Multi-dimensional Review of the Western Balkans

Assessing Opportunities and Constraints

Report

OECD Development Pathways

10 June 2021

17. Multi-dimensional analysis of development in Serbia

Abstract

Achieving rapid, inclusive and sustainable development requires progress across a range of development domains. This chapter identifies major development constraints in Serbia. It builds on multi-dimensional analysis across the five pillars of the Sustainable Development Goals: people, prosperity, partnerships and financing, peace and institutions, and planet. In each pillar, the analysis highlights key areas where Serbia could further realise its full development potential.

This chapter of the MDR of the Western Balkans identifies the key capabilities and most pressing constraints in Serbia by linking economic, social, environmental and institutional objectives. The assessment is organised around five thematic sections based on the five pillars of the 2030 Agenda: People, Prosperity, Partnerships and Financing, Peace and Institutions, and Planet. Whenever relevant, Serbia is compared with a set of benchmark economies in the region (Albania, Bosnia and Herzegovina, Kosovo, Montenegro and North Macedonia), the OECD (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), non-OECD economies in the European Union (Croatia and Romania) and non-OECD economies in other regions (Kazakhstan, Morocco, Philippines and Uruguay). It includes regional averages for the Western Balkans and OECD and EU members.

People – towards better lives for all

The People pillar of the 2030 Agenda for Sustainable Development places quality of life at the centre stage, focusing on the international community’s commitment to guaranteeing the fulfilment of all human beings’ potential in terms of equality, dignity and good health. In the past decades, Serbia has managed to generate more jobs for its population and is about to undertake reforms in the labour market and social protection systems to align with EU standards.

However, there is still a long way to go to achieve a society that provides opportunities for all. Many groups, including young people, women, some ethnic minorities and those living in non-urban areas, are left behind in Serbia’s development, especially in terms of labour market outcomes. Necessary fiscal consolidation measures in the years after the 2008 financial crisis and the crisis that hit the country after the 2014 flooding have prevented the expansion of social spending and investment in human capital (Figure 17.1). Many public services do not yet operate at their full potential: the education system does not equip students with relevant skills to thrive after graduating, and social transfers, while generally achieving good coverage, are too low to prevent material deprivation for all. The social protection system needs to be reviewed in terms of financial sustainability and ease of accessing services. Going forward, and despite the financial crunch COVID-19 will present, Serbia cannot afford to miss opportunities for investing in its human capital. The People section in this chapter identifies five major constraints to the well-being of the population of Serbia (Table 17.1).

1. Young people, women and some ethnic minorities often lack opportunities to participate in the labour market.

2. More investment in teachers’ capacities, a curriculum update and better co-ordination with the productive sectors are needed to equip students with job-relevant skills.

3. Pension and social assistance transfers are too low to prevent poverty.

4. Social protection financing is inadequate and over-reliant on (frequently evaded) social security contributions.

5. Complicated administrative procedures and strict eligibility designs prevent easy access to social safety nets.

Figure 17.1. Fiscal consolidation has prevented the expansion of social spending

Government expenditure on education, health and pensions (% of GDP)

Improving well-being for all, everywhere

Serbia has seen GDP per capita grow over the past 15 years, but amidst the economic downturn after the 2008 financial crisis, household consumption has remained largely flat. Poverty and inequality persist. After a spike following the 2014 floods, one-quarter of the population was at risk of poverty, after accounting for social transfers, in 2018 (Figure 17.2 – Panel A). Poverty also affects those in employment: some 10% of employed people are at risk of poverty, meaning they cannot fulfil their basic needs, despite working (European Commission, 2020[3]). While disposable income inequality is in line with regional peers, Serbia has very high market inequality (Figure 17.2 – Panel B). This is partly due to high overall unemployment and the fact that agricultural and other subsistence income is not well captured in some household surveys (UNDP, 2018[4]). Both measures of inequality have changed little since 2008 (Solt, 2019[5]).

Inequalities among Serbia’s four major regions persist along various aspects of well-being. About one-quarter of the population live in each region: Belgrade Region (Beogradski Region), Southern and Eastern Serbia (Region Južne i Istočne Srbije), Šumadija and Western Serbia (Region Šumadije i Zapadne Srbije) and Vojvodina Region (Region Vojvodine). Belgrade Region, with the capital city of Belgrade, hosts most economic activities and generates about 40.4% of the country’s GDP, whereas Southern and Eastern Serbia generates about 13.8%, and its GDP per capita is one-third that of Belgrade Region. Regions also vary in terms of poverty and access to services. Southern and Eastern Serbia’s poverty rates are three times higher than in Belgrade Region, and only about two-thirds of households are connected to the water supply system (Table 17.2). Poverty rates within regions vary significantly. The southern parts of Serbia especially have significant municipal pockets of poverty: differences range from 4.8% in Novi Beograd in Belgrade Region to 66.1% in Tutin in Šumadija and Western Serbia (SORS/World Bank, 2016[6]). The lack of harmonised decentralisation and regional development frameworks partly explains persistent regional inequalities (see the Peace and institutions section in this chapter).

Figure 17.2. Household spending has risen, and poverty has declined

Household consumption, GDP per capita and at-risk-of-poverty rate after social transfers (Panel A) and income inequality, 2018 or latest available year (Panel B)

Regions	Population (%)	Employment rate (%)	People with incomplete primary education (%)	GDP share (%)	GDP per capita (USD)	Annual gross earnings (USD)	Poverty	Crude mortality rate (per 1 000 people)	Inhabitants per physician	Household connected to water supply system (%)
Belgrade Region	24.4	64.9	3.4	40.4	9 688.3	579.6	10.5	12.8	288	94.3
Vojvodina Region	26.7	60.7	9.5	26.5	5 733.0	442.0	25.8	14.6	397	96.0
Šumadija and Western Serbia	27.5	59.8	12.6	19.2	3 997.8	398.3	32.3	14.9	389	78.3
Southern and Eastern Serbia	21.5	56.9	13.5	13.8	3 664.7	410.5	33.0	16.2	335	67.3

Sources: SORS (2020[8]), STAT database, https://data.stat.gov.rs/?caller=SDDB&languageCode=en-US; SORS (2020[9]), Statistical Pocketbook of the Republic of Serbia 2020, https://publikacije.stat.gov.rs/G2020/PdfE/G202017013.pdf; SORS/World Bank (2016[6]), Poverty Map of Serbia – Method and Key Findings, http://pubdocs.worldbank.org/en/859541477472336209/Poverty-Map-of-Serbia.pdf.

Some minorities, especially Roma and Bosniaks1 living in non-urban areas, continue to be left behind. This is true along several dimensions of well-being, including access to education, labour market and public services. According to data from the 2014 Multiple Indicator Cluster Survey, one-third of Bosniaks living in non-urban areas are vulnerable in terms of multi-dimensional poverty. Regardless of their location, about one-quarter of Roma are also vulnerable in this way. Roma could constitute up to 8% of the total population by some estimates – one of the largest shares in the Western Balkans region (Maghnouj et al., 2019[10]). In addition, only one in five Roma students are enrolled in upper secondary education (UNICEF, 2015[11]), compared to 87% for the country average. The percentage of those completing tertiary education remains extremely low at 1%, compared to 16% of the non-Roma population and low levels of education remain a key barrier to their employment prospects (European Commission, 2020[3]). While the average labour force participation rate is 66% in Serbia, it is 33% for Roma. Likewise, as much as 62% of the Roma population aged 15 to 24 are not in education, employment or training (NEET), more than three times the average for Serbia. Only 65% of Roma have access to the public sewage system, and health outcomes for Roma children, as described elsewhere in this chapter, are poor (World Bank, 2018[12]).

Lesbian, gay, bisexual, transgender and intersex (LGBTI) communities face continued discrimination and harassment. Serbian society, which is largely Orthodox Christian, remains rather conservative and negative in its attitudes towards LGBTI people. Serbia elected an openly gay prime minister in 2017. However, according to a 2015 population survey, almost half the citizens of Serbia believed homosexuality is a sickness and would try to help their son or daughter find a cure if they found out their child was not heterosexual (ERA, 2020[13]). There have been numerous instances of violent gay-bashing in the past, the most extreme occurring during the first Belgrade Pride in 2001.

Existing legal provisions to protect LGBTI rights can be strengthened. The 2009 Anti-Discrimination Law explicitly prohibits discrimination on the grounds of sexual orientation and gender identity, and Serbia is bound by almost all UN human rights treaties, the European Convention on Human Rights2 and numerous conventions of the Council of Europe. In practice, the protection of rights is weak and inconsistent: LGBTI people continue to face harassment ranging from violence and hate speech to being denied access to healthcare services.3 A 2015 opinion poll revealed that 51% of LGBTI people in Serbia had been personally discriminated against because of their sexual orientation or gender identity (ERA, 2020[13]). Serbia also does not currently recognise same-sex marriage or same-sex adoption, and there are no standardised procedures for recognising gender where this differs from the sex assigned at birth, which leaves people undergoing transition in a legal vacuum (UNDP/USAID, 2017[14]). Beyond strengthening legal protections and investigating hate crimes, the government should promote a culture of respect for the rights of LGBTI people. It could be taught to citizens of Serbia from a young age by removing current discriminatory content from school textbooks and curricula.

Strengthening the productive potential and equal participation of all citizens of Serbia

Young people and women need better labour market integration

Serbia’s employment performance improved over the last decade, but young people are left out. In 2019, employment rates were close to the OECD and EU averages and were among the highest in the Western Balkans (Figure 17.3 – Panel A). However, unemployment rates for people under age 25 are about three times higher than for the overall labour force (Figure 17.3 – Panel B).

Figure 17.3. Despite overall solid labour market performance, youth outcomes are not encouraging

Employment rates, age 15+ (Panel A) and unemployment rates (Panel B)

Youth unemployment is highest among those with higher education, suggesting significant skills mismatches (Figure 17.4). A large share of young workers are engaged in low-wage occupations: 22.9%, compared to the EU average of 17.2%. Young workers are more likely to be low-wage earners (21.4%) than those over age 30 (13.9%) (Vidovic et al., 2019[15]). The exclusion of young people not only affects them directly and encourages migration abroad but is a constraint to Serbia’s overall growth potential.

