Ex post evaluation of the macro-financial assistance to Serbia : final report.
Date: 2013-11-18
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: EU aid, EU loan, Serbia, aid evaluation, financial aid, macroeconomics

Ex Post Evaluation of the Macro-
Financial Assistance to Serbia

Final Report

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The information and view set out in this report are those of the author(s) and do not
necessarily reflect the official opinion of the Commission. The Commission does not
guarantee the accuracy of the data included in this study. Neither the Commission nor
any person acting on the Commission’s behalf may be held responsible for the use
which may be made of the information contained therein.

This study exists in English only and can be downloaded from the website
http://ec.europa.eu/economy_finance/evaluation/index_en.htm

A great deal of additional information is available on the Internet. It can be accessed
through the Europa server (ec.europa.eu)

KC-01-13-694-EN-N

© European Union, 2013
Reproduction is authorised provided the source is acknowledged

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table of Contents

Table of Contents .............................................................................................. 3
Glossary of terms .............................................................................................. 4
Executive summary ........................................................................................... 6
Our evaluation approach ...................................................................................10
Our operational approach ...............................................................................16
History and context of MFA operations ................................................................28
Historical and institutional context on the eve of the 2000s .................................28
Serbian economy in 2000-2008: persistent
structural weaknesses, growing
macroeconomic imbalances.............................................................................31
MFA: rationale, objectives and logic of intervention...............................................35
The rationale for MFA operations to Serbia ........................................................35
The objectives of the 2009 – 2011 MFA operations in Serbia ...............................36
2009 – 2011 Macro-Financial Assistance: logic of intervention .............................38
MFA contribution to short-term macroeconomic stabilisation in Serbia.....................48
MFA objectives for short-term macroeconomic stabilisation and their relevance to
the needs of the Serbian economy ...................................................................48
Serbian macroeconomic evolution before and after MFA: 2010-2013 ....................49
Counterfactual analysis...................................................................................65
MFA impact on structural reforms .......................................................................78
Gross structural effects of the MFA: structural reforms in 2010-2012 ...................79
Counterfactual analysis: net impact of the MFA on structural reforms ...................87
Case study: pensions and pension reforms in Serbia ..........................................93
Case study: the establishment of the rule-based fiscal framework......................101
MFA effects on external financial sustainability ...................................................109
Evolution of Serbia’s external financial sustainability indicators..........................109
Quantitative assessment of the external
financial and public debt sustainability
evolution 2010-2012 ....................................................................................121
MFA contribution to medium-long term external financial sustainability ..............126
Macro-Financial Assistance design and implementation........................................129
Synergies with the Instrument for Pre-Accession (IPA) budget support...............129
Synergies with IMF and World Bank programmes.............................................132
MFA volume, structure and timing of disbursement ..........................................133
Conclusions and recommendations for future MFA operations...............................135
Main findings...............................................................................................135
Recommendations for future MFA operations...................................................137
Appendix A – Our approach to the Delphi interviews ...........................................139
Appendix B – Questionnaire for structured interviews..........................................154
Appendix C – Our modelling approach ...............................................................161
Appendix D – List of persons interviewed...........................................................175
Appendix E – list of literature and data sources ..................................................178

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Abstract
The ex-post evaluation of the Macro-Financial Assistance (MFA) to Serbia assesses the
effects of the MFA on the macroeconomic stabilisation and structural reforms in the
recipient country. The Macro-Financial Assistance (MFA) to Serbia was awarded in
2009 to alleviate the country’s external financing difficulties, in the form of a loan
conditional on the implementation of specific policy conditions. The loan was disbursed
by a single tranche of EUR 100 million in 2011. The present report presents the
macroeconomic context of the operation, assesses the macroeconomic impact of the
MFA, the implementation of structural reforms in line with the MFA policy conditions,
the evolution of the external financial sustainability indicators of the Serbian economy
the
following MFA,
international financial assistance to Serbia, and the added value of the MFA with
respect to the latter. The evaluation findings are based on the interviews with Serbian
officials, representatives of international financial
institutions and of the European
Commission, the results of the Delphi analysis, a review of the documentation relevant
to the operation and macroeconomic modelling. The study presents and summarizes
the results of the evaluation and draws recommendations for future operations.

the MFA with the other components of

the interaction of

L'évaluation ex-post de l'Assistance macrofinancière (AMF) à la Serbie évalue les effets
de l’AMF sur la stabilisation macroéconomique et les réformes structurelles dans le
pays bénéficiaire. L'Assistance macrofinancière (AMF) à la Serbie a été accordée en
2009 pour atténuer les difficultés de financement extérieur du pays, sous forme d’un
prêt conditionné à l’adoption de conditionnalités spécifiques. Le prêt a été versé en
une seule tranche de 100 millions d'euros en 2011. Le présent rapport présente le
contexte macro-économique de l'opération, évalue l'impact macroéconomique de
l'AMF, examine la mise en œuvre des réformes structurelles en lien avec les
conditionnalités de l'AMF, l'évolution des indicateurs de solidité financière extérieure
de l'économie serbe suite à l'AMF, l'interaction de l'AMF avec les autres composantes
de l'aide financière internationale à la Serbie, et la valeur ajoutée de l'AMF à l'égard de
celle-ci. Les résultats de l'évaluation sont basés sur des entretiens avec des
responsables serbes, les représentants des institutions financières internationales et
de la Commission européenne,
les résultats de l'analyse Delphi, l’examen de la
documentation relative à l’opération et la modélisation macroéconomique. L'étude
présente et résume les résultats de l'évaluation et tire des recommandations pour les
opérations à venir.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Glossary of terms

EU – European Union
DG ECFIN – Directorate General for Economic and Financial Affairs of the European
Commission
FDI – Foreign Direct Investment
FDR – Fiscal Deficit Rule
IMF – International Monetary Fund
IPA – Instrument for Pre-Accession
MFA – Macro-Financial Assistance
MoU – Memorandum of Understanding
NBS – National Bank of Serbia
PIFC – Public Internal Financial Control
PIO – Pension & Disability Insurance Fund of Serbia
SBA – Stand-By Arrangement
WB – World Bank

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Executive summary
The Macro-Financial Assistance (MFA) to Serbia was awarded by the Council of the
European Union Decision 2009/892/EC on the 30 of November 2009. The 2009 – 2011
MFA was the third provided to Serbia since two MFA operations had already been
undertaken in 2001 – 2002 and in 2002 – 2006 to the benefit of Federal Republic of
Yugoslavia and State Union of Serbia and Montenegro respectively, entities of which
the Republic of Serbia was constitutive at these periods.

The decision to grant the Macro-Financial Assistance 2009 – 2011 was linked to the
financial assistance to Serbia. The MFA
International Monetary Fund (IMF)
Memorandum of Understanding states that disbursement of funds in the framework of
the MFA operations
to the satisfactory track record in the
implementation of the ongoing Stand-By Arrangement referring to the 2009 – 2011
SBA). Another pre-criterion to disbursement was a positive evaluation, by the
European Commission, of the progress made in the implementation of structural
reforms. In addition, the MFA was conceived to be complementary to the IMF and
World Bank funding, and the volume of funds for the MFA was determined based on
the IMF forecasts of the Serbian economy’s needs.

conditional

is

The 2009-2011 Macro-Financial Assistance was awarded in the form of a loan facility
of EUR 200 million. To meet this obligation, the Commission was authorized to borrow
up to EUR 200 million on the capital markets or from financial institutions.

The MFA operations were expected to be disbursed in two instalments, of EUR 100
million each, taking place over a two-year period. The Memorandum of Understanding
was signed on the 5th of July 2010 and the Loan Agreement was signed on the 17th of
December 2010, it entered in force on the 12th of April 2011.

On the 15th of April 2011, Serbia submitted to the European Commission a request for
the release of the first MFA instalment, accompanied by a report on the fulfilment of
the structural reform criteria conditional to the first tranche. Upon fulfilment by Serbia
of
the first
instalment of EUR 100 million was disbursed on the 15th of July 2011.

the conditionalities included in the Memorandum of Understanding,

The second tranche was not disbursed because the IMF programme was not on track
any more by the end of 2011 and because Serbian financing needs sidestepped. The
MFA expired two years after the signature of the Memorandum of Understanding.

The objective of this report is to present our findings from the evaluation of the MFA
support operations to Serbia.

Our report is structured in the following manner:



First, we present the macroeconomic context against which the MFA operation
was approved. This allows us to gain an understanding the problems and the
needs of the Serbian economy pre-2010, the rationale for the MFA and IMF
interventions, and the evolution of the Serbian economy post MFA and IMF
support operations. This, in particular, allows us to assess the relevance of the
Macro-Financial Assistance’s financial design and policy requirements.

 Second, we assess the macroeconomic impact of the MFA on the Serbian

economy through a two- step process:

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

 We examine the macroeconomic evolution of Serbia between 2010 – 2012
in order to identify a range of possible impacts of the MFA and assess the
extent to which the macroeconomic objectives of the MFA were attained;

 We conduct a counterfactual analysis seeking to identify the net impact of

the MFA and IMF interventions on the Serbian economy; and

This assessment of the macroeconomic impact of the MFA on the Serbian economy
helps us assess the effectiveness of the MFA operations as well as the impact of the
MFA to the Serbian economy.







Third, we address the question of the structural reforms implemented following
the policy conditions formulated in the Memorandum of Understanding (MoU)
of the MFA. This task has two components:

 We examine the effectiveness and the modalities of implementation of the
structural
in the
Memorandum of Understanding. Based on this, we assess the relevance of
the policy conditions and the impact of the corresponding structural reforms
for the Serbian economy; and

reforms related to the policy conditions laid out

 We address the question of whether the corresponding structural reforms
would have been implemented in absence of the MFA, thereby assessing
the impact on the Serbian Economy.

Fourth, we examine the external
Serbian economy and study the impact of the MFA on these indicators.

financial sustainability indicators of

the

Fifth, we address the question of
interaction of the MFA with the other
components of the international financial assistance to Serbia, in particular the
Instrument for Pre-Accession (IPA) provided by the European Union, the IMF
SBA 2009-2011 and the World Bank budget support programmes.

This allows us investigating the potential complementarities or redundancies across
the MFA and the programmes mentioned and ultimately inferring the added value of
the MFA with respect to these programmes, in particular the IMF programme.

 Sixth, we summarize our evaluation findings and present recommendations for

future MFA operations.

Our evaluation findings are based on the fieldwork in Serbia – with interviews with
stakeholders from the Serbian government, international financial institutions and the
European Commission – the output of the Delphi analysis, an extensive documentation
review and economic modelling.

As a result, we are able, and draw conclusions regarding the effects of the Macro-
Financial Assistance on the Serbian economy, the optimality of the MFA design, and
added value with respect to the IMF, the World Bank assistance as well as EU
assistance through IPA.

The aim of the MFA was to provide funds in order to cover the external financing
needs of the Serbian economy while ensuring – through appropriate policy conditions
– the implementation of structural reforms which would help Serbia achieve medium
and long term fiscal sustainability and align its internal
financial control on the
European Union standards.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

crisis

From the short-term macroeconomic stabilisation point of view, the MFA and the IMF
financial assistance helped preventing the Serbian economy from slipping into a major
that was not excluded in 2009-2010. The MFA short-term
economic
macroeconomic objective of stabilizing the Serbian economy was therefore effectively
attained. However the Serbian fiscal and external financial situation remains fragile
and subject to numerous risks and challenges. The net contribution of the MFA loan to
the Serbian economy, as our counterfactual
the macroeconomic stabilization of
analysis shows, is likely to have been very limited situating in the range from 0 to
0.05% of GDP loss in absence of the MFA. The impact on the other macroeconomic
aggregates is of similar magnitude. The macroeconomic impact of the IMF financial
assistance, in its turn, is likely to have been substantial in 2010 (GDP up to 0.3%
lower in absence of the IMF funds) and very close to zero in 2011. More important
than the direct financial support was the signalling to private actors about the EU
intention to help to Serbia in the face of adverse shocks.

Regarding the policy component, in October 2010 the Serbian Parliament voted a Law
on Amendments and Addenda to the Budget System Law which formally fulfilled both
of the MFA policy conditions: introduction of quantitative fiscal rules and adoption of
provisions in the field of Public Internal Financial Control (PIFC) from the PIFC Policy
Paper. The involvement of the EU through the MFA was instrumental in pushing for
implementation of the measures described in the policy conditions. In absence of the
MFA the implementation of these legal acts would probably have been made at a
slower pace or even postponed.

The PIFC measures are part of a structural improvement of the Serbian public financial
management and contribute to gradually absorbing the Acquis Communautaire in the
pre-Accession perspective. As such, their implementation is impactful and useful and
underlying MFA policy condition made a difference.

The fiscal rules had three components: a cycle-adjusted fiscal deficit rule, a debt rule
and a set of indexation rules. Although made part of the Budget System Law in 2010,
these rules made little difference to the Serbian economy: the actual fiscal deficits
exceeded those fixed by the Fiscal Deficit Rule (mainly for reasons related to electoral
cycle), the debt rule was largely breached in 2011 and 2012, while indexation rules –
while formally respected – were overturned by ad hoc remuneration of public
employees practices. However, the quantitative fiscal rules had the added value of
introducing fiscal responsibility as one of the main targets of the economic policy.

Our case study dedicated to fiscal rules went further in investigating the impact of the
fiscal rules for the Serbian economy. We show that the Serbian fiscal deficit has been
largely structural implying that the fiscal deficit would not be eliminated if GDP growth
resumes at its potential level. Serbian fiscal policy has been pro-cyclical in the two
years immediately preceding the crisis which dried out the resources for a counter-
cyclical response once the crisis occurred. The necessity to cushion the adverse effects
of the crisis along with the upcoming elections was the reason why the fiscal rules
were largely disregarded by the fiscal policy in 2011-12.
One of the key components of the fiscal sustainability of Serbia is pensions. The issue
of the Serbian pension system organization, macroeconomic impact is investigated
along with possible reform options.

During the evaluation, no unexpected effects of the MFA have been found.

An examination of the external financial sustainability of Serbia reveals that the
country’s stance is fragile and subject to numerous risks. Widening current account
deficit requires capital inflows which can dry out quickly in the event of a financial

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

crisis. Very high euroisation of the economy exposes it to negative exchange rate
shocks. Serbian external debt to GDP ratio has been stable over the period 2010-
2012, but remains one of the highest in the region. The foreign currency reserves
level, by contrast, is fully adequate and compares favourably to peer countries’. In the
Serbian public debt to GDP ratio evolution in 2010-2012, primary fiscal deficit
contribution was essential, along with the exchange rate dynamics. Regarding external
debt sustainability, current account and capital account dynamics were the main
drivers of the fall in the fluctuations of the debt-to-GDP ratio over the period. The MFA
contribution to Serbian external financial sustainability was very modest: the gains
from cheaper debt are real, but very modest and unlikely to make a difference over
the long term. The involvement of the EU to support Serbia – including through MFA –
and Serbia’s commitment to implement the reforms associated with joining the EU
were, however, considered important by the rating agencies with subsequent impact
on the Serbian sovereign credit rating. This hints at the MFA exercising an indirect
favourable effect, although the latter cannot be assessed quantitatively.

In respect of the design and implementation of the MFA, the terms and conditions and
the volume of the MFA loan were fully adequate, although its efficiency for the Serbian
economy would have probably been greater had the funds been made available more
operationally. Regarding the articulation of the MFA with respect to the other financial
assistance programmes, our findings show it was largely complementary to the IMF
SBA. In addition, MFA provided a strong political backing for the implementation of the
structural
reforms agreed between the Serbian authorities and the IMF. The
interaction with the Instrument for Pre-Accession also exhibited complementarities
with little overlap. Overall, the greatest added value of the MFA with respect to the
IMF and World Bank assistance was to provide a political backing for structural
reforms within Serbia, and to inform the private economic agents about the EU
commitment to support the country – in particular in the accession perspective – both
within Serbia and outside.

In backward perspective, the MFA was clearly relevant to the Serbian economy needs.
The macroeconomic stabilisation objective of the MFA has been reached, even though
the MFA own contribution was very modest. In the structural reform area the MFA
contribution was more important, but its effectiveness was only partial (fiscal rules
breached) due to exogenous factors. The interaction with other forms of assistance
and financial instruments exhibited a lot of complementarities, and the design of the
MFA was broadly adequate. The added value from the MFA resides mainly in the
political backing of structural reforms and market signalling.

Regarding financial assistance disbursement, the improvement would imply, on the
other hand, faster MFA loan disbursement in order to provide MFA funds when they
are needed the most and, on the other hand, discontinuation of the new instalments
disbursement if during the MFA timeframe financial assistance is deemed unnecessary
to ensure external financial sustainability of the recipient country in order to avoid
potential windfall effects.

Regarding the policy component of MFA, the enhancement of the MFA mechanism
requires, on the other hand, a focus on “quick wins” prior to the disbursement of the
first instalment – in order to enable quick disbursement of the loan when it is needed
– and, on the other hand, a requirement of sustained policy compliance with the
legislation produced in line with the MFA policy requirements, so as to ensure the
effectiveness of the structural adjustment.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Résumé
L'Assistance macrofinancière (AMF) à la Serbie a été attribuée le 30 Novembre 2009
par la Décision 2009/892/CE du Conseil de l'Union européenne. L’AMF de 2009-2011
était une troisième à destination de la Serbie avec deux opérations précédentes
d'Assistance macrofinancière entreprises en 2001-2002 et en 2002-2006 au profit de
la République fédérale de Yougoslavie et de la Communauté d'États de Serbie-et-
Monténégro respectivement, entités dont la République de la Serbie était constitutive
à ces périodes.

l'Assistance macrofinancière de 2009-2011 était

liée à
La décision d'accorder
l’assistance financière à la Serbie fournie par le Fonds monétaire international (FMI).
Le Mémorandum d'entente de l'AMF précise que la mise à disposition des fonds dans le
cadre des opérations d'AMF est conditionnelle à la mise en œuvre satisfaisante des
dispositions de l’accord de confirmation 2009-2011 avec le FMI. Une autre pré-
condition de décaissement était une évaluation positive, par
la Commission
européenne, des progrès réalisés dans la mise en œuvre des réformes structurelles.
En outre, l'AMF a été conçue pour être complémentaire de celle apportée par le FMI et
par la Banque mondiale, et le volume des fonds pour l’AMF a été déterminé sur la base
des prévisions du FMI des besoins de financement extérieur de l'économie serbe.

L'Assistance macrofinancière de 2009-2011 a été accordée sous la forme d'une facilité
de prêt de 200 millions d'euros. Pour cela, la Commission a été autorisée à emprunter
jusqu'à 200 millions d'euros sur les marchés des capitaux ou auprès d’institutions
financières.

L’assistance financière devait être décaissée en deux tranches, de 100 millions d'euros
chacune, sur une période de deux ans. Le Mémorandum d’Entente a été signé le 5
Juillet 2010 et l'accord de prêt a été signé le 17 Décembre 2010 pour l’entrée en
vigueur le 12 Avril 2011.

Le 15 Avril 2011, la Serbie a soumis à la Commission européenne une demande pour
la mise à disposition de la première tranche de l'AMF, accompagnée d'un rapport sur
le respect des critères de réformes structurelles conditionnant le décaissement de la
première tranche. Suite au remplissage par la Serbie des conditionnalités inclus dans
le Mémorandum d’Entente,
la première tranche de 100 millions d'euros a été
décaissée le 15 Juillet 2011.

La deuxième tranche n’a pas été décaissée parce que l’accord avec le FMI n'était plus
honoré depuis la fin 2011 et à cause de la diminution des besoins de financement de
la Serbie. L'AMF a expiré deux ans après la signature du Mémorandum d'Entente.

L'objectif de ce rapport est de présenter les résultats de l'évaluation des opérations de
l'AMF à la Serbie.

Le rapport est structuré de la manière suivante:



Premièrement, nous présentons le contexte macroéconomique dans lequel
l'opération d'AMF a été initiée. Cela nous permet de mieux comprendre les
problèmes et les besoins de l'économie serbe avant 2010, la raison d'être de
l'AMF et de l’intervention du FMI ainsi que l'évolution de l'économie après l’AMF
et l’aide du FMI. Ceci, en particulier, nous permet d'évaluer la pertinence de la
structuration financière et des conditionnalités de l'Assistance macrofinancière.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

 Deuxièmement, nous évaluons l'impact macroéconomique de l'AMF sur

l'économie serbe en deux étapes:

 Nous étudions l'évolution macroéconomique de la Serbie entre 2010 et
2012, afin d'identifier une série d'impacts possibles de l'AMF et d'évaluer
dans quelle mesure les objectifs macroéconomiques de l'AMF ont été
atteints ;

 Nous procédons à une analyse contrefactuelle cherchant à déterminer l’effet

net de l'AMF et de l’aide du FMI sur l'économie serbe.

Cette évaluation de l'impact macroéconomique de l'AMF nous aide à déterminer
l'efficacité des opérations de l'AMF ainsi que leur impact général sur l'économie serbe.



Troisièmement, nous abordons la question des réformes structurelles mises en
œuvre suivant les conditionnalités formulées dans le Mémorandum d’Entente
(ME) de l'AMF. Cette tâche comporte deux volets:

 Nous examinons l'efficacité et les modalités de mise en œuvre des réformes
structurelles liées aux conditionnalités énoncées dans le Mémorandum
d'Entente. Sur cette base, nous évaluons la pertinence des conditionnalités
et
l’impact des réformes structurelles correspondantes sur l'économie
serbe,

 Nous nous interrogeons si

les réformes structurelles correspondantes
auraient été mises en œuvre en l'absence de l'AMF, estimant ainsi l’impact
des conditionnalités sur l'économie serbe.

 Quatrièmement, nous examinons les indicateurs de viabilité financière externe

de l'économie serbe et étudions l'impact de l'AMF sur ces indicateurs.

 Cinquièmement, nous abordons la question de l'interaction de l'AMF avec les
autres composantes de l'aide financière internationale à la Serbie, en particulier
l'instrument d'aide de préadhésion (IAP) fourni par l'Union européenne, l’accord
de confirmation du FMI pour 2009-2011 et
les programmes de soutien
budgétaire de la Banque mondiale.

Ceci nous permet d’identifier les complémentarités ou des chevauchements potentiels
entre l’AMF et les programmes mentionnés afin d’en déduire en fin de compte la
valeur ajoutée de l'AMF par rapport à ces programmes, notamment le programme du
FMI.

 Sixièmement, nous tirons les conclusions de l’évaluation et formulons des

recommandations pour les opérations d'AMF à venir.

Les résultats de notre évaluation sont basés sur le travail de terrain en Serbie –
notamment des entretiens avec les représentants du gouvernement serbe, des
institutions financières internationales et de la Commission européenne – les résultats
de l'analyse Delphi, un examen approfondi de la documentation et sur la modélisation
macroéconomique.

Ceci nous permet de tirer des conclusions quant aux effets de l'Assistance
macrofinancière sur l'économie serbe, l'optimalité de la structuration de l'AMF, et la
valeur ajoutée de celle-ci par rapport à l’aide du FMI, de la Banque mondiale et de l'UE
à travers l'Instrument d’aide de préadhésion.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

L'objectif de l'AMF était de fournir une ligne de crédit afin de couvrir les besoins de
financement externes de l'économie serbe, tout en assurant – par des conditionnalités
appropriées – la mise en œuvre de réformes structurelles visant à permettre à la
Serbie à atteindre la viabilité budgétaire à moyen et long terme et à aligner ses
procédures de contrôle financier interne sur les normes de l'Union européenne.

Au regard de la stabilisation macroéconomique à court terme, l’AMF et l'assistance
financière du FMI ont contribué à empêcher l'économie serbe de subir une crise
économique majeure dont la survenance n'était pas exclue en 2009-2010. L’objectif
macroéconomique à court terme de l’AMF de stabilisation de l'économie serbe a donc
été effectivement atteint. Toutefois, la situation financière budgétaire et extérieure
serbe demeure fragile et soumise à de nombreux risques et défis. La contribution
nette du prêt AMF à la stabilisation macroéconomique serbe, comme le montre notre
analyse contrefactuelle, a été vraisemblablement très limitée avec une perte de PIB
comprise entre 0 et 0,05% en l'absence de l'AMF. L'impact sur les autres agrégats
macroéconomiques est estimé d'une ampleur similaire. L'impact macroéconomique de
l'aide financière du FMI, à son tour, est susceptible d'avoir été considérable en 2010
(le PIB plus bas de 0,3 % en cas d'absence des financements du FMI) et très proche
de zéro en 2011. Plus important que le soutien financier direct fût le signal donné à
des acteurs privés sur la volonté de l'UE d’aider à la Serbie face à des chocs négatifs.

En ce qui concerne le volet des conditionnalités, en Octobre 2010 le Parlement serbe a
voté des amendements modifiant et complétant la Loi sur le Système Budgétaire
remplissant officiellement les deux conditionnalités de l'AMF : l’introduction de règles
budgétaires quantitatives et l'adoption de dispositions en matière de contrôle financier
interne public (CFIP) issues du document définissant la politique publique en matière
de CFIP. La participation de l'UE via l’AMF a été déterminante dans la mise en œuvre
des mesures décrites dans les conditionnalités. En l'absence de l'AMF l’adoption de ces
actes légaux aurait probablement été faite à un rythme plus lent, voire aurait été
reportée.

Les mesures relatives au CFIP induisent une amélioration structurelle de la gestion des
finances publiques serbe et
l'Acquis
communautaire dans la perspective de préadhésion de la Serbie. Ainsi leur mise en
œuvre est pertinente et utile et la conditionnalité correspondante de l'AMF a eu un
impact positif dans ce domaine.

contribuent à absorber progressivement

Les règles budgétaires ont trois composantes: une règle de déficit budgétaire avec un
ajustement pour le cycle, une règle pour le ratio de la dette au PIB et un ensemble de
règles d'indexation des salaires publiques et des retraites. Bien que faisant partie de la
Loi sur le système budgétaire depuis 2010, ces règles ont eu peu d’impact sur
l'économie serbe : les déficits budgétaires réels ont dépassé ceux fixés par la règle du
déficit budgétaire (surtout pour des raisons liées au cycle électoral), le ratio de la
dette au PIB établi par la règle a été largement excédé en 2011 et 2012, alors que les
effets règles d'indexation - formellement respectées - ont été largement dévalués par
les pratiques de rémunérations ad hoc accordées aux employés du secteur public.
le mérite d’introduire la
Toutefois,
problématique de la responsabilité budgétaire comme l'un des principaux objectifs de
la politique économique.

règles budgétaires quantitatives ont

les

Notre étude de cas consacrée à des règles budgétaires examine plus en profondeur
l'impact des règles budgétaires sur l'économie serbe. Nous montrons que le déficit
budgétaire serbe est largement structurel ce qui implique que le déficit budgétaire ne
serait pas éliminé si la croissance du PIB reprenait à son niveau potentiel. La politique

November 2013 12

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

budgétaire serbe a été pro-cyclique dans les deux années précédant immédiatement la
crise, ce qui a réduit les marges de manœuvre budgétaires pour une réponse contra-
cyclique une fois la crise survenue. La nécessité d'atténuer les effets néfastes de la
crise ainsi que les élections à venir sont les principaux facteurs qui expliquent que les
règles budgétaires furent largement ignorées par la politique budgétaire en 2011-12.

L'une des composantes-clés de la viabilité des finances publiques de la Serbie est le
système de retraites. La question de l'organisation du système de retraites serbe et
l'impact macroéconomique de celui-ci sont étudiés avec des options de réforme
possibles.

Durant l'évaluation, il n’y a pas eu d’effets inattendus de l'AMF identifiés.

Un examen de la viabilité financière externe de la Serbie révèle que la position du
pays est fragile et soumise à de nombreux risques. Le creusement du déficit du
compte courant nécessite des entrées de capitaux qui peuvent s’arrêter brutalement
en cas de crise financière. Une « euroisation » très élevée de l'économie expose celle-
ci à des chocs de change négatifs. Le rapport de la dette extérieure au PIB a été stable
sur la période 2010-2012, mais reste parmi les plus élevés de la région. Le niveau des
réserves de change, en revanche, est tout à fait adéquat, notamment en comparaison
avec les pays « pairs ». Concernant l’évolution du ratio de la dette publique au PIB de
la Serbie en 2010-2012,
la contribution du déficit budgétaire primaire était
déterminante avec la dynamique du taux de change. En ce qui concerne la viabilité de
la dette extérieure, le compte courant et la dynamique du compte de capital ont été
les principaux moteurs de la baisse des fluctuations du ratio de la dette au PIB sur la
période. La contribution de l'AMF à la viabilité financière externe de la Serbie a été
très limitée : les bénéfices liés à la dette moins chère sont réels, mais très modestes
et peu susceptibles de peser sur le long terme. Néanmoins la volonté de l'UE à
soutenir la Serbie - y compris via l'AMF - et l'engagement de la Serbie à mettre en
œuvre les réformes liées à adhésion future à l'UE ont été jugés importants par les
agences de notation pour la dette souveraine serbe. Ceci permet d’envisager un effet
favorable indirect de l’AMF, bien que ce dernier ne puisse être évalué
quantitativement.

En ce qui concerne la conception et la mise en œuvre de l'AMF, les termes et les
conditions, et le volume de l'emprunt de l'AMF étaient tout à fait adéquate, bien que
son efficacité pour l'économie serbe ait probablement été plus grande si
les fonds
avaient été mis à disposition plus rapidement. En ce qui concerne l'articulation de
l'AMF à l'égard des autres programmes d'aide financière, nos résultats montrent
qu'elle était largement complémentaire à l’aide financière du FMI. En outre, l'AMF a
fourni un fort soutien politique pour la mise en œuvre des réformes structurelles
convenues entre les autorités serbes et le FMI. L'interaction avec l'Instrument d'aide
de
de
chevauchement. Dans l'ensemble, la plus grande valeur ajoutée de l'AMF par rapport à
l’aide du FMI et de l'assistance de la Banque mondiale était de fournir un soutien
politique aux réformes structurelles en Serbie, et de rassurer les agents économiques
privés sur l'engagement de l'UE à soutenir le pays – en particulier dans la perspective
d'adhésion – tant à l'intérieur qu'à l'extérieur de la Serbie.

complémentarités

préadhésion

également

exposé

avec

peu

les

a

Après un examen ex-post, il apparaît que l’AMF a été clairement adaptée aux besoins
de l'économie serbe. L'objectif de stabilisation macro-économique de l'AMF a été
atteint, même si la contribution propre de l'AMF a été très modeste. Dans le domaine
des réformes structurelles la contribution de l'AMF était plus importante, mais son
efficacité n'est que partielle (règles budgétaires enfreintes) due à des facteurs
exogènes. L'interaction avec d'autres formes d'instruments d'assistance financière

November 2013 13

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

présentait beaucoup de complémentarités, et la structuration de l'AMF était largement
satisfaisante. La valeur ajoutée de l'AMF réside principalement dans le soutien
politique des réformes structurelles et le signal politique de soutien à la Serbie donné
aux marchés.

Dans une perspective d'avenir et sur la base des conclusions de cette évaluation, il y a
d'Assistance
claires
deux
macrofinancière à venir concernant à la fois la mise à disposition de fonds et les
conditionnalités de l'AMF.

d'amélioration

opportunités

opérations

pour

les

En ce qui concerne le décaissement de l'aide financière, l'amélioration impliquerait,
d’une part, une mise à disposition plus rapide de fonds de l’AMF afin de fournir les
fonds quand ils sont le plus nécessaires et, d'autre part, l'arrêt de versements afin
d'éviter d'éventuels effets d'aubaine si au cours de l’opération l'aide n’est plus
nécessaire pour assurer la viabilité financière extérieure du pays bénéficiaire.

En ce qui concerne le volet politique de l'AMF, le renforcement du mécanisme de l'AMF
exige, d'une part, l'accent sur les conditionnalités générant des «gains rapides» avant
le décaissement de la première tranche - afin de permettre un décaissement rapide de
l'emprunt lorsque cela est nécessaire - et, d'autre part, une exigence de conformité de
politiques par rapport à la législation produite en réponse aux conditionnalités de
l'AMF, afin d'assurer l'efficacité de l'ajustement structurel.

November 2013 14

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Our evaluation approach
This section outlines and details our evaluation approach step by step, along with the
evaluation techniques that we used.

The Terms of Reference specify the following evaluation questions:

Table 1: Evaluations questions as per Terms of Reference

ToR evaluation questions

Q1

Q2

Q3

Q4

Q5

Q6

How would the economy of Serbia have evolved in the absence of the MFA
assistance?

To what extent has the MFA assistance been effective in terms of the
short-term macroeconomic stabilisation of Serbia?

To what extent has the MFA assistance been effective in terms of
supporting structural reform in Serbia?

What have been the indirect and/or unexpected effects of the MFA
assistance?

To what extent has the MFA assistance contributed to returning the
financial situation of Serbia to a sustainable path over the
external
medium to longer-term?

How has the way in which the MFA assistance was designed and
implemented conditioned its effectiveness and efficiency?

Q7

To what extent has the EU added value been maximised?

Our operational approach for the evaluation of the Macro-Financial Assistance sought
to answer all these questions by reordering them in logical sequence following the
intervention logic of the MFA. The question 1 refers to a counterfactual situation in
terms of both the macroeconomic stabilisation impact and of impact on structural
reforms. Thus, the question contains two components – a macroeconomic component
and structural reforms component.

We structure our evaluation approach in the following way:



First, we describe the MFA in terms of objectives, the design and relevance
for Serbian economy. This step is a prerequisite for the evaluation. It provides
a ground for answering the questions contained in the ToR;

 Second, we estimate its macroeconomic effects for the Serbian economy
(“gross” effects as a response to question 2 of the ToR, then “net” effects as a
response to the macroeconomic component of the Q1 of the ToR);





Third, we investigate the structural effects of the MFA . This provides the
answer to the question 3 and the structural reforms component of the question
1 of the ToR;

Fourth, we infer the impact of the MFA on the external financial situation
based on the results obtained in two previous steps: we assess the change in
the external financial situation of Serbia over the period 2010-2012; then we

November 2013 15

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

infer the net impact of the MFA on the external financial situation of Serbia
given the figures of the counterfactual analysis of macroeconomic stabilisation
and of structural reforms. In this step we cover the question 5 of the ToR;



Fifth: based on the results for the macroeconomic and structural impact and
the impact on external financial situation of Serbia, we address the question of
the effects of the design and implementation characteristics of the MFA
on its results. This step covers the question 6 of the ToR;

 Sixth, we assess the added value of the MFA, specifically with respect to the

IMF programme. This step corresponds to the question 7 in the ToR.

Our operational approach
The primary step consisted in identifying objectives, the design characteristics and the
implementation logic of the MFA. This would allow us, in particular, assessing its
relevance to the needs of
involved the
examination of all the documentation and files (Memorandum of Understanding, Loan
Agreement, DG ECFIN notes to the Economic and Financial Committee) related to the
MFA which were obtained from DG ECFIN. Along these documents, we examined the
IMF reports on the Serbian economy (the full list is presented in the Appendix E – list
of literature and data sources).

the Serbian economy. Operationally it

Based on this, we identified the objectives and the intervention logic of the MFA,
presented in this Report, defined the evaluation criteria and identified the
characteristics which useful in the further steps of the evaluation.

From there our evaluation followed the two pathways described in the intervention
logic of the MFA.



The first line of evaluation bore on the potential macroeconomic effects of the
Macro-Financial Assistance and examined to what extent the macroeconomic
objectives of the MFA had been reached. For that sake we proceeded in two
steps:





The first step involved assessing the macroeconomic developments,
including effects from the MFA, i.e. whether the macroeconomic situation of
Serbia changed. For that sake we assessed to what extent the main
macroeconomic indicators posterior to the intervention match the ex ante
expectations. The main tool for performing this step was the analysis of the
IMF reports and data from various Serbian sources (the list is available in
the Appendix E – list of literature and data sources) presenting the
evolution of the Serbian economy after the implementation in the period
when the IMF SBA and the MFA were active (between January 2009 and
December 2012). A specific attention is dedicated to the issue of the
evolution of external financial sustainability following the MFA/IMF SBA.

In the second step, we assessed the net contribution of the MFA and
MFA+SBA on the macroeconomic evolution of the Serbian economy – i.e.
how the Serbian macroeconomic stance would have evolved in absence of
the MFA (and IMF) disbursement of funds. This contribution is inferred from
the comparison between the actual evolution of the Serbian economy in
2009-2012 and two hypothetical scenarios: a scenario in which the IMF SBA
is enacted, while the MFA is not; a scenario in which neither the MFA nor

November 2013 16

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

the IMF SBA is enacted. In order to work out the “net” macroeconomic
effects of the MFA and IMF SBA we rely on the macroeconomic modeling
(presented in the Appendix C – Our modelling approach). The differences in
values of macroeconomic indicators under consideration provide us with the
“net” macroeconomic effects of the MFA.



The second line of evaluation addressed the structural effects of the MFA. This
reforms have been
involves examining to what extent
successfully implemented and the instrumentality of
the MFA in this
implementation:

the structural





The “gross” effects of the MFA on structural reforms simply study whether
the two conditionalities specified in the Memorandum of Understanding had
been effectively implemented and enacted. Evaluation of this effectiveness
is based on the structured interviews and the examination of the Serbian
documents related to the Serbian budgetary preparation process in 2009-
2011. The questionnaire that was used for the structured interviews is
presented in the Appendix B – Questionnaire for structured interviews.

The net – counterfactual – effects of the MFA (i.e. whether the structural
reforms would have been put in place even without the MFA) are addressed
through the Delphi questionnaire (presented in the Appendix A – Our
approach to the Delphi interviews).

 Once the macroeconomic and structural effects of the MFA identified, we
proceed to the backward evaluation of the design and implementation
features of the operation. In other words, given the actual impact of the
MFA discovered in answering the evaluation questions, we examine whether
the impact could have been more important had the MFA been structured
implementation would have gone
differently or had the MFA operational
differently
implementation schedule). Structured
interviews provided a backing to our conclusions in this field;

(e.g. a different



the added value of

Finally, we infer
the Macro-Financial Assistance
intervention, in particular with respect to the IMF intervention, based on the
results obtained in the previous steps. For instance, in order to assess the
added value of the MFA with respect to the IMF in terms of macroeconomic
stabilisation of Serbia, we rely on the figures obtained in the counterfactual
analysis: the added value would be given by the difference between the net
contribution of the IMF+MFA and the net contribution of the IMF alone.
Following the same principle, the net contribution of the MFA to structural
reforms is given by the increased likelihood of implementation of the two
conditionalities contained in the MFA MoU with respect to the no-MFA
situation (the question of whether these policy conditions would have been
implemented even without the MFA also includes the consideration of
whether in absence of the MFA similar policy conditions would have been
put forward by the IMF or the World Bank).

Table 2 below unfolds our evaluation logic step by step, indicating the evaluation
questions from the ToR that each step provides an answer to. For each evaluation step
we also indicate one or a set of judgement criteria which allowed us providing an
answer to the evaluation question. For each of the criteria we rely on the examination
of one or more indicators which were obtained from the sources specified.

November 2013 17

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

For every question and every judgement criteria, these indicators were used as
benchmarks in order to check the impact of the Macro-Financial Assistance on the
macroeconomic stabilisation of the Serbian economy and on the specified fiscal and
public finance management reforms undertaken in Serbia in 2010-2012.

Following the evaluation logic developed in the Table 2, we present the specific
techniques used in answering these evaluation questions in Table 3 Evaluation
methodology.

The sequence of steps are closely interrelated (e.g. the description of the MFA is a
pre-condition to the evaluation of its macroeconomic or structural effects) and are
ordered as presented in the evaluation logic.

The first step has consisted in acquiring a full understanding of the MFA operations by
examining the related documentation and interviewing the stakeholders involved in its
design and implementation. Furthermore, we have acquired a complete understanding
of the Serbian economy whose needs the MFA operations sought to address. This step
allowed us to set up benchmarks against which the performance of the MFA had to be
assessed in the following steps. In addition, full understanding of the MFA operations
instruments and background has indicated the data to be used for the
goals,
macroeconomic analysis of
the MFA impact and the documentary source and
stakeholders involved and to be interviewed in order to perform the analysis of the
MFA effects in terms of structural reforms.

