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The Government of the Republic of Serbia

In the service of citizens

Increased productivity to boost Serbia's competitiveness

Belgrade, 11 April 2005

Serbian Minister of Economy Predrag Bubalo spoke to Sunday's edition of daily Politika about the upcoming visit to Washington, bank loans, first quarter industrial production results, foreign trade and privatisation of public companies. The official website of the Serbian government brings excerpts from the interview.

Predrag Bubalo

On the upcoming visit to Washington

- Although I am aware that talks with the International Monetary Fund (IMF) and the World Bank are never easy, I am not concerned about next week's trip to Washington. I am sure that the two remaining assessments of the IMF will be favourable. After this arrangement expires we will surely want a new one in order to send out a good signal to investors.

I have to say that the IMF representative in Belgrade described the relaunching of the privatisation process as excellent and that we are not going to disappoint international financiers: already in the first quarter of the year, a full third of the 300 auctions planned were realised, six tenders were invited and three more planned. However, I must admit that the sale of shares from the Share Fund was somewhat slower.

I think that Serbia's shattered economy still needs state subsidies. The need for them will decline with the completion of restructuring and privatisation of companies. Yet, I am aware that poor production output in the first quarter throws a shadow on this year's projections and that requires certain measures.

The solution

- The poor results were partly influenced by the introduction of the value added tax (VAT). Of course that its introduction is favourable, it has positive effects to budgetary revenues, boosting of exports and reduction of imports, but it also drained the small amount of money the economy had. Along with the introduction of the VAT, the state should have provided much more resources for financing production, under more favourable terms, with lower interests. Cheaper capital is both a precondition and a way to achieve a six percent rise in GDP, which I consider to be needed and feasible.

On cartelisation of banks with the aim of inflating interest rates

- The bank loans are too expensive. It is true that there are good performers that can easily get relatively soft loans. However, for the major part of Serbia's industry the banking system simply does not exist, it is closed. There are a large number of companies who have production contracts but cannot start production because they do not have sufficient funds to buy intermediate goods. I am not saying that we should pay more attention to bad performers than to good ones, but I think that we should help those who still don't have good positions on the market to obtain them.

What can the government and the Minister of Economy do?

- There are no short-term recipes. The solution is to change the structure of economy through privatisation, restructuring and development of small and medium-sized enterprises. The Ministry of Economy is responsible for direction and control of subsidies and loans of the Share Fund, but I cannot influence the banking system. The Share Fund is the only chance for a great part of Serbia's companies, but the funds it can offer are symbolic in relation to the real needs of Serbia's economy. I think that all unused money from the state budget should be used for crediting production, especially towards export, without harming the macroeconomic stability and increasing the budgetary deficit.

How to improve foreign trade exchange?

- This year, apart from full realisation of the free trade agreement (we are currently having a serious problem in trade exchange with Bosnia-Herzegovina, but we have been promised that the situation will be solved during April), positive results of the textile agreement and the launch of the Export Insurance and Financing Agency, I expect that the EU will accept negotiations and allow us reduced customs fees on intermediate goods. That would harmonise the tax duties for around 160 products. Of course, the key to our competitiveness is boosting productivity, which is already happening in the industrial sector, in most privatised companies. On the restructuring of public companies and social pressures:

- Agreement has been reached to do and finish that and we have started that business. I expect that 2005 will be crucial for public companies. However, one needs to penetrate into all segments of public expenditure: health sector, education system, and public administration. On the announcements of new strikes:

- There is no reason to fear if it is done in line with business programmes. On the interested bidders for privatisation of public companies: - They are not prohibited to show interest. But it will not be as easy as they think… I pledge for boosting those companies’ value and their technological level through recapitalisation. On the support for government’s reforms:

- There is resistance to changes and that is nothing new for a transition country, but I don’t think we lack support. There is full agreement that this is a reformist government. It has passed a series of examinations by the IMF, the World Bank, the London Club, many regulations proposed by the government have been approved… And there have always been different opinions on certain issues, such as exchange rates… Although I think that increasing the exchange rate to 100 dinars [for one euro] would only stimulate inflation, while we would not get what we expect on the export side. I don’t see it as a problem if investors point to certain boundaries for attracting more foreign investment, their suggestions are valuable, of course, if they stick to principles. On privatisation of Zastava:

- Zastava should privatise four of its parts by the end of April. The Ministry and the Agency have done their job. On privatisation of RTB Bor:

- A financial advisor is being chosen for Bor. After the financial advisor does the job, a tender will be announced. There are some five or six letters of intent. New bankruptcies:

- Bankruptcy procedures in three companies from the restructuring list should begin in the next five to six days. The process of issuing licences for bankruptcy managers is slow, the first ones will be issued in early June, but it will be no obstacle for bankruptcy procedures to take place.