Figure 17.4. Highly-educated young workers in particular are affected by unemployment

Unemployment, youth aged 15 to 24, total (% of total labour force) by education level

In the medium to long term, Serbia is at risk of losing and underutilising its human capital. Poor inclusion of young people and migration of the high-skilled abroad, together with persistent long-term demographic pressures (Figure 17.6), pose a threat to Serbia’s development potential. The migration abroad of especially high-skilled young people in search of better employment opportunities drags down productivity growth and increases the speed of population ageing, making social protection more challenging. Austria, Germany, Slovenia, Switzerland and Turkey are the main destination countries for emigration from Serbia, although the nature of migration has changed over time. Managed labour migration to Germany in particular has increased in recent years through a labour migration facilitation scheme. On average, around 30 000 to 60 000 people per year left Serbia in recent years, one-quarter of whom had completed higher education (Radonjić and Bobić, 2020[17]). Most of the citizens of Serbia currently living in OECD countries are highly qualified: almost 70% are plant and machine operators and assemblers; technicians and associate professionals; professionals; services and sales workers; and craft and related trades workers (Figure 17.5). About 73% had medium or higher education (OECD, 2016[18]). According to a recent state-ﬁnanced survey conducted on a sample of 11 000 students from Serbia, one-third would like to leave the country due to their inability to ﬁnd work in their profession, low salaries and poor living standards. For 94.3% of those surveyed, the main reasons to emigrate were economic, including lack of employment opportunities and low living standards. Loss of funds spent on education, decrease in GDP due to lower consumption and loss of human capital are some of the major consequences of youth emigration. Recent estimations show that the total education costs in one year of people leaving Serbia range from EUR 960 million to a little over EUR 1.2 billion (Western Balkans Democracy Initiative, 2019[19]). While emigration may bring benefits in the form of remittances or new skills, returns are complex, often triggering subsequent emigration due to misplaced expectations, disappointments, problems with pursuing entrepreneurial, research or scientific ideas, diploma recognition issues and non-acceptance by wider social and professional communities, among other reasons (Anđelković Vesković and Bobić, 2019[20]).

Figure 17.5. High-skilled people represent the majority of Serbian people living in OECD countries

Number of Serbian people living in OECD economies, 2015/16

Figure 17.6. Demographic pressures are on the horizon

Old-age dependency ratio projections (ratio of population age 65+ per 100 population aged 20 to 64, %)

Gender inequalities in the labour market persist. The employment gap between men and women is lower in Serbia than in the region and in OECD countries but nevertheless far from equality at about 14.5% in 2018 (employment rates are 55.4% for men and 40.9% for women, compared to 57.3% for women in OECD economies) (ILO, 2020[22]; OECD, 2020[23]). The difference in employment rates is mainly due to women’s markedly higher inactivity in the labour market: in 2019, labour force survey data showed a 13.5 percentage point difference between men and women aged 15 to 64, while the gender unemployment gap was 1.3 percentage points (World Bank, 2020[2]). Similarly, 27.0% of women compared to 18.5% of men aged 20 to 34 were neither in employment, education or training, a slightly higher gap than the EU averages (Eurostat, 2020[24]). While women are more likely to work part-time (23% of female employees vs. 18% of male), this gap is much lower than in OECD countries (25.4% of women and 9.6% of men), largely reflecting the high prevalence of part-time employment in Serbia overall (OECD, 2019[25]; World Bank, 2020[2]).

Women’s lower labour market participation reflects unpaid work in the household, including taking care of children and sick or elderly people, inadequate support to women in reconciling work and family responsibilities, and employers’ discriminatory treatment of young women. Only one in two children has access to preschool education in Serbia, and access to early education in Serbia remains inequitable: more than 80% of children from the households in the better-off quintile are enrolled in early childhood education and care programmes, compared to less than 10% of children from the poorest families. Access for Roma children averages only 6% (World Bank, 2017[26]). Serbia has a generous maternity leave scheme of 52 weeks, well above the EU average of 23 weeks. However, with the 2017 amendments to the Law on Financial Support for Families with Children, future mothers will be able to receive the maximum benefits only if they were employed during the previous 12 months. Women with less than six months of employment will no longer be entitled to the guaranteed minimum (ESPN, 2018[27]). Serbian law mandates equal remuneration for work of equal value, but its application is difficult, for instance due to the fact that employees rarely know the salaries of their co-workers (World Bank, 2017[28]).Nevertheless, the gender wage gap (11%) is lower than the OECD average of 13%, partly reflecting the higher education qualifications of women who work compared to men (OECD, 2020[29]; Vladisavljeviü et al., 2013[30]).

Women’s participation in Serbian society is not yet equal

Although far from reaching parity, female representation in the legislative and private-sector management is higher than in OECD countries. Female MPs currently occupy 38% of national parliamentary seats in Serbia, and women make up more than one-third of senior and middle managers, compared to the OECD averages of 28% and 16%, respectively average (OECD, 2020[29]; IPU, 2020[31]; World Bank, 2020[2]). Women are relatively well represented in the executive. Currently, 10 out of 23 ministerial posts are held by women (compared to 4 out of 21 in the previous administration despite the election of a female prime minister since 2017) but women’s participation in decision making at the local level is significantly lower. However, the share of men and women in senior civil service positions is close to equality (OECD/SIGMA, 2019[32]). As in neighbouring economies, a significant share of the population in Serbia (39%) believes that men make better political leaders than women (OECD, 2019[33]). The National Strategy for Gender Equality 2016-20 aims to achieve no less than 30% female participation in all levels of advisory and expertise bodies responsible for planning and drafting public policies, and a 2015 budget system introduced gender-responsive budgeting as mandatory for all budget users (OECD, 2019[33]). In early 2020, parliament announced an amendment to electoral laws with a new minimum quota of 40% of candidates from the less-represented gender on electoral lists for parliamentary and local elections from the less-represented gender (IPU, 2020[34]).

According to the OECD Social Institutions and Gender Index, discrimination against women in social institutions overall in Serbia is categorised as “very low”. However, there is room for improvement when it comes to access to productive and financial resources (OECD, 2019[33]). Men own most land and property in Serbia, and in some non-urban areas, women do not have de facto access to land, as it is traditionally registered in the name of their husbands or other close male relatives. Once married, any land or property a woman owns is signed over to her male relatives so that it remains in the family. The situation is more acute among Roma: only 0.2% of property is registered in a woman’s name. Lack of property to act as collateral translates into women often experiencing difficulty obtaining credit, including for starting businesses. Moreover, many banks that view women primarily as mothers and housewives remain sceptical of financing female entrepreneurship.

Gender-based violence remains high in Serbia, and existing legislation needs to be better enforced. Comparable surveys suggest a 24% lifetime prevalence of domestic violence against women in Serbia, which is in line with the OECD average, other studies have found that up to 45% of women who have or have had an intimate partner experienced intimate partner violence (including psychological violence) (OECD, 2019[33]; OSCE, 2019[35]). As of 2016, a specialised department to prevent and fight domestic violence had been created in the Criminal Investigations Directorate in 2016, but it needs to be reinforced (European Commission, 2016[36]). Emergency protection orders are not issued promptly, and the number of shelters is insufficient. There is often an informal acceptance of domestic violence by police whereby violence against women is considered a private matter, and little assistance is provided to women seeking help.

Labour market institutions need to be strengthened

Declining productivity and other factors hampered wage growth. Since 2015, wages have increased only slightly: the share of salaried workers earning less than RSD 25 000 has declined, while the share of workers earning between RSD 25 000 and RSD 45 000 has increased (Reyes and Nguyen, 2020[37]). In part, the steady decline in labour productivity since 2004 has not justified more significant gains (Figure 17.7). Moreover, under the 2014 fiscal consolidation programme, in co-operation with the International Monetary Fund (IMF), all public-sector wages above the minimum wage were cut by 10%. Amendments to labour laws also led to a reduction in labour costs of about 3% for employers. Recently, the minimum wage was allowed to increase and reached slightly above 50% of the average wage (Eurofound, 2020[38]). In September 2020, the Government of the Republic of Serbia passed the Decision on the amount of the minimum labour wage for the period January-December 2021, raising the hourly minimum wage by 7% to RSD 183.9 (net) per working hour from 1 January 2021.4 In 2016-21, the minimum wage increased, on average by 6.8% in real terms, in contrast with the 2.0% depreciation of the fiscal consolidation period (2013-15).

The Serbian labour market is characterised by significant informality, and labour market insecurity is high. This manifests itself in a large share of unregistered workers, as well as under-reporting of sales and wages by formal enterprises (Vidovic et al., 2019[15]). The share of informal employment in total employment was estimated at about 20% in 2018 (World Bank/Vienna Institute for International Economic Studies, 2020[16]). Workers with official contracts do not necessarily enjoy quality employment: one in five employees age 15 and above had a temporary contract (SORS, 2020[8]). About one-third of all workers are self-employed, many of them working informally (SORS, 2020[8]). Once again, the young are particularly vulnerable, with higher overall shares of workers under age 24 working informally (28%) or on temporary contracts (55%). This highlights high economic and social vulnerabilities, which may be exacerbated by the COVID-19 pandemic.

Figure 17.7. Wages have stayed flat in light of declining productivity growth

A high tax burden on minimum wages and loss of benefits discourage formalisation and prevent access to social security. The net income change from formalisation is negative for wage levels of 25% of the average wage (Koettl, 2013[40]). First, the minimum social security contribution base is set at 35% of the average monthly salary, which makes formal part-time low-wage work costly for both employers and employees. Second, workers with earnings above a certain (very low) threshold become ineligible for means-tested social assistance benefits (see section on social protection) (Vidovic et al., 2019[15]; ESPN, 2017[41]).5 Hence, the lack of economic viability effectively excludes a substantial share of the working-age population from formal employment and social security coverage. In this sense, informality and inactivity are predominantly a matter of exclusion rather than voluntary exit. Considering the limited capacities of the labour inspectorate (242 inspectors to cover about 440 000 businesses), the capability to monitor formalisation is low.

Activation measures are too limited and underfunded to connect job seekers with quality work or to boost their skills. In 2019, Serbia spent about 0.08% of GDP on active labour market policies, compared to the Western Balkan average of 0.12%, to Croatia (0.71%), and to Slovenia (0.61%) (European Commission, 2020[42]).6 Active labour market policies also have very low coverage in Serbia: in 2017, less than 25 000 beneficiaries (around 3.7% of all registered unemployed) were included in measures such as training, employment or self-employment subsidies or public works.