The second step involves the analysis of the gross macroeconomic effects which was
undertaken through the examination of statistical data and different documents
bearing on the Serbian economic evolution in the period 2010-2012. The previous step
helped us to identify all the relevant documentation sources and to collect all the
necessary data so as to perform the analysis in the next steps. The analysis indicates
the likely range of the MFA effects.

The third step identifies how the Serbian economy (and in particular the indicators
expected to be the impacted by the MFA and IMF financial assistance) would have
evolved in absence of the financial assistance from the EU and the IMF. In order to
assess the net effects of the MFA (and IMF SBA) we constructed and calibrated the
model of the Serbian economy, presented in detail in the Appendix C – Our modelling
approach. We collected a full set of data for the evaluation period 2010-2011 and the
first results of the counterfactual modeling are presented in this Report.

Gross structural effects have been investigated in the same time as the assessment of
the gross macroeconomic effects. In addition to the analysis of the statistical data, our
these effects was performed through structured interviews with
assessment of
relevant stakeholders. Through the interviews we acquired full understanding of the
modalities of implementation of the structural conditionalities specified in the MFA
MoU.

Net structural effects are covered through the Delphi analysis. We designed the
questionnaire used for the Delphi
interviews (the questionnaire submitted to the
stakeholders is presented in the Appendix A – Our approach to the Delphi interviews)
and composed a list of stakeholders targeted as our Delphi participants. The purpose
to which the MFA had been
of
instrumental
specified as MFA
conditionalities. The Delphi analysis was carried out in two rounds involving overall ten
participants among the Serbian officials, representatives of the international financial
institutions and of the private sector.

the Delphi analysis was to assess the extent

the implementation of

structural

reforms

for

Once the results of the – both in terms of macroeconomic stabilisation and in terms of
structural reforms – had been fully identified through the previous stages, we were

November 2013 18

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

able to assess the impact of the design and implementation features of the MFA on the
latter. This step also relied on the interviews with representatives of different
stakeholder groups who formulated the alternative design/implementation hypotheses
and allowed us discriminating between the effects of these hypotheses on the final
outcome.

The question of the added value of the MFA, in particular with respect to the IMF or
with respect to other EU instruments, was inferred from the previous results.

November 2013 19

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Judgment criteria

Indicators

Source

Table 2 Evaluation logic

Steps

Description of
MFA

Evaluation
questions

Preliminary
step to
answering
all the
question
from the
ToR

Matching between Serbian economy
needs and the economic policy targets
assigned by the Macro-Financial
Assistance (MFA)

Evaluation of
gross
macroeconomic
short term effects

The extent to which the short-term
quantitative targets (i.e. “achievement of
the 2010 deficit target of 4.1% of GDP”)
set by the MFA/MFA+IMF SBA met

Q2

The extent to which the programme was
successful in reaching its short-term
qualitative objectives, in particular:

 Did the public debt to GDP ratio
stabilize during the assistance?

 Was the fiscal balance target

reached?

Change in the macroeconomic stance of
the country after MFA/MFA+IMF SBA
assistance

 External financing gap

 MFA

(difference between gross
financing requirements and
available financing)

 Characteristics of the MFA

loan:
 amount,
 timing of disbursement,
 maturity,
 interest rate.

Actual figures for:

 Currency reserves
 Current account balance
 Fiscal deficit
 Public debt-to-GDP ratio
 External debt-to-GDP ratio

Actual figures for:

 Currency reserves
 Current account balance
 Fiscal deficit
 Public debt-to-GDP ratio
 External debt-to-GDP ratio

Memorandum of
Understanding

 Technical

Memorandum of
Understanding
IMF review
reports

IMF SBA
Technical MoU
IMF review
reports







 NBS statistics



IMF review
reports

 NBS statistics

 Difference between ex-post



outcomes and ex-ante
programmes’ projections
(mainly IMF-based)

IMF review
reports

 NBS statistics
 Ministry of

Finance and

November 2013 20

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Steps

Evaluation
questions

Judgment criteria

Indicators

Source

Evaluation of net
macroeconomic
short term effects

Change in the macroeconomic stance of
the country attributable to
MFA/MFA+IMF SBA assistance.

Q2

Q1

 What would have been the cost of

meeting external financing needs in
2009-2011? What would be the cost
in terms of growth of a sharper
current account adjustment?

 What would have been the likelihood
of a successful fiscal consolidation
without the MFA (or MFA+IMF SBA)?

 What would have been the cost of

Dinar depreciation?

Economy of
Serbia data



IMF review
reports

 NBS statistics
 Ministry of

Finance and
Economy of
Serbia data

 Differential of the

macroeconomic variables
(GDP growth rate, current
account balance, magnitude of
fluctuation of the exchange
rate, number of corporate
defaults, interest rates on
public debt, change in the
likelihood of sovereign default
etc) with respect to the
counterfactual

Evaluation of
gross structural
effects of MFA

Evaluation of net
structural effects
of MFA

 Effectiveness – the potential positive

 Binary indicator: condition

impact on the recipient country
reforms progress

Q3

 Compliance – did the programme

deliver on its main structural
objectives?

fulfilled/not fulfilled



IMF review
reports

 Output of the
structured
interviews

 Output of cases

studies

 The likelihood that the reforms

 Probability of implementation

 Output of Delphi

Q3

Q1

undertaken in 2009-2012 would have
been undertaken without MFA
assistance (MFA + IMF assistance)?
 The likelihood of the reforms’ success
without MFA assistance (MFA + IMF
assistance)?

analysis

 Output of cases

studies

November 2013 21

Steps

Evaluation
questions

Judgment criteria

Indicators

Source

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Gross impact of
MFA on medium-
long term
external financial
situation of Serbia

Net impact of MFA
on medium-long
term external
financial situation
of Serbia

Public debt sustainability in the
medium-long run

Capacity to stabilize the current
account deficit (produce surpluses)
over the medium-long term – external
competitiveness

Q5

Fiscal sustainability

 Share of private liabilities in



foreign currency
Interest rates at different
maturities

 Public debt in % of GDP


Interest rates on the public
debt

 Primary fiscal deficit (current

and forecasted)

 Eurostat
statistics
IMF review
reports



 NBS statistics
 Ministry of

Finance and
Economy of
Serbia data

 Medium-term fiscal deficit
 Labour cost index (vs. main

trading partners)

 Share of imports in exports

Public debt sustainability in the
medium-long run

Counterfactual values (no
MFA/no MFA and IMF) for:

Capacity to stabilize the current
account deficit (produce surpluses)
over the medium-long term – external
competitiveness

Q5

Q1

Fiscal sustainability

 Share of private liabilities in



foreign currency
Interest rates at different
maturities

 Public debt in % of GDP


Interest rates on the public
debt

 Primary fiscal deficit (current

and forecasted)

 Medium-term structural fiscal

deficit

 Labour cost index (vs. main

trading partners)

 Share of imports in exports

 Output of the
counterfactual
modelling

November 2013 22

Steps

Evaluation
questions

Judgment criteria

Indicators

Source

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

How have the
design and
implementation
features of the
MFA conditioned
its performance?

How was the
interplay between
the MFA and the
IMF assistance?

What was the
added value of the
MFA with respect
to IMF
assistance?

What was the
added value of the
MFA with respect
to other EU
instruments (e.g.
Instrument for

Q6

Q6

Q7

Q7

The relationship between the
design/implementation of the MFA and
its macroeconomic impact

The relationship between the
design/implementation of the MFA and
its impact on structural reforms

 Characteristics of the MFA

 MFA

loan:
 amount,
 timing of disbursement,
 maturity,
 interest rate

 MFA effects on different

abovementioned indicators

Memorandum of
Understanding

 Results of the
analysis of the
previous
questions

Extent of complementarities between
MFA economic policy conditions and IMF
SBAs structural benchmarks/structural
performance criteria

 Proportion of identical

 MFA

conditionalities in the IMF
TMoU and MFA MoU

Memorandum of
Understanding

 Proportion of conditionalities

 Technical

Degree of coordination with the MFA
and IMF macroeconomic targets

in the IMF TMoU and MFA MoU
not overlapping but belonging
to the same structural reform
area

Memorandum of
Understanding

The evaluation of the MFA added value is performed based on the analysis of the results in the
previous questions.

The evaluation of the MFA added value is performed based on the analysis of the results in the
previous questions.

November 2013 23

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Judgment criteria

Indicators

Source

The evaluation of the MFA added value is performed based on the analysis of the results in the
previous questions.

Steps

Evaluation
questions

Pre-Accession)?

What was the
added value of the
MFA with respect
to other IFI
initiatives (e.g.
World Bank)?

Q7

NB: The question Q4 of the Terms of Reference (“indirect and unexpected effects of the MFA”) is addressed based on the findings of
the analysis of macroeconomic and structural effects of the MFA.

November 2013 24

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 3 Evaluation methodology

Steps

Description of
MFA

Evaluation
questions

Preliminary step
to answering all
the question from
the ToR

Evaluation of
gross
macroeconomic
short term effects

Evaluation of net
macroeconomic
short term effects

Evaluation of
gross structural
effects

Q2

Q1

Q2

Q3

Evaluation techniques

















Face-to-face interviews and group meetings with the MFA stakeholders (Serbian
authorities, IMF and DG ECFIN representatives);

Examination of all
(Memorandum of Understanding;

the relevant documentation provided by the DG ECFIN

Literature review

Analysis of statistical data on the evolution of main macroeconomic aggregates
before and after MFA disbursement: growth rates in GDP and components, interest
rates, real exchange rate, fiscal deficit, current account deficit, current account
components (exports, imports, current transfers), inflow of FDI, portfolio and other
investment, international reserves at the central bank, public and private debt and
debt payments, debt ratings, etc.

Economic modelling

Face-to-face interviews and group meetings with the MFA stakeholders (Serbia
authorities, IMF and DG ECFIN representatives) in order to parameterize our model
and to select the most plausible counterfactual scenario once the range of net effects
of the MFA has been defined.

Analysis of statistical data on the evolution structural
liquidity and stability, etc. - before and after the MFA operations.

indicators - banking sector

Face-to-face interviews and group meetings with the MFA stakeholders (Serbia
authorities, IMF and DG ECFIN representatives).

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

 Delphi triangulation method

Evaluation techniques



Case studies based on documentation review and interviews with relevant
stakeholders.

These effects aretaken into account both in the framework of the macroeconomic
modelling and also investigated using the documentation analysis and the Delphi
triangulation method

Face-to-face interviews and group meetings with the MFA stakeholders (Serbia
authorities, IMF and DG ECFIN representatives);

Findings from previous questions.

Face-to-face interviews and group meetings with the MFA stakeholders (Serbia
authorities, IMF and DG ECFIN representatives);

Findings from previous questions.

Steps

Evaluation
questions

Evaluation of net
structural effects

Q3

Q1

Evaluation of
indirect and
unexpected
effects

This question is
answered based
on our findings for
other sections

How have the
design and
implementation
features of the
MFA conditioned
its performance?

How was the
interplay between
the MFA and the
IMF assistance?

Added value of the
MFA with respect
to IMF assistance

Q6

Q6

Q7

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Steps

Evaluation
questions

Evaluation techniques

Added value of the
MFA with respect
to other EU
instruments (e.g.
IPA)

What was the
added value of the
MFA with respect
to other IFI
initiatives (e.g.
World Bank)?

Q7

Q7

Findings from previous questions.

Findings from previous questions.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

History and context of MFA operations
In order to understand where Serbian economy stood at the outbreak of the crisis we
have to examine the challenges the economy faced in the years immediately
preceding it and policies conducted through the decade in order to meet these
challenges. Serbian economic background of the 2000s, in turn, was born from the
complex political and economic evolution of the preceding decade.

Thus, we proceed first to understand the historical and institutional context in which
the Serbian economy evolved in the 1990s. This allow us understanding the
characteristics of the Serbian economy at the beginning of the 2000s, the challenges
that a new reformist government had to face once it assumed leadership from October
2000 and subsequent economic developments that the Serbian economy underwent.
Then, in the second place, we describe and analyze the macroeconomic evolution of
Serbia in the 2000s. This sheds light on the weaknesses of the Serbian economy in the
years preceding the crisis and the channels through which the crisis hit Serbia in 2008.

Historical and institutional context on the eve of the 2000s

Before 1992 the Republic of Serbia was part of the Socialist Federal Republic of
Yugoslavia (SFRY). After the breakdown of the SFRY, in 1992, Serbia and Montenegro
formed the Federal Republic of Yugoslavia which became into a State Union of Serbia
and Montenegro in 2003. The Republic of Serbia was founded after the breakdown of
the State Union of Serbia and Montenegro subsequently to the declaration of
Independence of Montenegro in June 2006.

In the period 2000-2008 Serbia had to undergo simultaneously a transition from
socialist to market economy and a reconstruction after a decade of war and political
the
turmoil. These two difficulties were embodied in cumulating challenges: at
beginning of the 2000s, the country’s economy suffered from several and intertwined
structural deficiencies and macroeconomic weaknesses resulting from the “lost
decade” of 1990s or inherited from the command economy before 1991.

instability and international

“The lost decade”
By 2000, the economy of the Republic of Serbia had been severely damaged by years
of war, political
isolation. Years of war represented a
gradual sinking into the abyss: during the 1990s decade its Gross Domestic
Product fell by more than 50%1. Income per capita in Serbia recovered to its
1990s level only in 20062. Real GDP growth reached 7.8% in 1996 and 10.1% in
1997. However, the Kosovo war led to a serious slowdown in 1998 (+1.9%) and a
sharp fall in 1999 (-15.7%)3. In addition, public infrastructure was affected by war
destructions and a decade of under-investment.

1 International Monetary Fund, Country Report No.11/213 July 2011
2 Idem.
3 These numbers refer to the Federal Republic of Yugoslavia (FRY) composed of Serbia and
Montenegro. However, Serbian GDP represented 90% of the aggregate FRY GDP. Thus,
economic evolution of the Serbian economy can be inferred from the evolution of the economy
of FRY. In addition, Serbian economy is likely to have been relatively more affected by the
Kosovo was since, in particular, NATO air strikes spared the Montenegro territory.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Through the decade and up to 2000s, the economy kept several relics of the
administered economy. In particular, a large part of the economy relied on state-
owned and socially-owned firms, inherited from the pre-1990 period. These firms,
employing an important share of the labour force, suffered from poor management
and organization. The companies relied heavily on public support in the form of
administered prices (in the case of monopolies) and subsidies to cover their losses.
Survival of these inefficient corporate forms hampered development of the Serbian
economy. Thus privatization became a key target for the government in the 2000s.
The 1990s decade was also a decade of low investment which – along with the
existence of inefficient state enterprises – explains Serbia’s supply problem of the
2000s.

Hyperinflation and defiance towards the Dinar
The break-up of Yugoslavia led to the collapse of the Yugoslav Dinar into several
currencies of newly independent states. In the 1990s, several revaluations were
undertaken, but the stability of the FRY currency was seriously undermined by the
hyperinflation of the middle of the 1990s.

Hyperinflation was a consequence of a sharp and growing mismatch between the
output and a monetary mass. Output fell drastically following the collapse of the
Yugoslavian economy, wars in neighbouring areas and international sanctions imposed
reflecting
In the meanwhile, money supply increased very rapidly,
on FRY.
government’s reliance on seignorage revenues to cover its financing needs. By the end
of 2000 Serbian external debt was estimated at around 145% of GDP, largely made of
arrears on payments. Government was using monetary financing of the budget deficit,
fuelling inflation. Furthermore, losses of state-owned companies were also covered by
the monetary financing which further spurred inflation.

As a result, inflation was double digit through the 1990s, strongly accelerating
after 1997. In 2000, inflation – as measured by retail price index – reached 113.5%.

This inflationary environment had, in turn, two consequences. First, high inflation
undermined confidence in the Serbian dinar and pushed to a large share of
transactions being done in deutsche marks (which became legal tender in
Montenegro), later in euros. Second, following hyperinflation in the period 1992-1994,
Serbian economy underwent severe demonetization and did not recover before the
beginning of the 2000s.

Inflationary hysteresis and defiance towards the Dinar followed the Serbian economy
into the 2000s and to the present day.

Among other structural weaknesses the reformist government inherited were a highly
restrictive trade and foreign exchange rate regime, widespread administered prices
and regulated employment contracts and wage determination. Addressing the latter
became a priority of structural reforms.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Two past Macro-Financial Assistance support operations

Before the Macro-Financial Assistance operation under consideration, there had been
two Macro-Financial Assistance (MFA) programmes.

1st Macro-Financial Assistance (MFA) operation to Serbia: July 2001 – August 2002

The first MFA, awarded in July 2001, involved total amount of EUR 300 million4, later
increased to EUR 345 million. Initially, the MFA comprised both loans and grants in the
proportion of EUR 225 million for the former and EUR 75 million for the latter. In
December 2001 the Council decided on the increasing the grant component by
additional EUR 45 million of grants. The assistance was disbursed in three instalments
from October 2001 to August 2002.

Table 4 – 1st Macro-Financial Assistance to Serbia 2001-2002

Instalments

1st instalment

2nd instalment

3rd instalment

Amount

Disbursement date

EUR 225 million loan

EUR 35 million grant

EUR 40 million loan

EUR 45 million grant

October 2001

January 2002

August 2002

Source: European Commission

The MFA was linked to the IMF Stand-By Arrangement of June 2001.

2nd Macro- Macro-Financial Assistance (MFA) operation to Serbia: November 2002 –
December 2005

The second MFA was awarded in November 2002 for the total amount of EUR 130
million, brought to 200 million in November 2003. The funds were made available in
four instalments between December 2002 and December 2005. Disbursement of the
fifth instalment involving EUR 20 million in grants and EUR 10 million in loans was
cancelled by the European Commission given the improvement
in the external
financing needs of the State Union of Serbia and Montenegro. Furthermore, the loan
component of the fourth instalment of EUR 15 million was not disbursed because the
the condition laid down in the Memorandum of
recipient country did not
Understanding. Thus, only EUR 155 million was effectively disbursed, including EUR
100 million in grants and EUR 55 million in loans.

fulfil

4 2001/549/EC: Council Decision of 16 July 2001 providing macro-financial assistance to the Federal
Republic of Yugoslavia

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 5 – 2nd Macro-Financial Assistance to Serbia 2002-2005

Instalments

1st instalment

2nd instalment

3rd instalment

Amount

EUR 30 million grant

EUR 10 million loan

EUR 35 million grant

EUR 30 million loan

EUR 10 million grant

EUR 15 million loan

4th instalment

EUR 25 million grant

Source: European Commission

Date

December 2002

February 2003

July 2003

September 2003

December 2004

April 2005

December 2005

Serbian economy in 2000-2008: persistent structural weaknesses,
growing macroeconomic imbalances

After 2000, Serbia made significant progress with important political and economic
reforms. The restoration of the macroeconomic stability provided a basis for rapid
economic growth. Thus before the occurrence of the crisis in 2008-2009, Serbian
economy exhibited strong rates of growth of GDP and GDP per capita (see Figure 3
below).

Figure 1 Serbia, Real GDP growth 2000-2008

Source: IMF

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Overall, real GDP increased from RSD 887 billion in 2000 to RSD 1,352 billion in 2008.
The real GDP growth represented 5% per year on average through the period 2000-
2008. Albeit strong, this growth reflects mainly the catch-up of the economy after a
decade of political and economic turmoil. A low level of capital per capita –
consequence of a decade of low investments – and a huge restructuring potential
underpinned a strong labour productivity growth through the 2000s decade. The graph
below illustrates the evolution of the Serbian labour productivity from 2001 to 2008:

Figure 2 - Serbia's labour productivity growth, 2002-2008

Source: IMF

The evolution of the external
indebtedness was characterized by two dynamics: a
sharp decline in the ratio of public external debt to GDP (from 76.6% in 2001 to
16.9% in 2008) and, from 2004, a fast growth in private external debt which more
than doubled (from 20.7% in 2001 to 46% in 2008). Thus on the eve of the crisis the
main threat was posed by the level of private indebtedness, while the public external
debt remained at largely manageable levels.

A major vulnerability of the Serbian macroeconomic situation resided in a current
account deficit growing over the period 2001-2008.

The current account deficit is not a problem in itself when it reflects foreign borrowing
to finance domestic investment. However, in the case of Serbia, investment in % of
GDP was equally low for an economy in transition. Investment was constrained by
domestic savings in % of GDP close to zero over the period and largely financed by
the remittances inflows (which were on a downward trend) and relied heavily on
foreign borrowing.

This extensive foreign borrowing - with a large proportion of loans in EUR - led to an
important volume of unhedged foreign exchange positions.

Finally, although inflation declined considerably at the beginning of the period, all over
the period Serbian economy remained subject to strong inflationary tensions: average
inflation was the highest among the Central and Eastern European transition
economies in 2004-2008. This can be partly explained by inflation expectations
hysteresis inherited from the 1990s.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

These vulnerabilities resulted from a set of structural problems which characterized
the Serbian economy.

Over the whole of the decade Serbian economic development was hampered by
several structural problems. A major structural deficiency resided in the fact that
growth was skewed toward the non-tradables - retail trade, communication, transport.
While GDP grew by around 5.5% on average through the period 2001-2008, the
tradable sector contribution was lower than one quarter of this expansion. Economic
growth in the period 2000-2003 of 4% (annual average) was attributed to a cautious
recovery in agriculture and the growth of the service sector, while the industrial and
construction sectors contracted. Many industrial sectors that showed strong signs of a
rebound in 2000 started to contract in 2001 and continued their decline through until
2003. In 2008 exports in % of GDP represented less than half of the level of
comparable countries (central and eastern European economies in transition), while
the imports in % of GDP stood at a roughly comparable level (65% of GDP in Serbia
against 68% of GDP in comparable transition economies). Thus, in parallel to the
lagging export performance,
imports surged due to a rapidly growing domestic
demand fueled by rapid growth of credit, inflow of remittances and increased foreign
borrowing by firms. These two contrasting evolutions led to an increasing current
account deficit (see Figure 1 below).

Figure 3: Current account balance (in % of GDP), Serbia, 2002-2009

Source: National Bank of Serbia

As shown in Figure 3: Current account balance (in % of GDP), Serbia, 2002-2009, the
current account balance deteriorated sharply until 2008, evolution mainly driven by a
strong growth of imports. Similarly, the strong subsequent correction of the current
account deficit after 2009 is mainly due to the sharp decrease in imports offsetting the
decline in exports and the fall in remittances.

The financial counterparts of the growing current account deficit are growth in external
debt and capital inflows, specifically under the form of foreign direct investment (FDI).

Foreign direct investment (FDI) was relatively strong prior to the global financial crisis
- USD 3.8 billion in 2007, USD 3 billion in 2008. In 2008, FDI net inflows reached
6.2% of GDP and the outflow of portfolio investment was equal to 0.6% of GDP.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

However, FDI declined by 22% in 2009 and 44% in 2010 to respectively USD $1.9
billion in 2009 and USD 1 billion in 2010.

The private sector’s share of the economy had been much lower in Serbia than for
comparable transition economies due to slow pace of privatization. Serbia’s score on
the EBRD transition indicators was low, especially on restructuring and privatization of
large enterprises and competitiveness policies. Furthermore, Serbian economy
suffered from poor business climate5. Overall, this hampered the development of a
dynamic private sector reducing incentives for investment.

Public spending effort in Serbia was skewed towards social transfers and public
employees’ at the expense of the public investment. To complicate matters, public
sector remunerations often grew faster than labour productivity and inflation. Wage
growth in the public sector pushed up the equilibrium wage in the economy
stimulating growth of wages in the private sector and thus reinforcing already-high
unemployment. High wage growth intertwined with inflationary pressures to reduce
the country’s competitiveness furthering its trade deficit.

Global economic crisis caused serious deterioration in Serbia’s macroeconomic
situation. A strong policy response from the government with substantial support from
IMF and EU was carried out.

The following section presents the EU Macro-Financial Assistance support operations
and explains its rationale, objectives and the logic of intervention.

5 World Bank Doing Business Report, 2008

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

MFA: rationale, objectives and logic of intervention

This chapter is dedicated to explaining the reasons of the MFA support operations
initiative, the objectives of the latter and the structuring of the operation.

The rationale for MFA operations to Serbia
By the end of the 2008, Serbia had suffered from huge external
imbalances. The
current account deficit – which was widening through the 2000s decade – reached
21.5% of GDP in 2008. This decade had been fuelled by extensive foreign borrowing,
thus private external debt increased from 22.3% of GDP in 2003 to 46% in 2008. An
outbreak of the global financial crisis – along with slowing external demand for
Serbian exports and a decline in prices of main Serbian exports – dried the capital
inflows into the country, calling for a subsequent current account correction.

Since a large proportion of these loans were in foreign currency, a current account
adjustment through currency depreciation could have induced a sharp increase in the
share of non-performing loans. To give an idea of the importance of this channel,
according to IMF estimates6, a real depreciation of the Dinar by 30% in 2011 would
have produced an increase of the external-debt-to-GDP ratio from 75.3% in 2011 to
110% in 2012 (instead of a decrease to 70.1% in a baseline scenario with the
exchange rate stability).

Furthermore, since Serbian supply remained weak for structural reasons, a correction
of the trade balance would go mainly through the decline of imports. Indeed, a
depreciation of the Dinar would make the latter more expensive, reducing the
purchasing power of the households and their demand.

Subsequently country risk indicators for Serbia strongly increased while capital inflows
dried up sharply and suddenly, households withdrew a substantial share of their
deposits in Serbian banks, and exports and imports experienced a strong decline. In
addition, scarcer foreign capital was accompanied by an increased cost of borrowing –
both private and public – fuelling fears of significant deterioration of the financial
situation of public and private agents in Serbia.
In the face of large external financing gap, the authorities adopted an approach
comprising three elements and embedded in an IMF-supported Stand-By Arrangement
(SBA):







Fiscal adjustment to restore fiscal sustainability,

Financial Sector Support Program (FSSP), with foreign banks to maintain their
external exposures to Serbia, while providing liquidity to their Serbian
subsidiaries and recapitalising them if needed,

External financing from the IMF, the World Bank and the EU to close the
external financing gap.

6

International Monetary Fund, Republic of Serbia: Request for Stand-By Arrangement, October 2011, Pp. 47-48

November 2013 35

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

In this perspective, Serbian authorities requested financial assistance in the form of a
precautionary Stand-By Arrangement (SBA) from the International Monetary Fund at
the end of 2008 and an SBA was approved by the IMF Executive Board on 16th of
January 2009 for an amount of SDR 350.8 (around EUR 388 million). The SBA was
extended to SDR 2,629.12 million (around EUR 2.9 billion) on the 15th of May 2009.
The IMF SBA was put in place to smooth current account adjustment while ensuring
that necessary structural reforms are implemented which has to positively impact
different aspects of Serbia’s economy – quality of public finance management,
external competitiveness – and thus improve external
financial sustainability
perspectives of the country.

Complementary to the IMF programme, a Macro-Financial Assistance support
operations were initiated. On the 15th of April 2011, Serbia submitted to the European
Commission a request for the release of the first MFA instalment, accompanied by a
Report on the fulfilment of the structural reform criteria related to the first tranche.
Reassured by the fulfilment of the conditionalities included in the Memorandum of
Understanding, the first instalment of EUR 100 million was disbursed on the 17th of
July 2011.

The objectives of the 2009 – 2011 MFA operations in Serbia
The global objective of the Macro-Financial Assistance to Serbia as described in the
Report from the European Commission to the Council and the European Parliament on
the implementation of macro-financial assistance to third countries in 2011 is to
ensure macroeconomic and financial stability in Serbia both in the short run and in a
longer term perspective.

In the macroeconomic context of Serbia, stabilization of the economy and driving it on
a sustainable path occurs through two intermediate objectives: an orderly adjustment
of
the existing macroeconomic imbalances in the short and medium term and
implementation of structural reforms which would provide the country with a more
sound fiscal framework and better growth perspectives.

the purpose of

the MFA within the framework of

Thus, operationally,
the
macroeconomic stabilisation was to provide funds in order to cover the external
financing needs of the Serbian economy and its budgetary needs in the short run
and. In the medium and long perspective, the MFA operational objective consisted in
improving the medium-long term fiscal sustainability through structural
reforms. To achieve this the MFA included a double-conditionality for disbursement of
implementation of own conditionalities in the MFA MoU and a
funds: successful
satisfactory track record in implementing structural conditionalities required by the
Stand-By Arrangement (SBA) with the IMF.

The Figure 4: Objective Tree of the 2009 – 2011 MFA Operations to Serbia below
illustrates the global, intermediate and operational objectives of the Macro-Financial
Assistance and how they are related.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Figure 4: Objective Tree of the 2009 – 2011 MFA Operations to Serbia

Global Objectives

Intermediate
Objectives

Operational
Objectives

GO1

To strengthen
macroeconomic and
financial
stability in Serbia, while
encouraging the
implementation of
appropriate structural
reforms

IO1
Funding support to underpin
an orderly rebalancing of the
economy and safeguard
macroeconomic and financial
stability of Serbia

OO1
Addressing residual
external financing and
budgetary needs That
emerged in Serbia due to
the global crisis

IO2
Introduce or reinforce
structural reforms in Serbia
with a view to achieving
medium to long term macro-
economic stability and
external sustainability

OO 2
Serbian Government’s
approval of the Budget
System Law amendments
on fiscal responsibilities

IO3
Complements, and
reinforces, the reform
programme with the IMF

OO3
Satisfactory track record in
the implementation of the
current SBA with IMF

The purpose of this ex-post evaluation is to assess the extent to which the
objectives described above were attained.

Given that the only one instalment of EUR 100 million was disbursed in July 2011
and the structural conditionalities were explicitly laid down in the Memorandum of
Understanding in July 2010, approximately two years have elapsed since the
disbursement of
funds and slightly more than two years has elapsed since the
implementation of the structural conditionalities of the MFA. Broadly following the
“Guidelines of the Ex-Post Evaluation of the MFA operations (2010)”, we divide the
potential effects of the MFA into short-run macroeconomic and structural effects
(occurring up to two years after the MFA), medium run structural effects (occurring up
to four years after the MFA) and the long run impact on the Serbian external financial
situation sustainability (occurring up to three years after the MFA).

Given the time horizon since the disbursement of
funds, the potential short-run
macroeconomic and structural effects would have been fully effective two years after –
even those occurring with a lag – and therefore we estimate to capture this in our

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

evaluation. If the MFA funds have had any short run macroeconomic or structural
effects, they should appear in the data available today.

By contrast, medium term structural effects – along with effects on external financial
sustainability are likely to have been effective at longer time horizons, three to four
years after the MFA, thus and existing data does not allow tracking them in full.

2009 – 2011 Macro-Financial Assistance: logic of intervention
Having defined the objectives of the MFA, we now examine how the 2009-2011 MFA
was structured so as to achieve these objectives. In order to evaluate the actual
achievements of the MFA, we first need to outline its intervention logic; this allows us
to design the evaluation criteria and indicators against which the realisation of the
objectives is to be assessed.

The 2009-2011 Macro-Financial Assistance consisted of:







the financial assistance of EUR 100 million;

structural conditionalities laid down in the MFA MoU which were prerequisites
for the disbursement of funds; and

structural conditionalities of the IMF, the fulfilment of which served as a
prerequisite for the disbursement of MFA funds.

Thus, the intervention logic of the MFA unfolded around two parallel pathways:

 macroeconomic one developed around the disbursement of funds, and


structural – involving the implementation of the two sets of conditionalities.

The two pathways ultimately converge to attain the global objective fixed by the MFA:
stabilise the macroeconomic situation of Serbia and put the Serbian economy on track
for medium and long-term external financial sustainability.

On the macroeconomic side, the MFA Memorandum of Understanding foresaw two
tranches of EUR 100 million each, out of which only the first was disbursed. The
reason was twofold. First, the IMF programme was no longer on track due to
the change in the
the fiscal stance of Serbia. Second,
disagreements over
macroeconomic stance of Serbia made external financial assistance less relevant. Thus
the Serbian authorities did not request the disbursement of the second tranche and
the MFA programme expired two years after the signature of the Memorandum of
Understanding (in 2012).

Operationally, the MFA funds were transferred to the account of the National Bank of
Serbia (NBS), more specifically its foreign currency reserves line. The NBS, in turn,
transferred an equivalent amount in dinars to the Treasury. The economic use of the
funds under consideration was, therefore, twofold: replenish the currency reserves of
the NBS and cover a portion of the budget deficit.

The expected outcomes were the macroeconomic stabilisation of the Serbian economy
in the short run, thanks to increased fiscal sustainability, and smoother rebalancing of
the current account.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

As a prerequisite to the disbursement of funds, the MFA laid down conditionalities
pertaining to structural reforms in the area of public finance management (PFM):
implementation of quantitative fiscal rules and strengthening of the Public Internal
Financial Control (PIFC). The stipulated reforms were implemented in the period 2010-
2011 introducing a set of general and specific fiscal rules into the Serbian budget
preparation process and aligning the Serbian PIFC to European law. These structural
reforms would help achieving external financial sustainability by putting fiscal balance
– one of the components of the latter – on a sustainable path.

In addition to structural reforms specified in the Memorandum of Understanding, the
MFA funding required the satisfactory fulfilment of the structural conditionalities of the
International Monetary Fund 2009-2011 SBA. Although the evaluation of
these
structural conditionalities is out of the scope of the present study, the MFA backing of
the IMF conditionalities
its
implementation.

could have potentially affected the success of

The Figure 5: Logic of Intervention for the 2009 – 2011 MFA Operations to Serbia
below illustrates the logic of intervention of the MFA support operations to Serbia and
matches the MFA objectives to the outputs and the outcomes of the MFA operations.

November 2013 39

Figure 5: Logic of Intervention for the 2009 – 2011 MFA Operations to Serbia

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The Macro-Financial Assistance was designed and implemented along with the IMF
financial assistance programme with the aim of ensuring Serbia’s short-term
situation
macroeconomic
sustainability. In order to achieve these goals, the programmes – both MFA and IMF
SBA – relied on two instruments: transfer of funds and structural conditionalities.

stabilisation and medium-long run external

financial

Provision of funds is intended to help Serbia cover its budget financing needs and, in
parallel, replenish its foreign exchange reserves in order to smooth its current account
adjustment.

Serbia’s external financing gap was projected to EUR 1.85 billion over the period
2009-2011 , thus, financial assistance from the IMF, the EU (MFA) and the World Bank
was expected to cover this external financing gap in order to avoid an adjustment
through sharper currency depreciation – which would threaten medium-long term
external financial situation – or through additional contraction of domestic demand. In
order to be fully effective, this financial assistance was accompanied by a set of
structural conditionalities related to the fiscal policy stance.

The MFA specified two policy conditions:





an introduction of the quantitative fiscal rules into the Budget Law, and

amendments in the field of Public Internal Financial Control aligning Serbian
legislation in the areas of accounting, public debt management, internal and
external audit to the European law.

the MFA conditions aimed at

Thus,
improving public finance management and
providing a quantitative framework for fiscal policy so as to enable Serbian authorities
to check that ongoing fiscal stance is in line with medium term fiscal sustainability
objectives. In addition, MFA laid fulfilment of the IMF conditionalities as a prerequisite
for disbursement of funds. Thus, the MFA complemented the IMF financial assistance
both on the financial side and on the structural reforms implementation side.

The two following subsections present in detail each of the components of the MFA
intervention along the two intermediate objectives: short-term macroeconomic
stabilisation and medium-long term fiscal sustainability.

Short Term Macroeconomic Stabilisation: close external financing gap, cover
budgetary needs
The MFA planned two tranches of EUR 100 million each. Only the first one – for the
amount of EUR 100 million – was effectively disbursed on the account of the National
Bank of Serbia (NBS). The funds were used for two purposes: replenish the currency
reserves and cover budget needs. The ultimate purpose of this funding was to
contribute to a short-term macroeconomic stabilisation of Serbia.

According to the IMF figures, Serbia’s external financing gap – the difference between
the gross financing requirements and the available financing – in 2011 represented
EUR 220 million. These financing needs were fuelled mainly by debt amortisation
requirements (which increased from EUR 3.62 billion in 2008 to EUR 5.31 billion in
20117), while the current account deficit sharply declined after 2008. The following
table provides a breakdown of Serbian gross financing requirements and available
financing sources for 2011:

7

IMF, Republic of Serbia: Request for Stand-By Arrangement, page 29

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 6 Serbia: external financing requirements and sources (in billion EUR),
2011

Gross financing requirements

Available financing

Current account deficit

Debt amortisation

Medium-and long-term debt

Public sector

Commercial banks

Corporate sector

Short-term debt

Commercial banks

Corporate sector

Accumulation of gross reserves

Other outflows

TOTAL

2.50

5.31

3.78

0.50

0.35

2.93

1.54

1.10

0.44

0.23

0.00

8.04

Capital transfers

Foreign direct investment (net)

Portfolio investment (net)

Debt financing

Medium- and long-term debt

Public sector

Commercial banks

Corporate sector

Short-term debt

Commercial banks

Corporate sector

TOTAL

Source: IMF, Republic of Serbia: Request for Stand-By Arrangement, October 2011

0.00

1.50

0.10

6.22

4.69

0.75

0.94

3.00

1.54

1.10

0.44

7.82

As explained in previous sections, the external financing gap existed for the period
2009-2011. In 2009 and 2010 the gap was covered by the IMF and the World Bank
funds. In 2011, the EU is the main contributor through the Macro-Financial Assistance.

Since only one installment was ultimately disbursed in the framework of this MFA, our
analysis bears on this tranche financial characteristics. The latter are specified in the
Confirmation notice for the disbursement of the first installment.

The nominal amount represented EUR 100 million disbursed on the National Bank of
Serbia account, short of costs deducted prior to disbursement (including payment of
external legal opinion).

The interest rate on the loan represented 3.382% per annum, with the interest
payment dates annually in arrears on 12 of July, commencing on and including 12 July
2012 up to and including the Final Maturity Date. The final maturity date is the 12th of
July 2019, with principal repayment schedule breaking into three elements:





EUR 33 million 333 thousand on the 12 July 2017;
EUR 33 million 333 thousand on the 12 July 2018;
EUR 33 million 334 thousand on the 12 July 2019.

The average maturity for this instalment is computed by the following formula
specified in the Loan Arrangement:

Thus, the average maturity for the instalment (and therefore for the loan) is seven
years.

November 2013 42

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Regarding the amount of the MFA effectively disbursed, EUR 100 million represented
only 5% of the total external financing gap coverage over the period 2009-20118 and
45% of the total financing gap coverage in 2011. The following table provides a
breakdown of the external financing gap coverage by year and by source:

Table 7: External financing gap coverage of Serbia 2009 - 2011

2009

2010

2011

Total over 2009-2011

European Union

International Monetary Fund (IMF)

World Bank

Total over the three sources

0

1.12

0.04

1.16

0

0.34

0.13

0.47

0.1

0.05

0.07

0.22

0.1

1.51

0.24

1.85

Source: International Monetary Fund, 2011

Overall through the period 2009-2011, the contribution from the Macro-Financial
Assistance to closing the financing gap is only incremental (5% of the total EUR 1.85
million). By contrast the contribution of the IMF represents 82% and the contribution
of the World Bank accounts for the remaining 13%. In addition, the MFA contribution
is entirely concentrated in 2011, while the financing gap took the largest value (EUR
1.16 billion) in 2009.

The incremental value of the MFA financial assistance does not preclude the existence
of a macroeconomic impact of the MFA. However, it gives a preliminary insight on the
likely upper bound of these impacts at the as well as the relative importance of MFA
compared to the IMF assistance9.

In line with the Memorandum of Understanding, the amount of the first installment
was transferred to the National Bank of Serbia (NBS) acting as an agent. The amount,
in Euro, was registered on the foreign currency reserves balance of the NBS. In
the Memorandum of Understanding allowed transferring the amount
addition,
equivalent in dinars to the Treasury, which could later be used to finance the
expenditures planned in the Budget Law. The Memorandum of Understanding did not
tie the MFA funds to any specific budget expenditure, leaving the decision to the
discretion of the Serbian authorities.

