IPA DIRECT BUDGETARY SUPPORT EXPERIENCE OF SERBIA EXPERIENCES, CHALLENGES AND OPPORTUNITIES The Case of Serbia Gordana Lazarevic, Assistant Minister

Background and context Lessons from Serbian experience

Background and Context Budget Support under Article 15.1: exceptional circumstances, requested, granted Linked to framework of MIPD and EU focus and on PFM fundamentals on other (2 general conditions require ongoing macro-stability & PFM stability) Latter implies i) explicit link to IMF programme ii) assessment of PFM dynamics especially fiduciary (PEFA norm) although for Serbia there was a separate Financial Circuits review

Experience Process relatively smooth, request submitted on March19th, signature of FA on September 17th, expected 1st tranche by November: Immediate absorption Conditionality: arguably the highest impact under IPA programming: –eg external audit of 2008 budget done by early October, PFIC/AA under implementation –acquis-related laws/regulations focussing on Single Market: state aid, competition, public procurement adopted (SAA conditions under progress, prior to negotiations) –updated PEFA earmarked and owned by the Government

Early crises detection/recognition –mid 2008 Urgent two tiers coordinated approach/permanent consultancy - IMF - EC Government early measures targeted at: - prevention of banking sector destabilization- run on the banks - capital outflow - deep but controlled depreciation of domestic currency - budgetary savings –freezing of the salaries and pensions up to the end of 2010, additional temporary income taxation, increase of excise charges

Crises deeper and longer then expected –Growth domestic demand driven (-3% by the end of 2009) –Budget deficit higher then predicted in spite of two consequent upside corrections (5,5%) – pensions - 60% of the budget, high redundancy in public administration, no additional revenues from privatization, subsidies to consumers to support demand, losses of VAT due to shrinking import and custom duties

Realistic insight in the areas where reforms are delayed Concentration of the efforts to boost these processes Realistic estimations of the size of budget deficit- concentration on the fiscal reforms Early, but fragile political consent on the measures to be undertaken Strong governmental ownership and initiative in this process

General conditionality – a substantial macroeconomic and fiscal framework supported by IFIs – notably through a disbursing IMF programme; as long as the IMF assessment on broad compliance with the programme requirements is favourable – the general condition for IPA budget support is fulfilled Administrative and financial circuits establishing a sound fiduciary environment

Specific disbursement conditions –PFM: that credible and relevant programme to improve PFM is in place or under implementation –EU integration: in lone with NPI, maintaining and further developing the level of legislative alignment and administrative capacity necessary to meet requirements of the EU integration process (institution development, staffing, retention policy, DIS in place).

Appendix to Annex A –Modalities for disbursement: verification sources and supporting documents for tranche release- general and specific conditions prior activities Base for Governmental plan how to organize mayor activities Clear task assignment, verification source, reporting lines and date for final delivery

Lessons and Implications Aid effectiveness: effective IPA financing consistent with broader commitment to ensure aid effectiveness and Budget Support one tool in this Ownership of Government-clear priorities, measures, activities - strong commitment for delivery Use of the national systems in implementation – on job improvements Establishment of control, monitoring and reporting systems in cooperation with relevant EC institutions

Lessons and Implications Budget supports: works but consider Europaid experience ag ENPI and general and sector budget support Consider modifying Article 15.1 IPA (1086/2006) to allow budget support on non-exceptional basis Impact on EU accession progress higher if Budget support is used as part of broader mix of tools: but require robust focus on programming and link to impact indicators – PAR and capacity building of civil service is becoming an undisputable priority

Contact Ministry of Finance Sector for Programming and Management of EU funds Kneza Milosa St Belgrade Serbia Phone: (+38111)