The institutional framework underpinning social dialogue remains weak. Trade union density remains high in the public sector (over 60%) but is much lower in the private sector (below 20%), limited by loss in confidence and by legal provisions preventing workers in new forms of employment from joining unions (Petkovic Gajic, 2018[43]). The Serbian Association of Employers, the representative employers’ organisation, also has limited representativity at the branch and sectoral levels, as it does not include the largest employers. After the lapse of all collective agreements following the reform of the Labour Law in 2015, a number of collective agreements have been signed in the public sector, with coverage estimated at around 60%. However, they remain the exception in the private sector. The Social and Economic Council (SEC), set up by a dedicated law in 2004, is Serbia’s key forum for social dialogue on policy issues and sets the annual increase in the minimum wage. However, a number of laws in relevant fields have not been discussed in the SEC, which has weakened trust in the process and capacity of the SEC (ILO, 2017[44]). Recently, the SEC has not achieved consensus on minimum wages, which were increased by government decision in 2019, for example (European Commission, 2020[3]).

Boosting education quality

The education system has a solid base. Nearly all children participate in compulsory education, and participation rates at other levels, including technical training, are also very high.7 Participation at the upper secondary level has increased significantly over the past years and is now about 87%, higher than the Western Balkan, OECD and EU averages. Serbia also has a very high proportion of students who stream into upper secondary vocational education and training (VET): about 74% of students enter VET rather than general education, compared to an OECD average of 47%. Socio-economic family background plays an important role in deciding whether students go to general or vocational programmes; students from more favourable backgrounds are more likely to attend general schools. There are two VET tracks in Serbia: three-year and four-year. The latter offers the opportunity to transition to tertiary education later on. Student demand for four-year VET profiles has increased in recent years. Vocational programmes have multiplied and been updated, some becoming very reputable, whereas gymnasium curricula were not updated for two decades (Reyes and Nguyen, 2020[37]). At 67.2%, participation in tertiary education is close to the OECD average.

Yet, the education system is not adequately adapted to meet labour market needs. In terms of employment rates for recent graduates aged 20 to 34 who are not in education and training, Serbia trails behind EU economies (Figure 17.8). Close to 30% (28% in 2019) of all recent tertiary education graduates studied science, technology, engineering and mathematics (STEM) subjects, compared to 15%, on average, in OECD countries in 2015 (UNESCO, 2020[45]; OECD, 2018[46]).8 However, higher education institutions adopt traditional methods of teaching that do not necessarily encourage interactive thinking or collaboration, and employers rarely collaborate with higher education institutions (Maghnouj et al., 2019[10]). In 2017, 29.3% of companies indicated problems with finding new workers, mostly due to skills shortages. Skills shortages extend across most sectors of the economy, with significant shares of companies citing the problem across sectors: manufacturing (38.6%), construction (37.7%), mining (33.3%), accommodation and food production (32.2%), information and communications (32.1%) and transport and storage (29.4%) (Reyes and Nguyen, 2020[37]). Interestingly, apart from the information and communications sector, which values technical skills of employees the most, all sectors interviewed in Serbia’s Skills Toward Employment and Productivity (STEP) Skills Measurement Employer Survey, placed a higher value on socio-emotional skills, such as reliability and resilience. In general, employers report that the skills of VET graduates are slightly more relevant than those of general education graduates. The establishment of the Agency for Qualifications and Sector Skills Councils in 2018 was a positive step towards reducing the mismatch between skills required in the labour market and education outcomes (European Commission, 2020[3]).

Figure 17.8. Employment rates of recent tertiary education graduates aged 20 to 34 not in education and training, 2019

While Serbia is the best PISA performer in the Western Balkans, it trails behind many more developed economies in terms of test scores and inequalities in student outcomes. Although its PISA scores for 15-year-olds have improved in comparison to the 2006 and 2012 PISA cycles, Serbia still lags behind many benchmark economies from Central and Eastern Europe and the OECD (Figure 17.9). While it is promising that Serbia’s share of overall high performers9 increased by nearly 2% since 2009, the share continues to be much lower than the OECD average in all three test subjects: in 2018, 3% of students in Serbia were top performers in reading (OECD average: 9%), 2% were top performers in science (OECD average: 7%) and 5% were top performers in mathematics (OECD average: 11%). Moreover, the performance gap has widened, and the simultaneous increase in low performers (4.9%) means that fewer students are achieving moderate outcomes (Maghnouj et al., 2019[10]). Lack of equity remains an issue, with low-quality schools tending to be in more disadvantaged areas. Variation in socio-economic background among schools explains about 40% of the variation in low performance in mathematics, suggesting significant concentrations of low performers in particular schools (OECD, 2016[48]).

Girls have somewhat better PISA test scores than boys, while as in most participating economies, 15-year-old boys in Serbia show higher career ambitions in computer-related fields than the girls. In PISA 2018, girls significantly outperformed boys in reading (by 30 score points, on average, across OECD countries) and somewhat outperformed boys in science (by 2 score points). Boys outperformed girls in mathematics (by 5 score points). In Serbia, girls scored better than boys in reading and similarly to boys in mathematics and science. Some 16% of boys and 3% of girls in Serbia expect to work in ICT-related professions (OECD, 2020[49]).

Figure 17.9. Education outcomes in Serbia are higher than in neighbouring economies but could be better

Mean PISA science score, 2018

A recent OECD review of evaluation and assessment in the education system points to chronic underfunding of the school system, which limits the capacity of schools to enact meaningful changes in their policies and practices. Serbia’s level of public expenditure on education, especially at the secondary level, has an important impact on education outcomes. At 3.6% of GDP in 2016, public education spending remains lower than the OECD average (5.3%) (World Bank, 2020[2]). While Serbia increased per-student funding at the pre-primary and tertiary levels between 2007 and 2015, per-student funding decreased for primary and secondary education (Maghnouj et al., 2019[10]). Overall public expenditure on secondary education is relatively low compared to neighbouring and European economies, despite similarly high enrolment rates at the secondary level (Figure 17.10). Low secondary education spending might reflect the fact that these programmes are still based mainly on theory, representing another gap at the secondary level: these programmes tend to be more costly across OECD countries due to the need to adapt infrastructure and materials for practical learning (Maghnouj et al., 2019[10]). Local governments are responsible for funding professional development for teachers and other school staff but lack funds. This among other factors affects teacher quality and makes the teaching profession unattractive.10

Figure 17.10. Despite its importance, secondary education is underfunded in Serbia

Government expenditure per student, secondary education (% of GDP per capita), 2016 (Panel A) and net school enrolment, secondary education (%), 2017

Lack of quality teachers and little teacher training are main constraints at all levels of education. Despite a small pupil/teacher ratio overall, which may act favourably to improve teaching, poor selection criteria for teachers and lack of opportunities for professional development drag down teacher motivation and education outcomes (Maghnouj et al., 2019[10]). Criteria for entry into initial teacher education in Serbia are not selective, and almost all applicants to teaching faculties are admitted: acceptance rates are almost 100%, and many universities struggle to fill available positions with graduates (Maghnouj et al., 2019[10]). The take-up of professional development programmes remains low, especially in some areas.11 In Serbia, teachers are required to complete 100 credit points of professional development (one hour of training equals 1 point) over five years. In 2017, less than half of teachers had achieved 80 credit points over the reference period (Politika, 2016[51]). Main reported reasons related to lack of financial support; often, teachers pay out of their own pocket to attend training.

Teachers need greater support to implement the new curriculum. While a new learning standard with a competency-based approach was introduced in 2013, the curriculum was not rolled out until 2018. At the same time, the new curriculum is overloaded and very prescriptive, compared to practices in OECD countries. This severely limits teachers’ room to adapt their practices to the specific learning needs of students (Maghnouj et al., 2019[10]). In addition, there are no guidelines that describe students’ learning progression in a cycle. Based on external school evaluation results, the use of assessment to inform learning and adapt teaching to student needs is weak in almost half of basic education schools and two-thirds of upper secondary schools (IEQE, 2017[52]). While the Ministry of Education, Science and Technological Development (MoESTD) identified student assessment as a priority for teachers’ professional development in Serbia for 2017-20, the take-up rate for professional development remains low, as previously described.

Considering the relevance of the VET system, the government is working to make VET more relevant to Serbia’s labour market needs. In 2016, the MoESTD and the Chamber of Commerce began to work together to institutionalise dual education in Serbia (only 2% of the total student population attended dual education in 2018/19). As a result, several VET profiles were terminated, and others are being modernised. The Chamber of Commerce, representing companies, supports the MoESTD and the Institute for the Improvement of Education in designing VET curricula to meet current labour market needs for the professions (Reyes and Nguyen, 2020[37]). Because, as mentioned, a large proportion of students get to higher education through vocational schools, making VET schools more relevant to skills the labour market demands may yield efficiency gains, as well as improve student skills.

Improving health and social protection outcomes

Quality of health care has deteriorated amid austerity measures and reliance on frequently evaded social contributions

Serbia’s overall key health outcomes are good for its income level but significantly worse for low-income and minority groups. In 2017, life expectancy at birth (76 years) and under age 5 child and maternal mortality rates (5.9 per 1 000 and 12 per 100 000 live births, respectively) were in line with regional averages (World Bank, 2020[2]). Yet, the latest available data on child health show that mortality rates for under age 5 Roma children are twice as high as for the general population (SORS/UNICEF, 2014[53]). Children in Roma settlements are also five times more likely to be underweight and three times more likely to be stunted. With the involvement of Roma mediators, the government newly registered 131 495 Roma for health insurance between 2009 and 2014, and 30 018 children and 2 719 adults were immunised. The 2016-25 strategy for the social inclusion of Roma for the period also lists improvements in the health status of Roma and their access to health care as a priority goal (ESPN, 2018[54]).

As elsewhere in the Western Balkans and the OECD, the ageing population and unhealthy lifestyles in Serbia mean that non-communicable diseases pose a growing risk to health, productivity and well-being. In 2018, Serbia’s top causes of premature death were cardiovascular diseases (51%) and cancer (22%). Although smoking rates have decreased slightly over the past decade, Serbia remains among the ten economies with the highest smoking rates in the world: 40% of adult men and 37% of adult women (the highest rate for women in Europe) regularly consumed tobacco in 2016 (World Bank, 2020[2]). In 2019, 9% of the population had diabetes (one of the top five causes of death and disability in Serbia),12 compared to 6.4% in the average OECD country (Institute for Health Metrics and Evaluation, 2020[55]; OECD, 2017[56]; World Bank, 2020[2]).