Thus, the MFA funds’ direct macroeconomic impact was twofold: an impact on the
volume of foreign currency reserves (increasing the euro holdings of the NBS) and
coverage of a portion of the fiscal deficit financing needs.

The following table provides an insight on the volume of National Bank of Serbia
foreign exchange reserves in June and July 2011 (when the MFA funds were
disbursed).

8 According to the IMF estimates, the external financing gap was open only through the years from 2009 to 2011.

9

According to the IMF Staff Report on Ex Post Assessment of Longer-Term Program Engagement and Ex Post Evaluation of Exceptional
Access, without IMF assistance facing private sector external rollover needs and debt service and covering the current account deficit would
represent a serious challenge for Serbia.

November 2013 43

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 8 Foreign exchange reserves of the National Bank of Serbia, in EUR
million, 2011

Gold

455.9

508.7

June

July

Special
Drawing Rights
(SDR)

Cash holdings
and deposits
abroad

Securities

Total

0.1

7.2

1,105.8

1,428.8

8,405.0

8,439.2

9,966.8

10,383.8

Source: National Bank of Serbia

The MFA fund was disbursed to the NBS euro account and recorded in the “cash
holdings and deposits abroad”. According to the table, from June to July the foreign
exchange reserves of the NBS went up by EUR 417 million. The cash holdings and
deposits abroad went up by EUR 323 million.

The outcomes which ought to be investigated refer to the potential
impact of the
Macro-Financial Assistance on the indicators related to macroeconomic stabilisation of
the Serbian economy. In the context of the MFA intervention logic, these indicators
are the gross international reserves, the current account deficit and the debt to GDP
ratio. However, we also examine the evolution of all
the main macroeconomic
aggregates in order to assess in full the macroeconomic impact of the MFA. The
counterfactual analysis seeks to investigate what would have been the evolution of the
Serbian economy in absence of the MFA financial assistance and in absence of the IMF
and MFA involvement taken together.

In addition to the short-run macroeconomic stabilization,
the MFA backed two
important structural reforms in the area of public finance which ought to put the
Serbian economy on the sustainable path in the medium to long term.

The following graph represents the financial assistance operations to Serbia performed
by the European Union, the International Monetary Fund and the World Bank between
January 2009 and December 2011.

November 2013 44

International financial assistance to Serbia – 2009-2011 timeline

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Source: PwC, IMF, World Bank, European Commission

November 2013 45

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

reform conditions:

improve medium-long term fiscal

MFA structural
sustainability
Serbian economy’s sharp downturn in 2008 unmasked a weak underlying fiscal
position. According to the IMF, structural fiscal deficit in Serbia stood at 4.5% in 2008.
Since fiscal deficit translates into borrowing, in particular external, higher fiscal deficit
undermines external financial sustainability. Thus, in order to strengthen Serbian
external financial medium-long term sustainability, both the IMF SBA and the MFA
sought to address the issue through suitable macroeconomic policies and structural
reforms in the area of public finance.

Among the latter, both IMF and MFA conditionalities put an accent on improvement of
the budget preparation and execution process and establishment of fiscal rules setting
quantitative targets on the main public finance indicators (debt-to-GDP ratio, fiscal
balance).

Improvement in the budget preparation and execution process induces a better use of
existing resources: thus the same level of public services can be sustained with
reduced revenues or expenditures.

Fiscal rules subordinate the fiscal strategy to the objective of fiscal sustainability: the
targets set in the rule are taken as given and all the policies involving revenues and
expenditures are adjusted to fit the fiscal rule on aggregate. As a counterpart, when
quantitative targets of public debt and deficit are successfully reached, it ensures that
financial sustainability is sound. Along with
the fiscal component of the external
contributing directly to external financial sustainability, fiscal rules provide a stable
and foreseeable framework for the private agents.

the IMF SBA and the
Both the Technical Memorandum of Understanding of
Memorandum of Understanding of the MFA included a clause for the establishment of
fiscal policy rules setting a ceiling on the level of public debt to GDP and defining a
clear target for medium-long fiscal deficit. Henceforth, fiscal policy would be globally
constrained by rules rather than following a discretionary path.

The following table summarizes the conditionalities underlying the Macro-Financial
Assistance to Serbia 2009-2011 and presented in the Annex I of the corresponding
Memorandum of Understanding.

Table 9 MFA November 2009 Structural reform criteria

1st instalment
Government approval of the Budget System Law
amendments on fiscal responsibility including:

1) The establishment of quantitative fiscal

rules, and

2) Provisions foreseen in the field of Public
Internal Financial Control
(PIFC) as a
follow-up to the policy paper approved in
November 2009.

2nd instalment

1) Parliament approval of the amendments to
the Budget System Law approved by the
government prior to the 1st instalment

2) Circulation among relevant stakeholders of
a draft PEFA report in the context of the
PEFA update exercise launched in 2010
with the aim of preparing a PFM roadmap

3) Approval of by-laws

regulating extra-

budgetary funds

4) Recruitment of
internal auditor

the Ministry of Finance

5) First steps in the implementation of the
new public debt strategy; in particular

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

issuance of Dinar-denominated T-bills with
a maturity of at least 18-months

6) Further integration of

the Medium-Term
Expenditure Framework (MTEF) into the
budget
by
introducing a 3-year budget ceilings

particular

process,

in

7) Adoption of public accounting standards in

line with international standards

8) Enactment of the revised Law on the State

Audit Institution

9) State Audit Institution:

 Production of a draft audit report
on the 2009 financial statements
for the Republic of Serbia, and

 Launching the audit of
state-owned enterprises

three

10) Maintain

and

administrative
develop
capacity in the Ministry of Finance in order
to deal with the EU integration issues, such
as
implementation
decentralised
system (DIS) and state aid control.

the

Source: Memorandum of Understanding between the European Community and Serbia, July 2010

Since only the first
conditionalities related to the first instalment is relevant for this evaluation.

instalment was disbursed, only the implementation of

the

Thus, our evaluation addresses the effectiveness of the inclusion of the quantitative
fiscal rules and provisions in the field of Public Internal Financial Control (PIFC) in the
Budget System Law, their effective implementation and possible impact on medium
and long term fiscal sustainability.

The implementation of the two conditionalities constituted a prerequisite for the
disbursement of funds. On the 14th of April 2011, The Ministry of Finance of Serbia
addressed to the delegation of the European Union to the Republic of Serbia a request
to consider the release of the first loan instalment consequently to the fulfilment by
Serbia of the two conditionalities included in the Memorandum of Understanding for
the first instalment.

Indeed, in October 2010 The National Assembly of the Republic of Serbia made
effective the Law on amendments and addenda to the Budget System Law, including a
set of quantitative fiscal rules and included a set of amendments related to the Public
Internal Financial Control.

The expected outcome is the impact on medium-long term fiscal sustainability. This
impact is investigated based on the documentation review.

A counterfactual analysis is also undertaken using the Delphi technique, investigating
possible scenarios for the implementation of the mentioned structural reforms in
the
absence of
counterfactual is the projection of trends that would prevail in the absence of the MFA.

the MFA-backed reforms in the area of public finance. Then,

November 2013 47

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The evaluation criteria used for the assessment of the MFA impact on the structural
reforms is the relevance (to what extent the structural conditionalities specified in the
MoU matched the needs of the Serbian economy), effectiveness (to what extent have
the structural conditionalities specified in the MoU been implemented) and efficiency
(what was the impact of the implementation of these conditionalities on the short,
medium and long term fiscal position of Serbia).

For the first criterion – relevance – we provide a qualitative response based on the
structured interviews and our analysis of the situation of the Serbian economy prior to
the MFA.

For the second criterion – effectiveness – we address the issue of the fulfilment of the
conditionalities and its effective sustainability over the period (i.e. to what extent rules
put in place have been effectively applied). We also address the question of whether
the conditionalities specified in the MFA MoU would have been put in place without the
MFA. The latter question is addressed through the Delphi questionnaire.

Finally, for the third criterion – efficiency – we estimate the gross and net impact of
the MFA on the evolution of the fiscal – and more generally external financial –
sustainability indicators.

to

short-term macroeconomic

MFA contribution
stabilisation in Serbia
The evaluation of the MFA impact on short-term macroeconomic stabilisation is
undertaken in three steps. First, we describe the objectives of the MFA in the field of
macroeconomic stabilisation and assess their relevance to the Serbian economy.
Second, we describe and analyze the macroeconomic developments – which include
the effects from the MFA – in Serbia in the period under consideration. Third, we
perform the counterfactual analysis in order to gauge the net macroeconomic effects
of the MFA.

MFA objectives for short-term macroeconomic stabilisation and their
relevance to the needs of the Serbian economy
The purpose of this section is to describe the objectives of the Macro-Financial
Assistance in terms of macroeconomic stabilisation and to assess their relevance.
The MFA funds were disbursed in July 2011 therefore direct macroeconomic effects of
the MFA could not be produced before. However, indirect impact of the MFA – e.g.
sending a message to private markets and investors about the EU commitment to
support Serbia – could have taken place even before the funds were actually
disbursed. Thus, the direct effects of the MFA on macroeconomic stabilisation are
assessed over the period July 2011-December 2012, while the indirect macroeconomic
effects of the MFA cover the period December 2009- December 2012.

Macro-Financial Assistance operated simultaneously and in line with the International
Monetary Fund financial assistance. Thus, in our analysis we take into account the
effects of the financial assistance provided by the IMF along with the effects of the
MFA funds.

In order to assess the relevance of the MFA for the Serbian economy, we need to take
into account two considerations: the channels through which the Macro-Financial
Assistance aimed at impacting the economy and the relative size of the MFA funds
with respect to the indicators it sought to impact.

November 2013 48

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The MFA funds were used twofold:




To increase the foreign currency reserves of the NBS in 2011
To cover a portion of the budget deficit of Serbia as it stood in 2011

The IMF loan was used exclusively to increase the foreign currency reserves of the
NBS. The IMF assistance is just a transfer of funds to the NBS (in SDR) which can be
used (or not used) for foreign currency operations, but not for the budget support.
The NBS is prohibited from purchasing government debt on a primary market
(monetisation of debt) and can only purchase public debt on secondary market.

Thus, the MFA funds could impact the Serbian economy through the channel of foreign
currency reserves and through the budget deficit channel, while the IMF loan could
impact the economy only through the foreign currency reserves. The channel of FX
reserves consists in providing the National Bank of Serbia with additional foreign
currency funds thus increasing its ability to finance national agents trade operations at
the unchanged nominal exchange rate of the Dinar.

In order to assess the potential impact of the MFA funds on the Serbian economy we
study the evolution of the Serbian economy in 2010-2013.

Serbian macroeconomic evolution before and after MFA: 2010-2013
This section seeks to assess the macroeconomic impact potential of the MFA, in other
words the evolution of the Serbian economy following the implementation of the MFA.
Although this does not imply direct causation from the MFA or IMF financial assistance,
it allows identifying the likely range of the macroeconomic effects of both the MFA and
the IMF. In addition, we are able to make an assessment of whether the objectives of
the MFA in terms of macroeconomic stabilisation were achieved qualitatively. Own
contribution of the MFA and IMF funding is identified in the next section.

GDP growth
The global economic crisis of 2008-2009 which hit the Serbian economy translated
into a slowdown of economic growth by the end of 2008 which turned into a full-
fledged recession in 2009 when the GDP contracted by 3.5%. The crisis impacted
particularly the industrial and construction sectors where output fell respectively by
12.2% and 14.3% in 2009. Years 2010-2011 brought only modest recovery with 1%
growth in 2010 and 1.6% in 2011 as Serbia was hit by the second wave of the crisis in
particular financial difficulties and subsequent weakening of the demand of the
Eurozone. In 2012 GDP fell again, by 1.7%. The recent downturn is due, in particular,
to adverse weather conditions affecting the agricultural production and persistently
weak demand in the euro area which is the major destination of Serbia’s exports.

November 2013 49

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The table below presents the real GDP growth in Serbia from 2002 to 2012:

Figure 6 - Serbia real GDP growth 2005-2013

Source: National Bank of Serbia

As we will see further on, this pace of GDP growth was one of the key reasons for the
Serbian government’s failure to comply with the medium-term fiscal deficit target of
1% of GDP contained in the fiscal responsibility legislation of 2010 (which in turn was
introduced to comply with the MFA policy condition). Since the outbreak of the crisis
and all through 2009-2012 the GDP growth never reached its pre-crisis rates. At the
end of 2012 Serbian GDP stood at around 97.34% of its 2008 level. The IMF and the
Serbian government anticipate real GDP growth to reach around 2% in 2013 due to a
recovery in agricultural production and the opening of a Fiat plant in Serbia previous
year.

From the sector perspective, the 2010-2011 recovery was driven by industrial and
agricultural production, building industry, transport and telecommunications. The
largest contribution to real GDP growth in 2011 was from the information and
communication sectors (0.9 percentage points of the overall 1.6% real GDP growth)
and from the industry (0.6 percentage points), while the highest negative contribution
was from the wholesale and retail trade sectors (-1 percentage point).

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The following table provides a breakdown of Serbian GDP by type of expenditure:

Table 10 - GDP breakdown by expenditure (current prices), 2005-2011

2005

2006

2007

2008

2009

2010

2011

Private consumption

77.1

77.1

76.4

77.0

79.7

80.1

77.0

Public consumption

18.8

19.0

20.5

20.1

19.8

19.7

19.3

Private investment

19.0

21.0

24.3

23.8

18.8

17.8

18.5

Changes in inventories

4.7

3.1

4.7

6.0

-0.7

-0.5

1.7

Net exports

-19.6

-20.1

-25.9

-26.8

-17.7

-17.0

-16.4

 Exports of goods and services

28.3

31.4

30.6

31.4

29.4

36.0

36.6

 Imports of goods and services

47.9

51.5

56.5

58.2

47.1

53.0

53.0

Source: Statistical Office of the Republic of Serbia

One of the key challenges facing the Serbian economy at the outbreak of the crisis
was the switch from an unsustainable domestic consumption-driven growth to more
export-oriented growth model. The crisis years did not
increase the share of
investment in GDP: over the period 2003-2008 the share of investment represented
20.7% of GDP on average, in the crisis period 2009-2011 the share of investment
declined to 18.4% of GDP. This change is due to the investment being generally more
cyclical than consumption. The major change is on the trade balance side: although
Serbia had remained a net importer, the net exports as a share of GDP rose to -16.4
from an average of -22.5% of GDP in 2003-2008. This change, is due both to a
decrease in the share of imports (relatively to the years immediately preceding the
crisis) and to the increase in the share of exports to GDP.

For the sake of consistency the following table provides a breakdown of the GDP by
expenditure in constant prices over the same period:

Table 11 - GDP breakdown by expenditure (constant prices), 2005-2011

2005

2006

2007

2008

2009

2010

2011

Private consumption

77.7

78.7

78.9

78.5

77.6

78.2

78.0

Public consumption

19.5

18.6

20.4

20.6

20.4

19.7

19.6

Private investment

19.1

21.5

25.9

25.3

19.2

17.5

19.0

Changes in inventories

Statistical discrepancy

4.9

-2.7

3.1

1.6

4.9

0.8

5.9

-0.7

-0.5

-3.0

2.4

-0.5

1.6

1.1

Net exports

-18.4

-23.6

-30.8

-27.3

-18.9

-14.4

-19.3

 Exports of goods and services

27.8

31.9

33.3

32.4

29.9

33.6

36.6

 Imports of goods and services

46.2

55.5

64.1

59.6

48.8

48.0

55.9

Source: Statistical Office of the Republic of Serbia

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The figures presented in this table are in line with our findings from the previous table.

The following table provides real growth rates for the GDP components over the period
2006 to 2012.

Table 12 – GDP components, real growth rates (to the previous year, in %), 2006-2012

2006

2007

2008

2009

2010

2011

2012

Gross Domestic Product

Final consumption expenditure

 General government
sector consumption

3.6

5.1

5.4

8.9

-0.3

11.1

Gross fixed capital formation

17.2

29.7

Exports of goods and services

16.9

11.7

Imports of goods and services

20.0

31.0

3.8

6.1

5.9

8.5

9.8

9.6

-3.5

1.0

1.6

-1.7

-2.7

-0.7

-0.7

-1.2

0.2

1.2

-22.1

-5.5

-8.0

15.3

-19.1

3.1

1.2

8.4

3.4

7.0

1.8

-3.4

4.5

2.3

Source: Statistical Office of the Republic of Serbia, IMF

In the years preceding the crisis imports grew faster than exports. In 2008 the two
aggregates grew at the same pace, with the outbreak of the crisis imports fell more
than exports: the former declined by 19.1%, while the latter fell by 8%. Exports also
recovered stronger in 2010 exhibiting 15.3% growth against a 3.1% growth for
imports.

As expected in recession,
investment growth rates became sharply negative,
effectively driving the fall in GDP. This fall in investment rates is explained by a sharp
fall in foreign direct investment and foreign borrowing.

This net export performance is explained both by the contraction in domestic
consumption which reduced the demand for imports and by the Dinar depreciation
from 2008. The following graph shows the nominal and real exchange rate evolution of
the Serbian Dinar in 2005-2011:

November 2013 52

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Figure 7 - RSD nominal and real exchange rate indices, 2005-2011

Source: National Bank of Serbia

After 2008, the Dinar depreciated against the main trading partners’ currencies both in
nominal and in real terms. Despite Serbia’s persistently high inflation and a positive
inflation differential with the EU and the US, RSD real effective exchange rate
depreciated sharply from 2008 to 2010. From 2010 to 2011 the nominal exchange
rate stabilised, while in real terms the Dinar appreciated against the basket of
currencies of the main trading partners, almost returning to its pre-crisis levels,
largely because of the persistently high inflation in Serbia.

The two main counterpart currencies for Serbia – both for financial transactions and
trade – are the Euro and the US dollar. The following graph shows the Dinar nominal
exchange rate evolution against the Euro and against the US dollar from 2005 to
2013:

November 2013 53

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Figure 8 - RSD nominal exchange rate against EUR and USD, 2005-2013

Source: National Bank of Serbia

the debt-denomination currencies of

From 2008 to 2012, Dinar depreciated by 39% against the Euro and by 58% against
the US dollar in nominal terms. Given that well over 90% of the Serbian public debt
had been denominated in foreign currency, a considerable nominal Dinar depreciation
against
this magnitude strongly
contributed to increasing the debt burden. Over the evaluation period (2010-2012) the
nominal depreciation of the Dinar against the euro was 9.8%. However, even this
modest depreciation represented a serious increase in the debt burden. The public
debt stood at EUR 12.157 billion (RSD 1252.695 billion) by the end of 2010. Given
that the share of Euro-denominated liabilities represented 60.4% of the total public
debt that year a depreciation of 9.8% applied to this share (RSD 756.6 billion) would
induce an increase of RSD 74.1 billion over the two following years. The Dinar nominal
depreciation increased the debt stock of 2010 by 6%. The 13.1% depreciation against
the US dollar over the same period induced an increase of the debt stock by around
RSD 23.6 billion, i.e.

the

of

Pass-through from exchange rate depreciation was another major driving force which
increased the inflation rate up to 12% in 2012.

Inflation
After the hyperinflationary episode of the 1990s and a strong inflation of the beginning
of the 2000s, the increase in the consumer prices stabilised at a level of around 9%
per year in the period 2006-2012. Inflation targeting strategy, adopted in 2006,
coincides with a slightly lower inflation over after 2006 as compared to previous years.
in particular in comparison with other
However,
economies in transition (Croatia, Bosnia-Herzegovina, Romania...).

inflation remains rather high,

November 2013 54

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Figure 9 - Consumer prices (%, year-to-year), 2006-2013

Source: National Bank of Serbia

Over the period 2009-2012 the average inflation stood at 9% against 8.7% over the
period 2006-2008. However, the years 2006-2008 immediately preceding the crisis
were a period of high GDP growth – 4.3% per year on average – while in the period
2009-2012 real GDP growth was -0.7% per year on average. Thus, in 2009-2012
inflation was higher despite much lower GDP growth.

The surge in inflation in the period 2009-2012 had two main factors underlined during
the structured interviews. The first factor has been the rise in energy (one of Serbia’s
main imports) and food prices affecting the country in 2011-2012. The second factor
has been persistently high and auto-feeding inflation expectations inherited from the
1990s period. The National Bank of Serbia adopted the inflation targeting policy
framework in 2006.

As mentioned before, a sharp consequence of the persistently high inflation has been
a large “euroisation” of the Serbian economy. During the focus period 2009-2012,
Serbian authorities’ made efforts to reverse “euroisation”. However, this strategy bore
only limited fruits. Over the considered period, the share of loans in euro and indexed
to euro made to Serbian households and firms went from around 80% in January 2009
to around 72% in May 2011. However, the share of deposits in EUR in the total
deposits increased from around 71% to around 76% over the same period, evolutions
partly explained by the strong nominal depreciation of the Dinar over the period. All
Serbian government officials and private sector representatives interviewed mentioned
the strong reluctance of the Serbian households to borrow and save in Dinars,
something they explained as a consequence of the “hyperinflation hysteresis” of the
1990s.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 13 - Currency composition of household savings, 2008-2012

2008

2009

2010

2011

2012

Savings in Dinars

2.49%

2.14%

1.79%

2.43%

1.90%

Savings in foreign
currencies

97.51%

97.86%

98.21%

97.57%

98.10%

Source: National Bank of Serbia

The share of savings in Dinars of the Serbian households has been dismal through the
period (2.15% on average) with little variation. The national currency serves mainly
for transaction purposes. Persistently high and unstable inflation expectations explain
the households’ reluctance to save in Dinars.

“Euroisation” reduces the effectiveness of the monetary policy. Indeed, the impact of
the movement of policy rates (in Dinars) has only a limited impact on the volume of
lending, since most of the lending is done in euro (or other foreign currency).
Therefore, the National Bank of Serbia is led to adapt its monetary policy to the
currency structure of the economy.

A ‘managed float’ regime replaced the peg to euro in 2006. Therefore the National
Bank of Serbia has officially no exchange rate target and intervenes only to smooth
daily excess volatility. However given the share of foreign currency liabilities in the
total burden of the external debt – both public and private – a sharp depreciation of
the Dinar would lead to subsequent increase in the debt levels. This provides an
incentive for the NBS to intervene in order to “cushion” the depreciation pace.

Public finance
In the pre-crisis period (2006-2008), the fiscal policy had been strongly pro-cyclical
with strong increases in capital expenditures, growth of the public wage bill and
pensions. According to the IMF, fiscal tightening would have been instead required in
2006-2008 in order to contain external imbalances. Thus, Serbia met the crisis with
little or no scope for countercyclical fiscal loosening. In fact, with the occurrence of the
crisis the country faced a dilemma: allow automatic stabilizers to operate in full
in
order to preserve growth and domestic demand (i.e. maintain the same volume of
spending while fiscal revenues are shrinking) or undertake a fiscal adjustment in order
to preserve financial stability.

The table below represents the evolution of the fiscal receipts in 2010 and in 2011:

November 2013 56

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 14 - General Government revenues, 2010-2011

2010
in RSD billion

2011
in RSD billion

Nominal growth
in %

Real growth
in %

Public revenues

Current revenues

Tax revenues

Personal income tax

Corporate income tax

VAT

Excises

Customs revenues

Other tax revenues

Contributions

Non-tax revenues

Capital revenues

Grants

1223
.4
1214.
5

1056.5

139.1

32.6

319.4

152.2

44.3

46

323

158.1

1.4

7.4

1302.
5
1297.
8

1130.9

150.8

37.8

342.4

170.9

37.8

43.5

346.6

166.9

2

2.6

6.5

6.9

7.1

8.5

16

7.2

12.3

-12.4

-5.3

7.3

5.6

40.9

-64.2

-4.1

-3.7

-3.6

-2.3

4.5

-3.4

1.2

-21.1

-14.7

-3.3

-4.9

26.9

-67.7

Source: Ministry of Finance and economy of Serbia

Regarding current revenues, general government receipts declined in real terms for all
the items except the excises and the corporate income tax. There is a strong growth –
both in nominal and real terms – of the capital revenues, but from an extremely
narrow base.

Budget spending scenarios in the pre-crisis budgets were based on increasing tax
receipts. After the shrinking of the tax base following the crisis, maintained levels of
budget expenditures would have led to high and unsustainable structural fiscal deficits
if no measures were taken. Thus, fiscal adjustment efforts were deemed necessary
and a fiscal consolidation programme was agreed upon with the IMF. Within the IMF
SBA, in the framework of fiscal consolidation, a medium-term objective of the wage
bill of the government limited to 8% of GDP by 2015 was established. In order to
meet this target, the government planned to undertake the following measures:





Freeze of public employees’ nominal wages (also affecting for local government
utilities and ten largest state-owned enterprises) and freeze in nominal
pensions in 2009-2010

Fiscal responsibility legislation establishing binding nominal ceilings on the
general government wage and pensions bills for 2011-2012

In 2009 the government also planned cuts in public staff expenditures by about 10%
by April 2010 along with a hiring freeze. However, these cuts could not be achieved as
planned in the Law of December 2009 and were reported to 2010. A hiring freeze was
established for 2011.

The fiscal responsibility legislation involved the incorporation in the Budget System
Law of quantitative fiscal rules establishing a 1% medium-term deficit target and a

November 2013 57

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

gross public debt limit of 45% of GDP. The deficit was allowed to exceed the
thresholds implied by the fiscal rule by the amount of public investment exceeding 4%
of GDP in 2011 and 5% over 2012-2015. A detailed presentation of the quantitative
fiscal rules and the role of the MFA in their implementation and shaping are presented
in detail in the corresponding sections and in the dedicated case study. Along with
fiscal responsibility legislation, the Budget System Law of 2010 introduced three-year
expenditure frameworks in order to improve budget preparation and medium-term
planning.

The fiscal responsibility legislation also incorporated rules regarding indexation of
public wages and pensions. Regular semi-annual indexation of wages was set to start
in January 2011 with the first indexation of public wages and pensions capped at 2%.
Two additional indexations were to be undertaken in May and November 2011. The
indexation rule specified the adjustment of public wages and based on CPI inflation
during the previous six months and ½ of the real GDP growth rate (if positive) of the
previous year for April 2011 and April 2012, and adjustment based only on CPI
inflation during the previous six months for October 2011. From then on, public wages
and pensions should be indexed semi-annually on CPI inflation. The fiscal policy also
involved freezing of the amount of subsidies in 2011 at their nominal level of 2010 and
the use of the privatization proceeds to reduce interest payments on the public debt
through anticipated reimbursement of a portion of Serbia’s high-interest debt.

The table below describes the evolution of the general government expenditures in
2010 and in 2011:

Table 15 - General Government expenditures, 2010-2011

2010
in RSD billion

2011
in RSD billion

Nominal growth
in %

Real growth
in %

Public
expenditures
Current
expenditures

Expenditures for
employees
Purchase of goods
and services

Interest repayment

Subsidies

Social insurance and
assistance

of which pensions

Other current
expenditures

1359.
9
1224.
8

308.1

202.5

34.2

77.9

579.2

394

22.9

Capital expenditures

105.1

Net lending

30

1460.
9
1324.
7

342.5

216.3

44.8

80.5

609

422.8

31.7

111.1

25

Source: Ministry of Finance and economy of Serbia

7.4

8.2

11.2

6.8

31

3.4

5.1

7.3

38.1

5.8

-16.6

-3.2

-2.6

0.2

-3.8

18.1

-6.9

-5.3

-3.3

24.4

-4.7

-24.9

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

General government expenditures declined in volume terms for almost all
the
expenditure items since nominal growth of different items was lower than the inflation
the decline of expenditures (-3.2% in volume) was less
rate. Nevertheless,
pronounced on average than the decline in fiscal revenues (-4.1% in volume), pushing
up the fiscal deficit in real terms. In addition, two items exhibited strong real growth –
albeit their weight in the total expenditures is modest – “interest repayments” (due
mainly to Dinar depreciation) and “other current expenditures”. From the point of view
of structure of public expenditures, since capital expenditures – public investment –
declined more, in volume terms, than the current expenditures, which is likely to
generate an adverse economic impact over the years to come.

The adoption of an expansionary fiscal decentralization law in late 2011 and later
relaxation of the fiscal stance damaged the fiscal consolidation efforts. As a result,
fiscal deficits continued to increase as a percentage of GDP through all the period
2009-2012, reaching -6.4% in 2012 as compared to -2.6% in 2008.

The following figure shows the evolution of the fiscal deficit over the period 2005-
2012:

Figure 10 - Fiscal balance of Serbia, 2005-2012, in % of GDP

Source: Ministry of Finance and Economy of Serbia

In spite of the fiscal consolidations efforts undertaken since 2009 and the fiscal
responsibility framework,
the fiscal deficit has been continually increasing as a
percentage of GDP. This increasing fiscal deficit was a major driver of the increase in
public debt – the evolution is examined in one of the later sections – beyond the
legally binding level of 45% of GDP.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Balance of payments

In the pre-crisis period Serbian economy had exhibited high and growing current
account deficits matched by corresponding capital and financial account surpluses. The
current account deficits had corresponded mainly to external borrowing to fund
domestic consumption and foreign direct investment. After the outbreak of the crisis in
2008-2009 current account deficit contracted sharply: down to -6.6% of GDP in 2009
and -6.7% of GDP in 2010 from the record high of -21.6% of GDP in 2008. The
following table shows the current account balance evolution from 2002-2012:

Table 16 - Current Account Balance of Serbia, in % of GDP, 2003-2012

Source: National Bank of Serbia

According to the IMF, Serbia had to face the global financial storm from a severely
unbalanced external position, with high external debt
levels adding to its
vulnerabilities. At the moment of the crisis the current account deficit reached 21.6%
of GDP (in 2008). The period 2009-2012 brought in a sharp and fast adjustment by 15
percentage points of GDP from 2008 to 2009, largely explained by the improvement of
the trade balance subsequent to the Dinar depreciation and shrinking domestic
demand which led to lower imports. This correction of the trade balance was attained
thanks to imports falling by a larger value than exports. In the following years the
current account deficit growth resumed with the current account balance standing at -
10.5% of GDP in 2012, reaching its level of 2006. Albeit this figure is half of the 2008,
this large current account deficit arises in the context of slow growth – unlike in 2008.
In fact, the nature of the current account deficit changed from the pre-crisis years. In
the years preceding the crisis, current account deficit was fuelled by booming private
consumption funded by extensive external borrowing (which explains high levels and
growth rates of the private external debt). By contrast, current account deficit surge in
2011-12 is largely a ‘twin deficit’ phenomenon: fiscal deficit fuels growth of the
current account deficit.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 17 - Serbia: Balance of Payments, 2007-2012 (in EUR)

I. CURRENT ACCOUNT

-5,052.5

-7,054.2

-1,910.1

-1,887.2

-2,870.0

-3,155.1

2007

2008

2009

2010

2011

2012

I. a) CURRENT ACCOUNT
BALANCE, BEFORE
GRANTS
3. Goods and services
balance (3.1.-3.2.)

3.1. Export goods and

services

3.1. Import goods and

services

4. Income

4.2. Expenditure

5. Current transfers

5.1. Receipts

5.2. Expenditure

II. CAPITAL ACCOUNT

1. Receipts

2. Expenditure

-5,218.9

-7,216.8

-2,107.6

-2,080.3

-3,076.2

-3,299.4

-7,329.9

-8,685.9

-4,925.8

-4,573.3

-5,155.2

-5,297.4

8,686.5

10,157.3

8,477.8

10,069.6

11,471.9

11,913.4

-
16,016.4

-
18,843.2

-
13,403.6

-
14,642.9

-
16,627.1

-
17,210.9

-598.7

-921.8

-502.5

-669.9

-757.9

-798.5

-1,115.6

-1,479.9

-1,002.1

-1,107.5

-1,186.2

-1,345.7

2,876.1

2,553.6

3,518.2

3,356.0

3,043.1

2,940.8

3,104.7

2,828.3

3,762.0

3,624.0

3,394.2

3,280.6

-228.6

-313.9

14.9

-328.8

-274.7

-243.8

-268.0

-351.0

-339.8

13.2

16.5

-3.3

1.6

5.5

-3.9

0.9

3.0

-2.1

-2.5

2.7

-5.2

-10.8

1.1

-11.9

III. FINANCIAL ACCOUNT

5,175.6

7,133.3

2,032.6

1,818.5

2,693.8

2,883.2

1. Direct investment - net

1,820.8

1,824.4

1,372.5

860.1

1,826.9

231.9

2. Portfolio investment - net

678.2

-90.9

-51.0

3,418.7

3,713.2

3,074.6

38.8

-9.1

1,619.1

1,665.9

1,049.2

-151.7

3. Other investments

4. Reserves Assets (-
increase)/4

IV. ERRORS AND
OMISSIONS - net

OVERALL BALANCE

-742.1

1,686.6

-2,363.5

928.7

-1,801.5

1,137.2

190.8

-92.3

-124.1

67.8

178.7

282.6

742.1

-1,686.6

2,363.5

-928.7

1,801.5

-1,137.2

Source: National Bank of Serbia

Net foreign direct investment declined by 24% from 2008 to 2009 and by more than
50% over the two years period 2008-2010. A temporary recovery of 2011 – when the
net FDI returned to its pre-crisis level – was followed by a new record fall: at the end
of 2012 the net FDI stood at around 12.7% of its 2008 level. The main factor driving
the change in the net FDI was the decline of equity capital: in 2008 foreign investors’
investment in the Serbian firms increased by EUR 1.3 billion, in 2012 an outflow of
capital amounted to around EUR 580 million.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Table 18 - Republic of Serbia: Financial Account, 2011 (in million EUR)

III. FINANCIAL ACCOUNT

2. Portfolio investment - net

2.1. Assets (claims)

2.1.1. Equity securities

2.1.2. Debt securities

2.1.3. Financial derivatives

2.2. Liabilities

2.2.1. Equity securities

2.2.2. Debt securities

2.2.3. Financial derivatives

3. Other investments

3.2. Liabilities

3.2.2. Loans/3

3.2.2.1. National bank of Serbia

3.2.2.1.1. Long-term

-drawings

-repayments

3.2.2.1.2. Short-term

3.2.2.2. General government

3.2.2.2.1. Long-term

-drawings

-repayments

3.2.2.2.2. Short-term

Source: National Bank of Serbia

2,693.8

1,619.1

67.0

-4.4

45.1

26.3

1,552.1

49.5

1,503.6

-1.0

1,049.2

493.4

-394.6

44.8

44.8

51.7

-6.9

0.0

687.5

687.5

963.2

-275.7

0.0

The Macro-Financial Assistance is recorded under General government’s long-term
drawings, while the Serbian government total gross external borrowing is recorded
under General government long term drawings and under Portfolio investment, debt
securities (alongside private debt paper). The total external borrowing of the Serbian
government in 2011 amounted to 1.517 billion EUR.

The IMF loan is recorded under National Bank of Serbia’s long-term drawings
amounting to 51.5 million EUR of 2011.

Labour market: persistently high unemployment
Serbian population has been shrinking at a growing rate since 1992. From 1992 to
2011 population of Serbia declined by around 9.5% due to the negative natural
increase. 1992 was the first year when the number of deaths exceeded the number of
births and this gap has been ever growing since then. The activity rate declined
approximately in the same proportion (by seven percentage points between 2004 and
2011, from 66.4% to 59.4% of the total population) reflecting the aging of the
Serbian population.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

One of the features of the Serbian economy is the remarkably and persistently high
unemployment rate. Through the whole decade 2000-2010 the unemployment rate
had remained high despite a decline in population (which in the short run opens new
job vacancies as the number of retiring exceeds the number of new entrants on the
labour market) and strong GDP growth (which usually goes hand in hand with job
growth).

The following graph displays the evolution of unemployment from 2001 to 2012
encompassing the evaluation period 2010-2012:

Figure 11 Unemployment rate, Serbia, 2001-2012

Source: IMF

rising
As shown on the graph, Serbian economy underwent
in 2001-2005 the increase in the
unemployment. During the first phase,
unemployment rate was driven mainly by the privatization and restructuring of the
inefficient state-owned or collectively owned enterprises. Labour productivity growth
(see Figure 2 - Serbia's labour productivity growth, 2002-2008) exceeded real GDP
growth – 7.58% per year for the former, 5.25% per year for the latter – thus
economic expansion was accompanied by growing rate of unemployment. The
unemployment rate culminated at 21.8% in 2005.

two phases of

Over the next three years unemployment rate fell sharply, down to 14.7% in 2008.
Labour productivity fell in 2006 (by 1.6%) and stood at 4.5% per year in 2007 and
2008, much lower than its rate in 2002-2005 and below real GDP growth in 2006 and
2007.

The second phase of unemployment growth was initiated by the crisis: from 2008 to
2012 unemployment increased by 7.7 percentage points of GDP. During the MFA
evaluation period (2010-2012) unemployment stabilised at a high level: 20%-22.4%.
In 2009 and 2010 labour productivity growth (see graph below) exceeded sharply the
real GDP growth.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The following figure shows labour productivity growth rates in Serbia over the period
2008-2012:

Figure 12 - Serbia's labour productivity growth, 2008-2011

Source: Statistical Office of the Republic of Serbia, PwC calculations

Before the crisis Serbian labour productivity growth was among the highest of the
regional transition economies with a comparable level of capital per capita (see Figure
2 - Serbia's labour productivity growth, 2002-2008).

Upon the start of the crisis Serbian economy experienced a slowdown in labour
productivity growth. The average labour productivity growth represented 2.6% in
2008-2011 against an average of 5.5% over the period 2002-2007. Only in 2010 did
the Serbian labour productivity grow in line with its pre-crisis trend.

MFA macroeconomic impact potential
The year 2011 – the MFA disbursement year – was the best year so far in terms of
GDP growth since the outbreak of the crisis (given that 2013 figure corresponds to the
first quarter). However, given its relative volume (0.32% of GDP), the MFA loan is
unlikely to have produced a significant impact on the main macroeconomic aggregates
of Serbia. As far as the main macroeconomic aggregates are concerned, there is no
break in series – either adverse or favourable – that could be meaningfully attributed
to the MFA or in which an MFA contribution could be detected or implied analytically.

From a qualitative point of view, although the peak of the crisis of 2009 is behind the
Serbian economy, its position is fragile due to numerous risks (exchange rate shock,
external trade shock, sharp and sudden capital outflows) and challenges (widening
fiscal deficit, growing public debt, slow GDP growth). Thus, IMF and MFA programmes
were not followed by a favourable change in macroeconomic trends.

in spite of persistently mediocre macroeconomic perspectives, one
However,
qualitative achievement of the MFA and the IMF was to prevent the Serbian
economy from slipping into a major economic crisis that was not excluded in
2009-2010. This has been done through the direct financial support as well as through
the signalling to private actors about the IMF and the EU intention to offer to Serbia a
financial safety net in case risks would have materialized.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Counterfactual analysis
This section presents an assessment of
the Macro-Financial
Assistance (MFA) on the macroeconomic stabilisation of Serbia. In doing so, it seeks to
answer the question of how the macroeconomic situation of Serbia would have
evolved without the support of the MFA – the Counterfactual Analysis. The description
of the macroeconomic outcomes relies on indicators whose values are estimated on
the assumption that the MFA was not granted.

impact of

the net

The MFA was part of the financial assistance package provided along with the IMF.
Thus, the net macroeconomic impact is assessed both for the MFA alone (in 2011) and
for the MFA jointly with the IMF (in 2011). In addition, and for the sake of
completeness, the impact of the IMF financial assistance is assessed for 2010.

From the structured interviews we understood that the MFA was a priori expected to
make a difference to the Serbian economy even if to a small extent, since when it was
disbursed in July 2011, the Serbian government had fewer sources to borrow from
than today. In 2011, when the MFA funds were disbursed, the global financial crisis
was ongoing, financial conditions improved only in 2012 and the MFA could actually
have been more needed in 2011 than in 2009.

