market did not change and is characterised by significantly lower activity and employment rates compared to men. Job creation continued to be impeded by weak labour demand and structural obstacles. Labour demand, although on the rise, is far below its pre-crisis levels. Amendments to the labour law, adopted two years ago, increased labour market flexibility. ERP policy guidance: Step up the provision of targeted active labour market policies to facilitate in particular the reintegration of workers made redundant in the resolution of state-owned enterprises and public administration rightsizing. Increase the capacity of the National Employment Services to roll out such measures to larger numbers of beneficiaries. However, the relatively high social contribution burden, in particular on low incomes, impedes job creation and fuels labour market duality. More than 85 % of all unemployed have a medium or high level of education, pointing to considerable gaps between acquired skills and labour market demand. Brain drain remains a major challenge. The National employment service is being strengthened and the budget for active labour market policies was increased, with a special focus on young people, redundant workers and the long-term unemployed. 4.2. The capacity to cope with competitive pressure and market forces within the Union Serbia is moderately prepared to cope with competitive pressure and market forces within the Union. Some progress was made concerning support to SMEs and entrepreneurship. Public and private investments increased. However, the quality, equality, and relevance of education and training do not fully match societal needs. The level of investment activity is still below the economy’s needs. SMEs face a number of challenges, including an unpredictable business environment, a high level of parafiscal charges, and difficult and costly access to finance. In line with the ERP recommendations and in order to support longterm growth, in the coming year Serbia should pay particular attention to: → improving the quality of the education system; → stimulating private investments and improving prioritisation and management of public infrastructure projects; → better regulating and reducing the scope of parafiscal charges, in particular for SMEs. Education and innovation The worsening demographic situation and weak education outcomes demand increased focus on human capital policies. Serbia’s population is ageing and shrinking by around 0.5 % per year. Public spending on education is comparable to that of EU countries, but outcomes in terms of skills and key competences are weaker. This is manifested by belowaverage PISA test scores showing that around onethird of the population is functionally illiterate. Serbia ranked below all EU Member States in the 2016 World Economic Forum human capital index, with particularly weak results in the 15-24 age group. Although the country has a relatively good scientific base, the level of investment in research is less than 1 % of GDP and cooperation between the public and private sector is weak and not systematically supported. The quality, equality, and relevance of education and training have to be improved in order to better match societal needs. Both employers and graduates believe that the education institutions do not equip students with key soft skills, such as problem solving, organisational, decision-making. The national strategy and action plan for education development aims to address the outdated curricula and obsolete teaching methods. On the basis of existing qualification frameworks for vocational and higher education, an integrated national qualification framework for lifelong learning has been developed and is under consultation with relevant national bodies. It should be linked with steps for a progressive reform of the education system at all levels, improving the level of basic skills acquired by students. Preprimary education enrolment is below the EU average at around 60 % for children aged 3 and above and just 17 % for children aged below 3. Physical capital and quality of infrastructure Investments increased but are still below the economy’s needs. Years of underinvestment have taken their toll and, despite a strong pickup in both public and private investment activity that started last year, the share of total investment stood at just 18 % of GDP in 2015. Work on major transport corridors intensified but, in view of the poor state of infrastructure, ERP policy guidance: Address the underexecution of public capital expenditure by improving its prioritisation and management; as a priority, make significant progress in the preparation of the construction of the Bulgaria-Serbia gas interconnector project and finish road works on Corridor X by end of 2017. there is a clear need to further increase government investment. Importantly, foreign direct investment rose markedly to 5.4 % of GDP in 2015 and was largely channelled into tradable sectors like manufacturing, thus improving competitiveness and increasing the production and export base. However, there is still significant room to attract new FDI as Serbia lags behind peer countries in terms of cumulative FDI per capita. There is an untapped potential to facilitate investment via connectivity reform measures in the energy and transport sector. Project planning, preparation and coordination needs to be improved, building upon existing structures like the National Investment Committee and the Single Project Pipeline. Given limited fiscal space, careful consideration should be given to prioritising and implementing projects with cle