The preventative care component in Serbia’s primary healthcare sector will need to be strengthened and regulation to discourage unhealthy behaviours sharpened. Tobacco taxes (at EUR 70 per 1 000 cigarettes) are two-thirds the EU standards and could be gradually increased in co-ordination with non-EU neighbouring economies to prevent smuggling (Institute of Economic Sciences Belgrade, 2018[57]). Authorities are currently discussing an amendment to the Law on Protecting the Population from Exposure to Tobacco Smoke that would introduce a full ban on indoor smoking. In addition, the current Law on Excise Duties prescribes a gradual increase in the total excise burden on cigarettes, in order to reach the level prescribed by EU directives. A medium-term plan for a gradual increase in the excise burden in the period 2021-2025 has been adopted.13

Access to health care in Serbia is relatively equitable, but complicated administrative processes should be streamlined. A compulsory healthcare insurance scheme covered 97.5% of the population in 2016. The state provides insurance contributions for vulnerable groups, such as registered beneficiaries of social assistance and registered unemployed, who are also exempt from co-payments. One-fifth of all insured people were covered by this provision in 2016. There is also a cap on annual co-payments for the remainder of the insured, but the present procedure requires the collection of all receipts and a complicated calculation of the limit. This could be streamlined by monitoring payments through existing patient e-health cards. The proportion of citizens who reported unmet medical care needs has been decreasing since 2013, reaching 11.8% in 2018, while health care comprised 3% of household spending (ESPN, 2018[54]; Eurostat, 2020[47]). Nevertheless, unmet needs are higher for people in sparsely populated areas and those with lower incomes, one-sixth and one-quarter of whom reported unmet medical needs in 2014, respectively (Popovic et al., 2017[58]).

Evasion of health insurance contributions and corruption pose further challenges. Out-of-pocket (OOP) expenditure is a high and growing share of total health expenditure (Figure 17.11). Evasion of contributions by employers, including public companies, is one reason: in 2016, 47 000 employees in Belgrade, representing 7% of its employed labour force, were unable to exercise their right to health care as their firms did not pay health insurance contributions (ESPN, 2018[59]).14 There is also evidence that government financing for vulnerable groups in 2010 and 2015 was consistently lower than specified in the statutory obligation, leading to shortfalls in Health Insurance Fund (HIF) financing (ESPN, 2019[60]). A significant share of OOP health expenditure is spent on informal payments for better quality care or to reduce the waiting time for medical tests or surgery (see the Peace and institutions section in this chapter).15 The recent 2019 Law on Healthcare Protection includes provisions regulating conflicts of interest and thresholds for healthcare providers receiving gifts but does not stipulate the period of time for accounting for such gifts or forbid side payments for “bought and brought goods” (Radošević and Milica, 2019[61]). The HIF and the Ministry of Health should take a more active approach to reaching out and educating patients, the majority of whom, according to a recent survey, tend not to be well informed about their rights or how to report potential violations (European Policy Centre/European Movement in Serbia, 2018[62]).

Figure 17.11. Citizens of Serbia have to pay a significant and rising share of health expenditure out of pocket

Out-of-pocket health expenditure (% of total health expenditure)

In the past decade, the supply of health services was not driven by actual need and demand but was kept in check by fiscal considerations. Like Western Balkan neighbours but in contrast to other European economies, the health insurance model in Serbia largely depends on social security contributions. The government general budget covers the remaining costs as needed (Figure 17.12). In real terms, HIF revenues in 2017 were equal to half those in 2008, mainly due to declining contributions. A variety of factors contribute: the accumulation of debt for unpaid contributions (the HIF paid them off in 2012 with disastrous consequences for fund finances), a two percentage point cut in the social contribution rate in 2014, continued evasion of contribution payments by firms, low employment rates and minimal wage growth after the 2008 financial crisis. Overall health spending is in line with the Western Balkan average, but compared to 2008, dropped by close to one percentage point to 7.8% of GDP in 2017. It has also fallen relative to other social protection functions (World Bank, 2020[2]).

Inefficient health spending and a growing gap between the very broad basic package of health benefits and available resources have resulted in poor health system outcomes. These include rationing of services, deterioration of health infrastructure and longer waiting lists. Austerity measures included a stop on hiring public-sector employees in 2014. Coupled with the migration of qualified staff abroad, the number of healthcare personnel fell by almost 10% between 2008 and 2015. For a while, the government added no new or more innovative drugs to the Positive Drug List. Insured people in Serbia wait an average of 812 days for an innovative drug – the worst result in the Western Balkan region. By comparison, it takes 585 days in Albania and 127 days in Germany for a new drug to be made available to the general population (EFPIA, 2020[63]). Waiting times for all major surgical procedures continuously increased in 2012-16, despite the introduction of an online system for direct specialist bookings in some hospitals and e-prescriptions (ESPN, 2018[54]). Since 2017, some surgical procedures may be conducted in the private sector, but without wider inclusion of the private sector in managing waiting lists, the situation will remain problematic.

Figure 17.12. Social contributions make up a high share of Health Insurance Fund finances and have been falling in line with overall revenues

Division of financing of healthcare expenditure by main source (% of total financing) (Panel A) and % change of social contributions and overall HIF receipts since 2008 (Panel B)

To improve the sustainability of the healthcare system, medical staff and investments in equipment maintenance need to increase. On the back of slightly more favourable public finances from 2017 on, the government announced a raise in public-sector wages, including for medical staff, at the end of 2019 (Reuters, 2019[64]). However, given the likely negative impact of COVID-19 on public finances, some of the necessary savings will need to come from spending existing health funds more efficiently. Potential reform options include directing more people to primary care (costs for providing services vary significantly between primary care facilities and hospitals), output-based financing (reimbursement based on a Diagnostic Related Groups System is being piloted), enhanced facility autonomy, and accountability and reform of pharmaceutical spending. In addition, the widespread evasion of social security contributions in terms of under-reporting wages needs to be more stringently penalised, and current official exemptions for public companies need to be phased out.

Pensions and social assistance schemes fail to prevent poverty

Funding for other social protection measures has also been on a downward trend. In 2016, gross expenditure on social protection as a share of GDP was 21.5%, almost 6.7 percentage points lower than the EU28 average and 1.4 percentage points lower than in 2008 (ESPN, 2019[60]). Pensions, the majority of which are old-age benefits, make up the largest social protection function (46.2% of total expenditure in 2015) and, at 10.3% of GDP in 2018, are in line with the EU average (Eurostat, 2018[1]; SORS/Ministry of Finance, 2020[65]). Serbia has a public statutory pension system that is compulsory for all persons engaged in standard or non-standard forms of employment and is based on a pay-as-you-go scheme. The number of individuals enrolled in voluntary private pension funds is very low: around 2.9% in 2019 (National Bank of Serbia, 2020[66]).

Like health care, pensions were affected by fiscal consolidation and austerity measures. Given the high deficit of the Pension Fund for several decades, the government introduced various reforms that affected both the retirement age and the level of pensions from 2008 onwards: pensions were frozen in 2009-10, the pension indexation was adjusted below the inflation rate between 2011 and 2014, higher-than-average pensions (over EUR 208) were temporarily cut between 2014 and 2018 and penalties for early retirement were introduced (ESPN, 2019[60]). In combination with a four percentage point increase in the pension insurance contribution rate (in contrast to the reduction in contributions for health), these changes resulted in a decrease in the Pension Fund deficit, even though the number of old-age pensioners increased by almost one-quarter in 2008-16. While pension levels were raised again in 2020 by 5.4%, it is unclear whether necessary public funding will be available, given the negative economic impacts of COVID-19 (Reuters, 2019[64]).

Pensions in Serbia do not fully protect against old-age poverty. While coverage is high – 95.9% of men and 85.6% of women age 65 and over received a pension payment in 2019 – the adequacy of pensions is low. According to the latest available data in June 2020, about one-quarter of pensioners received less than EUR 128.50 per month, approximately one-third the cost of the average minimum consumer basket for a three-person household (ESPN, 2017[41]; Pension and Disability Insurance Fund for the Republic of Serbia, 2019[67]).16 In 2019, the at-risk-of-poverty rate for a household with two adults households and at least one person over the age of 65 was 18.4%, compared to an EU28 average of 11.9% (Eurostat, 2018[68]). The gender gap in pension income for those aged 65 to 79 is high at 25.5% (the retirement age for women is 61.5 years compared to 65 years for men) but less than the EU28 average of 36.5% and smaller when disability and survivor pensioners are excluded from the calculation (in which case it is only 17% for employees and 5.4% for farmers) (ESPN, 2017[41]).

In common with the region, social assistance in Serbia is inadequate. The overall expenditure on means-tested schemes, which include family, social exclusion and housing benefits, is low by European standards: it represented 0.9% of GDP in 2018 compared to 3.1% in the EU28 (corresponding to 4.7% of gross social protection expenditure for Serbia compared to 11.7% for the EU28) (ESPN, 2019[60]). FSA is the main financial support for all families with low incomes. Although the number of FSA beneficiaries increased by 67% and related budget outlays doubled to 0.34% of GDP between 2010 and 2014, transfers have low adequacy, especially for families with children and single parents. Families with three or more children have the highest at-risk-of-poverty rate at 44.4%, 19.8 percentage points more than the national average. It is estimated that FSA benefits for two-parent families should be increased by more than one-third to reach the poverty threshold (ESPN, 2015[69]).

In addition to benefit levels, coverage of social safety nets is an issue. While FSA targets the poor (75% of benefits go to the poorest quintile), the scheme covers only 5.7% of this population (World Bank, 2020[70]). There are huge gaps in coverage among municipalities: in Priboj, one of the poorest municipalities, 0.7% of poor households are covered by FSA, compared to 8.4% in Apatin, one of the richest. The main obstacles in take-up relate to complicated administrative procedures, the significant power of social workers and strict exclusion criteria. Applicants must submit a large set of supporting documentation, including birth certificates (which Roma in particular are less likely to have) and official proof that persons legally responsible to support the applicant are not doing so. Social workers have discretionary power to estimate unrecorded revenues and potential revenues17 and decide on applications. In addition, individuals who own more than the basic living area (one room per member) or agricultural land of 0.5 ha or more are not entitled to FSA unless they agree to mortgage their property for valorisation of cash benefit costs (European Minimum Income Network, 2014[71]).18 Very low income eligibility thresholds (EUR 68.9 for a single-person household and EUR 103.3 for two adults in 2017) also leave out beneficiaries on the minimum pension scheme (ESPN, 2017[41]). Given that this group is less likely to remain active in the labour market, a more relaxed FSA threshold could be defined for people over age 75.