To assess the possible impact of the MFA on the Serbian economy, we need to take
into account the channels through which the MFA and the IMF loans aimed at
impacting the economy. The MFA funds had been disbursed on the foreign currency
account of the National Bank of Serbia (NBS), which then transferred an equivalent
amount in Serbian Dinars (RSD) to the Treasury, as and when requested by the line
ministries, so that these funds could be used for budgetary purposes.

Therefore, the MFA is expected to impact the main macroeconomic indicators (GDP,
consumption, investment) through the fiscal balance channel; counterfactually, an
absence of the MFA would have led the Serbian government to seek for alternative
sources of funding or to cut the public expenditure.

In contrast to the MFA, the IMF loans were used exclusively to increase the foreign
currency reserves of the NBS; this was confirmed during our discussion with the NBS.
Thus,
the economy and its main
aggregates through the current account adjustment required to balance the worsening
of the capital account balance of the fall in the volume of the FX reserves of the NBS.

the IMF loans would impact

the absence of

According to structured interviews, at the time when the Stand-By Arrangement was
negotiated with the IMF – December 2008, January 2009 – a precautionary SBA made
sense: foreign currency reserves of the National Bank of Serbia were relatively high,
but the country’s political situation was difficult due to fragmentation. The upgrade to
exceptional access – in March 2009 – was undertaken partly because of the fiscal
deficit, the budget deemed unrealistic, a huge increase in pensions in 2008 (30-40
billions more, after years of strong growth and when crisis was not foreseen) and the
export drop.

Relative weight of the MFA and IMF funding
Before assessing its possible impact on different macroeconomic indicators, it is
important to give the order of magnitude of the MFA and IMF funds in order to judge
their relative importance for the Serbian economy:

November 2013 65

Ex Post Evaluation of the Macro-Financial Assistance to Serbia







The EUR 100 million of Macro-Financial Assistance was 6.6% of the total
general government gross external borrowing in 2011 which stood at
1.517 billion EUR10.

The Gross Domestic Product of Serbia in 201111 stood at around EUR 31.45
billion, therefore the MFA represented 0.32% of the Serbian GDP.

The fiscal deficit of Serbia in 2011 stood at EUR 1,130 million, therefore the
MFA funds covered 8.85% of the fiscal deficit.

These purely factual quantitative comparisons give a preliminary insight into the
possible magnitude of impact of the MFA on different macroeconomic indicators.

Similarly, we provide the order of magnitude of the IMF funds for 2010 and 2011
(years when the IMF assistance was made available):

 At the beginning of 2010, foreign currency reserves of the NBS stood at
around EUR 10.6 billion. During this year the foreign currency reserves
declined by around EUR 600 million, while the total IMF assistance
represented an inflow of EUR 344 million. The NBS has been mandated to
maintain its foreign exchange (FX) reserves at the level of at least six months
is considered “free”. From
of imports, all FX reserves in excess of this level
2009 to 2010, the ratio of FX reserves to the months of imports of goods and
services went from 9.5 to 8.2, while the “free” reserves declined from EUR 3.9
billion at the beginning of 2010 to EUR 2.68 billion by the 31 December of
2010. The IMF financial assistance represented 28% of the absolute value of
the change in the “free reserves” and 57.3% of the absolute value of the
change in the total foreign currency reserves.



In 2011, foreign currency reserves of the NBS stood at around EUR 10 billion
at the beginning of the year and EUR 12.1 billion by the end of the year,
covering 8.2 months of imports at the beginning of the year and 8.7 months of
imports at the end of the year. “Free” reserves increased by EUR 1,061 million.
The IMF assistance in 2011 represented EUR 51.7 million. Thus, the IMF
assistance represented 2.5% of the increase in the total FX reserves of
the NBS for that year and around 4.9% of the change in its “free”
reserves.

In order to assess the impact of the MFA loan and the IMF loans on the Serbian
economy, this counterfactual analysis simulates what would have happened if the MFA
and/or the IMF had not been awarded. In doing so, we are required to make
assumptions about the actions of the Government of Serbia to the shortfall of EUR 100
million if the MFA did not exist or had not been awarded. Thus, in our counterfactual
analysis we examine two main counterfactual scenarios:

10 Public Finance Bulletin, April 2012, Ministry of Finance and Economy
11 RSD 3,208 billion Converted at the average RSD/EUR exchange rate of 102 Dinars
for one Euro.

November 2013 66

Ex Post Evaluation of the Macro-Financial Assistance to Serbia





In the first scenario, the MFA was not provided at all, while the IMF
financial assistance was provided in full for both 2010 and 2011. This is the “no
MFA” (or IMF only) counterfactual set-up which allows the inferring of the
macroeconomic added value of the MFA.

In the second scenario, neither the MFA assistance nor the IMF
assistance was provided (neither for 2010 nor in 2011 for the latter). This is
the “no IMF, no MFA” counterfactual scenario which allows the inferring of the
added value of the IMF and MFA assistance combined.

These are the two main counterfactual set-ups matching the Terms of Reference and
provide the answers to the two key questions: 1) what would have happened if only
the IMF assistance was granted, but not the MFA and 2) what would have happened if
neither the IMF nor the MFA were granted.

1st counterfactual scenario: no MFA in 2011
In this scenario we examine what would have happened had the MFA not existed (or
not been awarded). This corresponds to the loan of EUR 100 million not being
disbursed in July 2011. We also assume that the IMF loans are fully disbursed through
the period 2009-2011 (as it occurred in reality) so as to find out the effect of the MFA
separately from the IMF financial assistance.

The absence of the MFA funds would have immediately and directly impacted the
economy through two channels:

 A need for alternative source of financing the portion of the budget deficit

equivalent to the volume of MFA funds



Lower capital account surplus and i) either the corresponding reduction of the
current account deficit, or ii) the substitution within the capital account of the
MFA loan by another source of external funding, or iii) the mix of the previous

The outcomes of this counterfactual set-up are therefore dependent on the actions
that Serbian authorities would have taken in absence of the MFA. We assume that had
the MFA not existed, the authorities had three possibilities – mentioned and validated
through the interviews conducted with Serbian stakeholders – to cover
the
corresponding shortfall of funds:

 Borrow domestically (from domestic banks)
 Borrow abroad (on capital markets or from foreign banks)
 Cut budget expenditures by a corresponding amount


Increase taxation (more specifically the VAT)

In order to assess which action the Serbian government would have been the most
likely to take, we submitted this question to the participants of the Delphi.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The Delphi analysis gave the following probabilities:

Serbian government action

Lowest value

Highest value

Average

Increased VAT

Decreased public expenditure

Borrowed more from the Domestic banks

Borrowed more abroad (from the banks or
through sovereign debt emission)

0

0

25

0

50

50

100

90

12%

9%

43%

37%

Thus, borrowing from the domestic banks is the most probable hypothesis, followed by
borrowing abroad, while increase in VAT and decrease in public expenditure were
deemed highly improbable by the Delphi participants. This is in line with the findings
of our structured interviews where the respondents were overwhelmingly convinced
that in absence of the MFA loan the Serbian government would have borrowed from
domestic banks or abroad. By contrast, a decrease in public expenditures was deemed
highly improbable, especially in a pre-electoral period. According to the IMF, proximity
of elections is likely to be associated with a lax fiscal stance. In addition, the financing
constraint relaxed around mid-2009 with growing demand for domestic T-bills, then
with Serbia’s issuance of Eurobond in the second half of 2011 and in 2012. Thus, it is
highly improbable that the Serbian government would have increased the VAT or
decreased the expenditures by the equivalent of EUR 100 million few months before
the Parliamentary and Presidential elections, especially given that, according to the
IMF, failure to meet fiscal targets set by the fiscal responsibility legislation was largely
due to expenditure overruns.

Thus, we keep two baseline scenarios for our counterfactual analysis: in one scenario
the government compensates the absence of the MFA loan by borrowing from
domestic banks, in the second one – the government borrows abroad.

Counterfactual scenario A: government borrows from domestic
banks
In this counterfactual scenario, the absence of the MFA loan of EUR 100 million is
compensated for by the Serbian government borrowing an equivalent amount from
domestic banks in 2011. During the structured interviews with various stakeholders,
including representatives from the Serbian government, domestic borrowing was
considered the most plausible hypothesis.

Faced with increased credit demand from the government domestic banks can
increase their balance sheet exposure to the Serbian public debt or reduce the credit
to the private agents (crowding out). In the first case scenario, the adjustment occurs
through a substitution within the capital account of government borrowing by private
borrowing (domestic banks borrow additional funds abroad to match the increased
lending to the government).

In reaction to the extension of the credit to the government in this scenario we
consider it realistic that some crowding out of the private borrowing occurs. It is
empirically different to estimate the extent of crowding out characteristic to the
Serbian economy. Thus, we make a hypothesis that EUR 100 million of additional
borrowing from the government is half compensated by additional borrowing abroad
and half compensated by a corresponding reduction in lending to private agents. It is
plausible that crowding out, if it would have occurred, would have been smoothed over

November 2013 68

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

the following years. Thus, the impact on macroeconomic aggregates in this scenario is
the present value of the impact on Serbian economy over few following years rather
than an impact in 2011 only.

The following table shows the corresponding results for different key macroeconomic
indicators:

Table 19 - Effects of no MFA, 2011 under the assumption of domestic borrowing

Macroeconomic
indicator

Percentage
change

Actual value in
% of GDP

Counterfactual
value in % of
actual GDP

Change in
percentage
points of the
actual GDP

Gross Domestic
Product (at market
value)

-0.05%

100

Consumption

-0.068%

-0.04%

-0.23%

-0.23%

Investment

Current Account
balance

Capital Account
balance

Nominal exchange
rate

Source: PwC computations

0.0056%

-

76.96

20.14

-9.16

9.16

99.95

76.91

20.14

-9.14

9.14

-

-0.05

-0.05

-0.00

+0.02

-0.02

-

In this scenario, 9.8% of the fiscal deficit (i.e. 0.35% of GDP) which were previously
covered by the MFA has to be financed from other source.

This counterfactual scenario indicates that had the Serbian government borrowed EUR
100 million from domestic banks, the Gross Domestic Product would have been
up to 0.05% lower.

the adjustment goes through the contraction of

Please note that this table does not describe the true counterfactual impact of no-MFA
on the GDP. It sets the upper bound of the impact as it refers to one specific
hypothesis that half the additional borrowing goes through domestic banks which
subsequently reduce the volume of lending to the private sector. Our model shows
that half of
investment and
consumption (or increase of savings). In reality, it is very likely that the borrowing
would have been more from abroad or that the domestic banks would borrow abroad a
more important portion of the additional
lending to the government instead of
contracting the private sector lending. In this case the impact on GDP would have
been lower indeed. However, under the hypothesis of government borrowing from the
domestic banks that do not increase their foreign borrowing by the full amount of the
additional lending to the government, there is indeed a subtraction of funds from the
private sector: government has to cover the deficit; it borrows from domestic banks
lending to private sector by 50 million which are
which reduce the amount of
subtracted from consumption and investment. The global impact on GDP under this
hypothesis would have been -0.05. The MFA funds – EUR 100 million – represented
0.32% of Serbian GDP over 2011, so the magnitude of the impact is plausible.

In the crisis and near-recessionary context, credit rationing is stronger than under
normal circumstances. Thus, if the government was led to borrow an equivalent of
0.32% of GDP from domestic banks, it would have reduced the volume of funds

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

available for domestic borrowing by private agents. Increased public borrowing would
at least partly evict private borrowing from households and firms resulting in a
decrease in consumption and investment (the figures of the counterfactual scenario
confirm this). This, in turn, would have produced the corresponding adjustment
through the reduction in the current account deficit (through a reduction in imports).
Given that in 2011 the Serbian economy was still recovering from the 2009 recession,
GDP growth rate was weak and, in particular, well below its 2000s average, the
multiplicative effects of lower investment and lower consumption would have been
plausibly strong.

Thus, the negative impact of “no MFA” is explained by the “crowding-out effect” of
private borrowing by the public borrowing (i.e. reduction in the volume of credit to the
private sector) and the multiplicative effects of reduction in the volume of credit on
business activity and private consumption.

This scenario sets an upper bound on the possible impact of MFA on GDP and other
macroeconomic indicators. Indeed, this scenario relies on the assumption that half of
the balance of payments adjustment following the absence of the MFA is carried out
through the current account deficit contraction. In other words, the government
borrows the entire amount equivalent to the amount of the MFA from domestic banks
– Serbian banks and foreign banks’ affiliates in Serbia – and these banks do not
increase their borrowing abroad by the full amount of what
they lend to the
government. Half of the increase in the volume of credit to the Serbian government is
equivalent to the decrease in the volume of credit to the private sector. The monetary
survey of the NBS shows that the credit growth contracted sharply from 2010 to 2011
(the volume of credit to households and firms) and overall the volume of credit grew
by around RSD 87 billon. The MFA funds represented around RSD 10.2 billion
(11.78%) of the growth in loans to households and firms. Thus, an eviction by the
government borrowing would induce a slowdown in credit growth with repercussions
on the real sector. Furthermore, the actual volume of credit for households and firms
declined from July to October 2011, eviction by government borrowing during the
same period would accentuate this decline.

The public debt of Serbia stood at RSD 1,513,796 million by the end of 201112.
Considering that the proportion of debt in foreign currency represented 83.8% of the
Serbian public debt on that year, a Dinar depreciation – which we assume would be
similar across all the foreign currencies – of 0.00056% would increase the stock of
debt outstanding by RSD 7,104,942 (not counting future interest payments). Thus, in
the event of realization of this scenario the substitution of the private domestic debt to
the MFA debt would have induced an increase in public debt by around RSD 7.1 million
due to the exchange rate shift.

Counterfactual scenario B: government borrows on capital
markets or from foreign banks abroad
An alternative hypothesis regarding the coverage of the EUR 100 million in fiscal
revenue evoked by Serbian policy makers is that the Serbian government would have
borrowed abroad. In this counterfactual scenario, the short-run impact of the MFA on
GDP, as well as on private consumption and investment levels is reduced to zero or
near-zero because the adjustment goes entirely through the capital and financial
account with the substitution of the MFA loan by other loans. Domestic savings do not
have to adjust and the volume of credit and of private borrowing follows the same
patterns as in the actual evolution. The effects on other macroeconomic indicators in
this scenario would equally stand at zero or near zero.

12 Source: Republic of Serbia, Ministry of Finance, Public Finance Bulletin, December
2011

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The only immediate impact concerns the increase in the present value of the stream of
future debt payments as foreign private debt – which would have been likely to be
more expensive – would have been substituted to the MFA debt. The impact on debt
and fiscal sustainability is covered in the corresponding section.

A sub-scenario where the government would have borrowed from domestic banks
which in turn, instead of reducing the volume of lending, borrow an equivalent amount
from abroad would yield close-to-identical results as far as the macroeconomic
indicators are concerned: there is no impact on investment and consumption because
the volume of credit is unchanged. The stock of public external debt would have
decreased by EUR 100 million compared to the actual situation13, while the stock of
private external debt would have increased by the same amount.

During structured interviews with World Bank representatives the latter evoked a
possibility of the World Bank increasing the volume of its budget support loans if the
MFA had not been granted. The counterfactual effects of the realization of this sub-
scenario for the level of GDP, consumption and investment would have been identical
to the counterfactual effects of the government borrowing abroad (i.e. zero or near-
zero). The only difference resides in that the terms and conditions of World Bank loans
would have differed from that of the commercial loans. Lending conditions associated
with the budget support loans from the World Bank would have been close to that
associated to the MFA, leaving the macroeconomic aggregates identical or almost
identical to the actual figures.

the counterfactual

Assessment of
macroeconomic stabilisation
The counterfactual analysis presented in the previous paragraphs incorporates two
counterfactual scenarios which differ by the authorities’ action aimed at covering the
shortfall of EUR 100 million as no MFA is awarded. These two scenarios give a range of
counterfactual values of the macroeconomic indicators of interest.

the MFA on the Serbian

impact of

In the absence of the MFA, the GDP would have been expected to be between
0% and 0.05% lower than its actual
level. Similarly, consumption would be
between 0% and 0.05% lower and investment between 0% and 0.04% lower than in
reality.

The two scenarios above assume that each response from the government would have
relied upon only one alternative source of funding. Therefore, one could argue that the
government’s response would have involved mixed sources of funding, for instance, by
covering the EUR 100 million by borrowing 50% of the sum abroad and 50%
domestically. A hypothetical set of n scenarios, each with a different mix of alternative
funding solutions, would generate a corresponding set of values of macroeconomic
indicators.

In evaluating the counterfactual effects of the absence of the MFA we make a
restrictive assumption that all of the effects will take place over the same year (2011).
This assumption is likely to overestimate the impact of the MFA. However, the
counterfactual impact on GDP, consumption and investment smoothed over the next
few years and further on is difficult to estimate non-speculatively given that not all the
required data is available (and in particular none is available after 2012).

13 The stock of public debt would have been unchanged, with simply EUR 100 million
of internal debt replacing the same amount of external debt (MFA).

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As an overall conclusion, we find a probable non-zero impact of the MFA loan on the
Serbian economy and on the macroeconomic stabilisation of Serbia. However, this
impact is likely to have been limited. The only scenario where the MFA would have
made a difference with respect to alternative means of covering the corresponding
fiscal deficit is probably the comparison with the fiscal expenditure cuts which in a low
the
growth context would have aggravated coming 2012 recession. However,
realization of this scenario had been deemed highly improbable by the participants of
the Delphi analysis and the Serbian public officials during the structured interviews.

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2nd counterfactual scenario: no MFA and no IMF Funds
In this counterfactual set-up it is assumed that the IMF assistance was not provided in
2010 and 2011 and the MFA was not provided in 2011. Of course, the 2010
counterfactual analysis applies solely to the IMF financial assistance, as no MFA funds
were disbursed in 2010.

In performing this analysis we, again, like in the previous set-up take into account the
different options Serbian authorities could have used in order to compensate for the
shortfall in fiscal revenue due to the absence of the MFA and the shortfall of foreign
reserves due to the absence of the IMF financial assistance.

The National Bank of Serbia has an informal target of maintaining a level of foreign
currency reserves sufficient to cover six months of imports with all the FX reserves
beyond this level are considered ‘free’.

Since variation in the foreign currency reserves of the NBS are part of the capital and
financial account and used to settle the payment of imports, a decline in the volume of
the foreign currency reserves would require either a shrinking of the current account
deficit (-6.8% of GDP in 2010; -9.16% of GDP in 2011) by a comparable amount or a
corresponding decline in the reserves assets (within the capital and financial account).

Thus, the counterfactual modelling of what would have happened in absence of the
IMF financial assistance relies on two main hypotheses for possible reactions from the
Serbian authorities (the NBS):





The NBS simply lets the foreign currency reserve be lower. Given the
magnitude of the IMF assistance in 2010 and 2011, this would have an impact
on the volume of the “free” reserves without affecting the six-month coverage
of imports. The adjustment takes place within the capital and financial account.

In the case of absence of IMF financial assistance, the National Bank of Serbia
would have sought to maintain its foreign currency reserves at the same level
as it would be with the IMF support and the subsequent adjustment would
have been accommodated through the current account
(through
reduction in imports).

We requested an opinion of the Serbian stakeholders in order to assess which option
would have been more likely to be chosen by the NBS between the two presented
above. The responses indicate that between 40% and 80% of the adjustment would
have been carried out through the first channel (decline in the FX reserves) and
between 20% and 60% through the second channel (current account adjustment). We
therefore adopt the hypothesis that the most likely option would be a mixed policy
response with 60% of the adjustment (around EUR 206 million of the total EUR 344
million) accommodated through the decline in the FX reserves and 40% (around EUR
138 million) of the adjustment accommodated through the current account deficit
reduction.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

2010
In 2010 only the IMF assistance, of course,
counterfactual effects are present.

is relevant, thus only the no-IMF

The table below shows the counterfactual effects of the absence of the IMF financial
the Serbian
assistance on different macroeconomic aggregates, assuming that
the
authorities would have chosen the policy option described above (60% of
adjustment accommodated through FX decline and 40% through the current account
deficit reduction):

Table 20 - Effects of no IMF, 2010

Macroeconomic
indicator

Percentage
change

Actual value in
% of GDP

Counterfactual
value
actual GDP

in % of

in

Change
percentage
points of the
actual GDP

Gross Domestic
Product (at market
value)

-0.31%

100

Consumption

-0.29%

80.16

Investment

-0.212%

17.24

Current Account
balance

Capital Account
balance

Nominal exchange
rate

0.176%

-0.176%

-6.80

6.80

0.0014%

-

Source: PwC computations

99.24

79.93

17.02

-6.62

6.62

-

+0.76

+0.23

+0.22

-0.18

+0.18

-

The counterfactual analysis indicates that Serbian GDP would have been up to
0.306% lower.

We assume that up to 40% of the adjustment would have been accommodated by a
current account adjustment. The absence of the IMF loan is equivalent to lower foreign
currency reserves and a worsening of the capital account balance which would not be
compensated by any alternative inflow of private capital or public borrowing abroad.
Part of it – 60% – is accounted for by the decline of the FX reserves of the NBS. For
the remaining 40% the current account would have had to adjust. This adjustment
would have gone through the fall
in consumption and investment: the volume of
imports covered by the existing FX reserves is reduced, the average relative price of
imports increases, and the volume of imports falls. Nevertheless, the current account
adjustment would have occurred less in terms of prices (nominal or real exchange rate
depreciation of the Dinar), than in terms of quantities (fall
in Serbian domestic
demand). The reduction of the current account deficit would have been made through
reduction in imports with only slight depreciation. The NBS’s official stance regarding
Dinar exchange rate is the ‘managed float’ with interventions only to smooth excess
daily volatility. However, given the importance of the FX-denominated debt burden
and Serbian authorities’ commitment in 2010 to limit public debt growth and avoid
adverse effects of Dinar depreciation on private indebtedness, it is likely that most of
the adjustment would have gone through the fall in imports – after reduction in money
supply – with only limited Dinar depreciation.

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Another 60% of the adjustment would have been, by assumption, carried out through
the decline in the FX reserves of the NBS. Overall the IMF foreign currency reserve
assistance in 2010 – which amounted to around EUR 344 million – represented 3.45%
of the total NBS foreign currency reserves of the end of that year and . Alternatively,
by the end of 2010, IMF funds represented 12.8% of the foreign currency reserves’
volume in excess of the 6-months of imports criteria targeted by the NBS. Since 2006
and the switch to ‘managed float’, the NBS has not had any explicit exchange rate
target and intervenes on the market only to smooth daily excess volatility.
Nevertheless, given an important share of debt – private and public – denominated in
foreign currency, cheaper Dinar would mean a higher debt burden. Therefore, a
hypothesis of the Dinar nominal exchange rate that would be only incrementally lower
than the actual one seems to be plausible. Our results are in line with this hypothesis,
showing a very slight nominal depreciation of the Dinar along with a slight slowdown
of
inflation (leading overall to a limited real depreciation) in the counterfactual
scenario. Thus, had its foreign currency reserves been lower than the actual figure,
the National Bank of Serbia would have most plausibly both maintained higher interest
rates (in order to keep domestic prices in check) and kept higher foreign currency
reserves requirements for the domestic banks. This ceteris paribus would have
induced less domestic private lending, thus, both private consumption and private
investment would have been lower in the counterfactual scenario.

At the beginning of 2010, foreign currency reserves of the NBS stood at around EUR
10.6 billion and declined by around EUR 600 million. In this scenario the absence of
the IMF loan leads to the foreign exchange reserves depleting by further 206.4 million,
so the global decline of the NBS foreign currency reserves over the year would amount
to EUR 806.4 million. In this case, by the end of the year the foreign currency
reserves would have represented 8.4 months of imports. Therefore, the FX reserves
would have been well above the mandatory level. The “free” FX reserves would have
been reduced by EUR 206.4 million (the amount of the IMF support) and decline from
EUR 2,683 million to EUR 2,477 million.

impact on the private
Under this scenario there could also have been a potential
agents’ expectations regarding the Dinar nominal exchange rate and confidence
regarding the Serbian public sector ability to face its external obligations (with
subsequent increase in interest rates on the Serbian debt). However, even with
foreign exchange reserves lower by EUR 806.4 million (instead of EUR 600 million) the
FX reserves of the NBS would have nevertheless represented 426.3% of the monetary
base. Thus, tension – if any – on the Dinar nominal exchange rate arising from the
depletion of the “free” reserves by additional EUR 206.4 million would have most likely
been of a very modest scale and easy to counter through a hypothetical intervention
of the NBS.

2011
For that year we are considering a mix of policy options of the Serbian government (to
cover the absence of the MFA) and of the NBS (to cover the absence of the IMF
funds). Concerning the IMF funds we keep the hypothesis of 40% of the adjustment
settled through a current account deficit reduction and 60% of the adjustment carried
through a decline in the FX reserves.

Thus, we model two possible outcomes, which depend on the fiscal authority action to
cover a share of deficit that would not have been covered by the MFA any more.

As in the previous “no MFA” scenario, the government had an option of either
borrowing abroad or borrowing from domestic banks (as in the “no MFA” scenario we
eliminate the options of raising Vat and cutting fiscal expenditures for the reasons
explained in that scenario).

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Below we present the counterfactual effects of the two scenarios:

Counterfactual scenario C: government borrows from domestic
banks
This counterfactual scenario mimics the settings of the scenario A – the MFA not
awarded in 2011 – with the only difference being that this scenario assumes that IMF
financial assistance for this year is not awarded either. The table below shows the
counterfactual
levels of macroeconomic indicators for this scenario as compared to
their actual values:

Table 21 - Effects of no MFA, no IMF, 2011; government borrows domestically

Macroeconomic
indicator

Percentage
change

Actual value in
% of GDP

Counterfactual
value
actual GDP

in % of

Change in
percentage
points of the
actual GDP

Gross Domestic
Product (at market
value)

-0.05

Consumption

-0.071%

-0.04%

-0.23%

-0.23%

Investment

Current Account
balance

Capital Account
balance

Nominal exchange
rate

Source: PwC computations

0.0058%

-

100

76.96

20.14

-9.16

9.16

99.95

76.91

20.13

-9.14

9.14

-

-0.05

-0.05

-0.01

+0.02

-0.02

-

The counterfactual analysis indicates that the absence of the MFA and IMF support
would have induced a GDP 0.05% lower than the actual figure. The results match very
closely the results in the “no MFA” scenario for GDP and its different components
(private consumption, investment). The decline in capital account balance would be
slightly higher compared to the “no MFA” scenario given that now IMF funds are
subtracted from the capital account along with the MFA funds. The current account
balance adjusts accordingly. Consumption and investment decline slightly more than
in the “no MFA” scenario.

In comparison to the “no MFA” scenario, all changes stand as incremental. This is not
surprising: the IMF financial assistance to Serbia in 2011 amounted to around EUR 51
million. The hypothesis of 40% of the adjustment is done through the current account
means that the current account has to adjust for only EUR 20 million of the missing
IMF funds.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Counterfactual scenario D: government borrows abroad
In this counterfactual scenario neither IMF nor MFA assistance is awarded in 2011 and
the absence of the MFA is compensated entirely by the foreign borrowing while the
adjustment for the absence of the IMF funds is settled at 40% through the adjustment
in the current account and at 60% through the decline of the FX reserves of the NBS.
The changes in the macroeconomic indicators associated to the realization of this
counterfactual scenario are very close to zero and the counterfactual values of the
main macroeconomic aggregates are almost identical to the actual figures. This is due
to the fact that almost all the adjustment (for the MFA and the IMF funds) goes
through the substitution of one type of borrowing to another within the capital and
financial account. The current account adjustment accounts for only EUR 20 million
from EUR 151 million (EUR 51 million of the IMF and EUR 100 million of the MFA)
which is less than 14%. The absence of the MFA is fully compensated by foreign
borrowing (with the effects of the absence of the MFA thus annihilated), while the
effects of the non-existence of the IMF assistance are very small.

The increase in public debt – analyzed more extensively in the corresponding
subsection – would have corresponded to an increase in the public debt burden due to
the Dinar depreciation of the magnitude indicated in the scenarios A and B.

Overall,
in 2011 the absence of the IMF financial assistance would have likely
produced very negligible effects on most of the macroeconomic indicators as attested
by the results of the different counterfactual scenarios. The counterfactual effects of
the MFA and IMF absence only very slightly deviate from the counterfactual effects of
the MFA absence alone. The main explanatory factor is the limited size of the IMF loan
in 2011, both in absolute terms (around EUR 50 million, i.e. half of the MFA funds)
and in relative terms (0.45% of the foreign currency reserves of the National Bank of
Serbia).

By contrast, the effects of the IMF financial assistance in 2010 were economically
significant, but the total of the IMF loans for 2010 (around EUR 350 million) was 2.33
times higher than the amount of the MFA and IMF’2011 taken together (around EUR
150 million), and represented 3.3% of NBS’s foreign currency reserves.

Conclusion: the net impact of MFA and IMF funds on Serbian macroeconomic
stabilisation
Our counterfactual analysis shows that the contribution of the MFA loan to the
macroeconomic stabilization of the Serbian economy is likely to have been very
limited. For instance, in absence of the MFA, Serbian GDP would have been between
0% and 0.05% lower. This finding is consistent with the limited size of the MFA with
respect to the Serbian GDP.

The macroeconomic impact of the IMF financial assistance is likely to have been
substantial in 2010 and near-zero in 2011. For instance, in 2010 the absence of
the IMF financial assistance Serbian GDP would be around 0.3% lower. The impact is
plausible given the size of the IMF financial assistance that year (around 1% of
Serbia’s GDP). By contrast, in 2011, the macroeconomic impact of the IMF funds was
close to zero, in line with the relative importance of IMF funds (only EUR 51 million,
half of the amount of the MFA loan).

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

MFA impact on structural reforms
The Memorandum of Understanding of the Macro-Financial Assistance (MFA) to Serbia
contained two policy conditions as a pre-requisite to the disbursement of the first
instalment:

 Government approval of

the Budget System Law amendments on fiscal

responsibility including the establishment of quantitative fiscal rules, and



Provisions foreseen in the field of Public Internal Financial Control (PIFC) as a
follow-up to the policy paper approved in November 2009.

In October 2010, the National Assembly of the Republic of Serbia made effective the
Law on amendments and addenda to the Budget System Law. The latter introduced a
set of quantitative fiscal rules and transposed into legislations a set of measures
related to the Public Internal Financial Control from the policy paper approved in
November 2009. Thus, the policy conditions of the MFA MoU were formally fulfilled
prior to the disbursement of the budget support funds in July 2011.

This section of the report investigates and analyses the legislative and policy changes
which took place in the framework of the MFA.

The evaluation criteria used for the assessment of the MFA impact on the structural
reforms are the relevance (to what extent the structural conditionalities specified in
the MoU matched the needs of the Serbian economy), effectiveness (to what extent
have the structural conditionalities specified in the MoU been implemented) and
efficiency (what was the impact of the implementation of these conditionalities on the
short, medium and long term fiscal position of Serbia).

This section is divided into two subsections.

The first section investigates the potential – gross – effects of the MFA policy
conditions. This analysis is based on the literature review and incorporates the output
of
the
the International Financial
representatives of
Institutions.

conducted with the Serbian stakeholders,

the European Commission and of

the structured interviews

The second section is dedicated to the “counterfactual” analysis of the structural
effects of the MFA policy conditions. There we address the question of whether the
conditionalities specified in the MFA MoU would have been put in place without the
MFA. This analysis is based on the output of the Delphi questionnaire.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Gross structural effects of the MFA: structural reforms in 2010-2012

The subsection is divided into two parts – one per policy condition. Each part, in its
turn, is organised as follows:





first we present the legislative features of the Law on amendments and
addenda to the Budget System Law introducing quantitative fiscal rules and
matching the corresponding policy condition;

second, we provide an overview of the extent to which the fiscal policies
complied with these legislative changes (i.e. to what extent rules put in place
have been effectively applied)

These two parts allow us assessing the effectiveness of the fulfilment of the policy MFA
conditions and its potential – “gross” – efficiency and impact on the Serbian economy.



third, we analyse the policy conditions and their implementation, based in
particular on the structured interviews output

This part allows us analysing the specific policy condition as regards its design,
rationale and effectiveness.

Quantitative fiscal rules 2010-2012: laws, policies and analysis
This section is organised in three parts. In the first part, we present the legislative
changes made in line with the specific policy condition related to the quantitative fiscal
rules. In the second part, we follow the relevant macroeconomic developments and
policies. In the third part, we analyse the policy conditions, their relevance and design.

Laws
The article 15 of the Law on amendments and addenda to the Budget System Law
added two sections IIA and IIB with articles from 27a to 27j after the article 27 of the
Budget System Law.

The article 27g bears on the fiscal rules, specifying in particular







the target annual fiscal deficit of 1% of GDP in the medium term perspective

the general state level debt, excluding the liabilities incurred from restitution,
capped at 45% of GDP

a set of indexation rules for salaries of the employees in the public sector and
for pensions over the period 2011-2015

In the following dedicated subsections we review these three components one by one.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

-

Fiscal Deficit Rule

In order to reconcile the fiscal responsibility objective with the objective of supporting
economic growth in case of a downturn, the Fiscal Deficit Rule left a leeway for
counter-cyclical fiscal policy by allowing the fiscal deficit to exceed the target in case
the growth rate is below its potential medium rate. Thus, according to the Fiscal
Deficit Rule, the maximum fiscal deficit (in % of GDP) in any year is computed through
the following formula:

is the medium-term GDP growth;

where
is the medium-term deficit target; a
is the adjustment coefficient for the deficit deviation comprised between 0 and 1; b is
the correction factor for the growth deviation and which also takes values between 0
and 1.

Thus, the fiscal deficit in any given year should be equal to the previous year deficit
corrected for the deviation of the previous year’s deficit from its medium-term target
and the deviation of that year GDP growth from the medium-term average.

For 2011-2013 the Amendments and addenda to the Budget System Law set the
adjustment coefficients at the level of a=0.3 and b=0.4. The text also states that the
potential GDP growth rate is expected to reach 4%. From 2014 the values of the two
coefficients have to be set by the Fiscal Council for the period of three years at the
minimum.

The article 27g also specified the accounting of investment in the computation of the
fiscal deficit:





The portion of the total public investments that exceeds 4% of GDP in 2011
and 5% over
the period 2012 to 2015 was excluded from the fiscal
expenditures.

The portion of public investments above the highest levels, by which the
increase of the consolidated general state deficit is allowed in accordance with
the general fiscal rule, must not exceed GDP 2%.

The legislation specified that if the Fiscal Deficit Rule were to be breached the
government should present an action plan in order to bring the deficit within the limits
set by the fiscal rule. The Law appoints the Fiscal Council as a supervisory authority
for the respect of the Deficit Fiscal Rule.

- Public debt cap at 45% of GDP

As a corollary of the medium-term fiscal deficit target in the Fiscal Deficit Rule, the
legislation specified a quantitative target for the public debt, capped at 45% of GDP.
According to the Budget System Law, this 45% of GDP target applies to the general
government debt, which in addition to the public debt itself includes the total debt of
social insurance funds and local governments. Both internal and external public debts
are covered by the rule.

According to the representatives of the Ministry of Finance and Economy involved in its
design, the target of 45% was fixed as a thumb rule of the difference between the
60% debt-to-GDP ratio – set by the Maastricht criteria – and the volume of liabilities,

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

created by the Law on property restitution and compensation, amounting to
approximately 15% of GDP.

The Law on property restitution and compensation14, made effective as of 6th of
October 2011, recognizes as legal liability of the Serbian government towards legal
entities or individuals the payments – in-kind or in cash – to be made to the latter in
compensation of the private property expropriations by the State having occurred
after 1945.

-

Indexation of salaries of public sector employees and of pensions

Along with the Fiscal Deficit Rule and the public debt cap at 45% of GDP, the Law
introduced a semi-annual
indexation schedule for the salaries of the public sector
employees and for pensions. According to this schedule the salaries of the employees
in the public sector and pensions should have been increased as follows:



January 2011: by CPI growth over the previous 6 months

 April 2011: by CPI growth over the past 3 months + ½ of the actual GDP

growth over the past year (if growth above zero)

 October 2011: by CPI growth over the past 6 months

 April 2012: by CPI growth over the past 6 months+ ½ of the actual GDP

growth over the previous year (if growth above zero)

 October 2012: by CPI growth over the past 6 months

From 2013 to 2015, the volume of salaries was indexed on the CPI growth + ½ of
the actual GDP growth over the previous year, while average pensions over the
same period were indexed on the CPI growth + the GDP growth rate of more than 4%.

The fiscal rules regulating the growth of pensions and salaries were set to apply after
2015 until the share of pensions in GDP reaches 10%, and the share of salaries in GDP
reaches 8%.

Policies
In 2011 and in 2012 the actual fiscal deficit figures exceeded the targets set by the
Fiscal Deficit Rule. The table below shows the difference between the fiscal deficit as it
should have been based on the Fiscal Deficit Rule and the actual figure over the period
2010-2012. There is a modest but persistent discrepancy over the three years under
consideration: the actual deficit was consistently higher than it should have been.

14 The Restitution Law “regulates terms, method and procedure for the restitution of and compensation for
the property which was confiscated on the territory of the Republic of Serbia with the application of
regulations on agrarian reform, nationalisation, sequestration, and other regulations, on the basis of
nationalisation acts, after 9 March 1945, from natural persons and legal entities and transferred into all
people, national, state, social or cooperative property (hereinafter referred to as "property restitution").

The Law shall apply on the restitution of the property whose confiscation was the consequence of the
Holocaust on the territory which now forms the territory of the Republic of Serbia.”

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Figure 13 - Deficit Fiscal Rule-based vs. actual fiscal deficit

2010

2011

2012

Fiscal Deficit Rule components

 Actual GDP growth

 Medium term GDP growth

 a coefficient

 b coefficient

 Medium term deficit target

1%

4%

0.3

0.4

1%

1.6%

4%

0.3

0.4

1%

 Previous year deficit

4.5%

4.7%

“Rule vs. discretion”

Rule-based deficit

Actual deficit

Difference

Source: PwC computations

4.65%

4.70%

0.05%

4.55%

4.90%

0.35%

-2%

4%

0.3

0.4

1%

4.9%

6.13%

6.40%

0.27%

The breach of the Fiscal Deficit Rule (FDR) – albeit insignificant in the first year –
occurred over the whole period. In 2011-2012 it was driven by the increase in fiscal
expenditures which exceeded the corresponding increase in fiscal revenues. According
to the stakeholders interviewed, this differential growth is due, in particular, to the
electoral agenda of 2012 which fuelled politically motivated public expenditure
increases. In 2013 the IMF expects the fiscal deficit to exceed 8% of GDP against
5.62% given by the Fiscal Deficit Rule.

Similarly,
the debt-to-GDP ratio exceeded the 45% target set by the fiscal
responsibility framework in 2011 and 2012. The table below shows the difference
between the two:

Analysis
In a preamble to the analysis of the policy condition and its implications and effects for
the Serbian economy a clear distinction must be drawn: the MFA Memorandum of
Understanding requested a “Government approval of
the Budget System Law
amendments on fiscal responsibility including the establishment of quantitative fiscal
rules”. Thus, the MFA MoU targeted only the formal commitment by the Serbian
government to inscribe its fiscal policy into a rule-based framework (thus abandoning
discretion) and, on the operational level, to design a rule – which would fix the fiscal
deficit and public debt levels. Another policy condition, attached to the second MFA
tranche, required to submit this rule to the Parliament for transposition into law.
Therefore, the MFA MoU did not specify any particular shape for the quantitative fiscal
rules or any specific shape for the fiscal deficit rule nor any specific target. According
to the structured interviews with the DG ECFIN officials involved in the design of the
MFA, this was purposeful as there is no consensus – neither among the policymakers
nor between academic economists – on the design on the suitable fiscal rule. In fact,
rather than seeking to establish a specific rule or reaching a specific target, the policy
condition aimed rather at bringing the fiscal sustainability to front of the
economic policy priorities and let
the Serbian authorities choose specific
instruments to achieve it.

