Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

Embracing the free market

Serbia needs billions of pounds worth of reconstruction but is bankrupt. Andrew Mylius reports.

Serbia's economy is in crisis. A check of its vital indicators yields a disturbing picture. Hyperinflation has resulted in five-fold devaluation of the Dinar, Serbia's currency, in two years.

Banks have been exhausted by state borrowing and 'lost' £8bn in the last decade. Unemployment stands at 50% and the average wage is £20-£25/month.

Gross domestic product was down from £19.27bn in 1989 to £6.47bn last year. Public sector spending exceeds revenue - the projected deficit for 2001 is £589M. Some 60% of gross national product goes through the black market. Outstanding international debt amounts to £8.56bn. Nationally-owned companies - most of Serbian industry, business, land and property belongs to the state - have been operating at loss for a decade.

Infrastructure and assets are run down to the point of collapse.

This is the grim reality facing Serbia's newly elected federal government, a democratic coalition headed by president Vojislav Kostunica. Euphoria that gripped the nation after Slobodan Milosevic was swept from power four weeks ago has now abated. Ordinary Serbs are looking to their new leaders for change.

Economic rejuvenation will take between 20 and 30 years, predicts Aleksander Kovacevic, an engineering economist working for the United Nations Operation for the Co-ordination of Humanitarian Relief in Belgrade.

Key to getting the nation back on its feet is repair and renewal of its oil and gas supply, electricity generation and distribution and its road, rail, navigation, port and airport infrastructures. Work is still under way to assess the scale of reconstruction needed.

Kovacevic describes the cost as 'incalculable'.

But real improvements in the Serbian quality of life can and must be achieved extremely quickly, he says.

A list of priority projects is being drawn up to get the country through this winter. Temperatures can be as low as -20C.

If energy is not available many are predicting a public health crisis, which will certainly result in public discontent, warns Djordje Siradovic, managing director of Serbia's largest cable manufacturer Novkabel. People will be looking for proof that the new political order is better than the last, adds Mladen Barcot managing director of independent import-export firm Mabar.

Getting Serbia through the next six months calls for infrastructure work that will cost £396M, says G17+, the Belgradebased economics forum provisionally in charge of economic affairs for Kostunica's government. G17+ is looking to international donations to meet immediate needs. The European Union agreed to give £120M worth of aid on 10 October; the Swedish Government has pledged £133M for emergency work on power supply, to be carried out by contractor ABB.

But donations will only get Serbia so far. G17+ has identified a further £3.86bn worth of reconstruction vital to Serbia's longterm recovery. The sum covers £2.1bn of repair to industrial structures, transport, power and energy distribution infrastructures damaged during the Nato bombing campaign, concluded in June 1999. According to G17+ less than 10% has been made good.

Spending on this scale requires international loans and commercial investment, says Kovacevic. He is particularly keen that 'business should provide finance solutions'. Institutional investors like the World Bank, European Investment Bank or the International Bank for Reconstruction & Development take a macro view of the economy. They are good at backing large-scale projects, but not as responsive as private sector investors to local markets.

Serbian economists have already begun to identify opportunities for loans, direct investment and the operation of concessions (see back page).

However, to attract capital, massive reform of property ownership, trading regulations, employment law, the banking and tax systems will have to take place. The government must also guarantee repatriation of all future capital investment and profits.

G17+ reckons first phase privatisation, including cement production, building materials, parts of the power, oil and chemical industries, the oil refinery in Novi Sad and Yugoslav Airlines, could realise £233M. The government should also be looking to sell land in Belgrade and other urban centres for development, says Vladislav Ilic, director of independent consulting engineer InnoTech.

Sale of state assets will go a long way to paying off outstanding debt, and privatisation is seen as a way of injecting Serbian industry with much-needed competitiveness. It will call for the break up of Serbia's huge, vertically integrated, diversified industrial combines. Private sector buyers will first select only those business units that are commercially viable, forcing the state to dispose of loss making operations, says Kovacevic.

They will also strip out unproductive assets and get rid of surplus labour.

Refocusing the business tax regime on assets instead of profits will force firms to divest themselves further of non-core and unprofitable operations.

Reform will hurt, Kovacevic concedes, 'but what else can the country do?' If Serbia wants prosperity in the long term it must brace itself for some gruelling short-term changes. Kostunica's government plans to act to allow firms greater flexibility in hiring and firing staff. It is also setting out to provide state pensions where it is currently the employer's responsibility to care for workers after they retire.

Even where privatisation does not take place, the state will be forced to mirror private sector business structures and behaviour as the country becomes more market focused.

For the time being, though, Serbia is locked into the status quo. The country has a three tier political system, headed by the federal parliament in which Kostunica's democratic coalition holds the majority. Democrats have been ousting Milosevic's cronies in city and municipal council elections, at the base of the political pyramid. But the republic parliament, between the two, is still dominated by the Socialist Party. It is the republic parliament that wields fiscal and legislative power. Milosevic's supporters will block all attempts at reform right up to elections on 23 December, which the democrats should win comfortably.

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions. Please note comments made online may also be published in the print edition of New Civil Engineer. Links may be included in your comments but HTML is not permitted.