Prosperity – boosting productivity

The Prosperity pillar of the 2030 Agenda for Sustainable Development calls for broad-based economic growth shared by all people. Over the past decade, Serbia has made notable progress in building a more competitive, export-oriented market economy. Thanks to advancements in the structural reform agenda, strengthening of the institutional framework and return of macroeconomic stability in recent years, Serbia is now better placed to pursue a higher growth trajectory and faster convergence with EU income levels.

Over the coming decade, continued commitment to macroeconomic stability will be crucial in strengthening and sustaining GDP growth, as will be reforms that create a more stable and predictable institutional, regulatory and business environment that is conducive to robust investment and productivity growth. This would entail increasing the transparency and predictability of regulations that affect business, reducing red tape and corruption and levelling the playing field for all actors in the economy. In line with its aspirations to foster faster and more sustainable growth through smart specialisation, Serbia also needs to improve the skills of its workforce and strengthen the capacities of its SMEs to innovate and adopt new technologies. These reforms are also critical for developing deeper linkages with the economy’s growing and increasingly diverse FDI sector and GVCs.

1. Weak investment and productivity growth impede income convergence with the European Union.

2. Investment is hampered by weaknesses in the administrative and regulatory environment, corruption and weaknesses in competition.

3. Economic upgrading and smart specialisation are constrained by weaknesses in the skills profile of the workforce.

Stronger investment, productivity growth and income convergence

Prior to the 2008 global financial crisis, the growth of the Serbian economy was high but unbalanced. Between 2000 and 2008, GDP grew by an average of 6.5% on the back of high domestic demand fuelled by strong credit growth from the newly foreign-owned banks, as well as expansionary fiscal policy (Figure 17.13 – Panels A and B). However, the high growth was not accompanied by strong investment growth or improvements in labour market outcomes, and this period saw a decline in employment, from 49% in 2000 to 43% in 2006. In the face of high inflation, which averaged 9.7% between 2002 and 2008, monetary policy remained tight and could not mitigate the currency appreciation pressures, which further dampened the weak export performance (Figure 17.13 – Panel B). The current account deficit rose significantly, from 4% to 20% of GDP between 2000 and 2008 (Figure 17.13 – Panel C), and external debt rose from 14% of GDP in 2004 to 77% in 2009. The high inflation and weak confidence in the local currency, the dinar, following the hyperinflation of the mid-1990s and the high and volatile inflation thereafter (Figure 17.13 – Panel D) resulted in high demand for foreign currency loans (80% of loans were denominated or indexed in foreign currency in 2007) and high exposure to currency risk. In the context of the credit boom, these risks materialised during the global 2008 financial crisis and thereafter, with the NPL portfolio reaching 21.6% of total loans by 2015 (National Bank of Serbia, 2020[72]).

Figure 17.13. GDP growth has weakened in the post-crisis period (%) on account of weaker domestic demand, but external balances and internal balances have improved

Growth in the post-crisis period has been relatively weak and quite volatile, especially in the immediate aftermath of the crisis. Serbia experienced a double-dip recession caused by the Eurozone crisis of 2011 and the devastating 2014 floods (Figure 17.13 – Panel A). These shocks amplified other challenges, including high and rising NPLs and weakening credit growth (Figure 17.14). They also dampened the gains in productivity (Figure 17.18 – Panel A) and exports coming from FDI, as Serbia began to attract investment in the tradable sector in the newly established free zones, leveraging the relatively cheap qualified labour and offering attractive incentives to export-oriented investors. This period also saw productivity gains from the reallocation of labour from agriculture into more productive manufacturing and services (Figure 17.18 – Panel A).

Figure 17.14. Export growth has been strong in the post-crisis period, but the increase in domestic private investment has been modest, despite high credit growth

Index of investment, exports and credit to the private sector (100 in 2007)

Over the past five years, economic performance has improved significantly, underpinned primarily by strengthened macroeconomic stability. Inflation has declined and stabilised, with an annual average of 1.9% (Figure 17.13 – Panel D). Strong fiscal consolidation (from a 6.4% deficit in 2012 to a 0.6% surplus in 2018) has reduced the public debt from 70% of GDP in 2015 to about 53% in 2019 (see the Partnerships and financing section in this chapter). Over this period, financial stability improved as well, with NPLs declining to 4% of total loans and dinar-denominated lending increasing from less than 20% in 2007 to 33% in 2019 (National Bank of Serbia, 2020[72]).

The improved macroeconomic environment has been conducive to stronger investment and export growth. Private investment has increased by more than 30% since 2014. This includes strong growth in FDI investment (Figure 17.15) – Serbia has been a global leader in greenfield FDI attraction in recent years – most of which went into export-oriented manufacturing, including the automotive industry, food and beverage processing, textiles and electronics (Development Agency of Serbia, 2020[74]). Exports growth also increased significantly (Figure 17.14, Figure 17.16). Manufacturing exports rose by nearly 52% since 2015 and currently account for 65% of total exports, while service exports, driven by the ICT sector, grew by 16% annually over the past three years and, in 2019, accounted for 30% of total exports (SORS, 2020[8]).

Figure 17.15. Serbia has attracted significant FDI over the past five years

Despite these positive developments, growth remains modest and income convergence with aspirational peers in the European Union is slow. Annual average GDP growth has been 3% since 2014. Given that Serbia’s current GDP per capita is less than a half the EU average, it would take Serbia more than 20 years to catch up to current EU income levels at this pace (World Bank, 2020[2]). The modest growth reflects a confluence of factors including low investment and its allocation to low value added sectors, weak productivity growth and slow structural transformation of the economy.

Figure 17.16. Exports’ contribution to GDP has increased considerably

Exports as a share of GDP

Domestic private and public investment remains relatively weak compared to regional peers (Figure 17.17). Private investment is constrained by weaknesses in the business environment and weak access to finance for SMEs, particularly start-ups and microenterprises, while public investment has been constrained by fiscal consolidation and structural weaknesses, including an insufficiently developed public finance management framework and the high share of current expenditures mainly going towards subsidies and transfers (see the Partnerships and financing section in this chapter). Weak investment is also reflected in the relatively weak contribution of the capital stock towards productivity over the past decade (World Bank, 2019[75]).

Figure 17.17. Gross capital formation in Serbia has been relatively weak compared to regional and global peers

Gross fixed capital formation (% of GDP), 2019

Productivity growth has declined considerably, and most employment is still in low-productivity sectors. Within-sector productivity growth has declined significantly in the post-crisis period, and Serbian labour productivity significantly lags behind that of aspirational EU peers. In 2019, value added per worker in industry (including construction) and agriculture was roughly one-quarter the EU average, while it was even weaker in services at 20% of the EU average (World Bank, 2020[2]). Productivity gains from labour reallocation to more productive sectors have also been relatively limited (Figure 17.18 – Panel A).

Figure 17.18. Productivity growth has declined considerably in the post-crisis period, and most current employment is in low-productivity sectors

The weak productivity growth from labour reallocation between sectors also reflects the relatively limited structural transformation of the economy. Sector contribution to GDP has not changed significantly over the past decade (Figure 17.19 – Panel A). Labour has moved from agriculture to manufacturing and services, but agriculture still accounts for nearly one-fifth of all employment (Figure 17.19 – Panel B) and productivity gains have been limited. Even though Serbia has been a regional leader in FDI attraction, these investments have not strongly contributed to structural transformation because the linkages with the domestic economy and other spillovers have been fairly limited. FDI has also been largely concentrated in labour-intensive manufacturing activities (automotive, food processing, textiles) with relatively low value added (OECD, 2017[77]).

Figure 17.19. Sector contribution to GDP (%) and sector share in employment (%)

Investment is hampered by weaknesses in the administrative and regulatory environment, corruption and weak competition

Regulatory and administrative burden

Over the past five years, Serbia has made notable progress in reducing the regulatory and administrative burden on businesses, but many challenges remain. Thanks to reforms that streamlined the process of issuing construction permits, introduction of an e-permitting system, introduction of filing VAT returns in electronic form and social security contributions, Serbia has facilitated doing business. This is reflected in its World Bank Ease of Doing Business rankings: from 2015 to 2020, Serbia rose from 186th to 9th on the indicator for dealing with construction permits and from 165th to 85th on the indicator for paying taxes (World Bank, 2020[78]).

More progress is needed to reduce bureaucratic red tape and improve regulatory transparency and certainty. In the latest Business Environment and Enterprise Performance Survey (BEEPS), Serbian firms cited considerable challenges in dealing with the administration. The management of Serbian firms spends, on average, more time dealing with government regulation requirements than management in peer economies. It also takes, on average, much longer (98 days) to obtain an operating license relative to comparable economies (24 days in Europe and Central Asia [ECA]; 28 days globally) (World Bank/EIB/EBRD, 2019[79]). Tax administration remains relatively cumbersome, as firms in Serbia have to make 33 tax payments per year – twice as many as in regional peers. Nearly half the firms surveyed in the BEEPS noted that they had to meet with tax officials, on average, two times per year (World Bank/EIB/EBRD, 2019[79]). The response to the COVID-19 pandemic has shown the capacity of Serbia to mobilise digital tools, building on the priority given by the Government of Serbia to digitalization and e-government. Serbia put in place distance learning, as did many other countries around the world, but also put in place innovative tools such as a volunteering platform (Be a volunteer) and a COVID-19 National integrated information system to aggregate and report data (OECD, 2020[80]). Digitalization of previously optimised procedures can contribute greatly to a more efficient, accountable and user-oriented public administration.

Increasing the transparency and predictability of regulations affecting businesses is an area where Serbia can make significant progress. Serbia has set up a regulatory and institutional framework for effective, inclusive, evidence-based policy making. When it comes to implementation, however, there is still room for improvement. Data collection and use in the process of policy making are not comprehensive and consistent across the administration. Since 2019, the Public Policy Secretariat (PPS) requires lawmakers to conduct impact assessments of draft laws and regulations. However, these assessments are not systematically submitted to the Parliament together with the legislative process (European Commission, 2020[3]). A policy planning legislative framework is well in place, and the Law on the Planning System of the Republic of Serbia (Republic of Serbia, 2018[81]) sets the framework for consultation with stakeholders throughout the process. Further efforts are warranted to ensure that its implementation leads to significant improvements in the inclusiveness of policy making.19 Domestic and foreign businesses, for instance, complain about the lack of timely consultation and regular dialogues with the business community when it comes to drafting legislation or regulations affecting their operations. Overall, businesses also complain about a lack of clear instructions on the implementation of regulations, which adversely affects their operations (Foreign Investors Council, 2019[82]).

