Serbian elections: mandate and expectations

The Progressive Party has an impressive mandate, and it is expected to introduce economic reforms. However, these reforms are problem driven. A commentary by Vladimir Gligorov.

Serbian elections in 2014; photo © Congress of Local and Regional Authorities

Early parliamentary and the elections for Belgrade’s city council produced few surprises. Forecasts had predicted a clear victory to the Progressive Party (which included some small and fringe parties on their list) and losses for both the democratic and nationalistic opposition parties. In the end, the Progressive Party’s victory was more decisive than expected both for the seats in the Parliament and in the City Council. By contrast, the nationalist parties were practically wiped out while the Democratic Party and the splinter New Democratic Party just managed to pass the threshold of 5% of votes cast. The fourth party to get into the Parliament is the Socialist Party of the acting prime minister with less than 14% of votes. The Progressive Party has a clear majority of seats in the Parliament and can have a two-thirds majority in coalition with either the Socialists or the New Democrats. That should make it easy to change the constitution, which will be necessary if the process of EU integration is to continue unimpeded.

So, the Progressive Party has an impressive mandate, the only question being how will it interpret it and what will it use it for? Given the issues on which the election was decided, it is rational to expect that the mandate of the Progressive Party will be interpreted as:

  • legitimising the Brussels agreement with Kosovo, which is the basis for the process of normalisation and eventually of formal mutual recognition, and also as an agreement with the decision to start negotiations with the EU with the aim of acceding as soon as possible;
  • approving the introduction of sweeping economic reforms, which was the key slogan of the Progressive Party in the pre-election campaign.

Which reforms can be expected, however? In the campaign, it was suggested that the budget would have to be revised immediately after the new government is voted in by the Parliament. Though specifics were not given, the understanding was that public expenditures would be cut, but not the pension bill. Significant reduction in public employment has been mentioned repeatedly together with further cuts in public wages and salaries. Further tax increases have been ruled out. Support for businesses in the form of subsidies is to continue, though there have been no specifics. The IMF mission was in Belgrade just before the elections and it was suggested that a three-year stand-by or precautionary agreement would be sought immediately after the new government takes office. Finally, the date of 15 July has been set for major reform bills to be adopted, including a labour market reform and a change in the bankruptcy law – all in all about 25 reform laws, though no details are available as to the contents of these laws.

In addition, most publicly or socially owned (leftovers from the self-management past) firms should be either restructured or liquidated by the end of this year (originally, i.e. six months ago, the deadline was end of June 2014). This is probably going to be included in the programme with the IMF, though the speed with which this is to be done seems ambitious. Also, some of the loss-making publicly owned companies, e.g. Srbijagas, the gas import and distribution company, and Serbian Railways, Smederevo Steel Mill, and a number of other companies, will be reorganised and financially stabilised.

It is important to realise that these reforms are problem driven. The government is announcing measures to deal with urgent or unsustainable problems; it is not, at least as far as one can tell on the basis of available information, strategy driven. It looks as if the IMF is going to adopt a similar approach as it mostly raises concerns with fiscal sustainability and some structural reforms, mainly relating to the labour market law. The emerging strategy, to the extent that it can be discerned, is to deal with problems as they emerge, but to rely mostly on investments, mainly from abroad. A number of those have been announced and should come from the Persian Gulf states as well as from Russia and China. Also, there is some interest of German firms investing in some industries.

The problem, however, is that the interest in investing in industry is limited while the domestic corporate sector is facing liquidity and solvency problems. Also, further exchange rate depreciation, which could help foreign investments in the tradable sectors, runs the risk of making private and public debts, which are either in euro or indexed to the euro, difficult to sustain. The government obtained a ten-year USD 1 billion loan with a 2% interest rate from the Emirates and intends to refinance the existing more expensive loans. But, current and forecasted public and current account deficits are such that additional financing is needed. So, the exchange rate policy is limited. That makes monetary policy also rather less than flexible, though currently inflation is slowing down significantly. But the central bank fears, perhaps even unnecessarily, that monetary easing would lead to exchange rate depreciation and that would exasperate the problem of debt refinancing.

Probably the most hard to assess is the attitude that the new government will take towards the system of governance. The main criticisms by the former minister of economy, Saša Radulović, but also by the public in general has been that party appointees mainly run the large public sector. This supports an oligarchic system that has all the usual costs in efficiency and employment. There is no indication that this is about to change. If it does not, the reform of the corporate system and of the product market will be difficult or impossible. That will also make it difficult to improve the financial system, because of the large share of corporate non-performing loans. This is probably the key test of the reform ambitions and as of now, the expectations are not very optimistic.

The weakness of the emerging party system is that there is no opposition or it is very weak. That is not an obstacle to reforms, if those are intended, but may prove to be problematic in case of challenging economic developments. The incoming government is facing a full agenda: constitutional reform, EU negotiations, financial and institutional stabilisation, and practically the whole transition agenda except for external trade liberalisation. The mandate is there as are the expectations, the issue is the lack of strategy and the uncertain sustainability of the political will.