Serbia's economy to take back seat again as politics rule

By bne IntelliNews March 11, 2008

Dominic Swire and Dejan Kozul in Belgrade -

Serbia's caretaker government has urged the president to call early parliamentary elections in May after the shaky ruling coalition collapsed over Kosovo's declaration of independence and Belgrade's ties with the EU. In the short term, simply holding an election will have a detrimental effect on Serbia's economy, but the resulting government that might emerge could be far, far worse.

Storm clouds had been gathering over Serbia since pro-reform Boris Tadic, leader of the Democratic Party (DS), won the presidential elections at the start of February. Since then, he and Prime Minister Vojislav Kostunica, leader of coalition partner Democratic Party of Serbia (DSS), have been unable to reach an agreement on a policy towards EU integration. Kostunica refuses to join the EU without Kosovo as part of Serbia; Tadic believes the best way to tackle the Kosovo issue is from within the EU. Therefore, the announcement of snap general elections comes as little surprise.

In the short term, the holding of yet another election will harm Serbia's economy since it will inevitably delay the privatization process and thus slow foreign direct investment, both crucial to the country's development. While progress has been made in privatizing swathes of the economy, figures from the investment bank ING illustrate the scale of reforms still needed: 50% of Serbia's GDP is still generated from the public sector, compared with around 15-20% in Central Europe. The country is also highly dependent on FDI, using it to fund a current account deficit of 16%.

If, as many expect, the election results in another hung parliament, power-sharing negotiations are likely to be protracted, leaving the country without a government that would put the reform process on ice for up to four or five months. But the wait could be worth it.

Goran Radosavljevic, marketing and research adviser at Serbia's investment agency Siepa, says that if a pro-reform government finally emerges, a number of major investors waiting in the wings will finally start pumping money into the country. Radosavljevic predicts this will happen, with a repeat of February's presidential election result where the democratic parties were able to mobilize enough voters to back pro-Western Tadic against rival ultranationalist Tomislav Nikolic. "No doubt it will be better if a pro-EU party were elected with a majority in parliament. This is likely to happen. The difference between pro-EU parties and the Radicals won't be large, but we expect that the Democrats will win," says Radosavljevic.

But this is just "wishful thinking," according to ING Emerging Europe Economist Agata Urbanska, who believes PM Kostunica is too wily to let that happen. "What would be Kostunica's reasoning to resign, then go again into same coalition again after elections?" she asks. "If there's any logic in Kostunica's resignation, then his option would be to turn to the Radicals or have some form of minority government, but we are really ending up with some coalition between the Radicals and Kostunica - or the Radicals just winning enough to form a majority this time."

Ironically, PM Kostunica's decision to dissolve the government over its failure to stand up to Kosovo's independence could actually help the new state achieve its first goal of World Bank membership and thus further entrench its independence.

Member of the best clubs

As well as divided opinions over further EU integration, further disagreement within the Serbian government was caused by Minister of Economy Mladjan Dinkic's idea that Serbia should stop paying back Kosovo's foreign debt. His proposal was that Serbia should use this money to help Kosovo's Serbs, but this was dismissed as contrary to the stated policy on Kosovo.

"If Serbia stops paying those debts, that would mean that we recognize Kosovo's independence. Kosovo is a part of Serbia and that means that we are obligated to pay those debts," PM Kostunica said after first hearing of Dinkic's plan.

Kosovo's debt totals more than $1bn, and in this year alone Serbia is supposed to pay back $91m. The World Bank, as well as the Paris and London Clubs, are Kosvo's biggest creditors and it looks like they are ready to write those debts off.

The World Bank's new country director and regional coordinator for Southeast Europe, Jane Armitage, visited Belgrade in early March, and while her office refused to discuss the situation over Kosovo's debts with bne, analysts believe it will almost certainly be high on the agenda for her visit. "The World Bank could write off this debt and after that, we can expect the same thing from the Paris and London Clubs," says Goran Nikolic, an analyst with the Serbian Chamber of Commerce. "Writing the debt off does not benefit Kosovo only, but [United Nations Interim Administration Mission in Kosovo] and the Security Council as well. This could be a good way to prove Kosovo's independence."

Kosovo's next steps would be membership of the Council of Europe, OSCE and finally the UN.

Democratic forces in Serbia believe that only a strong and European Serbia can prevent Kosovo from becoming a member of the most important international institutions of which Serbia is a member. So, even if the Democrats win the next elections, nobody should expect Serbia to give up Kosovo - the battle will just move on to the next stage. If the nationalists win, however, a worst scenario is possible - an isolated Serbia with a reason for war. The next two months are crucial, not just for Serbia, but for the whole region and the EU.

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