The Public Policy Secretariat (PPS) has undertaken important initiatives to improve interministerial co-ordination at the national level and to strengthen the stakeholder consultation process. This includes the preparation and implementation of the Action Plan for the Implementation of the Government Programme. In that regard, four implementation groups have been set up, and meetings with relevant authorities are being held regularly and include the preparation of follow-up reports and their submission to the prime minister.20 Preparation is also underway for an e-participation platform, an IT solution for the consultation process and public debate, which should help improve the ongoing consultation process in Serbia.

Corruption

Corruption remains an important challenge in Serbia. In the latest Transparency International Corruption Perceptions Index, Serbia ranked 91st out of 191 economies, well below most aspirational peers in Central and Eastern Europe (CEE) (Transparency International, 2019[83]). The prevalence of bribery is higher in Serbia compared to peers. In the latest BEEPS survey, a higher share of businesses in Serbia reported having to provide gifts to obtain licenses compared to regional and global peers. For example, the bribery incidence while obtaining operational licenses in Serbia was 18%, compared to 9% in the ECA region (World Bank/EIB/EBRD, 2019[79]).

Prosecution and sanctioning of corruption lags behind (see the Peace and institutions section in this chapter). In its latest assessment, the European Union noted that law enforcement and the judiciary have yet to establish a credible track record of prosecuting high-level corruption cases (European Commission, 2019[84]). Serbia’s ranking also declined on the latest Transparency International Corruption Perceptions Index on account of weak progress in anti-corruption efforts (Transparency International, 2019[83]).

Competition

Serbia lags behind many peers on indicators related to market competition and state participation in markets. In the latest World Economic Forum Global Competitiveness Index, Serbia ranked 110th out of 141 economies on the indicator for market dominance, which measures the extent to which corporate activity is dominated by a few business groups or is spread across many firms. It also ranked lower compared to most aspirational peers on the indicators for distortedness of taxes and subsidies (81st) and competition in services (85th) (WEF, 2020[85]).

The role of the state in the economy is decreasing but remains large; if not regulated, it may threaten competition. In 2018, state aid in Serbia accounted for 1.9% of GDP, decreasing from 2.2% in 2017. It still remains higher than in the rest of the region and the EU average (0.76% in 2018). State aid can promote growth, create jobs and trigger spillovers throughout the economy, but if mistargeted, it can provide incumbent unprofitable companies an unfair advantage over more innovative and competitive outsiders. In Serbia, sector-specific aid sometimes supports ailing industries. Some 60% of corporate subsidies target SOEs, which play a shrinking but still large role in the economy: they account for 19% of value added and formal employment (European Commission, 2019[84]; World Bank, 2019[75]). SOEs are present in many sectors, including utilities, telecommunications, transport, banking and insurance, construction and agriculture. The high presence of SOEs in network industries also affects the productivity of other sectors, especially manufacturing (World Bank, 2020[70]). In general, SOEs have enjoyed preferential treatment in terms of regulatory enforcement too (World Bank, 2020[70]).

The legal frameworks for the protection of competition, the regulation of state aid and SOE governance have been improving, but implementation needs to be strengthened. The country has long had an independent and empowered anti-trust agency (the Commission for Protection of Competition) and, since January 2020, an independent Commission for State Aid Control (CSAC) (in application of the Law on State Aid Control adopted in 2019). The actual empowerment of the CSAC will therefore be crucial to regulate the role of the state in the economy and prevent potential distortion of the market. State subsidies and guarantees for SOEs have been decreasing (World Bank, 2020[70]). The Law on Public Enterprises adopted in 2016 aims to reform the governance of SOEs, making a clear distinction between the ownership and the regulator (World Bank, 2020[70]).

Economic upgrading and smart specialisation are constrained by weaknesses in the skills profile of the workforce

Looking to the 2030 horizon, Serbia can seek further economic upgrading in order to boost the dynamism of the economy and increase its growth potential. Sectors with high export and growth potential in Serbia include ICT, agriculture and food processing, machinery, electronics, mining, etc. The growth and upgrading of these sectors can be supported through the attraction of FDI in higher value added activities but also through supporting the deeper and wider integration of domestic SMEs in GVCs, either through the FDI channel or independently. Serbia’s recently developed smart specialisation strategy, which identifies sectoral priorities for development across all regions, is an important step in setting out the vision and path for advancement.

Two key necessary conditions for the implementation of the smart specialisation agenda are the creation of a skilled and adaptable workforce and an SME sector that can innovate and adopt new technologies. On both fronts, Serbia can make progress to reach the benchmarks of aspirational peers in the European Union.

Skills

When it comes to education outcomes, Serbia performs well compared to regional peers, as evidenced by its relatively strong performance on international student assessments, such as PISA, and its comparatively high enrolment and completion rates across all levels of education. Yet, Serbia lags behind the EU and OECD averages on most of these indicators (see the People section in this chapter).

Despite the strong outcomes, enterprises still have difficulties in finding a workforce with the right skills. In the latest STEP survey, skills were identified as the most significant constraint for hiring followed by lack of experience. Skills were also cited as a constraint by about 50% of surveyed firms. Firms note the lack of both technical and cognitive skills, which are increasingly important as the economy upgrades to higher value added activities but which are not well integrated into education curricula of educational institutions in Serbia (World Bank, 2018[86]).

This skills gap reflects outstanding weaknesses in the education system and labour markets. There is significant scope to improve the quality and relevance of higher education by updating the curricula and fostering stronger linkages and co-operation between business and academia (World Bank, 2019[87]). The introduction of the dual education model following the experiences of Austria, Germany and Switzerland should enable smoother school-to-work transitions for VET students (Government of the Republic of Serbia, 2020[88]). Improvements in the access to and quality of life-long learning can help address skills mismatches after the completion of formal education, including addressing the challenges faced by the long-term unemployed (60% of the unemployed population) (World Bank/Vienna Institute for International Economic Studies, 2020[16]). Serbia’s ERP also envisages the introduction of relevant measures to encourage innovation in the education system through digitalisation. These include the introduction of an Education Management Information System that will be linked to the Central Registry of Statutory Social Insurance and thus enable the monitoring of graduates’ performance in the labour market and in turn help design better education policies to meet labour market needs (Government of the Republic of Serbia, 2020[88]).

Serbia faces considerable emigration of high-skilled people, which exacerbates the challenge of developing a skilled workforce that can support the economic upgrading envisioned in the smart specialisation agenda. Serbia’s ERP recognises this structural issue and addresses it in part through reforms aimed at supporting circular migration, particularly targeting the ICT sector. According to this measure, Serbian nationals returning to the country can receive a tax deduction of up to 70% for several years. This is an important first step, but it should be complemented by labour market and business environment reforms to provide incentives for people not to leave in the first place (European Commission, 2020[89]).

Innovation and technology adoption

Enhancing the capacities of companies to innovate and adopt new technologies is critical for fostering stronger linkages between the FDI sector and domestic SMEs and for supporting the upgrading and internationalisation of domestic SMEs. Serbian firms are, on average, more innovative than regional peers, and their performance on a number of innovation indicators is in line with EU peers. In the latest Small Business Act for Europe Assessment, the share of Serbian firms that had introduced product or process innovations, introduced marketing or organisation innovations and that innovate in-house are in line with the EU averages. Serbian firms also have a high share of employees with ICT skills, and they offer more ICT skills training to their employees compared to the EU average (Figure 17.20).

Figure 17.20. Serbian firms’ innovation performance is in line with the EU average on many indicators

Serbian firms lag behind on other critical innovation-related indicators. The share of innovative SMEs collaborating with other companies is weak (Figure 17.20), and the linkages between business and academia are tenuous (OECD, 2018[91]). Serbia also lags behind most EU countries with respect public- and private-sector R&D investment (Figure 17.21 – Panel A) and the adoption of quality standards necessary to meet industry standards and boost exports (Figure 17.21 – Panel B). Innovation is also constrained by weak access to finance, particularly to the underdeveloped non-bank financing for start-ups and innovative projects (see the Partnerships and financing section in this chapter).

Figure 17.21. Private-sector investment in R&D is low compared to the EU average, and adoption of quality standards lags behind aspirational peers

Partnerships and financing – financing sustainable development

The Partnerships and Financing pillar of the 2030 Agenda for Sustainable Development cuts across all goals focused on the mobilisation of resources needed to implement the agenda. It is underpinned by the Addis Ababa Action Agenda, which provides a global framework to align all financing flows and policies with economic, social and environmental priorities.

In the area of financing, Serbia faces challenges in improving the composition of public expenditures and the access to finance for start-ups and microenterprises (Table 17.4). On the public-sector side, even though Serbia has achieved impressive fiscal consolidation over the past five years, which primarily stemmed from the growth of current expenditures, there is still a need to increase capital spending in order to boost economic growth. In the absence of binding fiscal rules and in light of high discretionary spending, the risks of fiscal slippages remain non-negligible. On the private-sector side, access to finance is particularly constrained for start-ups and microenterprises, which cannot meet the financing requirements of banks but have little other financing recourse due to the relatively underdeveloped alternative sources of financing.

1. Low domestic savings have constrained investment, an impact only partially offset by external financing inflows.

2. Stronger growth in capital expenditures is needed, alongside more binding limits on current spending.

3. More diversified financing options are needed to support start-ups and SME innovation and growth.

Low domestic savings have constrained domestic investment, an impact only partially offset by external financing inflows

Weak domestic savings have constrained domestic private investment in Serbia. Domestic savings increased in the post-crisis period as a result of a decline in real consumption expenditure (from 95% of GDP in 2010 to 85% in 2019). However, despite their recent growth, at 18% of GDP, domestic savings remain low compared to most peers (Figure 17.22) and represent an important constraint to domestic private investment, which has contributed, on average, less than 5% to annual GDP over the past two years (World Bank, 2020[2]).

As a result, the Serbian economy has strongly relied on external financing. This includes debt financing, which has accounted for roughly 9% of GDP on an annual basis over the past five years (IMF, 2019[93]); foreign direct investment inflows, with an average annual GDP contribution of 7% over the same period; remittances, with an annual average contribution of 8.3% over the five-year period; and overseas development assistance (ODA), contributing 2% of gross national income (GNI) annually over the last five years (World Bank, 2020[2]).

