The transition of the economy of Serbia began under very difficult economic and social conditions. These conditions were the result of a decade of regional conflicts that followed the break-up of Socialist Federal Republic of Yugoslavia in 1991. By 2000, recorded per capita GDP was less than half of its 1989 level, external debt exceeded 130 percent of GDP, and annual inflation was over 140 percent.
The new governments of Serbia proclaimed joining European Union as the major long term goal. It began to stabilize and transform the economy by tightening macro-economic policies and recommencing market-oriented structural reforms, combining own efforts with the support of the international community and international financial organizations.
Substantial progress has been made in almost all areas.
For the past few years, business climate in Serbia has changed favorably and thoroughly. The inflation has been brought down from nearly 150 percent in 2000 to single digit rate in 2004.
Followed by growth of the economy of about 5% per annum, and changing ownership structure due to privatization, Serbia is recognized as a true growing market economy. EBRD has marked Serbia's business environment as 14th out of 27 assessed countries, whereas the transition process was marked as 3+ out of 4.
In July 2004, Government reached an agreement with the London Club of commercial creditors to write-off 62% of the Serbia's debt, while the debt to Paris Club was earlier reduced by 66%. These agreements decreased the debt burden of the country and stimulated foreign trade. All this indicates that Serbia is becoming a more stabile economy with a capacity to successfully attract foreign investments and facilitate faster integration into the world economy.
Having achieved macroeconomic stability, stability of the currency and having begun the changes of the legal environment, Serbia has become one of the most attractive locations for FDI in the region. In 2003 Serbia attracted about 1.3 billion Euro of FDI and about 900 million in 2004 what indicates that confidence of investors in is growing.
The investors are attracted to Serbia for many reasons. However, the main reasons are that they can experience growth through accessing new markets, reducing costs and being able to operate more efficiently in general. Serbia has the lowest corporate tax rate in the region, the highest literacy in English language in Central and SEE, as well as the most competitive labor costs.
Geographical location makes Serbia a natural gateway to the East and South East of Europe. It is positioned at the intersection of Pan European Corridors No.10 and No.7, while Danube, the biggest water way, is passing through Serbia with the length of 580 km. Today, with an enlarged EU and with the coming creation of the South East Europe Free Trade Area, investors will have a great possibility to, by establishing businesses in Serbia, reach a market of 50 million people in South East Europe. In addition, Serbia is the only country outside CIS that has a Free Trade Agreement with the 150 million people Russian market.
These are just some of the reasons why Serbia is seen as the logical link between South East, Central and Western Europe and the land of rising opportunity.
Business Environment
Initial deregulation of foreign trade began in December 2000, when the Government cut various administrative barriers. Tariff reform began in 2001 with the passage of a greatly improved Customs Tariff Law. Average tariffs dropped from 14 to 9.4 percent, and the tariffs simplified from 37 to six rates, ranging from 1 to 30 percent. A large number of quotas and licensing requirements were also abolished. Export controls continue on certain agricultural products, and import licenses continue on certain steel products.
The Government of Serbia set an ambitious reform agenda aiming to: improve the regulatory framework for business entry, facilitate the efficient operation of business through modification of the Enterprise Law; improve enterprises' access to finance; and reduce barriers to the efficient exit and redeployment of non-productive assets.
The Government launched a comprehensive reform of business registration at the end of 2002, and plans to complete the process by 2006. These laws would create a unified Serbian business registry that includes all business activities covered under the current Enterprise Law and Law on Private Entrepreneurs. Considerable progress has already been made in achieving the objective of reducing the number of days and costs to register an enterprise.
The authorities have adopted a number of key laws and regulations aimed at creating a legal and institutional framework to support credit transactions and easier access to finance.
Serbia has over 200,000 registered SMEs, including sole proprietorships. A new Small and Medium Enterprise Agency established in 2001 has since formed ten regional SME agencies. A new strategy on SME development was adopted in 2003, and the SME Agency has also been involved in the drafting of flaws on business environment, especially the Law on Private Entrepreneurs.
A labor law passed in 2001 creates the scope for enhanced labor mobility and job creation by simplifying the process of hiring and terminating employees, and by reducing labor costs. A new Law on Employment (July 2003) provides a basis for the reform of the existing Labor Market Bureau and allows for the establishment of private employment agencies.
Financial Sector
Twenty five insolvent banks representing nearly two-thirds of the assets of the banking system have been liquidated or put under bankruptcy. The bold measures to place the four largest state-owned banks into bankruptcy in early 2002 played a crucial role in restoring public confidence in the banking sector, which has led to a quite visible rebound in bank intermediation. A Bank Rehabilitation Agency has been given authority to administer banks in bankruptcy. A number of banking licenses have been issued, mainly to foreign banks, reflecting growing confidence in the Serbian banking system.
Privatization/Enterprise Reform
Under the Privatization Law passed in June 2001, the Privatization Agency and the Ministry of Economy and Privatization have the mandate to sell about 2000 socially owned enterprises. The law authorized the Privatization Agency to adopt three approaches: privatization by tender for large enterprises, auctions of small and medium enterprises, and restructuring and subsequent tender/auction for larger enterprises that cannot be sold in their current condition. Significant progress has been made, with a total of 1113 enterprises offered for sale, and over 1000 sold (as of December 2004). The bulk of these have been sold under auction.
About two-thirds of privatization revenues have so far come from the larger firms sold through tenders. Major privatizations have included the sale of three cement factories, a steal mill, the fuel retailer Beopetrol, and two large tobacco companies.