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The implementation of the FDR was formally effective – it was made into law in
2010, which made possible the disbursement of the first tranche of the MFA. However,
actual fiscal deficit consistently fell below the level established by the FDR. Similarly,
the 45% of GDP cap for the public debt was complied with only in the first year of its
legal existence, diverging sharply afterwards (in 2012 in particular). However, as will
be seen in the further sections, the breach of the cap was driven largely by the
currency depreciation (although the primary deficit contributed as well).

The majority of Serbian stakeholders interviewed considered the Fiscal Deficit Rule to
be a useful legislative development precisely because it established fiscal responsibility
as one of the major economic policy concerns. Even though the FDR has been
breached, it constitutes a fiscal anchor around which the economic policy discussion
revolves. This fiscal anchor character
the
government – in case of the breach of the FDR – to present an action plan specifying
how the fiscal deficit will be brought in line with the FDR constraint.

is reinforced by the obligation for

in pushing through the fiscal

According to the majority of stakeholders – both Serbian officials and International
Financial Institutions’ representatives – the Macro-Financial Assistance was politically
responsibility legislation. The fiscal
instrumental
responsibility framework was envisaged and discussed prior to the MFA MoU laid down
the corresponding conditionality. However, the MFA provided a political endorsement
to the legislation – making it easier to sell to the general public – thus making its
implementation likelier.

Thus, introduction of the quantitative fiscal rules – in the form of the Fiscal Deficit Rule
– was unanimously considered relevant for the Serbian economy, although the precise
configuration of the FDR was considered suboptimal (more on this in the case study on
rule-based fiscal framework).

The cap on the public debt at 45% of GDP has been a corollary of the Fiscal Deficit
Rule. A ceiling on the public debt – and the 45% target in particular – is logical with
respect to Serbia’s path towards EU-accession and the subsequent commitment to the
Maastricht criteria. In that sense, the debt-to-GDP target is relevant.

the major impact on the public debt

Nevertheless, from the effectiveness point of view, the debt-to-GDP ratio is to a much
lesser extent within reach of a fiscal policy than the fiscal deficit. The reason is that
that
is produced by the exchange rate
fluctuations, given the share of FX borrowing in the total borrowing of the Serbian
public sector and given the absence of any fixed exchange rate arrangement for the
Serbian currency. Thus, the deviation from the 45% debt-to-GDP cap – although
raising concern about public debt sustainability and external financial sustainability –
is only partly a by-product of a higher-than-expected fiscal deficit.

The introduction of the indexation rules for public sector wages and for pensions
sought to prevent discretionary increases in the public wage bill and pensions. Indeed,
the wage bill and the transfers to the Pension and Disability Insurance Fund (PIO)
weight heavily in the current expenditures and ultimately restrict the leeway for
capital expenditures. As a result, in 2012 net public investment in Serbia has been
below the emerging economies average according to the IMF.

The indexations rules introduced over the period 2010-2012 were effective, preventing
the deficit from deviating even further from its’ rule-based target. However, these
rules did not manage to contain growth of the salaries in the public sector because of
ad hoc remuneration mechanisms used by the government. The indexation rules,
however, helped moderating the weight of pensions in the economy. The latter

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decreased by around 1 percentage point of GDP over the period 2009-2013. Yet, their
level (14% of GDP) remains well above the target of 10% of GDP foreseen by the Law
on amendments and addenda to the Budget System Law (albeit without any specific
deadline).

The indexation rules bear a design flaw, underlined in the discussions with
to measure with
stakeholders.
consistency, especially in the Serbia’s context of
typically high inflation. Thus,
indexation on inflation induces an uncertainty about the effective cost for public
finances.

the past six months is difficult

Inflation over

In case of public sector wage indexation, in a context of large size of the public sector
in the total employment,
the former creates a danger of wage-inflation spiral
development. However, this risk is moderated by the fact that Serbia is a small open
economy and the major sources of inflation are the commodity imports (food, energy).

One beneficial effect from the fiscal rules that was evoked by the stakeholders is the
creation of the Fiscal Council. Although this was not part of the policy condition
pertaining to the introduction of the quantitative fiscal rules, creation of a supervisory
body with a mandate to observe the implementation of the fiscal responsibility
legislation (in cooperation with the IMF) reinforces the latter.

Public Internal Financial Control
The notion of “Public Internal Financial Control” was developed by the European
Commission in order to help the candidate countries to appropriate and put in place
the effective internal control systems.

The Memorandum of Understanding of the MFA included a policy condition requiring
Government approval of the provisions foreseen in the field of Public Internal Financial
Control (PIFC) as a follow-up to the policy paper (referred to as “PIFC Policy Paper”)
approved in November 2009 to be introduced into the Budget System Law.

The aim of this reform was to improve the public financial management and align it to
the European Union standards keeping in sight the pre-accession perspective.

This section is organised in three parts. In the first part, we present the plans related
to the PIFC reform as required by the MFA MoU. In the second part, we present the
actions undertaken by the Serbian authorities to fulfil the provisions of the PIFC
strategy. In the third part, we analyse the MFA policy condition related to the PIFC, its
relevance for Serbia and its design.

Strategy and plans
The measures related to the internal financial control in the public sector were outlined
in the Strategy for Development of Public Internal Financial Control in the Republic of
Serbia which was prepared in 2007 and submitted to the European Commission in
March 2009.

The PIFC Policy Paper presented an action plan for development of public internal
financial control with a list of measures/activities to be implemented, the bodies
responsible for the implementation of these measures/activities and deadlines for
completion.

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The action plan comprised three types of activities:

 Common activities: these activities involved a finalization of the PIFC strategy,
establishment of the Central Harmonisation Unit (which would be the key actor
of the internal financial control in the public sector) and the amendments to
the Budget System Law strengthening the PIFC framework. These
activities were expected to be completed by December 2010.

 Activities in the area of internal audit: these activities comprise establishment
of a decentralised internal audit function in the institutions receiving public
funds, training of the internal auditors in all relevant public sector institutions
and production of the Internal Audit handbook. Completion of these activities
was scheduled for December 2014.

 Activities related to implementation of public financial management and
control:
the activities involve appointment and FMC-focused training of
managers in all public sector institutions, production of an FMC handbook, and
adaptation of the legal framework and planning (including schedule). These
activities were expected to be completed by December 2014.

The MoU MFA did not require completion of all the activities described in the PIFC
Policy Paper for the disbursement of the first tranche of the MFA. It referred only to
Government approval of
the amendments to the Budget System Law for the
improvement of the legal framework on Pubic Internal Financial Control (mentioned
under Common activities above).

For the second tranche of the MFA, the MoU MFA laid out a policy condition requiring a
Parliament approval of the abovementioned amendments and a recruitment of the
Ministry of Finance and Economy internal auditor.

Institutional and legal reforms
PIFC Policy Paper were implemented through the vote by the Serbian Parliament of
the Law on amendments and addenda to the Budget System Law in October 2010.
Thus, the policy condition associated to the disbursement of the first tranche of the
MFA was fulfilled even beyond what was required.

The amendments to the Budget System Law related to the PIFC matters are contained
in the articles 31 to 34 of the Law on amendments and addenda to the Budget System
Law.

The article 31 of the Law adds to the field of the public internal financial control of the
Central Harmonisation Unit the prerogative of coordination of financial management,
control and internal audit.

The article 32 amends the article 81 of the Budget System Law by introducing the
responsibility of the Head of public funds beneficiary institution for maintenance and
regular updating of the financial management and control system. It was made
possible to transfer the operational execution of the task from the Head of the
institution to a competent person designated by the latter. The person in charge of the
task – either the Head of the institution or a person designated by the latter – was
henceforth given a duty of informing the Ministry of Finance and Economy on the

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adequacy of the functioning of the financial management and control system. The
Ministry, in its turn, had to define the reporting requirements.

The article 33 amends the article 82 of the Budget System Law requiring the public
funds beneficiaries to introduce internal audit. The article 33 introduces the
responsibility of the Head of public funds beneficiary institution for introducing and
ensuring adequate functioning of the internal audit.

The article 34 amends the article 83 of the Budget System Law. The tasks relative to
internal auditing, financial management and control are devolved to the Central
Harmonisation Unit within the Ministry of Finance and Economy. The article
enumerates the tasks covered by the activities of the CHU. The amendment takes into
account in full the recommendations made by the European Commission (DG Budget)
as for the internal audit responsibility. Thus, the latter is devolved to the Central
Harmonisation Unit of the Ministry of Finance and Economy.

In December 2011,
legislative framework on internal audit and on financial
management and control was further aligned with international standards. The Central
Harmonisation Unit (CHU) made some progress regarding training and certification of
internal auditors.

Analysis
The adoption by the Serbian Parliament of the Law on amendments and addenda to
the Budget System Law in October 2010 completes the common activities described in
the PIFC Policy Paper action plan. The PIFC strategy was finalized and agreed with
international stakeholders (DG Budget) in 2009. The Central Harmonization Unit was
established by the end of 2009. Thus, legal changes to be introduced in the Budget
System Law were the last activity required to complete the set of common activities
described in the action plan of the PIFC Policy Paper. These activities were importance
as they prepared the legislative background for the activities in the area of internal
audit and activities related to the implementation of public financial management and
framework specifying the duties and the
control. The establishment of a legal
responsibilities of the CHU and the public funds beneficiaries was a prerequisite to the
development of the internal audit function across the public sector. Thus, upon
completion of the former the establishment of the latter can be launched.

Thus, relevance of the PIFC-related MFA policy condition is unquestionable. The chief
importance of this policy condition is underlined by the fact that a similar condition
was included in the IPA budget support Memoranda of Understanding (the interaction
between IPA and the MFA is investigated in one of the later sections).

Outside the general considerations of good management and protection of public
funds, the structural reforms improving internal financial control in the public sector
were underpinned by two country-specific and related considerations. First, anti-
corruption policy has been of paramount importance for Serbia as it is for all transition
countries in the region. Second, the PIFC strategy is part of the general strategy of
adoption of EU standards in the field of public financial management and meeting the
requirements of harmonisation with Acquis Communautaire (defined in Chapter 32 of
accession negotiations). This alignment explains in particular the involvement of the
European Commission (DG BUDGET) in the drafting of the PIFC strategy document.

The fulfilment of the MFA policy condition was effective in a sense that legal changes
required were indeed made part of the Budget System Law. It also represented one
step further in the establishment of a full-fledged PIFC system along the lines of the

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action plan outlined in the PIFC strategy. Managerial accountability and separation of
the manager and accountant functions are better defined thanks to these legislative
developments. However, Serbia Progress Report 2012 of the European Commission
considers the action plan laid out in the PIFC Policy Paper largely outdated and
requiring a subsequent update. Further amendments to the Budget System Law are
also deemed necessary, especially with respect to provisions on Financial Management
and Control and inspection in order to bring economy, efficiency and effectiveness
issues in the forefront in the FMC alongside legality and regularity issues. Senior public
sector managers need better understanding of their specific tasks and duties in setting
up internal control systems and of the internal audit function within their institution.

Counterfactual analysis: net impact of the MFA on structural reforms

reforms in absence of

The counterfactual analysis seeks to determine what would have occurred in the field
of structural
the Macro-Financial Assistance. The main
to investigate these issues is the Delphi analysis which is
methodological
presented extensively in the Appendix A – Our approach to the Delphi
interviews,
along with the Delphi questionnaire submitted to the participants.

tool

The Delphi analysis involved ten participants. The table below provides a breakdown of
participants by institutional origin (for the sake of preserving anonymity the name of
the person/of the institution is not disclosed):

Table 22 - Delphi participants by institutional origin

Serbian government

International financial
institutions

Private sector

6

2

2

Number of
participants

Source: PwC

In this section we summarize and analyze the results of the Delphi analysis. The
results in full are presented in full in the Appendix A – Our approach to the Delphi
interviews.

1. How do you compare the current macroeconomic situation in Serbia, as

compared to mid-2010?

The majority of stakeholders (60%) consider that current macroeconomic situation of
Serbia is slightly better than it was at the moment of the signature of the MFA, while
30% consider that the situation worsened. This reflects the fact that mid-2010 was
close to the peak of the crisis (2009). So these contrasting opinions reflect the fact
that on the one hand Serbia pulled out of the crisis in 2010-2011, but that on the
other hand its macroeconomic situation deteriorated in 2012.

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2. In your judgement, what was the likelihood of a macroeconomic crisis in

Serbia in the years from 2009 to 2012?

Concerning the likelihood of the macroeconomic crisis, the vast majority of the
respondents (80%) agreed that it was likely or very likely in 2009.

The opinion divided over 2010, half of the respondents considering it unlikely, while
the other half considered it likely or very likely.

In 2011 and even more in 2012 the majority shifted again towards a higher likelihood
of the crisis, reflecting a worsening in the Serbian macroeconomic situation.

3. How do you assess the contribution of the European Union’s Macro-
financial Assistance (MFA) towards the macroeconomic stabilisation of
Serbia, when compared to the contributions from the IMF and the World
Bank?

The respondents
contribution of the MFA was minor.

considered by the overwhelming majority (90%)

that

the

4. How do you perceive the Macro-financial Assistance from the European

Union, where do you think it had the most impact?

All the respondents consider that the MFA was useful (80%) or necessary (20%). The
respondents considered that the MFA had some impact in terms of budget support and
assisting in the structural reforms. Its impact on the balance of payments was deemed
very limited.

5. How could the MFA have been more effective?

Concerning the MFA effectiveness, all the stakeholders considered that the volume of
funds could have been higher. This finding, however, does not mean that needs were
higher than what was computed by the IMF (the MFA volume was set based on these
computations), but that the MFA loan is cheaper than other types of government
borrowing.

Interestingly, all the respondents considered that the MFA should have comprised
more policy conditions. This is in line with the structured interviews finding that the
MFA provides a strong political backing for structural reforms. Thus, more policy
conditions would extend the support of the European Union over other structural
reforms.

The majority of respondents (around two thirds) consider that MFA loan disbursement
should have occurred earlier.

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6. In your opinion, if the Macro-financial Assistance (MFA) was not granted,

what could have happened?

The respondents consider that in absence of the MFA an extension of the IMF financial
support would have been unlikely. As for the conditionalities, the opinion divided over
whether the IMF policy conditions would have been stricter or easier.

For the World Bank, the question regarding the provision of additional budget support
divided the pool of respondents: half considered that it would have been the case and
half considered it unlikely or very unlikely. The same proportions prevail concerning a
possible shift of the World Bank funding from project-based to budget support
financial assistance in the event of an absence of the MFA.

The respondents did not expect any additional assistance from the other donors.

Importantly, the Delphi analysis also requested the experts’ assessment of the
probability attached to each alternative source of budget financing the Serbian
government would have resorted to in absence of the MFA loan.

7. If EUR 100 million from the MFA was not disbursed in July 2011, what, in
your opinion, were the probabilities of the following actions by the
Serbian government:

 VAT increase
 Decrease in public expenditure
 More borrowing from the domestic banks
 More borrowing from abroad (from the banks or through sovereign

debt emission)

The probabilities distributed in the following way for the four scenarios of the Serbian
government action:

Scenarios

Probability

- increase of the VAT

- decrease public expenditure

- borrowed more from the domestic banks

- borrowed more abroad (from the banks or
through sovereign debt emission)

12%

9%

43%

37%

The most likely scenarios of the Serbian government action in absence of the MFA loan
are borrowing from the domestic banks and borrowing abroad (43% and 37%
respectively). The increase in the VAT and the decrease in fiscal expenditures have
relatively low probabilities.

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8. How do you assess the progress of the structural reform as compared to

mid-2010?

The majority of stakeholders consider that structural reforms related to the fiscal
deficit and particularly to the public debt areas presented no improvement or even
made the situation worse.

Regarding the structural reform areas related to the Public Internal Financial Control
(PIFC) the majority of the respondents pointed out a slight improvement in all of the
fields under consideration.

With respect to the public expenditure management and treasury management all the
stakeholders point out a major (20%) or a slight (60-70%) improvement.

regarding tax revenue collection and general public administration the
Finally,
respondents’ opinion divided with half thinking there was a slight improvement and
half considering that no improvement occurred.

9. What contribution, if any, did the EU’s MFA have on reforms?

No one of the respondents considered that the MFA put any of the issues among the
structural reforms on top of the policy agenda. A minority of the respondents think
that the MFA helped speed up two types of reforms: the one related to the Public
Internal Financial Control and the one bearing on adopting the inspection law.

For the other structural reforms the majority of the respondents think that the MFA
helped influence the reform agenda without being instrumental for the implementation
of these reforms.

For the public debt-related structural reforms around two-third of the respondents
consider that the MFA had no effect in this area, while one third consider that the MFA
helped influence the reform agenda. Concerning structural reforms related to the fiscal
deficit (i.e. the fiscal rules) the respondents’ opinion divided is 50-50 between those
who consider that the MFA had no effect in this area and those thinking that it helped
influence the reform agenda.

10. At the time these reforms were proposed, how important do you think

they were to the national agenda?

The majority of respondents considered all the structural reforms relevant issues, with
fiscal deficit, public debt, public expenditure management, treasury management and
tax revenue collection being particularly important.

11. How would you rate the relative importance of these elements in bringing

about the reforms?

 Serbian government
 Macro-Financial Assistance

 World Bank

International Monetary Fund

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With respect to the public debt and fiscal deficit, the overwhelming majority of the
respondents consider that the IMF contribution was instrumental, although it the
Serbian government own initiative played an important role as well. By contrast, the
relative importance of the MFA in bringing about the reforms in these areas is
considered very limited.

Concerning the structural reforms pertaining to the public expenditure management,
treasury management, tax revenue collection and general public administration the
role of the MFA was more significant, but still junior to the Serbian government
initiative and the IMF involvement.

12. The area where the MFA really made a difference is the structural reforms

in the fields of:






Public Internal Financial Control (PIFC) strategy
Functioning of the Central Harmonisation Unit (CHU) of the Ministry of Finance
and Economy
Establishing decentralised internal audit units in direct beneficiaries of the
republic budget

 Certification scheme for “certified public sector internal auditor”



 Adopting an inspection law

Publishing the Financial Management and Controls (FMC) handbook
Training of managers of the FMC
Familiarisation training of managers in the public sector with PIFC systems

In these fields the relative importance of the MFA is often considered as the highest
among the four factors involved and in particular systematically rated higher than the
contribution of the IMF and the World Bank. This indicates that even though the
Serbian government awareness of the utility of structural reforms in these areas and
implementation, the
political will to enact them were the key to their successful
European Union involvement through the MFA was a major driver and of the main
success factors in pushing these reforms through. The number of
responses
concerning these fields was typically lower than for the other (deficit and debt in
particular) – or the share of the “No opinion” response was typically high – because of
the highly technical and specialized nature of these fields. However, those of the
participants who effectively gave their assessment have been directly involved in the
fields under consideration, which makes their opinion is particularly informed and
valuable.

13. Had the MFA operations not taken place, what do you think would have

happened to these reforms areas?

The logic of the responses to the previous question is confirmed by the responses to
the present one. For the fiscal deficit and the public debt in absence of the MFA policy
condition bearing on the introduction of the quantitative fiscal rules, conditionalities
related to the structural reforms in these two areas would have been added to the IMF
Stand-By Arrangement and would have been likely to figure on the Serbian
government policy agenda.

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Similarly the structural reforms in the field of public expenditure management,
treasury management, tax revenue collection and general public administration would
have been pushed through by the Serbian government and/or added to the IMF
conditionalities.

By contrast for the reforms related to the fields where the MFA role was deemed the
most important in the previous questions, the respondents did not expect any IMF or
World Bank involvement in absence of the MFA. The most likely scenario for the
majority of the stakeholders is that these reforms would have implemented by the
Serbian government from its own initiative.

However, with respect to the fields of




Public Internal Financial Control (PIFC) strategy approval,
Functioning of the Central Harmonisation Unit (CHU) of the Ministry of Finance
and Economy,

 Certification scheme for “certified public sector internal auditor”,



Publishing the Financial Management and Controls (FMC) handbook
Familiarisation training of managers in the public sector with PIFC systems
around one quarter of the respondents consider that these reforms would not have
been implemented at all in absence of the MFA.
In summary, the majority of the respondents consider that the MFA had a very
modest, but still positive macroeconomic impact, in particular regarding the budget
support. This finding is unsurprising given the relatively small size of funds provided
by the MFA loan.

In the area of structural reforms, most of the stakeholders think that the MFA had
little impact on the fiscal deficit and public debt and that in absence of the MFA the
reforms pertaining to these fields would have been included as conditionalities by the
IMF.

The real added value of the MFA lies in the area of structural reforms related to the
Public Internal Financial Control. In these areas, despite clear appropriation of the
reform objectives by the Serbian government the contribution of the MFA was
instrumental in pushing these reforms through.

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Case study: pensions and pension reforms in Serbia

This chapter presents the pension system and pension reforms in Serbia. Although the
Macro-Financial Assistance did not comprise any policy condition related to the
pension reform, external financial sustainability was one of the objectives of
the MFA. Yet, the financial stability of the pension system in Serbia is of paramount
importance for the long term sustainability of the public finances. As a snapshot,
pension expenditures represented 28.9% of the total central government expenditures
in 2011 and 29.7% in 2012. Thus, pension reform aiming at stabilizing the long term
pension payments balance trajectory is a key to achieving fiscal sustainability.

This chapter is organised as follows:



First, we briefly present the current organisation of the Serbian pension
system.

 Second, the scope and the origins of the pension problem in Serbia are

presented and explained.





Third, we present the pension reforms that took place over the evaluation
period 2010-2012 and assess their results as for the resolution of the pension
problem.

Forth, we anticipate the perspectives of the pension system evolution and the
structural reforms in this area.

Serbian pension system: organisation
The Serbian pension system relies on three pillars.

The first pillar is the mandatory state pension insurance. This pillar works on a
pay-as-you-go principle: current contributions from the employers and employees to
the state pension fund are used to pay pensions of the current pensioners. This type
of pension insurance is legally mandatory: all the persons employed in Serbia are
automatically enrolled in the pay-as-you-go system (1st pillar).

The second pillar, currently under construction, is mandatory complementary
private pension insurance. This pillar would consist of mandatory private savings
accounts. These accounts would be held with a private pension fund and funded by a
share of mandatory social contributions paid to this private pension fund instead of the
state pension system.

The third pillar involves voluntary complementary private pension insurance.
This pension insurance provides an opportunity to both the employed and the
unemployed to secure a complementary pension by paying additional pension
contributions to personal accounts in a voluntary pension fund. However, only 8% of
the persons employed have currently subscribed to a voluntary complementary private
pension scheme.

Thus, the main pension scheme in Serbia is the mandatory state pension insurance
based on the pay-as-you-go principle. This pension insurance is managed by the

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Pension and Disability Insurance Fund (PIO)15. In its coverage of the Serbian pension
problem the analysis will focus mainly on the PIO financial sustainability.

For the old-age pensions (the largest component of the mandatory state pension
insurance payments), benefits are a function of earnings earned during the working
years, the number of years of contributions, gender and occupation.

Despite recent reforms, the statutory retirement age necessary to benefit from a
full pension remains lower in Serbia than in other European countries. The
current retirement age requirement is of 65 years (with 15 annuities – years of
contribution) or 54 (with 40 annuities) for men and 60 years (with 15 annuities) or 53
years and 4 months (with 35 years and 4 months of contributing) for women. In
addition, there exist numerous early retirement options based on the number of years
of contributions, gender or professional occupation, while longer careers are not
rewarded. As a consequence, early retirement is frequent and the average
effective retirement age among old-age pensioners is of 61 years for men and 58
years for women16.
The minimum early retirement age in Serbia is of 58 both for men and for women.

The replacement rate for a pensioner with 40 annuities and average earnings
through his career stands at 70%, which is comparatively high with respect to other
European economies

Serbian pensions as a macroeconomic issue
As in any PAYG pension system, currently working persons contribute to the pension
fund in exchange of the rights to future retirement. These contributions are used for
payment of pensions to the currently retired. However, the social contributions
collected have not covered the social benefits disbursed for the thirty years.

The following table presents the dynamic of social contribution revenues and pension
expenditures of the PIO from 2005 to 2012 and the subsequent deficit:

15 PIO stands for Penzijskog i Ivanlidskog Osiguranja.
16 For disability pensioners the average effective retirement age is even lower: 55 for
men and 51 for women.

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Figure 14 - Deficit of the Pension Fund, Serbia, 2005-2012

Source: Ministry of Finance and Economy, Bulletin Public Finances January 2013

Over the period 2005-2012 the contributions to the Pension Fund have consistently
fallen below the pension benefits distributed, and the trajectories between the two
aggregates have been diverging over the whole period. The percentage of the benefits
covered by the contributions fell in percentage and in absolute terms: at the beginning
of the period, in 2005, contributions represented 60% of the benefits, while in 2012
only 50% of the benefits were funded thanks to contributions to the PIO. The deficit of
the Pension Fund resulting from the divergence of the contributions and benefits is
covered by the transfers from the central government budget.

the macroeconomic translation of

Thus,
the persistent and growing divergence
between the benefits and the contributions is the growing weight of the pension fund
deficit in the economy as measured by the percentage of GDP, as shown in the graph
below.

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Figure 15 - Deficit of the Pension Fund, 2005-2012 (as a % of GDP)

Source: Ministry of Finance and Economy, Bulletin Public Finances January 2013, National Bank

of Serbia, PwC calculations

The deficit of the Pension Fund, computed as the difference between the revenues
from social contributions and the expenditures on social
insurance benefits (i.e. on
pensions) increased substantially with the crisis from its pre-crisis level: from 5.25%
on average in 2005-2008 to 7.64% on average in 2009-2012. Since 2009, this deficit
has been on a diminishing trend, but still represented 7.36% of GDP in 2012. Pension
expenditures are currently the largest
the general government budget
expenditures, representing around 30% of the total budget expenditures in 2012.
Pensions have been the main drivers of Serbia’s fiscal deficit. In fact, given the
relative magnitude of the transfers to the PIO and of the budget revenues and
expenditures, in absence of the Pension Fund deficit, Serbian budget would move from
deficit into surplus! For instance, in 2012 the fiscal deficit of Serbia is estimated at
5.7% of GDP (cf. Figure 10 - Fiscal balance of Serbia, 2005-2012, in % of GDP)
against 7.36% of GDP of the Pension Fund deficit. Budget spending on pensions has
crowded out more effective spending items, for instance reduces resources available
for capital expenditures.

item of

Before 2008 governments took the stance of increasing pensions significantly, with
most pronounced growth in the period of 2006-2008 with especially important
increases around two consecutive elections in January 2007 and May 2008. As the
results of the coalition agreements, Ministry of Finance and Economy provided a 12%
increase in pensions in January 2008 and a 14.3% increase in October of 2008. With
other months indexations overall growth in average pension was around 45% over
one year (January 2008 to January 2009).

As a result of these policy developments, combined with shrinking economy, pension
cash costs spiked in 2009 and put the constraint on fiscal management in the next two
years. After the recession started, increased pensions became unbearable burden for
fiscal authorities and further increase and indexation had to be suspended from
January 2009 until January 2011.

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As the following graph shows, the number of pensioners in Serbia increased from 1.5
million persons in 2004 to around 1.7 million in 2013. Over the same period the
pension expenditures fluctuated between 11.5% of GDP in 2004 and 14% of GDP in
2013 with a peak at 15% of GDP in 200917.

Figure 16 – Pensioners and pension expenditures, Serbia 2004-2013

Source: PIO, Yearly bulletin, 2011 and National Bank of Serbia, Statistics, Macroeconomic
Indicators

The origin of the Serbian pension problem resides in the demographic evolution and
the subsequent change in the ratio of persons employed over the pensioners. Serbia
has been one of the European countries with the lowest fertility rate which has been
falling since 1991. As a consequence, population has been shrinking since the middle
of 1990s. The average age of the population increase from 34.9 years in 1991 to 39.9
in 2001 and 41.3 in 201018.

The following graph presents the evolution of the ratio between the persons employed
and the pensioners:

17

For the sake of comparison, transitional EU countries pension expenditures represented on average 8.5%

of GDP in 2010, while in the Eurozone pensions expenditures 12.2% on average in 2010.
18

National Statistical Office of the Republic of Serbia.

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Figure 17 - Pensioners and persons employed (in million and ratio), 2007-2012

Source: National Statistical Office of Serbia, PIO Fund

The number of pensioners has increased steadily over the whole period from 1.57
million in 2007 to 1.69 million in 2012. In the meanwhile the number of persons
employed decreased – from over 2 million in 2007 to 1.73 million in 2012 – as a result
of both a decrease in the working age population and rising unemployment. A direct
consequence of
the ratio between the number of persons
contributing to the Pension Fund and the number of the Pension Fund beneficiaries
decreased to approximately one pensioner for one person employed. Thus, every
person employed has to pay for one pensioner, both through pension contributions
and taxes.

these two trends,

Another important factor accounting for the high pension burden is a larger share of
disability pensions in the total pensions. Indeed, for Serbia this indicator reaches 22%
as opposed to the international average of 15%.

In addition to crowding out more productive spending within the fiscal expenditures,
ever-increasing pension costs could trigger two harmful effects for the Serbian
economy:

 Higher costs require higher contributions or taxes on the persons formally
employed, pushing increasing number of employees into informal employment
thus aggravating the pension funding problem

 An unsustainable pension cost burden put on the persons employed would
boost migration of the young from Serbia abroad again aggravating the
pension problem

Thus measures reforming the Serbian pension system are deemed necessary in order
to ensure its medium-long sustainability and, as a corollary, stabilizing its burden for
the public finances.

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Past reforms and current options
In 2000s, prior to the crisis, partial privatization of public pension systems was the
prevailing paradigm of the pension reform. Many Central and Eastern European
countries in transition have adopted this path the common belief being that the
private funded pensions’ regimes offer a higher degree of financial sustainability as
opposed to the pay-as-you go systems traditionally predominating in this geographical
area.

The first democratic government underwent some parametric reforms of the pension
system so as to stabilize the PIO fund and limit
the adverse economic and
demographic trends of the previous years. Retirement age was increased from 60 to
63 for men and from 55 to 58 for women. Pensions’ adjustment was made through a
new formula integrating the weighted average of the cost of life index and the average
wage growth:

New General point (GP) was calculated as a multiple of old general point and the
adjustment coefficient. This coefficient had been derived from weighted average of
cost of life index growth and growth of average wage in the country. In the period
2001-2005 both parameters had been taking 50% weight. Also, the Ministry of
Finance and Economy lowered the contribution rate from 32% to 19.6% coupled with
some regulatory changes that widened the tax base and eliminated many deductions.

The most important change enacted in 2005 was the change in the formula: from the
period 2005-2009 pensions were adjusted only for the cost of life19 while the average
wage growth parameter was abandoned. Later the law was amended so that pensions
follow CPI index and GDP growth over 4%20. Also retirement age was to rise by the
end of 2011 to 65 for men and 60 for women. The detailed retirement age rules are
still in place. Calculation formula was changed from taking into account the best 10
years, to accounting all years. However, these reforms that had some positive effects
in short term were cancelled by the additional law article that set minimum average
pension to the level of 60% of the average wage. This was the basis of unscheduled
pension increase of 12% in January 2008. The law's articles that defined pension
adjustments were suspended in 2009-2011 period and slightly amended for 2011 and
2012.

Fiscal responsibility framework made into law in 2010 ruled out discretionary pensions’
increases by setting an indexation rule (see the relevant section). According to the
legislation, these indexation rules will be in force until pensions bill is reduced to 10%
of GDP.

19 Cost of Life index was a particular methodology in socialist countries of measuring the rise of cost of
living. This is similar to CPI methodology, but the basket was more adjustable because it included particular
products, not product groups as CPI does. After the law reforms Statistical Office stopped accounting Cost of
Life index.

20

Formally the change was legal in 2005 but was to be applied only after Statistical Office changed inflation
measurements methodology to CPI. In addition, this rule was amended with government decision to
additionally increase pensions in 2008.

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Possible current reform options

For a full privatization of the pension system, approximately EUR 2 billion a year on
average are needed in course of 15 to 20 years to fund the transition, putting total
value of the transition at around EUR 55 to 60 billion. In addition, any partial
privatization, which would mean introduction of second pillar and mandatory private
account savings, would again increase PIO fund deficit and need for greater central
government transfers. Thus in the course of next 3 years, only parametric reforms
seem feasible. Before the economy fully recovers, pension system could only be
prepared for possible partial privatization.

Possible reform options that can significantly contribute to shrinking of PIO fund deficit
and pension system sustainability are given below:

 Gradually align the statutory retirement age for women to the level of
minimum retirement age for men at 65. This parameter change would
have significant effect in the beginning since women are the majority of total
and great majority of early retirees. Only Serbia and Albania left retirement
age for women at level of 60 after 2012 parametric adjustments in eastern EU
countries. The biggest difference between man and woman retirement age in
transitional EU countries is 2 years. According to the IMF computations, the
total savings from such reform if it had to start in 2013 would amount up to
7.2% of GDP as of 2050.

 Gradually increase the statutory retirement age for both men and
women to follow relative retirement age and age expectancy (at least to the
age of 67).





Introduce personal point penalties for early retirement before the
statutory age. One of the major flaws in the current pensions system is to
allow people retiring earlier without financial consequences. As a consequence,
men retire on average 3.5 years before the statutory age, while women retire
1.5 years earlier. According to the IMF, an introduction of actuarial penalties of
6% for every year of early retirement would both enhance spending savings
and stimulate labour supply.

Introduction of late retirement reward, which is the addition to the
pension for every year of postponed retirement. In the relevant countries this
award is usually around 6% for a year.

The global effect of reforms depends on the changes and their interaction. Every
10,000 of retirees that either have retirement right postponed or decide to wait, would
save at least EUR 25 million a year. However, actuarial penalties and retirement age
increase for woman would have very significant net effect in first 3 to 5 years. In that
period, the number of new pensioners could drop between 60 and 20 thousand
depending on the combination of changes. Accordingly, savings of EUR 160 to 55
million a year are possible if the right set of reforms is put in place in 2013.

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An additional fiscal measure to contain pension cost growth under consideration is a
nominal freeze on pensions in 2013. Due to increasing budget deficit and bad fiscal
projections after Q1, there is a possibility that current government would impose such
measure to control the rise in pension costs. This measure could be held in place as
long as there is a drop in wages in the country and unemployment stabilizes. This
would push average pension closer to 60% of average wage and decrease overall
costs of the pension by EUR 200 to 100 million in 2014.

Other complementary reforms could have significant medium term effects on pension
system, such as more flexible labour market that would increase employment and
contributions.

Case study: the establishment of the rule-based fiscal framework

Establishment of the quantitative fiscal rules was one of the conditionalities of the MFA
and one of the key elements of the fiscal strategy of restoration of fiscal sustainability
in the medium-long term. Thus, this section seeks to assess the gains from the
implementation of the quantitative fiscal rule, check on its effective implementation,
assess the relevance of its design and consider alternative formulations.

The section is organised as follows:



First, we analyse in detail the Serbian fiscal problem in order to understand the
adequacy of a fiscal consolidation and therefore of the fiscal responsibility
framework as a fiscal consolidation tool;

 Second, we examine the design and the implementation features of the fiscal
responsibility framework (of the Fiscal Deficit Rule in particular) in order to
assess its impact and efficiency for the Serbian economy. We also review the
FDR as implemented in Serbia against possible alternatives.

Analysis of the Serbian fiscal deficit problem
The fiscal deficit of Serbia has been increasing continually from 2006 to 2012,
increasing by over 7 percentage points of GDP from 2005 to 2012! The increasing
trend started in 2006 when the country’s fiscal balance moved from surplus to deficit.
However, a qualitative jump in the fiscal deficit came with the crisis: from -2.6% of
GDP in 2008 the fiscal deficit deepened to -4.5% of GDP. This movement was partly
due to the shortfall
in fiscal revenues and increase in fiscal expenditures usual for
recessionary time, partly to the fiscal policy stance which deepened the primary fiscal
deficit and partly to the concomitant depreciation of the Dinar which increased the
debt and the interest payments burden.

An important point in the Serbian fiscal deficit analysis is to discover which part is due
to the nature of the fiscal policy – thus calling for fiscal consolidation – and which
share is due to the economic slowdown (thus being of potentially self-correcting
nature).

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Structural vs. cyclical nature of the Serbian fiscal deficit
One of the main policy questions pertaining to the budget deficit analysis is to what
extent the deficit is a result of the cyclical factors (i.e. recession) and to what extent it
is the result of structural (macroeconomic and demographic) features of the economy
as well as of the mismatch between spending position and tax position. For instance, if
a fiscal deficit is entirely due to an ongoing recession, than once the GDP growth
returns to its trend and the output gap closes the deficit will disappear automatically –
due to an upswing of fiscal revenues – without any need to reconsider the fiscal policy.

In order to breakdown the fiscal deficit into a cyclical and a structural component, the
Ministry of Finance of Serbia followed an OECD methodology in computing the
cyclically-adjusted fiscal deficit by the following formula:

Where

is the elasticity of the fiscal balance with respect to the output gap,

is the

actual fiscal balance (as presented in the usual public finance statistics) and

is

the output gap (measure of the deviation of the GDP growth from its potential).

is computed as the sum of two elasticities: the elasticity of the fiscal
The elasticity
revenues to the output gap and the elasticity of the fiscal expenditures to the output
gap. Both elasticities have been assessed econometrically by the Serbian Ministry of
Finance and Economy.

The following graph shows the breakdown of the fiscal deficit in Serbia is 2005-2012
into a cyclical (recession-induced) and structural (due to policies and fiscal system
design) components:

Figure 18 – Structural and cyclical components of the Serbian fiscal deficit, 2005-2013

Source: Ministry of Economy and Finance of Serbia

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in GDP (and the deviation of the GDP growth from its potential

The graph shows that the fiscal deficit has been predominantly structural. Through the
crisis years the structural component has been overwhelming, except in 2009 when
fall
level) was the
largest. For the evaluation period, the fiscal deficit in 2011 was almost entirely
structural, while for 2010 and 2012 around 10-12% only of the fiscal deficit was due
to cyclical factors. The structural nature of the Serbian fiscal deficit implies that the
fiscal deficit would not be eliminated if GDP growth resumes at its potential level.

The relationship between the total fiscal balance and its cyclical component is also
informative of the fiscal policy stance over the period. Thus, in 2007 and 2008 not
only the fiscal deficit was entirely structural, but in absence of the expansionary fiscal
policies Serbia would actually have exhibited fiscal surpluses.
In the following
subsection we address in detail the issue of the Serbian fiscal policy stance over the
period under consideration (2010-2012).

Serbian fiscal policy stance before and after the crisis

In order to assess the nature of the fiscal policy, we rely on the computations of the
the Ministry of Finance and
previous subsection. Following the methodology of
Economy of Serbia, the fiscal policy stance in year t is calculated as a difference
between the structural (cyclically-adjusted) fiscal deficit in that year and the structural
deficit in the previous year. The figure obtained shows the impulse provided to the
economy by the fiscal policy.

The table below shows the evolution of the output gap (measure of the GDP growth
deviation from its potential) in parallel with the fiscal policy impulse (in percentage of
GDP). When the two figures move in the same direction (negative or positive) the
fiscal policy is pro-cyclical, when the fiscal
impulse moves in the opposite direction
with the output gap, the fiscal policy is counter-cyclical.

Figure 19 - Fiscal policy stance, 2005-2013

PRO-CYCLICAL

Source: Ministry of Economy and Finance of Serbia

PRO-CYCLICAL

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How to read the graph: when the GDP growth exceeds its potential level, the output gap shows as positive;
when the fiscal impulse is above zero, the fiscal policy is expansionary (the structural deficit of that year is
higher than the structural deficit of the previous year).

Counter-cyclicality is a usually recommended feature for the fiscal policy: in presence
of the strong growth fiscal deficit is contained or fiscal surplus is produced, in case of
an economic downturn the fiscal policy provides a “cushion” so as to smooth the
effects of the recession. Depending on the size of the public spending/taxation in the
GDP this is done to some extent through automatic stabilizers (increase in mandatory
expenditures and decrease in taxes) and to some extent through discretionary
expansionary fiscal policy. Surpluses accumulated through the period of economic
expansion provide resources for fiscal stimulus in years of slow or negative GDP
growth.