Figure 17.22. Domestic savings (% of GDP) are low compared to regional and global peers

External debt has been an important source of financing for the Serbian economy for both the public and private sectors. In the pre-crisis period, growth in external debt was strongly driven by government borrowing to finance the expansionary fiscal policy (see the Prosperity section in this chapter). As a result, the share of public debt rose from 25% of total external debt in 2004 to 68.7% in 2008. However, public debt, including external debt obligations (see below), declined due to fiscal consolidation in the post-crisis period, while private-sector borrowing continued to increase (IMF, 2019[93]). Currently, roughly half the external debt is owed by the government and about 40% by private enterprises (National Bank of Serbia, 2020[72]).

The contribution of FDI to the Serbian economy has also increased substantially over the last seven years. Net FDI inflows rose continuously, from USD 1.75 billion in 2012 to USD 4.3 billion in 2019 (World Bank, 2020[2]), as Serbia established free economic zones and introduced various incentives to attract export-oriented FDI. Serbia has become one of the leaders in FDI attraction in the region and among peer economies: net FDI inflows accounted for over 8% of GDP in 2019 (see the Prosperity section in this chapter).

In the pre-crisis period, remittances strongly contributed to the growth in consumption, and their contribution to GDP remains high compared to most peers. Remittances rose considerably in 2009, helping smooth consumption during the crisis period, but they have otherwise not shown strong countercyclical tendencies. This likely reflects the high share of the diaspora living in Eurozone economies also strongly affected by the same downturns (Figure 17.23 – Panel A). In recent years, there has been a pickup in remittance inflows. In 2018, they represented 8.2% of GDP, which is high relative to most global peers (Figure 17.23 – Panel B).

Figure 17.23. Remittances have bounced back in recent years and remain relatively high compared to global and aspirational peers

While ODA to Serbia has declined since the early 2000s, it remains sizable compared to most peers. In the early 2000s, Serbia benefited significantly from ODA aimed at supporting the country in the post-conflict recovery and the economic transition. Between 2000 and 2005, average annual ODA amounted to 10.6% of GNI, well above most regional peers. Since then, ODA has declined considerably, but at 2.2% of GNI, it is notably higher than in aspirational peer economies (Figure 17.24). Most ODA still comes from the European Union. EU institutions have been the largest donor since 2010, providing USD 1.42 billion in ODA between 2014 and 2018, mostly through the Instrument for Pre-Accession Assistance (IPA II). Individual EU countries (Austria, France, Germany and Sweden) are also among the ten largest donors, as are Japan and Switzerland (OECD, 2020[94]). In 2014 and 2016, Serbia also benefitted from significant financing from the United Arab Emirates in the form of two large soft loans for budgetary support. It has also received considerable financing from China, Russia and Turkey (MEI, 2020[95]).

Figure 17.24. ODA to Serbia remains high compared to global peers

In light of weak domestic savings, the contribution of these external sources of financing has been important in supporting investment growth. Nevertheless, as noted in the Prosperity section of this chapter, investment remains modest compared to global and aspirational peers, and stronger growth in both private and public investment is needed to accelerate convergence with EU income levels.

Public debt dynamics have improved, but risks persist

Public debt increased considerably in the post-crisis period. The government strongly relied on fiscal stimulus measures to support economic growth and job creation in the aftermath of the global financial crisis of 2008 and subsequent crises. Coupled with weaker revenue performance due to a significant slowdown in economic growth in the post-crisis period (see the Prosperity section in this chapter), the higher expenditures resulted in higher fiscal deficits (Figure 17.25 – Panel A) and an increase in public debt, from 31% in 2009 to 70% in 2015 (Figure 17.25 – Panel B).

Over the past five years, Serbia has implemented a successful fiscal consolidation programme. As part of the programme supported by an IMF Stand-By Agreement, Serbia reduced current public expenditures by lowering the public-sector wage and pension bills and the budgetary support for public enterprises, which had reached 5% in previous years. Serbia implemented additional reforms, including improving revenue collection and public financial management (IMF, 2019[93]). Serbia significantly improved its fiscal position thanks to the programme. The overall fiscal deficit declined from 6.2% of GDP in 2014 to a surplus of 1.1% in 2017 (Figure 17.25 – Panel A), while in the last three years of the programme (2016-18), the primary surplus averaged 2.7% of GDP. General government debt also declined, from 71.2% in 2015 to 52.7% in 2019. Contingent liabilities related to the SOE sector declined by more than 50% between 2013 and 2019 (Ministry of Finance of the Republic of Serbia, 2020[96]).

Figure 17.25. The fiscal balance has improved considerably since 2014 and general government debt is now at a moderate level relative to global peers

Despite the recent progress, fiscal risks remain high. Serbia does not have binding fiscal rules, leaving considerable space for discretionary increases in spending and potential deterioration of the fiscal position. Likewise, many reforms remain incomplete, including reforms of the wage and employment system in the public sector and improvement of the governance and performance of SOEs (European Commission, 2018[98]). The adoption of the Swiss formula for pension indexation at the end of 2019 is a step in the right direction. Consultations have also begun on the creation of new fiscal rules. It remains to be seen how they will be implemented and to what extent they will be binding.

The COVID-19 crisis poses further challenges to Serbia’s fiscal policy, and the post-crisis period will test the government’s resolve to maintain fiscal discipline and stability. Serbia has implemented the largest fiscal stimulus programme in the Western Balkan region to limit the impact of the COVID-19 crisis. It is estimated at 8.3% of (2020) GDP in public expenditure and includes a credit guarantee scheme worth 4.4% of GDP and a lending scheme through the Serbian Development Fund worth 0.4% of GDP. Measures have included: 1) higher fiscal expenditures for the public healthcare system; 2) aid to households and enterprises (universal cash transfer, wage subsidies); 3) deferment of private-sector business entities’ obligations towards the state (four-month deferment of labour taxes and contributions, deferment of advance payments of the corporate income tax for March, April and May 2020 until the submission of tax returns for the year 2020); and 4) a credit guarantee scheme to support enterprise liquidity (OECD, 2020[99]). These measures, alongside the impact on revenues from lower economic activity, will result in a significant increase in the fiscal deficit, which is projected to exceed 8.9% of GDP. Public debt is expected to increase to close to 60% of GDP mark and had increased to 58.1% of GDP as of September 2020 (IMF, 2020[100]).

The COVID-19 crisis also revealed the notable fiscal implications of the structural and operational problems of Serbia’s large SOEs, most notably those of the state airline operator, Air Serbia, and the state-owned energy utility, Electroprivreda Srbije (EPS, Power Industry of Serbia). Fiscal aid to these companies amounted to 0.4% to 0.5% of GDP over the past year, but as the Fiscal Council has noted, the full extent of the financing, its structure and its use is not well elaborated in the rebalancing of the budget. The Council postulates that financing goes well beyond the liquidity shortfalls caused by the crisis and aims to compensate for financial losses due to structural and operational weaknesses (Fiscal Council of the Republic of Serbia, 2020[101]).

Stronger growth in capital expenditures is needed, alongside more binding limits on current spending

After a decade of increasing current expenditures, the consolidation programme has created space for higher capital expenditures. Current expenditures, which accounted for over 90% of total government expenditures for most of this period, nearly tripled between 2005 and 2014 (Figure 17.26 – Panel A), significantly outpacing GDP and revenue growth and driving the rise in deficits and public debt. Since the start of the consolidation programme, current expenditures have, however, largely stabilised, providing scope for higher capital expenditures, whose share has increased to 11% of total expenditures (Figure 17.26 – Panel A).

Figure 17.26. Most growth of public expenditures has been due to current expenditures, particularly high subsidies and transfers

In spite of this progress, government spending composition can still be improved. Capital expenditure is low compared to the needs of the economy. An analysis that benchmarks Serbia’s current growth rate against the growth rate implied by convergence theory and based on EU countries points to the need for a significant increase in public and private investment if Serbia is to converge with the European Union at the optimal rate. Specifically, it finds that infrastructure investment should be increased by 1% of GDP per year and that central and local SOE investment should also increase by 1% of GDP (Petrović, Brčerević and Gligorić, 2019[102]). Investment needs are particularly high in the area of environmental infrastructure, where Serbia’s investments are considerably lower than those of its CEE aspirational peers and the EU average (Fiscal Council of the Republic of Serbia, 2019[103]) and its environmental outcomes are considerably worse (see the Planet section in this chapter).

Even though the growth of current spending has declined thanks to the fiscal consolidation, there is scope to address underlying structural issues. On the wage bill side, there is room for discretionary increases in wages, given the lack of binding fiscal rules that define the parameters for such increases (Fiscal Council of the Republic of Serbia, 2018[104]). In general, discretionary spending is high and has been increasing (European Commission, 2019[84]).

More diversified financing options are needed to support SME innovation and growth

Enterprises’ access to bank financing has been relatively limited in the period following the 2008 global financial crisis and the 2011 Eurozone crisis. In the early to mid-2000s, the entry of foreign banks in the Serbian market fuelled a credit boom that built up significant imbalances in the Serbian banking system, including a high share of foreign currency-denominated and foreign currency-indexed loans (80% of total loans) and an already high share of non-performing loans (11% of total loans in 2008). In the aftermath of the crises, the banking sector was hit hard by high and rising NPLs, which peaked at 21.6% of total loans in 2015 but remained in the double digits until 2017 (National Bank of Serbia, 2019[105]). Enterprise lending suffered significantly as banks tightened credit standards and was further crowded out by high government borrowing needs and growing mortgage and consumer lending (Figure 17.27).

Over the past five years, financial-sector health and stability have improved, and enterprise lending has begun to recover. Since 2015, NPLs have declined from over 20% to 4% of total loans, capital adequacy has improved (the risk-weighted capital ratio increased from 19 to 23) and the profitability of the banking sector has increased significantly (return on assets rose from an average of 0.3% in 2011-16 to 2% in 2017-20; return on equity increased from an average of 1.2% to 10.5% over the same time interval). The improved conditions and the overall improvement in the macroeconomic environment have been conducive to enterprise lending, which has risen by 15% since 2017 following a five-year stagnation (Figure 17.27).

On most banking sector indicators, Serbia performs better than regional and global peers. A higher share of Serbian enterprises (54%) have bank financing compared to the ECA and the all-country averages (37% and 33%, respectively). Serbian firms also reported a lower share of loans requiring collateral (41% vs. 73% for ECA and 78% for the world), a lower proportion of investments financed internally and a higher share of working capital financed by the banks. Last, at 101%, the value of collateral required to obtain a loan in Serbia is much lower than in regional peers (over 170%) and other global peers (176% for ECA and 199% for the world) (World Bank/EIB/EBRD, 2019[79]).

