Balkan countries seek funds, may delay reforms after floods

By bne IntelliNews May 23, 2014

Andrew MacDowall in Belgrade -

 

Facing its worst flooding since modern records began, the Western Balkans will need billions of euros to rebuild homes, infrastructure and businesses wrecked by the region’s biggest catastrophe since the end of the Yugoslav Wars. The region's governments might also delay crucial reforms required to fix their feeble economies.

Following a meeting with Serbian Prime Minister Ivica Dacic in Brussels on the afternoon of May 21, European Commissioner for Regional Policy Johannes Hahn promised that money from the €500m European Stability Fund (ESF) will be available for Serbia, as a formal candidate for EU membership. Croatia, which joined the EU last year, can also access the ESF, but Bosnia-Herzegovina, which has been worst hit by the floods, will have to rely on other mechanisms.

“Once the most immediate work of getting people to safety and dealing with the emergency has abated, the recovery, in terms of public costs of repairing infrastructure, water and transport links, is where the ESF can help,” Hahn’s spokeswoman Shirin Wheeler told bne. “Serbia as an accession country has a right to access the fund on exactly the same terms as any member state. Bosnia cannot benefit from the ESF, though there is a lot of discussion about how we can help via pre-accession funding and cross-border funds.”

Wheeler emphasised that Serbia and Croatia between then were unlikely to receive all the €500m in the fund – which was halved just months ago – but that other EU funding streams might be tapped to support the recovery efforts. “The Serbian government is open for any kind of international help that can be sent,” a government spokesman told bne. “With the help of the international community, we will repair the infrastructure, hospitals, houses, and ensure power plants run at full capacity – an absolute priority.”

Damage estimates

The flooding, which started in mid-May after exceptionally heavy rainfall, has so far claimed more than 50 lives in Serbia, Bosnia and Croatia, while 70,000 people have been displaced. The toll may rise further, and on May 21 the banks of the River Sava in Belgrade, downstream from the flooding, were lined with sandbags in anticipation of a surge of water. Many were laid over the previous weekend by the volunteer army that has sprung up through social media.

The damage in Serbia alone totals at least €1bn, according to the government, which has been marshalling resources to rescue stranded citizens and protect major power stations that together supply more than half the country’s electricity.

Bosnia’s foreign minister has compared the destruction to that caused by the country’s 1992-1995 war. Some 1m Bosnians are without clean water, and 100,000 homes have been destroyed. Many roads remain impassable, and thousands of landslides have damaged infrastructure and property, while also shifting wartime minefields. Meanwhile, on the night of May 20, 19 convicts escaped from prison in northern Bosnia as guards battled flooding that had filled cells a metre deep with water.

“The longer-term economic damage will take some time to assess, but it's already clear that serious damage has been done to the vital transport infrastructure,” says Biju Nair, CEO of ArcelorMittal Zenica, a steel mill that is one of Bosnia’s top-three export earners, and a major driver of foreign investment. “This is a mountainous country, and the main road and rail links inevitably follow the river valleys, where the flood damage is at its worst. Restoring them must be the first priority once the safety and well-being of the people is secured.”

In Serbia, the agricultural sector has been hit particularly hard, with livestock drowning in the floods; the army has been deployed to clear the carcasses as concerns about disease rise. Flooding was diverted around two coal-fired plants with total capacity of 1.12 gigawatts (GW), but the 1.65GW Nikola Tesla A station, which supplies around half of Serbia’s electricity, remains offline.

More than 20 EU countries have contributed equipment and relief workers to Serbia and Bosnia, as have the US, the UAE and Japan, according to the government spokesman. Russia’s controversial Emergencies Ministry (EMERCOM), which maintains a base in southern Serbia, was one of the first on the ground.

The future of reforms

The Serbian government has established a PayPal account to facilitate donations from abroad, an unusual move which the government says allows contributions to be processed without becoming entangled in Serbia’s banking and tax systems.

International support is all the more important because of the countries’ tough economic and fiscal positions. Serbia expects to run Europe’s largest budget deficit this year, at 7.1% of GDP, while Croatia is expected to endure a sixth consecutive year without economic growth. Bosnia’s economy is in even worse shape, already heavily reliant on funding from the EU and International Monetary Fund, some of which has been suspended over political deadlock between ethnic factions.

Serbia’s new government, appointed just over three weeks ago, has a sweeping majority with a mandate for long-delayed reform, including the privatisation of more than 100 companies and an overhaul of the labour code. As well as hitting business and the fiscal position, the disaster may also delay these measures.

But Milan Parivodic, an investment consultant and former minister of foreign economic relations, is more upbeat. “I see that in this horrible situation, there is potential as well in sense that I can unite and motivate people, in combination with very strong government with four-fifths of parliamentary seats, could push through reforms without major negative reactions from any quarter,” he says.

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