Over the two years immediately preceding the crisis – 2007 and 2008 – the Serbian
fiscal policy was expansionary and pro-cyclical. In spite of an economy growing faster
than its potential, the fiscal policy provided a further stimulus. As a result the country
lacked resources for a full-fledged fiscal support to the economy after the outbreak of
the crisis, in particular in 2009 and 2010. The fiscal policy was counter-cyclical over
2010-2011 and turned pro-cyclical again in 2012 with the fiscal tightening coinciding
with fall in GDP.

Serbian Fiscal Rules: design and implementation
The explicitly stated objective of the Fiscal Deficit Rule is to inscribe the fiscal policy
into a predictable legislative framework. The fiscal authority ties its hands by
abandoning discretion and committing to adjust its spending and taxation policies to
fit the numerical target on budgetary aggregates.

The benefits from a fiscal rule, usually accompanied by a fiscal deficit target, are
twofold:

 Correct

for

the overspending bias: governments tend to overspend,

in
particular in pre-election years and over strong growth periods when deficits
are below the medium term average.



Provide a solution to the “common pool problem”: competing interest groups or
population categories do not internalize the public sector budget constrain in
their requests for targeted spending or tax breaks.

Both arguments clearly apply for Serbia where the pre-electoral periods were
accompanied by strong (and sometimes pro-cyclical) increases in fiscal deficit and
where political fragmentation favours special interest pressures for budget outlays or
special taxation regimes.

The Serbian fiscal responsibility framework comprises three types of fiscal rules: a
structural budget balance rule (FDR), a debt rule with the target of the 45% debt-
to-GDP ratio and a form of expenditure rule with indexation of public sector wages
and of pensions on the evolution of macroeconomic aggregates (GDP growth and CPI
growth).

While all types of fiscal rules have their own theoretical structural advantages and
shortcomings, our analysis focuses on the specificities of the three Serbian fiscal rules
given the Serbian institutional and macroeconomic context.

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The Fiscal Deficit Rule
The Fiscal Deficit Rule fixes the maximum fiscal deficit (in % of GDP) in any year as
given by the following formula:

is the medium-term GDP growth;

is the medium-term deficit target; a
where
is the adjustment coefficient for the deficit deviation comprised between 0 and 1; b is
the correction factor for the growth deviation and which also takes values between 0
and 1.

As such, the Serbian Fiscal Deficit Rule accounts well for macroeconomic shocks by
integrating the output gap component. Thus, the rule not only allows the automatic
stabilizers to operate in case of an economic downturn and leaves open the option for
the counter-cyclical fiscal policy in a recessionary context, but effectively constrains
the fiscal policy to be countercyclical. However, this correction for the cycle is
empirically complicated.

The first reason is related to the difficulty of measuring with precision the output gap,
especially over recent periods.

The second reason is conceptual and refers to the output gap evolution through the
recession. For instance, the medium-term target of the fiscal deficit of 1% of GDP
seems having been out of reach given the actual deficits over the period 2010-2012
and the forecasted fiscal deficit between 3.6% and 4.1% of GDP in 2013. This
deviation is due to the consistent mismatch between the GDP medium term growth
and the actual GDP growth: the 4%-figure for the medium term GDP growth inscribed
in the FDR relied on the hypothesis of a return – in the years to come – of the
economy to its pre-crisis growth trend with the closure of the output gap. However,
the recession bringing down investment of the firms lowers the potential GDP growth
the recession the output gap closes through downward
as well. Thus, after
convergence of the potential GDP to the actual rather than the reverse. If the potential
(medium term) GDP growth is lower than the expected 4% per year, than the Fiscal
Deficit Rule would constraint the fiscal deficits to be much lower than what is foreseen
with the 4% assumption and considerably lower than what was actually achieved. As
an example, for 2011 the Fiscal Deficit Rule-based deficit should have stood at 4.55%
of GDP. However, assuming the medium-term GDP growth of 2% instead of 4% would
require the fiscal deficit in 2011 to be 3.75% which represents a considerable fiscal
consolidation effort.

issue of any fiscal rule is the degree of compliance with the latter.
One general
Indeed, credibility theoretically provided by the fiscal
rule – and subsequent
macroeconomic benefits – rely not only on the commitment, but also on the ability of
the government to comply with the fiscal rule. However, the design of the fiscal rule
chosen by the Serbian government – and in particular the parameters chosen – shed
doubt about the ability of the government to keep its spending and taxation policies in
line with the FDR target. For instance, the medium GDP growth of 4% per year
assumes a return to the pre-crisis trend at least in the medium run. In addition to the
“downward convergence” of the potential GDP to the actual one mentioned above,
there is a basic feature of increasing capital per capita: the 4% GDP growth refers to
the period 2000-2008 when Serbia started to grow from a lower level of capital per
capita; assuming growth resumption in 2013-2015, all else held equal, the Serbian
economy will grow from a relatively higher level of capital per capita, thus 4%

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hypothesis seems audacious. As a general matter, parameters chosen (medium term
deficit and growth) are too ambitious which makes the rule difficult to comply with.
This difficulty, in turn, undermines the credibility of the rule.

A subtlety of the fiscal rule design consists in striking a balance between leeway left
by the rule to smooth the economic cycle – which requires a certain degree of
complexity in its design – and its constraining character on public action to rein in
structural deficits – which requires clarity of formulation. The Serbian Fiscal Deficit
Rule is sufficiently flexible and fixes clear targets, but the GDP growth quantitative
parameters inputted weaken its credibility.

Regarding the implementation of the Fiscal Deficit Rule, an independent body – the
Fiscal Council – monitors its implementation and will acquire from 2014 the legal
authority for setting the values of the two weights put on the deviation from the
medium term deficit objective and on the output gap. However, the current role of the
Fiscal Council is purely supervisory. In particular it has no authority for setting the
budget assumptions which are left to the discretion of the government.

The FDR is, to a great extent, under control of the Serbian government with the
exception of the interest payments. The latter can affect the budget balance in case of
a sharp and strong depreciation of the Dinar (given that most of the Serbian public
debt is denominated in foreign currency). An alternative would have been to replace
the fiscal deficit with the primary fiscal deficit (which is entirely under control of the
Serbian government) as a reference for the FDR. However this would bring more
complexity into the rule.

The history of the implementation of the Fiscal Deficit Rule has shown its low
robustness to the electoral shocks which calls into question its credibility.

Public debt cap at 45% of GDP
The public debt to GDP ratio capped at 45% proved the less resilient of the fiscal
rules. The reason, however, resides largely outside of the political commitment of the
fiscal authority. The increased primary deficit contributed to the increase in public
debt. However, one of the major drivers of the increase in public debt was the
depreciation of the Dinar from 2011 to 2012 (see the next chapter for the detailed
analysis of relative contributions of different factors to the public debt increase).
According to the IMF computations, exchange rate depreciation accounted for 2.9
percentage points of GDP in the total growth of the public debt from 2011 to 2012.
Limited control of the fiscal authority is a serious drawback in the rule design which
limits the efficiency – and therefore the credibility – of the rule.

The rule does not comprise any economic stabilization feature. Given that the public
debt tends to increase – due to the increase in the fiscal deficit by the play of
automatic stabilizers – it could constrain the government to conduct a pro-cyclical
fiscal policy aiming at bringing the debt down if it exceeds or is close to the 45%
threshold.

Among the advantages, the rule is clear, easy to monitor and in line with Serbia’s
European perspectives since the Maastricht criteria of the public debt to GDP ratio of
60% was at the heart of the rule design.

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Indexation rules for public sector wages and for pensions
The indexation rules have been the most successful of the quantitative fiscal rules
introduced in Serbia. These rules represent a form of expenditure rules regulating
growth of two major components of the Serbian budget: wages of the public sector
employees and pensions. Given the size of the public sector in Serbia and given the
importance of the budget transfers to the Pension Fund to cover the deficit of the
latter, indexation avoids destabilizing discretionary increases. In particular, it shelters
the budget from political pressures related to the pensions’ evolution – this point is
especially valid for Serbia given the relative size of the pension-eligible age groups.

The downside is that the rule bears by definition only on expenditures without relation
with revenues. Thus, in case of a shortfall of fiscal revenue the indexation of the
salaries and pensions would be compatible with an increased fiscal deficit.

Furthermore, there are technical difficulties in measuring accurately the CPI growth of
the preceding six months in the context of high and volatile inflation.

The following table provides a summary of advantages and shortcomings for each of
the three Serbian quantitative fiscal rules:

Advantages

Shortcomings

 Accounts well for

 Empirical difficulty with

Fiscal Deficit Rule

macroeconomic shocks

assessing the output gap
(especially in the medium run)

 Parameters chosen are too

ambitious which undermines
credibility

45% cap on the Debt-to-GDP
ratio

 An indicator is clear and easy

 Public debt in FX, thus

to monitor

 Consistent with Serbia’s EU

accession path (designed with
the Maastricht criteria in mind)

exchange rate evolution
(factor out of control of the
fiscal authority) is the major
driver; government has limited
leverage over this ratio

 Clear and easy to implement
 Entirely under control of the

 Bears exclusively on

expenditures

Indexation rules for pensions
and public sector wages

fiscal authority

 Sizable impact on the fiscal

deficit

 Difficulty to measure CPI
growth over previous six
months induced uncertainty
about fiscal expenditures
evolution

The degree of compliance with a fiscal rule is proportional to the extent of the Serbian
government control over the aggregates involved in this rule. This hints at the Serbian
government willingness to comply with these rules: the rules the most under control
of the government are also the most successfully implemented. In that sense, given
that political willingness to implement the rules is a key success factor, the MFA
played an important role in pushing for the implementation of the fiscal rules and
providing incentive (of political
to the Serbian
government to design and implement the fiscal rules and comply with the latter to the
best possible extent.

than financial nature)

rather

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Although some of the design features could clearly be improved upon, there is no
panacea in the design of the fiscal rules: any rule would have its’ shortcomings. The
main contribution of the fiscal rules to the Serbian macroeconomic stability is to
provide guidance over the objectives towards which the fiscal policy shall be anchored.
Thus, the main benefit of the fiscal responsibility framework in Serbia is internal
(introduce the public finance targets as key objectives in the public discussion) rather
than external (gain credibility with the private economic agents). In spite of the two of
the three fiscal rules falling short of their objectives, it can be argued that without
these rules the fiscal deficit and the public debt outcomes for Serbia would have been
even less favourable

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MFA effects on external financial sustainability
The aim of this section is twofold. First, it summarizes the findings from the previous
sections and infers the evolution of Serbia’s external
financial sustainability over
several criteria with a specific focus on public debt. Second, the section investigates
the impact of different counterfactual scenarios occurring in the event of “no MFA” on
the public debt.

Evolution of Serbia’s external financial sustainability indicators
The evolution, the current situation and the prospective of the Serbian external
financial sustainability are assessed along five main indicators, which are key
measures of the external financial sustainability:

 Current account balance – in percentage of GDP (cf. previous sections)

Public debt – stock of debt, internal and external, in percentage of GDP

Private external debt – stock of debt in percentage of GDP
 Credit euroisation – share of loans to households and firms denominated in

foreign currency

 Reserve cover – number of months of imports covered by the NBS foreign

currency reserves)

The following graph summarizes the main characteristics of the financial external
situation of Serbia in 2009 (beginning of the crisis) and in 2012 (last available
figures).

Figure 20 - Serbia's external vulnerability indicators, 2009 and 2012

Source: National Bank of Serbia

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The values of the four indicators connected form an area. Relatively larger area
indicates qualitatively higher total vulnerability since higher value of each of the
indicators. The importance of the different indicators in the overall vulnerability
assessment and their numeric values cannot be compared between them (e.g. one
cannot say that the increase of the FX reserves by one month of import is more or less
important
the euroisation by one percentage point).
Nevertheless, a qualitative comparison can be made based on the evolution trends of
the four indicators. Overall, from 2009 to 2012, vulnerability level increased, due in
particular to a strong increase in the ratio of public debt to GDP and in spite of slightly
decreasing levels of private external indebtedness.

than the decrease of

The following figure provides a more detailed picture of the evolutions of these
indicators along with the current account balance figures:

Figure 21 - Serbia's external vulnerability indicators, 2008-2012

2009

2010

2011

Current account balance, in % of
GDP

Public debt, in % GDP

Private external debt, in % of GDP

% of FX loans in total loans

Gross international reserves,
months of imports

Source: National Bank of Serbia

-6.6

34.8

50.9

75.3

9.4

-6.7

44.5

52.5

69.5

8.1

-9.1

48.2

42.4

70.8

8.7

2012

-10.5

59.3

45.2

72.0

7.4

The period 2002-2008 saw a continuing increase in the private external debt (cf.
previous sections). After 2009 the private external debt to GDP ratio fell to 45.2% in
2012.

The share of foreign currency loans in the total loans to Serbian households and firms
slightly decreased from 2009 to 2012. However, this decrease is attributable to the
variation around the mean rather than a trend.

Foreign currency reserves exceeded the six-month benchmark of the NBS all through
the period 2009-2012.

Over the next subsections the evolution for each of them is examined separately and
in detail.

Public debt
Public debt is an important element of external financial sustainability because of the
detrimental macroeconomic effects of high debt/GDP ratio. These effects are exercised
through three channels:

 Crowding out private investment. High public debt captures an important part
of domestic savings which reduces the volume of lending to the private sector
(and possibly pushes up interest rates). Thus public debt crowds out private
is specifically important in the case of emerging
investment. This channel
countries where on the one hand reliance on credit in financing of firms is
relatively more important and, on the other hand, the shortfall of domestic
savings is only partially offset by private external borrowing.

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 Necessity to generate high primary surplus. No country could borrow without
bound, thus to stabilise the public debt/GDP ratio, the country must generate a
primary fiscal surplus.

The debt evolution is given by the following formula:

Where
previous year;
the nominal GDP growth rate;

is the stock of debt of the previous year;

is the GDP of the
is the average nominal interest rate on the existing debt; y is

is public expenditure and

is public revenue.

Over the last years the weighted average nominal interest rate paid on public
debt has been higher than the nominal GDP growth rate, stabilisation of the
public debt/GDP ratio requires achieving primary fiscal surplus equal to the
differential between these terms multiplied by the existing debt/GDP ratio.
Thus, higher debt/GDP ratio would impose higher primary surplus, all the while
the country has faced important fiscal deficit issues.



Increasing threat of self-fulfilling debt crisis. At the beginning of 2013, around
60% of the Serbian debt was held by non-residents21. This leaves the country
vulnerable to a (largely self-fulfilling) debt crisis: if a growing public debt/GDP
ratio spurred fears of insolvency, the country could face increasing interest
rates on its government securities which would, in turn, effectively increase the
probability of default. In 2012, interest rates on Serbia’s public debt were
increasing as a result of inflationary pressures, looser budgetary policy, and
general flight to safer assets in Europe.

In the context of the MFA, capping the public debt at the level of 45% of GDP was part
of the quantitative fiscal rules introduced in 2010. However, in the following years this
level was exceeded. The following table shows the evolution of the public debt-to-
GDP22 ratios in 2002-2013:

21

Update for investors, January 2013, Public Debt Administration, Ministry of Finance and Economy,

Republic of Serbia
22

‘Public debt’ here refers to all the direct and contingent liabilities of the central government, both internal

and external.

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Figure 22 – Public (central government) debt of Serbia, 2006 - March 2013

Source: Ministry of Economy and Finance of Serbia

The crisis of 2008-2009 was a turning point in the evolution of the public debt-to-GDP
ratio. It had been falling since 2002, going from 72.9% of GDP that year to 29.2% of
GDP in 2008. However, from 2008 to 2012 the public debt of Serbia doubled in
percentage of GDP reaching 61.5% in 2012. This evolution has been driven by two
major factors: the Dinar depreciation which made the debt, predominantly labelled in
foreign currency, more expensive and a GDP growth which remained weak in 2010-11
and negative in 2009 and 2012. Slow or negative GDP growth led increasing
unemployment (cf. Figure 11 Unemployment rate, Serbia, 2001-2012) and fall
in
fiscal revenue, which generated a growing fiscal deficit. The fiscal deficit exceeding the
legally fixed threshold led to the accumulation of the public debt also well beyond the
legal upper limit of 45% of GDP immediately after the introduction of the fiscal
responsibility legislation.

Along with increasing fiscal deficit, nominal Dinar depreciation was another
explanatory factor of the increase in public debt over the period 2010-2011.

The following table shows the currency structure of Serbian public liabilities:

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Table 23 - Currency structure of the Serbian public debt23 2009-2012 (in %)

2009

2010

2011

2012

SDR

EUR

USD

CHF

RSD

Other

Total

4.7

66.7

12.9

1.9

12.7

1.1

100

7.7

60.4

14.4

1.7

14.8

1

100

6.6

57.3

17.8

1.3

16.2

0.8

100

5.9

52.8

20.4

1.3

18.9

0.7

100

Source: Ministry of Economy and Finance of Serbia, Public Debt Administration

Foreign-currency-denominated liabilities have represented the largest proportion of
the Serbian public debt. The Euro-denominated debt alone represented a share of two
third to one half of the Serbian public debt over the period. However, through 2009-
2012 the trend has been to the increase of the share of Dinar-denominated debt: from
12.7% to 18.9% of the total. This modification of the currency structure of the public
debt is due to relatively larger share of new borrowing in Dinars. Thus in 2011, for
instance, the Serbian government intensified issues of Dinar-denominated securities in
2011 in order to finance the fiscal deficit. This increased the share of Dinar-
denominated public liabilities to around 16.2% by the end of that year. “Dinarisation”
of the public debt is one of the priorities of the Serbian government’s public debt
management strategy.

Serbian government securities are given a sovereign rating from the 1 November
2004 by Standard & Poor’s and from the 19 May 2005 by Fitch Ratings.

The following graph shows the evolution of Serbia’s sovereign credit rating given by
Standard & Poor's and Fitch from June 2007 (pre-crisis) to March 2013.

23

Please note that internal borrowing – borrowing from domestic banks – can also be denominated in

foreign currency.

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Figure 23 - Serbia's sovereign credit rating

Source: NBS, Standard & Poor’s, Fitch

Through the whole period 2007-2013 Serbia has maintained its BB- grade from both
Standard & Poor’s and Fitch with an exception of the March 2011-August 2012 period
when S & P upgraded Serbia’s grade by one notch. BB- corresponds to the speculative
grade described as “Capacity to meet financial commitments, risk of changes in
business environment and economic conditions, significant credit risk”. This signals
that in the medium-long run perspective its external financial situation as measured
by the credit risk has been stable.

On March 11, 2008, S & P revised its outlook on Serbia from stable to negative. This
decision was motivated by political tensions with a collapse of the Serbian government
and a threat of a new government dominated by radicals, which would damage
Serbia’s EU prospects. For S & P, Serbia’s EU integration perspective is “a key
supporting factor for its sovereign rating”. In addition, government change was
feared to weaken fiscal responsibility hence increasing Serbian external vulnerability.

On December 23, 2008, Fitch followed, revising the outlooks on Serbia’s Long-term
Issuer Default ratings (IDRs) from stable to negative. This decision was motivated by
the deterioration of the global economic outlook and increasing credit risks for Serbia
given the country’s “high external debt stock, wide current account deficit and large
external financing requirement”.

The revision of Serbia’s outlook from negative to stable by S & P on December 1, 2009
was based on the large reduction in Serbia’s current account deficit, stabilisation of
the Dinar exchange rate and government’s commitment to implement the
programme agreed with the IMF, in particular the fiscal consolidation.

On November 11, 2010, Fitch also changed Serbia’s outlook from negative to stable.
This change was due to reduction of external risks related to reduced balance of
payments imbalances, increase in FX reserves and reduction in short-term debt.

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The upgrade of Serbian sovereign credit rating by one notch by S & P on March 16
2011 reflects improvements in political stability, expectations of improvements in
fiscal and external performance and “the emergence of political consensus
supportive of European integration” expected “to anchor the direction of economic
policymaking”.

On August 7, 2012, S & P downgraded Serbian sovereign credit rating by one notch,
with a negative outlook. This downgrade was motivated by the deterioration of
Serbian fiscal deficit and widening current account deficit. This could seriously strain
internal and external financial sustainability. According to S & P, Serbian authorities
failed in their commitment to fiscal stability and promote confidence in the NBS
commitment to inflation targeting. On the one hand, Serbian authorities’ relaxation of
the fiscal stance, the IMF suspended its Stand-By Arrangement with Serbia. On the
other hand, legislative changes made in 2012 threaten independence of the National
Bank of Serbia.

The downgrade by S & P was followed by a change in outlook for Serbia by Fitch from
stable to negative on August, 16 2012 on similar grounds.

Private external debt
In the context of high euroisation and important private external debt, a depreciation
of the Dinar would induce massive growth of the debt burden and subsequent wave of
bankruptcies of the private borrowers – firms and households – unless the state steps
in. In the latter case, either the NBS tries to prevent or smooth currency depreciation
(which requires considerable spending of FX reserves) or the state takes over at least
a portion of the burden. In addition, slow – or negative – growth, which characterized
Serbia in 2009-2012, would put a significant strain on the borrowers’ ability to face its
liabilities. Thus the level of private external debt is a relevant indicator to assess
vulnerability of the Serbian external financial position.

The following graph shows the evolution of the private external debt in Serbia from
2002 to 2012:

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Figure 24 - External debt (private and public), 2002-2012

Source: National Bank of Serbia

From 64.6% of GDP in 2008, before the crisis, the total external debt in Serbia
reached 77.7% of GDP at the end of 2009 and 84.9% of GDP in 2010 – an increase b
around 20 percentage points in two years. This represents a significantly higher level
of indebtedness than the average of the upper middle income countries group in which
Serbia is classified24.

Public and private sector contributed more or less proportionally to this increase: 55%
is attributable to higher public external debt (which stood at 27.2% of GDP in 2010)
and 45% is due to higher private external debt burden (which accounted for 54.4% of
GDP in 2010)25.

Credit “euroisation”
The importance of credit euroisation is twofold. First, the volume of credit delivered in
foreign currency conditions the effectiveness of the monetary policy. A high proportion
of credit in FX means that the National Bank of Serbia policy instruments – policy rate
changes or open market interventions – affecting the monetary base in Dinars have
limited impact on the volume of loans. Second, high proportion of foreign currency-
denominated loans in the total of loans to firms and households exposes the debtors
to significant foreign exchange risk and therefore de facto constrains the NBS to avoid
sharp depreciation of the national currency that could create solvency issues for
domestic economic agents.

Table 24 - Currency composition of credit to households and firms, in %, 2008-2012

Loans in Dinars

Loans in FX

2008

29.5

70.5

2009

24.7

75.3

2010

30.5

69.5

2011

30.6

69.4

2012

28

72.0

Source: National Bank of Serbia

24

25

According to World Bank classification

Source: IMF.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Thus, the official strategy of the Government and of the National Bank of Serbia is
towards the “Dinarisation” of the economy. However, as the graph shows, the
proportion of loans in foreign currency remained stable over the period 2008-2012:
around 71% of the loans to households and firms have been granted in foreign
currency. The most recent estimates indicate the proportion of
loans in foreign
currency at 71.8% of the total loans to households and firms in the first quarter of
2013.

Reserve cover
The level of foreign exchange reserves of the NBS is an important measure of the
sustainability of the current account deficit in the short run, since FX reserves
constitute the main source of liquid assets to settle all current and future external
obligations in good time. The most common measure of external liquidity is the ratio
of foreign exchange reserves to imports of goods and services (in months). The
economic literature considers as adequate the foreign exchange reserves level
covering six months of imports as an appropriate level , the National Bank of Serbia
ligation of keeping its.

Figure 25 - Foreign exchange reserves of the NBS, 2002-2012

Source: National Bank of Serbia

In 2009, foreign exchange reserves of the National Bank of Serbia increased by EUR
2,441.5 million or 29.9% relative to 2008, reaching EUR 10,601.9 million at the end of
December. Around two thirds of this increase resulted from the inflow of funds
from the IMF in the framework of the 2009-2011 SBA representing the total amount
of EUR 1.137 billion. Privatisation receipts (Petroleum Industry of Serbia) brought FX
funds for EUR 0.4 billion. Over 2009, the National Bank of Serbia sold around EUR
0.66 billion on the foreign exchange markets “to boost foreign exchange supply in the
market and ease excessive daily volatility of the exchange rate of the dinar”.

For the three years of the evaluation period 2010-2012 the foreign exchanges
reserves stood well above the requirement of 6 months of imports.
By the end of 2010, the NBS’s foreign exchange reserves represented EUR 10 billion,
down by EUR 600 million relative to the end of 2009 (a decline by 5.7%). This

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corresponded to 8.2 months of imports, well above the minimum requirement in spite
of the sharp decline of that year. This level of reserves represented 417% of the
monetary base (M1).

On 31 December 2011, the foreign exchange reserves represented around EUR 12
billion, up by EUR 2.055 billion from the end of 2010 which covered 429.6% coverage
of the monetary base and represented the equivalent of 8.6 months of imports. Over
the year the major inflow came from the sale of euro-denominated government
securities – EUR 1.258 billion, of which EUR 0.534 billion was sold domestically and
EUR 0.724 billion on the international financial markets. In April 2011, EUR 51.7
million was disbursed under the 2009-2011 IMF SBA.

Peer comparison: Serbia vs. main regional economies
It is important to assess Serbia’s position with respect to its peers. The two following
tables compare Serbian vulnerability indicators against other South-Eastern European
transition countries across several dimensions.

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Figure 26 - External financial vulnerability indicators – Serbia vs. regional peers

Public debt,
2011

External debt, % GDP, end
2011

Gross FX reserves

Croatia

Estonia*

Hungary

Latvia

Lithuania

Poland

Slovak Republic*

Slovenia*

Albania

Bosnia and Herzegovina

Bulgaria

FYR Macedonia

Kosovo

Montenegro

Romania

Serbia

Source: EBRD

% GDP

Total

Private

46.7

6.1

81.4

42.2

38.5

56.4

43.3

46.9

58.6

40.3

15.5

27.7

…

46.9

33.0

48.7

94.9

98.5

123.5

68.8

94.8

72.6

137.2

107.0

76.1

64.8

77.3

131.3

33.7

46.5

87.1

65.0

…

94.6

68.4

84.9

48.3

55.1

33.5

65.7

8.9

22.2

80.2

45.5

…

…

45.3

59.8

Short
term

29.6

52.0

33.3

56.7

34.4

20.7

…

…

3.3

11.8

30.2

24.0

…

…

24.5

18.8

in % of
GDP

in % of
short term
debt

in months of
imports

23.2

78.3

…

38.3

22.5

19.1

19.0

…

…

18.3

19.9

31.5

21.5

…

11.0

20.5

27.0

…

97.4

45.7

53.3

100.6

…

…

553.5

167.9

104.3

89.8

…

…

83.7

143.2

7.2

…

4.5

5.1

2.8

5.4

…

…

4.2

4.0

5.6

3.6

…

2.2

6.1

6.3

Bank
deposits

% of GDP

Loans/
deposits

Private sector, in
%

63.1

53.2

42.2

36.5

38.2

44.9

48.4

52.6

69.7

41.9

63.8

48.7

…

53.4

33.8

43.5

112.5

154.2

117.3

191.6

130.8

115.2

96.8

152.4

59.0

140.6

112.1

94.8

…

101.9

115.9

138.7

The figures in blue signify that on the specific indicator the country performs relatively better than Serbia, figures in red mark a
weaker performance compared to Serbia.
* country-member of the Euro zone.

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Figure 27 - External financial vulnerability indicators – Serbia vs. regional peers 2

Sovereign rating

Domestic FX loan stocks

Share FX credit

Non-performing
loans

Croatia

Estonia*

Hungary

Latvia

Lithuania

Poland

Slovak Republic*

Slovenia*

Albania

Bosnia and Herzegovina

Bulgaria

FYR Macedonia

Kosovo

Montenegro

Romania

Serbia

Source: EBRD

S&P

BB+

AA-

BB

BBB

BBB

A-

A

A

B+

B

BBB

BB

…

BB-

BB+

BB-

Fitch

BBB-

A+

BB+

BBB

BBB

A-

A+

A-

…

…

BBB-

BB+

…

…

BBB-

BB-

Total private
sector

to firms, %
GDP

to
households,
% GDP

% of total loan stock

% of total loans

44.9

2.0

28.5

59.0

36.6

16.3

0.4

3.6

25.6

36.8

45.3

25.6

…

…

24.8

43.3

16.2

2.0

13.7

29.0

18.9

4.0

0.4

0.7

19.6

19.4

35.3

16.8

…

…

12.4

29.7

28.7

0.0

14.8

30.1

17.6

12.5

0.0

2.9

6.0

17.4

10.1

8.9

…

…

12.3

13.6

71.2

2.4

54.3

86.7

72.5

31.6

0.6

4.5

62.2

66.9

63.4

54.7

…

0.0

63.3

71.8

14.1

3.3

15.6

12.0

15.8

8.8

5.4

17.0

22.7

12.7

16.9

10.9

7.0

13.2

17.3

19.9

Unemployment

% of total labour
force

14.5

9.6

10.8

14.2

12.4

10.4

14.0

8.6

13.3

27.6

11.5

30.6

45.1

18.1

6.8

25.5

The figures in blue signify that on the specific indicator the country performs relatively better than Serbia, figures in red mark a
weaker performance compared to Serbia.
* country-member of the Euro zone

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On a comparative basis, Serbia performs relatively better in terms of foreign exchange
reserve cushion. However, this performance is mainly the flipside of a relatively higher
degree of euroisation and therefore higher exchange rate risk of the country.

Serbia’s external debt is in line with the comparable countries’ average, for the total
and for the private debt. The country performs better than its peers in terms of short-
term debt exposure.

On the downside, the relative weight of the public debt (48.7% of GDP for Serbia
against 41.7% of the peer average) and the share of FX loans in the total
loans,
considerably higher in Serbia than for other countries under consideration. The share
of non-performing loans is equally considerably higher for Serbia (around 20% against
around 12.9% of the peer average). However, according to Serbian private sector and
international
institutions’ stakeholders interviewed, Serbian banks have
provisioned for these losses, thus fragility of the Serbian banking and financial system
should not be overestimated by the high NPL figure.

financial

Finally, unemployment rate is much lower in the peer countries in comparison to
Serbia. From the sixteen countries only Bosnia, Former Yugoslavian Republic of
Macedonia and Kosovo exhibit lower performance than Serbia.

Partly as a consequence of the comparison of the abovementioned indicators, the
sovereign rating of Serbia is among the lowest in this peer comparison to other
fourteen countries with only Albania and Bosnia rated lower by Standard & Poor’s and
Montenegro having the same rating as Serbia. According to Fitch, Serbia is a worst
performer (but the peer sample is reduced to eleven countries). However, in addition
to the economic vulnerability assessment, the difference in sovereign rating between
Serbia and its peers is likely to be driven by the political variable of belonging (or not)
to the European Union and the Euro zone.

Quantitative assessment of the external financial and public debt
sustainability evolution 2010-2012

financial

sustainability has

The external
two related and partly overlapping
dimensions. The first dimension is related to the dynamic of the public debt and bears
on the Serbia’s capacity to stabilize the public debt-to-GDP ratio in the medium-long
run. The second dimension is related to the capacity of the Serbian economy to
produce current account balance which would stabilize the external debt in the
medium-long run. The task of this subsection is to estimate the relative contribution of
the different factors (exchange rate, primary deficit, real
interest rate, etc) in the
evolution of the Serbian public debt or the Serbian external debt (both public and
private). In order to address these two dimensions we adopt the methodology
developed and used by the IMF for its assessment of countries’ external debt
sustainability and of public debt sustainability.

Serbia’s public debt sustainability
The public debt sustainability refers to the evolution of the public debt to GDP ratio.
The change in the public debt to GDP ratio has two main components: the change in
the primary balance and the automatic debt dynamic. The debt evolution is given by
the following formula:

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Where
year;
growth rate;

is the stock of debt of the previous year;

is the average nominal interest rate on the existing debt;

is public expenditure and

is public revenue.

is the GDP of the previous
is the nominal GDP

The primary balance refers to the budget balance before interest payments on the
existing debt.

The automatic debt dynamic formula used by the IMF is given below:

is the average nominal interest rate on the existing debt;

is the real GDP
Where
growth rate; p is the inflation rate; a is the share of FX-denominated debt in the total
public debt stock of the previous year, e is the depreciation rate of the Dinar with
respect to the euro and

is the public debt stock of the preceding year.

NB: The formula above is the same as the debt evolution formula stated before with
an addendum of the exchange rate contribution parameter.

Thus, the task is to assess numerically the contribution of these factors to the
evolution of the Serbian public debt. The table below shows the values of the different
parameters of the debt sustainability framework for the evaluation period 2010-2012

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Table 25 Serbia's public debt sustainability

2010

2011

2012

Public sector debt

44.5

48.7

61.5

Change in public sector debt (=1+2+3+4)

+9.7

+4.2

+12.8

1. Primary deficit contribution

+3.5

+5.4

+4.0

2. Automatic debt dynamics contribution (a + b)

+5.8

-1.0

+8.8

a) Contribution from interest rate/growth rate

differential

+1.3

-0.6

+4.0

 Of which contribution from real interest rate

+1.6

-0.0

+3.1

 Of which contribution from real growth rate

-0.3

-0.6

+0.9

b) Contribution from exchange rate depreciation

+4.5

-0.4

+4.8

3. Contribution from other identified debt-creating flows

4. Residual, including asset changes

Key underlying macroeconomic and fiscal assumptions

-0.2

-0.2

-0.1

-0.1

0.0

0.0

Share of the previous year public debt stock in foreign

currency (in %)

87.3

85.2

83.8

Real GDP growth (in %)

1

Average nominal interest rate on public debt (in %)

11.3

Average real interest rate

Nominal depreciation

Inflation rate

5.1

14.2

6.2

1.6

13

0.1

-1

13

-2

13.5

6.5

10.9

7

Source: International Monetary Fund, PwC computations

In 2010, the major factor explaining the increase in the public debt to GDP ratio is the
depreciation of the Dinar with respect to the main borrowing currencies and in
particular with respect to the Euro. This depreciation alone increased the public debt
by 4.5 percentage points of GDP. The primary deficit contribution was the second most
important factor. High inflation was accompanied by high nominal interest rates on the
new debt, thus the contribution from the real interest rate was to increase the stock of
public debt to GDP. Finally, the modest but positive economic growth marginally
contributed to lower the debt-to-GDP ratio.

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In 2011, the increase in the public debt is due entirely to the increase of the primary
budget deficit, driven mainly by a decrease in fiscal revenues stronger than the
decrease in public expenditures. By contrast, the automatic debt dynamics pushed the
debt-to-GDP ratio down. Both the real
interest rate and the real growth rate
contributions to the growth in public debt were negative and the hierarchy between
the real interest rate and the real growth rate contributed to lower the public debt to
GDP ratio. Slight appreciation of the Dinar lowered the Serbian debt by 0.4 percentage
points of GDP.

In 2012 both the primary deficit and the automatic debt dynamics (strongly) increased
the debt to GDP ratio – from 48.7 to 61.5 percent of GDP – with the automatic
dynamics contributing for around two third of the increase while the primary deficit
accounting for about one third.

Serbia’s external debt sustainability
The external debt sustainability is measured as the ratio of the external debt (both
public and private) to GDP.

The three major components of the external debt evolution are the current account
evolution, the automatic debt dynamics and the net non-debt creating capital inflows.

The automatic debt dynamic formula is given below:

is the nominal effective interest rate on external debt,

Where
domestic GDP deflator in euro terms, g is the real GDP growth rate,
FX-denominated debt in the total public debt stock of the previous year,
depreciation rate of the Dinar with respect to the euro in nominal terms and
public debt stock of the preceding year.

is the change in
is the share of
is the
is the

The table below shows the values of the different parameters of the external debt
sustainability framework for the evaluation period 2010-2012.

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Table 26 - Serbia's external debt sustainability

2010

2011

2012

External debt

85.4

76.7

85.8

Change in external debt (=1+2+3+4)

+7.6

-8.7

+9.1

1. Current account deficit contribution

+4.3

+6.6

+7.8

2. Automatic debt dynamics contribution (a + b)

+5.4

-6.8

+5.0

 Of which contribution from nominal interest rate

+2.4

+2.5

+2.7

 Of which contribution from real growth rate

-0.8

-1.2

+1.4

 Of which contribution from price and exchange

rate changes

+3.8

-8.1

+0.9

3. Net non-debt-creating capital inflows

4. Residual, including asset changes

Source: International Monetary Fund

-3.1

+0.9

-6.2

-2.3

-0.6

-3.0

In 2010, the current account deficit was the main driver of growth in the external
debt-to-GDP ratio, followed by the price and nominal exchange rate movement. Real
GDP growth contributed to slightly moderate the increase in external debt. Thus,
overall, the external debt-to-GDP ratio increase represented 7.6 percentage points of
GDP.

In 2011, the external debt in % of GDP went down sharply, largely thanks to an inflow
of FDI and portfolio investment and to favourable automatic debt dynamics. These two
developments more than offset the widening of the current account deficit which was
pushing the external debt up. Slight nominal appreciation of the Dinar made the
external debt slightly cheaper.

In 2012, the external debt to GDP ratio increased again, by 9.1 percentage points.
This increase was fuelled both by an increase in the current account deficit and
positive contribution from all the components of the automatic debt dynamics: real
GDP fell by 2 percent that year, while the Dinar depreciated both in nominal and real
terms.

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MFA
sustainability

contribution

to medium-long

term external

financial

This section seeks to assess the MFA impact on the Serbia’s external
sustainability through three channels:

financial

 Direct impact on the public debt cost and structure – this impact goes through
the interest rates differentials between the MFA loan and other types of Serbian
government loans in 2011; to this interest rates differential effect we add an
effect on the Serbian public debt outstanding of a potential Dinar depreciation
that would have occurred in absence of the MFA loan





Indirect impact on the interest rate – the impact is made through fluctuations
of the markets sentiment regarding the RSD nominal exchange rate, interests
on the Serbian debt and ultimately, probability of default;

Indirect impact on the public debt volume – this impact goes through the
effects of the structural reforms – which were pushed for by the MFA – on the
deficit and therefore on the public debt sustainability

The “cheaper debt” channel: the MFA reduced the medium-long term debt
burden
In June 2011 – the month preceding the disbursement of the MFA loan – the Serbian
liabilities stood at EUR 13.237 billion of which external debt, including both direct and
contingent liabilities, represented EUR 7.32 billion (55.3%). By the end of 2011, the
total debt stock of Serbia amounted to EUR 14.5 billion. Overall, in 2011 the Republic
of Serbia’s total debt stock increased by EUR 2.44 billion, including EUR 1.57 billion
borrowed externally.

The MFA loan represented 4.1% of the total net borrowing in 201126 and 6.4% of the
total external borrowing that year. The share of the MFA loan in the total Serbian debt
stock of the end of 2011, however, represented only around 0.7%.

The following table presents the nominal interest rates on the newly emitted securities
of the Serbian government in 2011 by maturity:

Table 27 - Nominal interest rates on new government securities of Serbia, 2011

Weighted average nominal interest rate on Serbian
government securities in RSD

Weighted average nominal interest
rate on the Serbian government
securities in EUR

3 months 6 months 12 months 18 months 2 years

3 years 12 months18 months 3 years

15 years

12.69

12.44

12.90

12.92

13.06

14.38

4.48

5.40

5.00

5.85

Source: NBS

The weighted average nominal
Serbian government in 2011 stood at 5.18%.

interest rate on the new borrowing in euro for the

26

This refers exclusively to the disbursed 1st tranche.

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The MFA loan was granted at the nominal
interest rate of 3.382% per year at an
average maturity of seven years. No government security had been emitted over 2011
at comparable maturity, thus comparison is not straightforward. Nevertheless, the
examination of the nominal interest rates on the newly emitted securities shows that
the cost of the debt for the Serbian government stood consistently above the interest
rate to be paid on the MFA loan: on average the interest rates on the new debt in euro
in 2011 were at 5.18% with a distribution from 4.48% to 5.85%. The nominal interest
rates on the debt in Dinars ranged between 12.44% and 14.38% (but the maturities
did not exceed three years). Thus,
if the Serbian
government would have borrowed on the markets under the conditions prevailing and
at the rates presented above, the cost of debt would have undoubtedly been higher.
This qualitative result is robust.

in absence of an MFA loan,

Any quantitative estimation of the cost of substitution of the private debt to the MFA
debt is necessarily speculative given the uncertainty over the amount that the Serbian
government would have borrowed and the breakdown of this borrowing between loans
in Dinars and loans in Euro. In addition, the MFA loan was awarded at average
maturity generally exceeding that of the Serbian government securities. Nevertheless,
a first-hand approximation of this cost can be attempted based on the assumptions of
our counterfactual analysis and findings of the Delphi.

The total cost of the MFA loan is found out from the formula:

Where 100 is the volume of the loan, 3.382% is the interest rate and 7 is the
maturity.

The total cost of the MFA loan is equal to EUR 130.007 million.

The first-hand approximation of the cost of alternative borrowing is given by the
formula

Where the interest rate of 5.1825% is an average of the nominal interest rate on the
Serbian government securities in EUR at different maturities in 2011

The total cost of alternative borrowing is equal to EUR 142.431 million.

Comparing the two types of borrowing – MFA and borrowing on the private markets –
reveals an additional cost of around EUR 12.424 million that the Serbian government
would bear if it had to replace MFA debt by the debt in EUR contracted on the private
markets. Given that this cost would have been spread over seven years and that, for
instance, the interest payments of Serbia on its public debt in 2011 amounted to EUR
395.464 million, the impact of this additional cost would be very limited.

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In addition to the direct effect of substituting cheaper MFA loan to more expensive
loans contracted on the private markets, we should add the effect on the public debt
of the Dinar depreciation occurring in case of an absence of the MFA. This effect is
estimated based on our counterfactual analysis. Our modelling exercise shows that in
absence of the MFA, the nominal effective exchange rate of the Dinar would depreciate
by 0.00056%. Given that the public debt of Serbia stood at RSD 1,513,796 million by
31st of December 201127, while the proportion of debt in foreign currency represented
83.8% of the Serbian public debt on that year, a Dinar depreciation – which we
assume similar across all the foreign currencies – of 0.00056% would increase the
stock of debt outstanding by RSD 7.1 million (not counting future interest payments).
Qualitatively the effect is marginal and would not affect the public debt sustainability
of Serbia.

fears” channel: averting downturn in private investors’

The “market
expectations
This channel refers to the impact on the private investors’ confidence regarding
Serbian public debt and solvency of the Serbian state.

The direct financial effect of the MFA is likely to have been limited, given the volume
of the loan with respect to the relevant external financial sustainability indicators. As
seen in the previous subsection, the cost differential between the MFA debt and the
debt contracted on the private markets would have been very limited thus having
proportionately very limited impact on the solvency of the Republic of Serbia. For the
sake of comparison, the Dinar depreciation from 2011 to 2012 increased the public
debt-to-GDP ratio by almost 6 percentage points. Furthermore, disbursement of the
MFA loan occurred in 2011 while the probability of the crisis – according to the Delphi
responses and the structured interviews – was at its height in 2009. In addition,
Macro-Financial Assistance direct budget support did not
to
intervene in case of a crisis occurrence. Thus, the design, the timing and the volume
of the MFA were such that the perception by the private investors of its direct financial
impact on Serbia’s sovereign creditworthiness – and therefore on the interest rates on
the Serbian sovereign debt – was likely to have been near-zero.

imply commitment

Nevertheless, concerning Serbia’s sovereign credit rating, through the whole period
2007-2012 both S & P and by Fitch considered that Serbia’s EU integration prospects
and related institutional and structural reforms as crucial factors supporting Serbia’s
creditworthiness. In this perspective, Macro-Financial Assistance to Serbia would have
to help Serbia through the global
bolstered confidence in the EU commitment
economic downturn and corresponding commitment of the Serbian authorities to
implement structural reforms which, would bring down the primary budget deficit and
ensure public debt sustainability and external financial sustainability. This was likely to
have exercised an influence on Serbia’s sovereign credit rating.

impact: providing incentive for structural reforms that

Direct structural
enhance medium-long term external financial sustainability
The MFA contained a policy condition of the introduction of the quantitative fiscal
rules. The successful implementation of these rules would build a fiscal responsibility
framework would have a ceiling on the budget deficits enhancing public debt and
external financial sustainability. The issue of implementation of the quantitative fiscal
rules is fully addressed in one of the previous sections.

27

Source: Republic of Serbia, Ministry of Finance, Public Finance Bulletin, December 2011

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Macro-Financial Assistance design and implementation
This section addresses the question of how the structuring of the MFA and the
modalities of its implementation shaped its impact. The chapter is organised according
to the following logic.

The first subsection is dedicated to the synergies and complementarities of the MFA
with the Instrument for Pre-Accession. In 2009-2010 Serbia was endowed with EUR
100 million of
funding. The
corresponding subsection reviews the potential synergies between MFA and IPA policy
conditions.

IPA funds in the form of untied budget support

The second subsection addresses the synergies between the MFA on the one hand and
the IMF and the World Bank assistance programmes to Serbia on the other hand. We
examine potential
the financial and policy
complementarity.

interactions under

the angle of

Finally, the third subsection investigates the issues related to the design, structuring
and implementation of the MFA. We explain its main features and identify areas for
improvement.

Synergies with the Instrument for Pre-Accession (IPA) budget support
The EU and Serbia signed the Stabilization and Association Agreement (SAA) on the
29th of April 2008 and Serbia has been granted the candidate status by the European
Council decision of the 1st March 2012. However the country has been benefiting from
the IPA assistance since 2007 receiving around EUR 1.1 billion from 2007 to 2012.
While IPA is generally a project-based funding, in 2009 and 2010 Serbia benefited
from two IPA tranches in the form of the budget support. The Commission adopted on
28 July 2009 the Budget Support Programme for Serbia under the IPA – Transition
Assistance and Institution Building Component for 2009. The IPA budget support for
the total amount of EUR 100 million was awarded, in the form of grants, in two
tranches, of EUR 50 million each, in December 2009 and in December 2010. The IPA
budget support was accompanied by a set of policy conditions.

From the financial point of view, the two programmes – MFA and IPA – are clearly
complementary rather than overlapping: IPA funds were disbursed in 2009 and 2010,
while the MFA loan was made available to Serbia in 2011.

On the policy ground, the MFA could have had two types of interaction with the IPA
budget support. The first type of interaction arises when the policy conditions of the
two programmes differ, but are related to the same policy field (e.g. public financial
management). In this case, MFA and IPA complement each other. The second type of
interaction arises when some of the policy conditions related to the two instruments
are identical or very close. In the case of overlapping the policy conditions could be
either redundant or mutually reinforcing. Redundancy would lead to conclude that MFA
conditionalities were superfluous, while mutually reinforcing character of the policy
conditions from two programmes would have been a sign of complementarity.

The following table provides a list of policy conditions related to the MFA on the one
hand and to IPA on the other hand:

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Table 28 – MFA and IPA budget support policy conditions

Macro-Financial Assistance (MFA)

Instrument for Pre-Accession (IPA) Budget Support

Disbursing IMF programme

Cooperation with the IMF

Disbursing IMF programme

Budget System Law

1st tranche. Government approval of the Budget System laws, specifically
establishment of Quantitative Fiscal Rules
2nd tranche. Approval of by-laws regulating extra-budgetary funds.







Submission by the Government to the Parliament of the new Budget System
Law
Publication in the Official Gazette of the new Budget System Law
Enactment of the Budget System Laws
To take first steps of regulation and harmonisation of the budget preparation
in extra-budgetary funds with the standard budget process, in particular
produce a list of extra-budgetary funds and budget appropriations of these
funds

1st tranche. Government approval of the Budget System laws, specifically
provisions in the PIFC policy paper of November 2009:
2nd tranche. Recruitment of the Ministry of Finance Internal Auditor.
2nd tranche. Enactment of the revised Law on the State Audit Institution.
2nd tranche. State audit institution: production of a draft audit report on the
2009 financial statements for the Republic of Serbia launching the audit of three
SOEs









Adoption by the Government of a Public Internal Financial Control strategy
paper
Establishment of a central harmonization unit for financial management and
control and internal audit within the Ministry of Finance
Submission by the Government to the Parliament of the amendments to the
law on the State Audit Institution in order to further align it to EU standards
Completion of the external audit of 2008 financial statements for the
Republic of Serbia and submission to the National Assembly

Public Internal Financial Control

Public Financial Management

2nd tranche. Adoption of public accounting standards in line with international
standards.
2nd tranche. Circulation among stakeholder of the draft PEFA report with the aim
of preparing a PFM roadmap
2nd tranche. Further integration of the Medium-Terms Expenditure Framework
(MTEF) into the budget process, in particular introducing 3 year budget ceilings.
2nd tranche. First steps in the implementation of a new debt strategy, in
particular issuance of Dinar-denominated T-bills with a maturity of at least 18
months.




Adopt by-laws on public procurement in line with the EU ‘acquis’
Launch a PEFA update with the aim of preparing a PFM roadmap

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European Integration

2nd tranche. Maintain and develop administrative capacity in the MoF in order to
deal with the EU integration issues, such as decentralised implementation system
(DIS) and state aid control.









Exclusion of personnel working with priority areas of EU integration from the
recruitment restrictions introduced in March 2009, in accordance with the
Human Resources Plan of the Government of Serbia for 2009.
Adopt the Law on Protection of Competition and start implementing it, by
adopting at least 4 out of the 10 foreseen by-laws. Increase the number of
qualified staff in the Commission for protection of Competition to at least
75% of the planned total number of employees foreseen in 2009 in the NPI.
Adopt the Law on State Aid Control and start implementing it by adopting
the by-law and establishing the appropriate operationally independent state
aid control body as stipulated in the law. Increase the number of qualified
staff working with state aid control
in the Serbian administration at least
50% of the planned total number of employees foreseen in 2009 in the NPI.
Produce an action plan for gap plugging for IPA components I and II, taking
into consideration the recommendation of the final Gap Assessment Report;
in the involved structures;
hire or allocate the required full-time staff
complete stage 0 and launch stage 1 of the Decentralised Implementation
System for IPA components III and IV.

Source: MFA Memorandum of Understanding, IPA Memorandum of Understanding

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One major policy condition pertaining to the two tranches of the MFA and to the IPA is
the compliance with the Stand-By Arrangement (SBA) concluded with the IMF. This
compliance pre-condition is complementary rather than redundant across the two
instruments. Both IPA and MFA seek to ensure IMF policy conditions implementation,
thus inclusion of the disbursing IMF programme as a precondition for disbursement of
IPA and MFA funds provide EU political backing to the former and thus increase
probability of its implementation.

Concerning the Budget System Law, IPA and MFA policy conditions are largely
the
complementary. MFA is the only programme containing the condition of
introduction of quantitative fiscal rules. Thus, the quantitative fiscal rules condition is a
clear added value from MFA compared to IPA. Both programmes address the issue of
extra-budgetary funds, but IPA requests to produce a list of extra-budgetary funds
and budget appropriations of these funds, while the MFA (2nd tranche) takes the issue
to the next stage by requesting the approval of by-laws regulating these funds.

With respect to the Public Internal Financial Control a major overlapping policy
condition concerns the adoption of the recommendations from the Public Internal
Financial Control strategy paper, a policy condition included in both programmes.
According to the Delphi analysis output, Public Internal Financial Control policy
conditions are those where the MFA indeed made a difference in a sense that the MFA
was pointed out by the Delphi participants as the main driver of their implementation.
The Memorandum of Understanding for MFA was designed during the disbursement of
the IPA tranches. Thus,
the
importance attached to them by the European Commission, therefore the overlap of
MFA and IPA on these topics is mutually strengthening rather than redundant.

these policy conditions witnessed of

inclusion of

The analysis of policy conditions related to public financial management and European
integration has to take into account the fact that for MFA these policy conditions were
attached to the second tranche which was ultimately never disbursed. However, the
examination of the two programmes shows that the policy conditions in these areas
are largely complementary. The only overlap concerns the preservation of
the
administrative staff dealing with the European integration issues: in the context of the
downsizing of the public sector employment both programmes sought to ensure that
the personnel who have competence and experience in the EU integration-related
areas would not be subject
the staff highly
experienced in EU-related matters is instrumental to the quality of the EU-Serbia
dialogue and insistence of both programmes on this subject is clearly complementary
since IPA pertains to 2009, while MFA extends this policy condition to 2010 and 2011.

to these layoffs. Preservation of

Synergies with IMF and World Bank programmes

The interactions of the MFA with the IMF and the World Bank programme have two
components: the financial component and the policy component.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Financial component
The financial component refers to the complementary/substitutable nature of the MFA
funding with respect to the IMF/WB funding. The volumes of financial assistance to
Serbia were calculated based on the IMF forecasts of the country’s anticipated external
financing needs and the breakdown of financial assistance across the EU, the IMF and
the WB was agreed beforehand. In the case where the IMF and/or the World Bank
would have simply stepped in to provide larger loans in case the MFA had not been
awarded, the MFA loan and the IMF/WB loans would be substitutable. Thus, the added
value of the MFA with respect to the IMF and the WB financial assistance would be
purely mathematical: a loan from the EU allows smaller loans from the international
financial institutions.

If the IMF and the WB would not have provided larger loans in absence of the MFA,
the Serbian government would have had to search for other alternatives to cover a
share of its financing needs through other sources, possibly at tougher financial
conditions. In this case,
the MFA would present real added value and exhibit
complementarity with regard to the financial assistance from the international financial
institutions.

The Delphi analysis indicates that an increase in the size of financial assistance from
the international financial institutions in the event of no-MFA would be possible, but
unlikely.

Policy component
The policy component refers to the policy conditions included in the Memorandum of
Understanding of the MFA on the one hand and in the agreements concluded between
the Serbian government and the international financial institutions (IMF and the World
Bank on the other hand.

According to the stakeholders interviewed, the MFA contributed positively to the
implementation of the International Monetary Fund policy conditions. The prevailing
opinion in 2008-2009 was that the crisis that had hit Serbia would be short-lived and
Serbian economy would quickly revert to its state before the crisis. Thus the impact of
the IMF opinion was reduced at this period compared to the current situation. The
bundling of the Macro-Financial Assistance into the financial assistance package and
the explicit pre-condition introduced in the MFA MoU of the IMF programme being on
track allowed for faster and smoother implementation of the latter.

The two MFA policy conditions do not overlap with the IMF and the World Bank
conditions, thus the former and the latter are complementary: they address different
issues in the same fields of structural reforms.

MFA volume, structure and timing of disbursement

This subsection analyses the impact of the MFA characteristics on its efficiency. We
examine the main features of the MFA design and implementation: the volume, the
interest rate, the maturity, the timing of the disbursement of funds, specific provisions
attached.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

MFA volume
The volume of the MFA was determined based on Serbia’s external financing needs
assessment by the International Monetary Fund and calibrated accordingly by the
European Commission. The key difference with the IMF financial assistance is that the
MFA funds are transferred to the budget, while the IMF funds constitute a support of
the foreign currency reserves of the National Bank of Serbia.

The respondents to the Delphi questionnaire evoked higher volume of the loan as one
of the improvement areas: this would allow substituting cheaper MFA debt to more
expensive debt borrowed on the markets. However, the MFA is designed to address
the financing needs of a country in economic distress and not to provide cheaper
funding on a permanent basis. With Serbian financial situation improving in 2011,
larger MFA loan volume would simply produce a windfall effect. By late 2011 Serbia
sovereign debt emissions on the markets were successful and a portion of the
proceeds was even left unused in the ongoing budget execution process. This
reinforces the windfall effect argument of a larger MFA loan volume.

Thus, the volume of the MFA loan was fully adequate given the ex ante forecasts and
the ex post needs of the Serbian economy.

MFA structure
The interest paid on the MFA loan was established at 3.382% per annum with an
average maturity of seven years.
According to the European Commission representatives involved in the design of the
MFA the interest rate was computed based on the LIBOR + the margin covering the
transaction costs of the funds management. The maturity has no formal legal basis,
but follows the principle that the recipient country has to be provided with a loan of
reasonable long term maturity of around 8-10 years.

The MFA borrowing terms were suitable since it allowed Serbia to benefit from an
interest differential (quantitative assessment of the impact of the interest differential
on the Serbian public debt is given in the previous chapter), while covering the
borrowing costs associated with the MFA lending of the EU. The interest rate on the
MFA loan was considerably lower than interest rates on Serbian government securities
emitted in 2011 (5.18 on average). In addition, the MFA loan was provided on an
average maturity longer than the average maturity of the Serbian public debt that
year.

Timing of MFA funds disbursement
The Decision 2009/892/EC deemed important that “the Community macro-financial
assistance to Serbia is disbursed before the end of 2010” given the country’s financing
needs for 2010, the Memorandum of Understanding was signed in July 2010, while the
funds were effectively disbursed only in July 2011. Regarding timing of the Macro-
Financial Assistance funds disbursement, the general feedback from the structured
interviews was that funds should have come earlier.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Indeed, the major needs for financial assistance situated in late 2008-2009 when the
Serbian economy underwent a fall
in its capital account volume requiring a major
external rebalancing. At this moment the risks of a full-fledged balance of payments
crisis followed by a fiscal crisis due to unsustainable growth of the external debt
burden were the highest (even if they ultimately failed to materialize) which motivated
the IMF precautionary SBA, augmented to Exceptional Access SBA in March 2009. By
imbalances were largely reduced – tensions and risks were far
2011, the external
below their 2009 level.

The length of the negotiation on the first tranche was evoked as one of the reasons
why the second tranche was not requested (the two other being the lack of financing
needs and non-disbursing IMF programme).

Conclusions and recommendations for
operations
This chapter summarizes the main findings of our evaluation of the MFA to Serbia and
draws recommendations for the Macro-Financial Assistance operations.

future MFA

Main findings
The MFA comprised two components: the financial component with the EUR 100 loan
and the policy component with the two policy conditions underpinning the
disbursement of the loan. Below we review the key findings for each of them.

Financial component of the MFA
From the macro-financial perspective, and even though only one tranche was
ultimately disbursed, the MFA loan had a positive impact on the Serbian economy, as
well as on the Serbian public finance sustainability.

As part of the international financial assistance framework, the MFA funding was
definitely relevant to the needs of the Serbian economy. MFA funds ensured 45% of
the coverage of the external financial needs of Serbia, as computed by the IMF, for
2011 and 5% for the period 2009-2011. According to the interviews with relevant
stakeholders, MFA financial contribution was probably even more needed in 2011 than
in 2009, at the height of the crisis. Nevertheless, according to the stakeholders
interviewed, efficiency of the MFA could have been higher had the funds been
disbursed faster. By contrast, the interest rate and the maturity of the MFA loan are
fully appropriate.

Along with the IMF and the World Bank contribution, the MFA helped the Serbian
economy to escape a full-fledged debt crisis and pull out of the recession for in 2010-
2011, even though the macroeconomic condition of Serbia worsened in 2012. Thus,
the MFA – along with other international
institutions assistance – were
effective in limiting the macroeconomic damage and reducing the danger of a major
crisis.

financial

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The impact of the MFA funds on the macroeconomic aggregates is very limited but
positive: without the MFA the Serbian GDP would be between 0 to 0.05% lower. Albeit
the quantitative assessment of the impact of the MFA is problematic, the absence of
the MFA would have left the country worse off in terms of revenue, consumption and
investment. The absence of the MFA would also lead to a slight Dinar depreciation with
respect to the main currencies. In addition, without the MFA the Serbian government
would be most likely led to borrow on the private markets at a higher interest rate.
This, in hand with the abovementioned Dinar depreciation, would lead to a slightly
higher debt burden for the Serbian economy (although this additional cost is very
limited). Even if
financial sustainability and public debt
sustainability are scarcely affected by the MFA due to the limited size of the latter, the
EU involvement contributed to stabilising the expectations of the private agents about
the Serbian economy.

the Serbian external

Policy component
The two policy conditions related to the first tranche of the MFA were negotiated and
agreed upon with the Serbian stakeholders, and both policy conditions were clearly
adequate to the needs of the Serbian economy.

The two policy conditions were formally fulfilled with on the one hand the adoption by
the Serbian Parliament of the Law on amendments and addenda to the Budget System
Law which introduced a set of quantitative fiscal rules and transposed into legislations
a set of measures related to the Public Internal Financial Control from the policy paper
approved in November 2009.

the EU through the MFA was instrumental

The involvement of
in pushing for
implementation of the measures described in the policy conditions. According to the
persons interviewed and to the participants of the Delphi, the MFA was one of the
major drivers – along with the IPA – of giving a legal ground to measures related to
the Public Internal Financial Control. Concerning Government and Parliament approval
of the PIFC-related legislation, the cooperation between the European Commission and
the Serbian government ensured an ownership of the PIFC measures, yet without the
MFA the implementation of these legal acts would probably have been made at a
slower pace or even postponed. The PIFC measures are part of a structural
the Serbian public financial management and are expected to
improvement of
contribute to gradually align the Serbian administrative capacities to the EU standards
in the field. By contrast, the efficiency and the impact of the fiscal rules for the
Serbian economy were limited by the fact that the targets fixed were breached in
2011 and in 2012.

In addition, MFA provided a strong political backing for the implementation of the
structural reforms at large within the Serbian economy, in particular of the structural
reforms agreed between the Serbian authorities and the IMF.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Recommendations for future MFA operations

In this section we provide a set of recommendations for improving the MFA instrument
for further operations. Even though these recommendations are based on the specific
findings from the MFA support operations to Serbia, they can be generalized to other
potential recipient countries. Our recommendations also take into account the Joint
Declaration by the European Parliament and the Council adopted on the 14th of August
2013 and outlining the considerations and the principles underpinning Macro-Financial
Assistance.

Better time-targeting of the financial assistance: “disburse faster, terminate
earlier”
Macro-Financial Assistance is provided to countries facing serious external financing
difficulties in the short run – which could potentially mean months – in order to
alleviate short-term balance of payment problems. Thus, delays in disbursement imply
a possibility for the recipient country to fall short of the funds which are needed
urgently and to face the very balance of payment crisis that MFA had sought to
prevent. Therefore a faster disbursement would make the MFA more efficient in terms
of macroeconomic stabilisation. This would have been particularly relevant in the
Serbian case, judging by the feedback from the Serbian stakeholders, as the main
financing needs arose in 2009, while the MFA loan first tranche was disbursed only in
July 2011.

the balance of payment crisis, either

The case for faster disbursement is also strengthened by the considerations related to
the existence of potential windfall effects: provide cheaper financing to countries
which do not need it anymore. If the financial assistance is provided when the country
had already pulled out of
through an
improvement of the general macroeconomic context or – as in the Serbian case –
through acquired access to new financing sources, then the added value of the
assistance would be nil from the macro-financial point of view. MFA would in particular
clearly diverge from its objective of alleviating short-term balance of payment
difficulties. In addition,
late disbursement of cheaper funds in absence of clear
financing needs could produce inadequate incentives as regards structural reforms and
adjustment measures: the opposite of the MFA objective. Thus, in addition to faster
disbursement of MFA funds we recommend discontinuation of the MFA disbursement if
the country’s external financial situation does not require it any more, i.e. if the no
clear balance of payments problem henceforth exist. This consideration is in line with
the Joint Declaration which states that “Macro-Financial Assistance (...) should be
discontinued as soon as the external financing situation has been brought back to a
sustainable situation”. In case of Serbia this was partly and unintentionally fulfilled as
the second tranche of MFA was not disbursed.

Thus, overall, MFA financial component efficiency would be maximized if the loan is
both disbursed faster and discontinued in the event of sufficiently improved external
financial conditions of the recipient country.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

MFA Policy conditions:
implementation

focus on “quick wins”,

follow-up on their

As far as the structuring of the policy conditions is concerned, the corollary of this
disbursement strategy would be to focus on “quick wins” – straightforward and
immediately implementable measures – for the first tranche of the MFA loan so as to
enable the recipient country to fulfil the MoU policy conditions quickly enough to
benefit from the financial assistance when it is needed. Typical examples of quick wins
would be legislative measures which can be adopted under short notice. An example
related to this specific MFA is Serbian Parliament’s adoption of measures related to the
introduction of quantitative fiscal rules and adoption of
the PIFC policy paper
measures.

Another recommendation related to the policy conditions would be to monitor the
effective implementation of the measures introduced to comply with the latter.
Indeed, MFA policy conditions are useful only to the extent that the legislative
measures related to these conditions are effectively translated into policies afterwards.
One example from the current evaluation is the introduction by Serbia of the Fiscal
Deficit Rule, the 45% debt-to-GDP cap and the set of indexations rules for pensions
and salaries of the public sector employees. Although effectively passed into the
Budget System Law, these quantitative fiscal rules were made ineffective by the
divergence of the fiscal policies from the objectives fixed by these rules. Thus, one
improvement to be considered for upcoming MFA operations is to introduce an
obligation for the recipient country to align its policies with the legal acts introduced in
line with the MFA policy conditions. Thus, the fulfilment of the policy conditions would
require the adoption of subsequent legislation as a pre-requisite for disbursement of a
tranche and public policies complying with the legislation afterwards as a prerequisite
for disbursement of further tranches.

According to the Joint Declaration, the MFA “should underpin the implementation of a
policy programme that contains strong adjustment and structural reforms measures
designed to improve the balance of payment position” of the recipient country. In
addition, the success of the MFA in restoring the recipient country’s external financial
sustainability relies on the implementation by the latter of the measures related to
structural adjustment in order to make its external financial position viable in the long
term (while the MFA loan helps to sustain it in the short term). If the recipient country
does not need to implement measures related to the structural adjustment – such as
the fiscal rules aiming at stabilising the fiscal deficit and debt-to-GDP ratio – this
would mean financial assistance is superfluous, which would make a case for
discontinuation of the latter.

November 2013 138

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Appendix A – Our approach to the Delphi interviews

November 2013 139

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The Delphi method for interviews
The Delphi method is an effective and reliable data collection method that
is
particularly useful when there are indirect effects that are to be evaluated or there is
uncertainty surrounding the area being investigated (Dalkey & Helmer, 196328). It was
originally developed by the RAND Corporation in the 1950s and applied to assess the
direction of long range trends, with emphasis on science and technology and their
effects on society; to forecast likely inventions, new technologies and the social and
economic impact of technological change.

Delphi method is defined as “a method for structuring a group communication process
so that the process is effective in allowing a group of individuals, as a whole to deal
with a complex problem.” (Linstone & Turoff, 197529). The main aim is to reach an
agreed view or shared interpretation of an emerging topic area or subject for which
there is contradiction or indeed controversy.

Rowe and Wright (199930) characterize the classical Delphi method by four key
features:

1. Anonymity of Delphi participants: allows the participants to freely express their
opinions without undue social pressures to conform from others in the group.
Decisions are evaluated on their merit, rather than who has proposed the idea;

2. Iteration: allows the participants to refine their views in light of the progress of the

group’s work from round to round;

3. Controlled feedback: informs the participants of the other participant’s

perspectives, and provides the opportunity for Delphi participants to clarify or
change their views;

4. Statistical aggregation of group response: allows for a quantitative analysis and

interpretation of data.

Recommended Characteristics
From literature review, particularly the paper by Day & Bobeva (2005)31, we see that
the Delphi study has a number of key characteristics that need to be defined and there
these
are standard guidelines for what
characteristics.

is considered acceptable in terms of

28

29

30

Dalkey D. & Helmer O. (1963) An experimental application of the Delphi method to the use of experts. Management Science 9, 83–90.

Linstone, H.A. and Turoff, M. (eds.) (1975) The Delphi Method Techniques and Applications. Massachusetts, Reading: Addison-Wesley.

Rowe, G. & Wright, G. (1999). The Delphi technique as a forecasting tool: Issues and analysis. International Journal of Forecasting, 15(4),

353 – 375.
31

Day J and Bobeva M (2005) “A Generic Toolkit for the Successful Management of Delphi Studies” The Electronic Journal of Business

Research Methodology Volume 3 Issue 2, pp 103-116.

November 2013 140

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Characteristic

Recommendations

Number of Rounds

Participant
characteristics

Mode of operations

Varying between two and ten (Lang,
199432; Errfmeyer et al, 198633) but most
commonly restricted to two or three rounds.

Homogeneous or heterogeneous groups.
The profile of
the participants could be
defined any number of characteristics that
tie the different participants together. Of
particular importance to potential users of
Delphi
is establishing the expertise of the
participant (Gordon, 199434) that affects the
quality of the outcomes.

Face-to-face
individual
participants or electronically administered
questionnaires.

interview with

Anonymity or panel Either keeping all the participants unaware
of the other members, which then helps
influence their opinion or having a full panel
discussion with all the members aware of
each other’s identities. This is a key element
of the Delphi study.

Number
participants

of

be

obtained

Ziglio (199635) asserts that useful results
can
size,
homogeneous groups of 10-15 experts.
However Dalkey, as cited in Linstone (1978,
p.29636),
found that seven is a suitable
minimum panel size.

from small

Our Approach
There a various types of Delphi studies that can be carried out. For our purpose we
choose the Classical Delphi approach, which is essentially a forum for establishing
facts. It is a type of Delphi data are collected from the participants in a series of
rounds and the results are fed back to the participants until stability in responses
among the participants has been achieved.

The basic rule is that a Delphi survey stops once a range of answers to all the
questions is narrowed enough by iterative survey process. This narrowing is allowed
by gradual expansion of common knowledge - first within groups, than at the inter-
group level.

Our proposed characteristics for the Delphi, based on the parameters identified above
are provided here:

32

33

Lang, T. (1994), An overview of four future methodologies, The Manoa Journal of Fried and Half-fired ideas (about the future).

Errfmeyer, R.C., Erffmeyer, E., & Lane, I. (1986), The Delphi Technique: An Empirical Evaluation of the Optimal Number of Rounds. Group

& Organisation Studies, v.1:1-2 (March-June), pp.120-128.
34

Gordon, T.J. (1994) The Delphi Method in Futures Research Methodology, AC/UNU Project.

35

Ziglio, E. (1996), The Delphi Method and its Contribution to Decision-Making. in: Alder M. and Ziglio, E. (Eds.), Gazing into the Oracle, The

Delphi Method and Its Application to Social Policy and Public Health. London: Jessica Kingsley Publishers, 3-33.
36

Linstone, H.L.(1978), The Delphi Technique. In: J. Fowles, Ed. Handbook of Futures Research. London: Greenwood Place.

November 2013 141

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Characteristic

Recommendations

Number of Rounds

Participant
characteristics

Mode of operations

to
the

develop

need
over

Given the nature of the questionnaire
and
our
the
hypothesis
period, we
conducted two sequential rounds. The
critical element in this approach is to
always ensure that the attrition rate is
to a level which meets the
kept
criteria. Our
minimum participant
Delphi analysis was successful
in this
respect.

to an expert

We proposed an expert group of
homogenous participants – all with
common ties
level
understanding of the Serbian economy
in general and of the macro financial
impact in particular. We also identified
participants
specific
knowledge to both the MFA operations
as well as the IMF interventions.

have

who

Although electronically administered
questionnaires were preferred, given
the ease of
filling them in and
responding, we proposed to use offline
version – MS Word documents which
could be filled in electronically – rather
than web based questionnaire.

This approach further allowed us to
follow up with individual participants to
ensure
the
process and create a follow up process.

commitment

their

to

Anonymity or panel

We keep the participants anonymous,
using only group characteristics to
identify them in subsequent rounds.
For example, we could have spoken to
a participant and state that
“the
respondents from the Central Bank
thought this, would you like to change
your opinion?”

November 2013 142

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Characteristic

Recommendations

Number of participants

we

with

worked

a
Because
homogenous group of participants, all
of who are knowledgeable about the
macro economy of Serbia, we had
proposed the following threshold for
the participants:

 Target number of participants: 15;
 Acceptable number of participants:

10;

 Critical threshold (below which the

Delphi will be declared
unsuccessful): 7.

The first round of Delphi consisted of sending the survey with questions bearing on the
Serbia macroeconomic situation and the effect of structural reforms in the MFA
operations to each participant.

After the responses are received from participants of a group, the results are made
known to all participants from this group. Therefore, at the start of the second round,
participants of a group knew what the other participants from their group responded.
Each participant was offered the whole range of answers that emerged from the first
round.

In the second round, the participants received the same set of questions, but now
they had prior knowledge of the answers from the other participants of the group.
Therefore, they could adjust their own answer. Once the round was over, we
performed a summary of the replies. The survey ends upon complete elimination of
smoothing of conflicting views and narrowing the range of responses across the three
groups until they summarize into a consistent view of the MFA macroeconomic and
structural impact.

The questionnaire is presented in the following pages. The questionnaire includes the
responses collected over the two phases of the Delphi analysis.

November 2013 143

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Delphi Questionnaire and the results of the Delphi analysis
The questionnaire below includes the answers obtained through the two phases of the
Delphi analysis. For each question we present the percentage of respondents that
selected each of the options available for each question.

1. How do you compare the current macroeconomic situation in Serbia, as compared

to mid-2010?

Worse

Much the
Same

30%

10%

A little
Better

60%

Much Better

Do not know

0%

0%

How to read this table: after two rounds of the Delphi, 30% of the participants
concluded that the current macroeconomic situation in Serbia is worse compared to
mid-2010, 10% think it is much the same, 60% consider the situation a little better.
None consider it much better.

2. In your judgement, what was the likelihood of a macroeconomic crisis in Serbia in

the following years?

Very small
chance of
happening

Unlikely to
have
happened

Could have
happened

Surely
would have
happened

Do not
know

10%

2009

2010

2011

2012

10%

50%

30%

20%

60%

40%

50%

50%

20%

10%

20%

30%

3. How do you assess the contribution of the European Union’s Macro-financial
Assistance (MFA) towards the macroeconomic stabilisation of Serbia, when
compared to the contributions from the IMF and the World Bank?

Made
things
worse

No
contribution

Minor
contribution

A major
contribution

Do not
know

10%

90%

November 2013 144

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

4. How do you perceive the Macro-financial Assistance from the European Union,

where do you think it had the most impact?

Necessary

Useful

Unnecessar
y

The MFA was ...

20%

80%

Its impact on

Major

Somewhat

No impact

Budget Support was ...

assisting in structural
reforms was ...

11%

addressing the Balance of
Payment deficit was ...

80%

67%

20%

22%

50%

50%

5. How could the MFA have been more effective? (choose all that applies)

Strongly
Agree

Agree

Not
relevant

56%

11%

56%

44%

89%

44%

The amount should have been bigger than the approved
€200 million

The grant component should have been larger

It should have had more structural reforms conditions

33.3%

33.3%

33.3%

The funds were needed earlier

100%

It should have had less structural reforms conditions

November 2013 145

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

6. In your opinion, if the Macro-financial Assistance (MFA) was not granted, what

could have happened?

Very Likely

Possibly

Unlikely

Very
Unlikely

Do not
know

IMF would have ...

- approved larger Stand by
Arrangements (SBA)

-
given
requirement

stricter

structural

-
given
requirement

easier

structural

World Bank would have ...

- approved larger loans

given
-
requirement

stricter

structural

-
given
requirement

easier

structural

- shifted from project loans to

macro-assistance loans

Other donors would have

- increased their program size

- increased debt cancellation

-

switched

Technical
Assistance funds to macro-
assistance components

0%

0%

0%

0%

11%

0%

0%

0%

0%

0%

10%

50%

40%

30%

40%

30%

0%

22%

78%

40%

22%

30%

22%

30%

44%

0%

11%

89%

50%

13%

38%

0%

0%

70%

56%

30%

44%

33%

33%

33%

November 2013 146

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

7. If EUR 100 million from the MFA was not disbursed in July 2011, what, in your
opinion, were the probabilities of the following actions by the Serbian government:

Serbian
Government
would have ...

Certainly

Very
Likely

Most
probably

Possibly

Unlikely

Very
Unlikely

Certainly not

Probability

1

0.9

0%

0%

0.75

0%

0.5

30%

0.25

10%

0.10

20%

0

40%

0%

10%

30%

30%

30%

0%

0%

- increased VAT

decreased

-
public
expenditure

-
borrowed
more from the
Domestic banks

borrowed
abroad
the
or

-
more
(from
banks
through
sovereign debt
emission)

10%

30%

30%

20%

10%

0%

0%

0%

30%

20%

40%

0%

0%

10%

November 2013 147

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

8. How do you assess the progress of the structural reform in the following areas, as

compared to mid-2010?

Major
Improvement

Slight
Improvement

No
Improvement

Worse

Do not know

Fiscal deficit

Public debt

Public
Control (PIFC) strategy

Internal

Financial

Functioning of
the Central
Harmonisation Unit (CHU) of
the Ministry of Finance and
Economy

Establishing
decentralised
internal audit units in direct
beneficiaries of the republic
budget

0%

10%

17%

40%

10%

50%

10%

20%

33%

50%

60%

0%

20%

40%

40%

0%

17%

83%

0%

0%

Certification
“certified
internal auditor”

public

scheme

for
sector

25%

50%

25%

the

Publishing
Management
(FMC) handbook

Financial
and Controls

0%

75%

25%

Training of managers of the
FMC

Familiarisation
of
managers in the public sector
with PIFC systems

training

Adopting an inspection law

Public
management

expenditure

Treasury management

Tax revenue collection

General public administration

20%

80%

40%

25%

20%

20%

0%

0%

60%

50%

60%

70%

50%

60%

0%

0%

25%

20%

10%

50%

40%

0%

0%

0%

0%

0%

0%

0%

0%

0%

November 2013 148

9. What contribution, if any, did the EU’s MFA have on reforms in the following areas?

Put the issue on
top of the policy
agenda

Speeded up
reforms

Helped influence
the reform
agenda

The MFA had no
effect in this
sector

Do not know

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Fiscal deficit

Public debt

Public Internal Financial Control (PIFC) strategy

Functioning of the Central Harmonisation Unit (CHU) of
the Ministry of Finance and Economy

Establishing decentralised internal audit units in direct
beneficiaries of the republic budget

Certification scheme for “certified public sector internal
auditor”

Publishing the Financial Management and Controls (FMC)
handbook

Training of managers of the FMC

Familiarisation training of managers in the public sector
with PIFC systems

Adopting an inspection law

Public expenditure management

Treasury management

Tax revenue collection

General public administration

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

25%

0%

0%

0%

0%

0%

0%

33%

0%

0%

0%

0%

50%

38%

75%

100%

100%

75%

75%

75%

75%

0%

80%

80%

60%

40%

50%

63%

0%

0%

0%

25%

25%

25%

25%

67%

20%

20%

40%

60%

November 2013 149

10. At the time these reforms were proposed, how important do you think they were to the national agenda?

Extremely
important

These were
relevant issues

Not relevant at all

Not Important at
all

Do not know

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Fiscal deficit

Public debt

Public
strategy

Internal

Financial Control

(PIFC)

Functioning of the Central Harmonisation Unit
(CHU) of the Ministry of Finance and Economy

Establishing decentralised internal audit units
in direct beneficiaries of the republic budget

Certification scheme for
sector internal auditor”

“certified public

Publishing the Financial Management and
Controls (FMC) handbook

Training of managers of the FMC

Familiarisation training of managers in the
public sector with PIFC systems

Adopting an inspection law

Public expenditure management

Treasury management

Tax revenue collection

General public administration

40%

30%

25%

0%

11%

0%

0%

0%

0%

25%

40%

40%

56%

20%

60%

70%

63%

88%

78%

86%

86%

86%

86%

63%

50%

50%

44%

80%

0%

0%

13%

0%

0%

0%

14%

14%

14%

13%

10%

10%

0%

0%

0%

0%

0%

13%

11%

14%

0%

0%

0%

0%

0%

0%

0%

0%

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

11. How would you rate the relative importance of these elements in bringing about the reforms?

(after assigning a proportional score, please ensure the total adds up to 100%)

Serbian
Government’s
Commitment

MFA Conditionality

IMF Conditionality

World Bank
Conditionality

Fiscal deficit

Public debt

Public Internal Financial Control (PIFC)
strategy

Functioning
Harmonisation Unit
Ministry of Finance and Economy

the
(CHU)

of

Central
the
of

Establishing decentralised internal audit
units
the
in direct beneficiaries of
republic budget

Certification scheme for “certified public
sector internal auditor”

Publishing the Financial Management
and Controls (FMC) handbook

Training of managers of the FMC

Familiarisation training of managers in
the public sector with PIFC systems

Adopting an inspection law

Public expenditure management

Treasury management

Tax revenue collection

General public administration

34%

34%

34%

44%

45%

49%

45%

52%

52%

52%

44%

48%

45%

48%

6%

4%

33%

30%

34%

37%

41%

34%

34%

28%

8%

14%

8%

22%

49%

44%

21%

15%

15%

9%

9%

9%

9%

16%

37%

29%

38%

20%

12%

17%

12%

11%

6%

5%

5%

5%

5%

4%

11%

9%

10%

10%

Total

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

November 2013 151

12. Had the MFA operations not taken place, what do you think would have happened to the following reforms areas?

Would have been
done by the Serbian
government’s
reforms agenda

The conditions
would have been
added to the IMF
SBA

The conditions
would have been
added to the World
Bank loans

No reforms would
have taken place in
this sector without
the MFA

Do not know

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Fiscal deficit

Public debt

Public
(PIFC) strategy

Internal

Financial

Control

the
Functioning
Harmonisation Unit
(CHU) of
Ministry of Finance and Economy

of

Central
the

Establishing
internal
audit units in direct beneficiaries of
the republic budget

decentralised

Certification scheme for
public sector internal auditor”

“certified

Publishing the Financial Management
and Controls (FMC) handbook

31%

33%

40%

75%

80%

75%

50%

Training of managers of the FMC

100%

Familiarisation training of managers
in the public sector with PIFC systems

Adopting an inspection law

Public expenditure management

Treasury management

Tax revenue collection

General public administration

75%

75%

44%

44%

63%

60%

54%

58%

40%

0%

20%

0%

25%

0%

0%

25%

44%

44%

38%

20%

15%

8%

0%

0%

0%

0%

0%

0%

0%

0%

11%

11%

0%

0%

0%

0%

20%

25%

0%

25%

25%

0%

25%

0%

0%

0%

0%

20%

November 2013 152

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Respondent Information (please leave blank if you do not wish to fill this in).

This questionnaire has been filled by:

Name

Title

Institution

Date

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Appendix B – Questionnaire for structured interviews
The guide is divided into two parts: the first related to the macroeconomic evolution of
Serbia (and the effects of MFA funds on the latter), the second – to structural reforms
(and the effects of MFA conditionalities on it).

Some questions are common to all the stakeholders, while part of the questions is
targeted at one or more specific categories of stakeholders.

November 2013 154

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Macroeconomic stabilisation
As specified in the Memorandum of Understanding, MFA funds were disbursed to the
National Bank of Serbia (NBS), acting as an agent of the Borrower (the Republic of
Serbia). These funds were recorded on the balance sheet of the NBS under the line
“foreign currency reserves and cash holdings”.

Relevance

Questions

Are you aware of the Macro-Financial Assistance support operations
(specifically within the international financial assistance to Serbia in
2009-2011)?

How do you evaluate the risk of a capital crisis occurring in Serbia in
2009 without the financial assistance from the IMF and the MFA
(including the signalling effects)?

What were the main targets and the main features of the Serbian
economic policies (monetary, fiscal) over the period 2009-2012?

How (through which channels) would you expect the MFA funds (EUR
100 million) to impact the Serbian economy?

What qualitative macroeconomic results did you expect the MFA to
achieve?
To what extent has your
management of MFA funds?

institution been involved in the

Target
groups

NBS
Ministry of
Finance
Fiscal council
NBS
Ministry of
Finance
IMF, WB
NBS
Ministry of
Finance
NBS
Ministry of
Finance

DG ECFIN

NBS
Treasury

November 2013 155

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Effectiveness

Questions

Target groups

As of your knowledge, when were the MFA funds Dinar equivalent
transferred to the Treasury?
As of your knowledge, when the MFA funds were effectively
integrated into the budget execution process (started being used for
disbursement purposes)?
Only the first instalment was requested and disbursed before the
programme expired in 2012. Serbian authorities did not request the
2nd instalment. Why did not Serbia request the 2nd instalment (given
that the interest rate on the MFA loans is considerably lower than
yields on the Serbian debt sold on the markets after the MFA)?
What are the main perceived constraints of the MFA? (In terms of
policy conditions? In terms of supervision?)

Efficiency

Questions

Did you see any impact of the Macro-Financial Assistance (at the
moment it was announced in November 2009 or at the moment
when it was signed in July 2010 or at the moment it was disbursed in
July 2011) on the private agents’ confidence as measured by:
 Yields at which Serbian debt is sold on the auctions
 Volume of households deposits held in Serbian banks
 Exchange rate evolution
 Credit Default Swaps on the Serbian debts
 Other indicators (which ones)

How well fitted was the timing of disbursement of MFA funds?

In 2011, Serbia’s external financing gap was evaluated by the IMF at
EUR 220 million. What would have been the alternative for coverage
of the financing needs in absence of the MFA (in absence of the MFA
and IMF loans)?
Regarding the restrictive fiscal policy, how much did you expect the
fiscal deficit to be reduced when the expenditures are reduced by 1
percent? (i.e. what size of the fiscal multiplier had been planned by
the Ministry of Finance when the restrictive fiscal policy was put in
place?)

NBS

Treasury

Ministry of
Finance
Fiscal council
Office of Prime
Minister
Ministry of
Finance
Fiscal council
Office of Prime
Minister

Target
groups

NBS
Treasury
Ministry of
Finance

NBS
Ministry of
Finance

Ministry of
Finance

Ministry of
Finance

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Sustainability

Questions

What additional macroeconomic policy measures do you deem
necessary in order to achieve full-fledged fiscal sustainability for
Serbia?

Given the alternative ways of financing that would have been used
without the MFA, what would be the contribution of the MFA funds to
put Serbia on a sustainable fiscal and external financial trajectory?

How important are the one-off wage bonuses in the remuneration of
the public employees?
What are the tools of multiyear budgeting of capital and current
expenditures in Serbia?
Could you please list the risks and their corresponding likelihood of
occurrence
financial
sustainability?

threaten Serbia’s

that would

external

Impact

Questions

Target
groups

Ministry of
Finance
IMF
NBS
Ministry of
Finance
Fiscal council
NBS
Ministry of
Finance
Ministry of
Finance
Statistical
Office
Ministry of
Finance
Fiscal council
NBS
WB, IMF

Target
groups

What could have been changed in the MFA structure (maturity,
volume, disbursement schedule) that would have improved on its
impact for Serbia (in terms of macroeconomic stabilisation and
medium-long term sustainability)?

Ministry of
Finance
Fiscal council

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Structural reforms

The two policy conditions specified in the Memorandum of Understanding (MoU) for
the Macro-Financial Assistance (MFA) were:




an introduction of the quantitative fiscal rules into the Budget Law, and
amendments in the field of Public Internal Financial Control aligning Serbian
legislation in the areas of accounting, public debt management, internal and
external audit to the European law.

Thus, our questions bear mainly on these two policy conditions. We assess their
relevance to the needs of the Serbian economy, effectiveness of their implementation,
their efficiency in the Serbian economic and fiscal context, their sustainability and
their impact at the different time horizons.

Relevance

Questions

How important were the two specified policy conditions on the
government agenda?

Do you think they would have been implemented without being on
the MFA MoU?

Was there any prior intention to introduce an automatic deficit rule?
(the MFA MoU was signed in July 2010 while the fiscal balance rule is
mentioned in the Letter of Intent of the Serbian government to the
IMF in June 2010)
The MFA MoU specified the requirement of “quantitative fiscal rules”.
The Serbian authorities introduced a Fiscal Deficit Rule and a set of
indexation rules for public wages and pensions (along with
corresponding targets). Did the Commission have these specific
rules (or any other) in mind when designing the MFA policy
conditions?
Was the Serbian government considering the alignment of its Public
Internal Financial Control standards to the policy conditions from the
MFA MoU before the decision on the MFA was made (i.e. before
November 2009)?
How relevant are the short and medium-term expected structural
effects of the assistance to the needs of Serbia?

Target
groups

Ministry of
Finance
Office of Prime
Minister
Fiscal council
Ministry of
Finance
Office of Prime
Minister
Ministry of
Finance
Office of Prime
Minister

DG ECFIN

Ministry of
Finance
Office of Prime
Minister
Fiscal council
Ministry of
Finance
Office of Prime
Minister

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Effectiveness

Questions

How is the Fiscal Deficit Rule (and specific indexation rules) are
computed operationally (by whom, how they are agreed upon)? How
is it revised (each year)?
Whose initiative motivated the introduction of the Fiscal Deficit Rule
(IMF requirement, MFA requirement, government own initiative)?

How the medium-term deficit targets were selected (the cap of the
medium-term fiscal deficit at 1% of GDP and a cap of debt at 45% of
GDP)? How were the weighting parameters chosen?
From your point of view, was the introduction of the Fiscal Deficit
Rule beneficial to the Serbian economy in terms of fiscal credibility
(should have translated into lower interest rates in Serbian debt,
lower CDS on Serbian debt)?
How does the fiscal
(implementation issue)

rule coexist with automatic stabilizers?

Did the authorities develop any implementation rulebook in order to
resolve practical issues arising from this numerical deficit rule?

The policy paper on necessary Public Internal Financial Control
measures was approved in November 2009 (before the decision on
the MFA was taken). Given that, do you think the corresponding
recommendations would be introduced in the Serbian legislation in
absence of the MFA? Would the schedule of implementation differ
from the actual one (did the MFA accelerate the adoption of these
measures)?

Efficiency

Questions

What was the motivation behind the Fiscal Deficit Rule (as opposed
to discretion) – tying the government hands to acquire fiscal
credibility? (i.e. like the Stability Pact in the Eurozone).
What were, from your point of view, the plausible alternatives to the
Fiscal Deficit Rule?
Were any other options than the Fiscal Deficit Rule considered?

Target
groups

Common

Fiscal council
Ministry of
Finance
Office of Prime
Minister
Fiscal council
Ministry of
Finance

IMF
WB

Ministry of
Finance
Fiscal council
Ministry of
Finance
Fiscal council

Ministry of
Finance
Fiscal council

Target
groups

Common

Common

Fiscal council
Ministry of
Finance

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Sustainability

Issues with fiscal deficit rules:





Practical: depends on growth forecasts,
indisputable if the fiscal rule is to acquire credibility.
In recession, if a more expansionary policy is needed to push the economy
back on track, wouldn’t there be a necessity (or at least a temptation) to use
expansionary fiscal policy beyond the limits specified in the Fiscal Deficit Rule?

the latter should be robust and

Questions

Given these uncertainties and the actual non-compliance with the
rule in 2011, what is the credibility of the fiscal rule?
What were the reasons of the actual deficit deviation from the target
specified in the Fiscal Deficit Rule in 2011?

How are the external debt sustainability evaluated in Serbia (in
technical terms)?

Impact

Questions

Could you please give examples (qualitatively, without specifying
numbers) of the gains induced by the implementation of the PIFC
related provisions?
What are the complementary/additional steps that need to be
undertaken in order to make the policies specified in the MFA MoU
and implemented fully effective and efficient

Additional questions

Questions

Would you be willing to take part in our Delphi analysis?

Target
groups

Fiscal council
IMF
Fiscal council,
Ministry of
Finance
NBS
Treasury

Target
groups

Ministry of
Finance

Common

Target
groups

Common

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Appendix C – Our modelling approach

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Evaluation of the net macroeconomic and external financial sustainability
effects of MFA

This phase aims at providing a counterfactual analysis of how the economy would
have evolved in absence of the Macro Financial Assistance operations (i.e. of the EUR
100 million loans).

The first stage is the construction of the macroeconomic model of the Serbian
economy. In order to evaluate the net impact of the MFA we have to assess how the
main macroeconomic aggregates would evolve in absence of the MFA. Since the
macroeconomic aggregates are closely interrelated we have to establish these
relationships and parameterize the strength of change in each aggregate in response
to the change in others.

Thus, the model of the Serbian economy consists of:

 A set of agents constituting the economy;



The macroeconomic indicators aggregating the actions of these agents;
The equations describing the links between macroeconomic aggregates.

a) Agents




The model comprises four sets of agents:
Public sector (government and the Central Bank of Serbia, further referred as
NBS);

 Non-financial private sector (households and firms);



Financial private sector (mainly banks);
The rest-of-the world (an agent aggregating foreign consumers,
investors, governments, etc).

firms,

b) Macroeconomic aggregates

We identify the main indicators on which the Macro-Financial Assistance would have
had a straightforward impact, for instance:

The public deficit (through the disbursement of funds);
The balance of payment (through the improvement of the capital account);
Public debt (the debt/GDP ratio, the maturity structure of public debt);




 Official reserves.

There are also indicators for which the MFA would have had an indirect impact, for
instance:


Exchange rate;

Inflation rate;
 GDP growth rate;

Interest rates.

The two sets of indicators have to be accounted for and the interactions between them
constitute the backbone of our modelling.

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c) Equations describing the relations between different macroeconomic

aggregates

The model is composed of the four main building blocks:

The government budget constraint equation;
The balance of payment (external constraint) equation;
Financial sector budget constraint equation;




 GDP identity equation;


and a multitude of equations ensuring links between these four main ones.

Here we do not fully specify the model spelling out all the linking equations, but we
explain the logic of our model outlining the four main equations and briefly describing
the links between them.

d) Logic of the model

The MFA loan would directly and simultaneously impact the government budget
constraint and the country’s external constraint (balance of payment constraint).

It would also produce an indirect impact on other variables through the impact on
these two constraints. Finally, the change in these variables would potentially produce
a feedback on the fiscal and external constraints.

Thus, we first construct the baseline scenario with the MFA loan awarded and involving
the three types of impacts mentioned above, fitting in the actual data.

In the second step, we assume the absence of the MFA loan and the resulting direct
effects on the government budget and the balance of payment.

In the third step, we consider a) the policy responses of the government and b) the
variations in the macroeconomic aggregates indirectly affected by the absence of the
MFA. To evaluate the policy responses a) we rely on the consultation of the relevant
stakeholders; to evaluate variations in the macroeconomic aggregates, we rely on the
latter and on the data analysis and literature review. This allows calibrating the model
with the most plausible values of different parameters37.

This allows us elaborating a set of counterfactual scenarios without the MFA loan.
These scenarios provide the impact on all the relevant macroeconomic aggregates
thanks to the relations defined between different indicators in our model of the
Serbian economy.

Comparing the baseline scenario with the counterfactual scenarios allows identifying a
range of net effects of the MFA.

A similar approach would be adopted for the construction of a counterfactual “no MFA
loan/no IMF loan”.

37

We run a sensitivity analysis by changing the values of different parameters.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The following paragraphs detail the model under consideration:

1st building bloc - The government budget constraint equation

Consider the budget constraint of the government in year t=0:

is the payment to the rest of the world on the existing stock of debt,

Where SG is government savings, PCPI is consumer price index, G is public expenditures,
is
foreign financial assistance (in foreign currency, thus parameterized by the exchange
rate). Due to inverse repo operations, the NBS used to withdraw money from the
circulation in the period under consideration instead of creating additional money
supply. This operation increased the policy interest rate (and all other interest rates),
and added up operational costs to the Central bank. Hence, the sign of S is negative
(S < 0).

The fiscal constraint would be impacted twofold: providing the government with
additional resources in year 0 (in 2011, the year of disbursement) - on the side of the
resources - and by increasing the debt payments in the years to come.

How would the fiscal constraint be adjusted in absence of the MFA? In order to “fill the
hole” Serbian government could:

 Decrease public expenditures (operational or capital);



Increase taxation;

 Borrow more on the capital markets (with the Serbian government debt

purchased by domestic or foreign investors);

 Speed-up privatisation of the SOE and collect proceeds in the budget.

The indicated choices identify four abovementioned parameters as “policy variables”.
The choice of the Serbian government of the policy response mix - which instruments
to use and in what proportions - would have produced different impact on the
economy.

We then construct several counterfactual scenarios with different policy response mix.
Construction of each of the scenarios and assessment of the likelihood of each of the
scenarios is based on the consultation with the competent stakeholders (in
particular representatives of the Serbian government) and the data analysis.

Once the plausible counterfactual scenarios are defined, we evaluate the effects of
different policy response mixes on real GDP (this effectively ensures the link
between government budget constraint and the GDP identity equation), inflation,
current account deficit and external financial sustainability.

 A decrease in public expenditures and/or an increase in taxation would have
directly produced an adverse effect on the real GDP (cf. GDP identity equation),
the importance of this effect (the fiscal multiplier) for Serbia is assessed based
on the literature review;

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia



Increased foreign borrowing is evaluated in the context of medium and long
term external financial sustainability (with a specific attention to the evolution
of the interest rates on the public debt).

Fiscal sustainability is a major component of the external sustainability analysis. In the
long run, primary surplus covers the service of public debt. This implies, at minimum:

where







is the primary surplus of the budget at date t;

is the nominal interest rate on the public debt;

is the existing stock of public debt.

Thus, solvency of a country is determined in the long run or at any point in time, by
the following formula:

where











is the primary surplus of the budget to GDP;

is the nominal interest rate on the public debt;

is the growth rate of the monetary base;

is the growth rate of the nominal GDP;

is the ratio of the existing public debt to GDP.

Money is created in Serbia only through foreign exchange transactions. Thus, net
capital inflow creates additional local currency supply, while capital outflow reduces
the money supply. As we already mentioned, the NBS drained liquidity from the
monetary system by using reverse repo operations on the open market. An increase in
the money base does not provide seigniorage revenues to the NBS.

Thus, the net effects, direct and indirect, of MFA on size of the public debt and the
average nominal interest rate on the public debt are taken into account based on the
equations above.

2nd building bloc - The balance of payment (external constraint) equation

The Macro-Financial Assistance (MFA) would also have a direct effect on the balance of
payment. Thus, evaluation of the net effects of the MFA takes into account the effects
going through the balance of payment.

The balance of payment is given by:

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

is the trade balance (exports minus imports),

Where
of-the-world (including remittances),
payment on existing public and private debt),
Direct Investment and the MFA) and
official reserves (a positive sign means a fall in the official reserves).

- earnings from the rest-
- payment to the rest-of-the-world (including
are capital inflows (including Foreign
are capital outflows, ΔOR are changes in the 

At the inception of the crisis, the Serbian economy experienced a drop in remittances
and an important outflow of capitals. A correction of the trade balance (both imports
and exports decreased, but drop in imports was more important than the decrease in
exports) compensated for this shortfall.

Had the MFA not been awarded, the capital account would have fallen short of EUR
100 million. The subsequent adjustment of the Balance of Payment could have
theoretically gone through:



Financing
organisations) or grants;

through

new foreign

loans

(from banks

or

international

 A further adjustment of the trade balance (especially a reduction in imports);

or

 A reduction in the level of official reserves hold by the NBS (which has a

precautionary floor corresponding to six months of import).

Once again, we construct two or more counterfactual scenarios involving one of the
three options to a different extent. The assessment of the likelihood of each of the
counterfactual scenarios is again based on the consultation with the relevant
stakeholders and data analysis.

New foreign loans induce an increase in the public debt/GDP ratio, which has a legal
ceiling of the 45 percent of GDP. In order to assess the net effect of the MFA, we
would have to compare the characteristics of the MFA loan to the borrowing terms for
Serbia on the capital markets - interest rates in particular. This comparison is possible
provided Serbia’s borrowing capacity was not saturated at the moment when the MFA
was awarded38. Examination of the Serbian public finances undertaken in the first
section hints that it was not the case. Thus, we can compare the characteristics of
the MFA loan with the characteristics of loans contracted by Serbia in 2009
before the MFA stepped in and make inferences about the net change in the
external financial sustainability induced by the Macro-Financial Assistance.

Note that the potentially positive impact of the MFA on the external financial stability
would not simply translate into lower need of borrowing on the capital markets and/or
more favourable borrowing terms, but could also improve the borrowing terms before
any of the MFA loan was disbursed. Indeed, the borrowing terms of a country depend
pro-cyclically on its external financial sustainability: if the private investors forecast an
improvement of Serbia’s financial situation due to the MFA they would be willing to
lend to Serbia at lower interest rates (risk premium on Serbian debt going down).
Thus, we also compare the trajectory of the interest rates on Serbian debt before and
after the decision of the Macro-Financial Assistance was taken and announced.

38 A country loses its borrowing capacity when markets consider it is on a brink of default. The interest rates offered on the newly emitted debt would

then have to be prohibitively high, driving the country out of the capital markets.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

A continuing adjustment of the trade balance accompanying the depreciation of the
Serbian currency is another possible outcome. From 2008, the Serbian dinar was
under “managed floating” and the authorities did not have any commitment to defend
a parity of the national currency with a foreign currency. Thus, the depreciation of the
dinar - already ongoing at the moment of disbursement of the MFA loan - would have
been likely to accelerate had the MFA not been awarded.

Let us define a nominal exchange rate of the dinar in terms of the euro e = RSD/EUR
(as it is the official practice in Serbia). Then, the real exchange rate is:

where CPI (Consumer Price Index) stands for the levels of CPI in the Euro zone and
Serbia. It encompasses the similar bundles of home and foreign goods, respectively.
Terms of trade is defines as the ratio of two price indices:

Where DPI is Domestic Price Index (foreign goods are excluded). There is a link
between CPI and DPI which depends on the level of openness of the economy and
elasticity of substitution in consumption between domestic and foreign goods.

The effects of real exchange rate depreciation on GDP are:





Exports become cheaper in terms of foreign currency, while imports become
more expensive;
Payment on the existing debt denominated in foreign currency increases in
national currency.

The immediate effect of real currency depreciation (an increase in q) is the worsening
of the terms of trade of the home country – one unit of domestic good exchanges for
fewer units of foreign goods (an increase in s) - since foreign prices in terms of local
currency relatively increased to domestic prices. This would achieve an improvement
in the current account because price adjustment
is immediate while quantity
adjustment takes longer.

In the second period, quantities adjust: foreign demand for national exports increases
(in reaction to its lower price), while domestic demand for foreign imports decreases
(since they are more expensive), increasing the volume of exports and decreasing the
volume of imports.

The relative importance of these two effects depends on the price elasticity of exports
and price elasticity of imports39. For the national currency depreciation to increase real
GDP, the improvement in foreign trade in volume terms must outweigh the effects of
the fall in domestic demand in volume terms due to the rise in import prices40.

39

For the currency depreciation to improve the country’s trade balance, the sum of the price elasticity of exports and price elasticity of imports
is greater than 1 (Marshall-Lerner condition). Empirical evidence shows a relationship in the form of a J-curve: first the terms of trade effect
worsens the current account balance, then the quantity adjustment improves it.
40

Price elasticities are of determined by the characteristics of the country specialisation (size of the industry vs. non-exportable services), the

nature of its imports (e.g. whether a country is importer or exporter of oil), the proportion of imports in exports, etc.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

In order to assess the net impact of the MFA, we would have first to look at how the
rhythm of the currency depreciation would have changed had the MFA not been
awarded.

Real Exchange Rate in Serbia
(A fall indicates the RSD appreciation)

0
0
1
=
5
0
0
2

104

100

96

92

88

84

80

76

72

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

For that sake we estimate the price elasticity of exports and price elasticity of
imports for the Serbian economy - this would be done through an extensive data
research, in particular based on the existing estimations (if any). If no such data
exists, we would have to make a set of reasonable assumptions and validate them by
the expert opinion (representatives of the Serbian Ministry of Finance, of the IMF,
etc.). The resulting range of estimates would allow us constructing scenarios of
additional depreciation required in absence of MFA.

Second, we consider the size of the additional adjustment in the balance of
payment (equal to the amount of the MFA) and apply the range of our estimates
of price elasticity of exports and price elasticity of imports in order to find out the
effects on demand and real GDP of the additional currency depreciation.

The share of external debt (public and private) denominated in foreign currency is
another important channel through which domestic currency depreciation impacts the
economy. Qualitatively, higher proportion of external debt denominated in foreign
currency would mean depreciation increases the value (in terms of national currency)
of the debt burden for private agents and the State whose liabilities are in foreign
currency. Thus, once we have our range of estimates for the additional depreciation of
the dinar required in absence of the MFA, our task was to assess the importance of the
share of external debt (public and private) denominated in foreign currency in Serbia,
and then to study the impact of this increased debt burden, in particular on the
increase in the number of defaults.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

3rd building bloc - Financial sector budget constraint equation
The assets and liabilities of the domestic financial sector equalize as follows:

On the assets side,
domestic assets held by the domestic financial institutions,
by the domestic financial institutions.

is foreign assets held by the domestic financial institutions,

is
is the public debt held

On the liabilities side,

is domestic liabilities (capital), while

are foreign liabilities of the domestic financial institutions,
is the broad money supply (including cash,
local and foreign currency deposits, equity capital of the financial sector and its loan-
loss provisions, and treasury bills).

It is useful for our analysis to split assets and liabilities into private and public parts,
and distinguish between them whether they belong to a local currency area or a
foreign currency area. Then, we rearrange all terms in order to define net foreign
assets (NFA) and net domestic assets (NDA) as follows:

Let us note that a dual currency system prevails in the Serbian economy (foreign
currency is legally used as a parallel means of payments and accounting unit). The
broad money supply is M3 aggregate, in which foreign currency deposits dominate
over M2 aggregate (cash and the dinar’s deposits with the NBS that are used for
transaction purposes).

The link with the financial sector is determined through:

 Valuation effects on foreign assets vs.

foreign liabilities induced by an

additional depreciation;
The impact on the broad money supply induced by capital
operations;
The volume of government debt held by the domestic financial institutions.

inflow and repo





the cases,

the
In all
counterfactual. What would be the impact of the absence of the MFA on the financial
sector budget constraint and through this:

the MFA provides an upper bound for

the amount of

 On the macroeconomic indicators,
 On the long-run external financial sustainability?

1. Additional depreciation would reduce the net foreign assets held by the domestic
institutions, forcing them ceteris paribus to reduce their lending to the

financial
domestic private sector (with a negative impact on investment);

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

2. On the contrary, monetary emission due to inflow of foreign capital (loans or FDIs)
would increase the money supply fuelling additional domestic lending (with a
positive impact on investment). However, to the extent this increase in money
supply would have been inflationary, it would push the nominal interest rates up
(with a negative impact on investment);

3. An increase of government debt held by the domestic financial institutions would
have produced at least partial eviction of the lending to domestic private sector
(with a negative impact on investment).

the counterfactual. For which of

It is impossible to assess a priori and qualitatively the net effects of these three
aspects of
the
corresponding equations, parameterize them - based on the review of economic
literature and the consultation with experts of the Serbian economy - and evaluate
these net effects.

these effects, we spell out

4th building bloc - GDP identity equation:

Where Y is domestic output, C - domestic private consumption, I - domestic private
investment, G - public expenditures, T - fiscal revenues, X - exports, M - imports.

The differential impact on the GDP between the baseline scenario (MFA awarded) and
the counterfactual scenarios (no MFA) would cumulate the differences over several
elements:

Evolution of the government spending and taxation;


 Change in the investment;
 Variation of exports and imports.

In addition, in order to evaluate the impact on the real GDP we take into account the
change in the inflation rate in the counterfactual scenarios (no MFA). Real GDP equals
to the nominal GDP deflated by the price index. Therefore, the comparison of real GDP
for the baseline scenario (MFA) vs. counterfactual scenarios (no MFA) would have to
take into account the differences in the price index (the GDP deflator).

Apart from visible and direct effects, we identify evolutions which could be attributed
to MFA in an indirect way (e.g. lower risk premium on the government debt due to
enhanced credibility itself produced by an adherence to fiscal rules, etc.).

As stated above, counterfactual scenarios of the absence of Macro-Financial Assistance
give different configurations of
the
evolution of government expenditures, trade balance or domestic demand. Thus, the
net effect of the MFA on Serbian GDP of GDP growth is a range of results rather than
one result.

this equation, depending on hypotheses of

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

In order to close the model, we have to allow for feedback effects of the national GDP
evolution on the macroeconomic aggregates seen before (public deficit, current
account, etc). For instance if government cuts its expenditure its deficit would be cut
less than proportionately because of the depressing and multiplicative effect of public
spending cuts on GDP41
.

As a general methodological feature, the net effects of the MFA operations would be
estimated by reassessing the evolution of the macroeconomic indicators 1°) without
MFA loan funds alone and 2°) without MFA and IMF loans.
The output of our modelling approach would include a set of counterfactual scenarios
providing a range of estimates for the MFA net effects.

The summary of the MFA net effects would include the impact of the MFA on different
macroeconomic indicators, including:

 Real GDP;

Inflation;
 Debt/GDP ratio;
 CAB/GDP ratio; and


Fiscal deficit/GDP ratio.

Ultimately, face-to-face discussions with key MFA stakeholders (in particular Serbia
officials and DG ECFIN representatives) allowed choosing the best - the most plausible
- counterfactual scenario and narrowing the range of MFA impact estimates.

For the check of consistency, we provide a Social Accounting Matrix (SAM) for Serbia
in 2011 and 2012, which combines in a systematic way all the macroeconomic
accounts. The blueprint of such a matrix is reported on the next page. The matrix is
constructed based on the data from the Serbian Statistical Office.

SAM explains links between four main agents in our model (Government, ROW,
Financial and Real sectors). Rows in the matrix indicate the origin of respective macro
aggregates. Columns in the matrix show allocation across different agents and
accounts or final use of these aggregates. Since the total sum of rows and columns
should exactly match to each other, the SAM matrix embodies the notion of a general
equilibrium. All variables are expressed as flows of funds. In the monetary survey
block (MS) values are recorded as annual changes in respective monetary stocks. Our
equations follow the logic of the SAM.

The following table provides a SAM matrix that is used for the counterfactual
modelling.

41

Empirical literature on the multiplier effect of government spending (or, in reverse, government spending cuts) produces contradictory

conclusions. However, given a set of qualitative characteristics of the Serbian economy, we could

November 2013 171

X

D

M

E

Q

Y

BUD

I

S

TAX

NONTAX

C

G

MS

ROW

Total

Social Accounting Matrix (SAM) for Serbia

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

X

D

M

E

Q

Y

BUD

I

S

TAX

NONTAX

C

G

MS

ROW

Total

Domestic
product

Export

Domestic
product
Import
at border
prices
+tariffs

GDP

Transfers

Investment

Private
consumption

Public
consumption

Tariffs

PDV+
Excises -
Subsidies

Private
savings

Direct taxes

Non-tax
revenue
Private
consumption

Capital
expenditures

Public
consumption

Tax
revenues

Non-tax
revenues

Fiscal
balance

Invest-
mints

Subsidies

ΔM3

Import
at
border
prices

GDP
at
factor
cost

Domestic
product

Total
import

Total
export

Compo-
site
goods

Income
spending

Fiscal
expenditures

Investments

Savings

Taxes

Non-tax
income

Private
consumption

Public
consumption

Assets

ΔNFA 

GDP at
factor cost
Domestic
product

Total import

Total export
Composite
goods

Income
formation

Fiscal
revenues

Export

Net
factor
income
Net
official
transfers

ΔNDA 

Investments

Savings

Taxes

Non-tax
income
Private
consumption
Public
consumption
Liabilities

Rest of the
World

Current
account
balance

Rest of
the
World

November 2013 172

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

The following table provides a specification of the equations that we will use in our counterfactual modelling.

Equations

Variables

Parameters

Nominal Flows

Tax revenue

Aggregate income

Aggregate savings

Government
balance)

savings

(fiscal

Net change of broad money
supply

Ratio between NFA and NDA

price

(world

PW
of
M
import at the border), Y
(aggregate income), e
(exchange rate), T (tax
revenue)

rate), tVAT (value-
ttar( tariff
added tax + excises),
tinc
(direct taxes on income), tnon
(share of non-tax revenue in
income)

PX

(price

PQ (price of composite
of
goods),
output at factor costs)
Ttrans
(transfer
payments),Trem
(remmitences and net
from
income
factor
abroad)

S (aggregate savings),
(government
SG
(current
B
savings),
account balance)

sinc (aggregate savings rate)

PCPI (consumers price)

Tgrant (foreign aids)

NDA

(broad

money
M3
supply),
(net
domestic assets), NFA
assets,
(net
including
international
reserves)

foreign

(shift

of NFA

parameter),
am
in
gamma(share
monetary
assets),
phi(elasticity of substitution
between
and
domestic assets)

foreign

(domestic

i
iw
rate),
interest rate)

interest
(foreign

November 2013 173

NFA

Foreign interest rate

Domestic interest rate

Import price definition

Export price definition

CPI definition

Output price definition

Supply Price definition

Numeraire

Current account balance

Investment-saving relationship

Closure rule

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Nominal Flows

NFAw (Net foreign assets
in
foreign
terms
currencies)

of

Separately determined by uncovered interest rate
parity

Prices

Equations

Variables

Parameters

PW
(world price of
E
export at the border)

Equations

Variables

Parameters

Equilibrium Conditions

Aggregate saving is adjusted to investment

November 2013 174

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Appendix D – List of persons interviewed

November 2013 175

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Name

Position

International Institutions
International Monetary Fund (IMF)
Bogdan Lissovolik
Marko Paunovic
Desanka Nestorovic

IMF representative in Serbia
Economist
Economist

World Bank
Loup Brefort
Lazar Šestović 
Duško Vasiljević 

Country Manager Serbia, World Bank
Country Economist, Serbia, World Bank Office in Serbia 
Private Sector Development Specialist for Serbia, World Bank HQ 

European Union Delegation to Serbia
Freek Janmaat
Dimitrije Stankovic

EU Delegation in Belgrade
EU Delegation in Belgrade

European Commission
Carole Garnier
Christophe Pavret de la
Rochefordière

DG ECFIN Head of Unit – Candidate and pre-candidate countries
Former DG ECFIN Deputy Head of Unit Economies of the
candidate countries and potential candidates

Serbian institutional and administrative representatives
Fiscal Council of the Republic of Serbia
Vladimir Vučković 
Danko Brčerević 

Member of the Fiscal Council  
Special Advisor 

National Bank of Serbia (NBS)
Branko Hinic

Director of Research, NBS
General Director, NBS
(de-facto responsible for the modelling framework)

Mirko Djukic

Serbian Government
Nataša Šimšić 

Kalina Markovic Ilić 

Goran Simunović 

Gerard Ennis

Ana Ilić 

Milena Radomirović 

Svetlana Ljubičić 

Gordana Pulja

Vera Vukčević 

Petar Špadijer

Nada Obradović 

Assistant Minister, CFCU, Ministry of Finance and Economy 
Head of Tender Preparation, CFCU, Ministry of Finance and
Economy
Head of Section, CFCU, Ministry of Finance and Economy 
Team Leader, Support to the PIFC Project, Phase 3, Ministry of
Finance and Economy
Assistant Director, Serbian European Integration Office 
Department for planning, programming, monitoring and
reporting on EU funds and development assistance, Serbian
European Integration Office
Treasurer, Treasury Department, Ministry of Finance and
Economy
Assistant director Budget Execution Department, Treasury
Department, Ministry of Finance and Economy
Head of Accounting Division – Budget Accounting and Reporting
Department, Treasury Department, Ministry of Finance and
Economy
Acting Director, General Secretariat of the Government, Human
Resource Management Service, SUK - Human Resource
Management Service, Ministry of Finance and Economy
Assistant Director Human Resource Management Service, SUK - 

November 2013 176

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Name

Snezana Antonijevic

Milan Radakovic

Sasa Markovic

Branko Drcelic

Jelena Sedlacek

Goran Cvejic

Marko Lisica
Marinko Bosnjak

Veronica Ignjatovic

Slavko Kapuran
Miladin Kovacevic

Private Sector
Branislav Radovanoivić 
Ljiljana Berić 
Alen Dobrić 
Nikola Vuletić 

Sonja Miladinovski

Dragoslav Velickovic

Goran Pitic

Position
Human Resource Management Service, Ministry of Finance and
Economy
Head of Training Centre, SUK - Human Resource Management
Service, Ministry of Finance and Economy
Officer, SUK - Human Resource Management Service, Ministry of
Finance and Economy
Assistant Secretary General, Prime Minister Office
Director, Public Debt Administration, Ministry of Finance and
Economy
Head of European Integration Department, Ministry of Finance
and Economy
Assistant Minister, Sector of Internal Control and Internal Audit,
Head of CHU, Ministry of Finance and Economy
Macroeconomic Analyst, Ministry of Finance and Economy
Head of Economics Analysis, Ministry of Finance and Economy
Assistant Minister, Department for International Cooperation,
Ministry of Finance and Economy
Assistant Director, Republic Statistical Office, Serbia
Deputy Director, Republic Statistical Office, Serbia

Deputy CEO, UniCredit Bank, Serbia 
CFO, UniCredit Bank, Serbia 
Chief Risk Officer, UniCredit Bank, Serbia 
Head of Retail Division, UniCredit Bank, Serbia 
Member of the Executive Board for Treasury and Finance,
Societe Generale Banka AD Beograd
Head of the macroeconomic research and analysis, Societe
Generale Banka AD Beograd
President to The Board of Directors, Societe Generale Banka AD
Beograd

Persons of Interest
Dejan Šoškić

Former Governor - NBS

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Appendix E – list of literature and data sources

November 2013 178

Ex Post Evaluation of the Macro-Financial Assistance to Serbia

European Commission

 DG ECFIN documentation related to the Macro-Financial Assistance (MFA)
 Serbia,

Progress Report 2012, Commission Staff Working Document
accompanying the document Communication from the Commission to the
European Parliament and the Council, Brussels, 10 October 2012
Joint Declaration by the European Parliament and the Council adopted together
with the decision providing further macro-financial assistance to Georgia, 12
August 2013



International Monetary Fund







Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding, December 25, 2008;
Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding April 30, 2009;
Letter of Intent and Technical Memorandum of Understanding, December 3,
2009;

Letter of Intent and Technical Memorandum of Understanding, March 18, 2010;

Letter of Intent and Technical Memorandum of Understanding, June 10, 2010;
 Republic of Serbia: Staff Report for the 2010 Article IV Consultation, Third
Review Under the Stand-By Arrangement, and Financing Assurances Review,
April 2010;

 Republic of Serbia: Seventh Review and Inflation Consultation Under the

Stand-By Arrangement, April 2011;

 Republic of Serbia: Ex Post Assessment of Longer-Term Program Engagement
and Ex Post Evaluation of Exceptional Access—Staff Report; Public Information
Notice on the Executive Board Discussion; and Statement by the Executive
Director for Republic of Serbia, July 2011;

 Republic of Serbia: Request for Stand-By Arrangement, October 2011;
 Republic of Serbia: 2013 Article IV Consultation, July 2013;
 Republic of Serbia: Selected Issues Paper, July 2013.

Public Debt Administration (PDA), Ministry of Finance and Economy of the
Republic of Serbia

 Monthly Report for April 2012-January 2013
 Monthly update for investors May 2012-February 2013


Public Debt Management Strategy 2012-2014

National Bank of Serbia

 Analysis of the Republic of Serbia’s debt, September 2012;
 Statistical Bulletin, Monthly publication, 2009-2012;
 Annual Report on Activities and Results, 2011.

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Ex Post Evaluation of the Macro-Financial Assistance to Serbia

Fiscal Council of Serbia



Fiscal Council Press Release on the Establishment of
Framework, November 10, 2011;

the 2012 Fiscal

 Assessment of Fiscal Rules Compliance in 2011, February 21, 2012.
Ministry of Finance and Economy of the Republic of Serbia

Economic and Fiscal Programme of the Republic of Serbia, January 2012;


 Strategy for Development of Public Internal Financial Control in the Republic of

Serbia;
Fiscal Strategy for 2013 with projections for 2014 and 2015, November 2012;
Public Finance Bulletin, April 2012
Law on amendments and addenda to the Budget System Law, October 2010.





November 2013 180