Figure 17.27. Enterprise lending has begun to recover after years of stagnation

Nevertheless, SMEs, particularly start-ups and microenterprises, face considerable challenges in obtaining financing. Analyses of the banking sector indicate that large enterprises and larger and more established SMEs are well-served by the banking sector because interest rates are low and these enterprises can meet the banks’ relatively stringent lending requirements, including credit history, turnover and collateral. By contrast, start-ups or microenterprises, which do not have sufficient years of operational history and turnover, face significant difficulty getting access to bank capital (World Bank, 2019[106]).

This challenge is exacerbated by the relative lack of other financing options. Non-bank financing remains underdeveloped. Microfinance is limited by a weak legal and regulatory framework. While factoring and leasing exist, they are significantly underutilised by small enterprises. Start-up financing through venture capital funds, business angels, etc. is undersupplied and cannot adequately support the growth of innovation in Serbia (World Bank, 2019[106]).

Last, capital markets remain relatively shallow. While the government bond market has grown, the private bond and stock markets are underdeveloped, as companies prefer other means of obtaining financing. Enterprises cite the highly restrictive Law on Financial Transactions, which significantly limits the types of financial transactions that can be made between enterprises, as a significant barrier to the development of capital markets in Serbia, according to mission interviews with the European Bank for Reconstruction and Development and AmCham Serbia.

The government has recently undertaken notable regulatory and policy initiatives to facilitate SME access to financing. It established a EUR 2 billion guarantee scheme for SMEs and drafted and approved two new laws: the Law on Open-Ended Investment Funds with Public Offering (“Official Gazette of the Republic of Serbia”, No. 73/2019) and the Law on Alternative Investment Funds. These laws establish a stable legal framework in line with international standards to better attract domestic and foreign investors. The Securities Commission has enacted by-laws that regulate the application of these laws in more detail. The government also continues its work on strategies for development finance and capital markets development that should promote alternative sources of financing, such as crowd funding, venture capital and angel investors.

Peace and institutions – strengthening governance

The Peace and Institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and trust, as well as effective governance and the performance of the public sector more broadly.

Serbia’s institutions have made progress in the past years. The European accession process has created momentum for significant reforms of the business regulatory environment and of the public sector. In particular, the country has an independent and empowered anti-trust Commission for Protection of Competition and, since January 2020, an independent body controlling state aid, the CSAC. Appeal to investors has increased has a result. Moreover, Serbia has engaged in a comprehensive reform to increase the efficiency of the civil service. Over the past few years, it has improved the capacity to deliver services and manage public-sector human resources (OECD, 2020[107]). Serbia is perceived as a very safe country, and the intentional homicide rate (1.2 victims per 10 000 people) is among the lowest in the region (together with Bosnia and Herzegovina and North Macedonia).

Yet, Serbia faces shortcomings in the institutional guarantee of the separation of powers. Checks on the power of the executive have weakened in recent years, and perceived corruption is high, in spite of recent progress. Political patronage risks undermining the independence of the judiciary, the efficiency of the public administration and the capacity of the state to deliver quality services to all. It also jeopardises the efforts of the executive to put forward a harmonised and monitorable strategy for development. Some civil servants may face incentives to pursue short-term, fragmented agendas rather than a common and prioritised one. The politicisation of institutions weakens the independence and reliability of data collection for evidence-based policy making.

Moving forward, the capacity of Serbia to capitalise on a promising macroeconomic framework and promote durable and inclusive development depends on the achievement of three main strategic goals (Table 17.5). First, courts need stronger institutional guarantees of their independence to serve justice better and to control the executive and legislative powers and thus strengthen quality democratic institutions. Judges need more skills to better enforce laws that uphold the competitiveness and contestability of markets. Second, Serbia needs a harmonised regional development and decentralisation framework to reverse the “Belgradization process”, promote balanced regional development and leave no places behind. Third, Serbia has to pursue reform of its public sector, discouraging all practices that could lead to further politicisation of the state apparatus.

1. The judiciary lacks sufficient guarantees of independence and has limited capacity.

2. Fragmented decentralisation and regional development frameworks undermine the balanced development of local communities.

3. The public administration continues to be politicised.

Checks and balances on the executive are weakening

Checks and balances on the executive are weakening, increasing the scope for discretionary policy making. According to the 2006 constitution (Art. 3), the separation of powers and the independence of the judiciary are cornerstones of the rule of law in Serbia. However, according to participants of the visioning workshop and expert assessments, the executive, legislative and judicial branches are poorly separated, and the limits to the executive have been eroded since the entry into force of the constitution (Figure 17.28). The judiciary is not afforded sufficient guarantees of independence and accountability and is the least trusted of the branches of government (Gallup, 2020[108]). Political parties often control media directly or indirectly. Journalists seem to be regularly denied access to public information (IREX, 2019[109]), changes in power may trigger the dismissal of entire public broadcast editorial teams, and marketing agencies with close political ties put pressure on the media (Kmezić, 2019[110]). Journalists, activists and certain party militants become the target of violence more frequently in Serbia than in the rest of the Western Balkans.

Any reform or policy aimed at improving social, economic, environmental or institutional standards has to take into account the traditional importance of informal networks and connections (veza). In particular, during the monarchy and the socialist regime, political connections within the ruling elite provided advantages, such as access to information, personal promotion and privileges, which in turn benefited their families, friends and associates. The transition to a market economy and democracy has not weakened political connections (političke veze), which are still perceived as a social lift for the few but hinder overall equality and inclusive development (Stanojevic and Stokanic, 2018[112]). In fact, it has led parties to compete for the monopoly of state resources, which they redistribute in exchange for political support. According to World Values Survey data, party affiliations relative to population (12.2%) are higher in Serbia than in any other benchmark economy and in all but two EU countries (Inglehart et al., 2014[113]). Based on interviews with the Organization for Security and Co-operation in Europe (OSCE), the ruling Serbian Progressive Party is one of the largest in Europe with 730 000 members. At the same time, employment in the public sector (including SOEs) accounts for 26.8% of total employment and, between 2011 and 2018, grew faster than in the rest of the region (1% annually vs. 0.1%).21

A widespread use of connections can limit access to public goods and services. Connections rather than merit and skills are seen as the most effective routes for social mobility, especially among young graduates (Tomanović et al., 2012[114]) – more so than anywhere else in the region. Often, households can only access quality health and education services with good connections, and connections and gifts are often used with the aim of influencing the judiciary (Krasniqi, 2019[115]).22

In the economic sphere, personal connections can help get business done. Interviews revealed that these patron-client relationships have attracted foreign investors, who have been driving the economy and structural transformation so far. The right connections can help enterprises circumvent or avoid state regulations and formal procedures. In other cases, they are the fastest and most profitable way to secure legal verdicts and gain access to workers, raw materials and machinery at below-market prices.

Connections therefore represent a trade-off. On the one hand, they could grease the wheels of a large and not always efficient state apparatus. On the other hand, they create inequalities between those with and without connections and could become a source of instability. As politics and the economy get increasingly intertwined, changes of government can scare off investors and expose the economy to major economic shocks. This risk could lead incumbent politicians to tighten their monopoly on state resources, thus further weakening the quality of institutions.

The judiciary lacks institutional guarantees of independence and has limited capacity

The court system consists of general courts and specialised courts. General courts are basic courts, higher courts, appeal courts and the Supreme Cassation Court. Specialised courts are the commercial courts (together with their appeal court), misdemeanour courts (together with their appeal court) and the administrative court. The judiciary is, in principle, self-governed by the High Judicial Council, which decides over the career of judges.

The judiciary remains exposed to undue political interference. A “fully objective, transparent and merit-based system for appointing, transferring and promoting judges and prosecutors in line with European standards” is still missing (European Commission, 2020[3]). Pressure on the judiciary remains high (European Commission, 2020[3])and improper government influence is higher in Serbia than in the average upper middle-income and high-income country (Figure 17.29). Separation of powers, although constitutionally granted, is generally at risk. Part of the problem lies in the composition and functioning of the high judicial bodies: most of the members of the High Judicial Council, for example, are elected by the national assembly. To improve independence, the ongoing constitutional reform provides that the majority of the Council members are judges elected by their peers, thus incorporating the recommendations of the international community (CoE/Venice Commission, 2018[116]; CoE/Venice Commission, 2018[117]). A clear constitutional prohibition on judges belonging to political parties, however, remains absent and is delegated to secondary law (CoE/Venice Commission, 2018[117]).

Figure 17.29. The judiciary remains exposed to undue political interference and is ineffective

The process of selection of judges and prosecutors does not isolate judges from political influence. According to Article 147 of the constitution, the national assembly elects first-time judges for a three-year probationary period from a list of candidates vetted by the High Judicial Council.23 The assembly does not simply rubber-stamp the council’s decision. According to the Law on Judges (Art. 50), the council proposes to the assembly one or more candidates for each position. It is not clear upon what criteria the assembly bases a final choice. This selection process is likely to expose judges to political pressure and interference, which could ultimately jeopardise the capacity of courts to deliver impartially (BTI, 2020[119]). Similarly, public prosecutors are elected by the national assembly upon proposal by the government. The ongoing constitutional reform will create the conditions for the introduction of a more merit-based recruitment, evaluation and appointment of judges and prosecutors (European Commission, 2020[3]).

The judiciary lacks capacity to deliver effectively, and there are significant delays in disposition times for cases. Civil justice in particular is subject to unreasonable delay more often than occurs in the average OECD country (Figure 17.29). The overall backlog of pending cases is large, especially in basic courts (European Commission, 2020[3]). In particular, the average number of days to resolve litigious civil and commercial cases in first-instance courts decreased from 316 days in 2010 to 224 in 2018; however it remains higher than in Albania (171) and North Macedonia (178) (CEPEJ, 2020[120]). The efficiency of the administrative court is relatively low, and there is evidence of regression over recent years: the average time to resolve a case increased from 235 days in 2010 to 745 days in 2018 (CEPEJ, 2020[120]). Part of the problem is the lack of specialisation of judges, who need to acquire better knowledge of competition law and economics. This is particularly true for judges in the administrative court, which is at the receiving end of all competition-related disputes (Rakić, 2017[121]). Alternative arbitration mechanisms exist to settle commercial-related disputes (the Permanent Arbitration at the Serbian Chamber of Commerce in Belgrade and Belgrade Arbitration Centre) and labour disputes (Agency for Peaceful Settlement of Labour Disputes).

Fragmented decentralisation and regional development frameworks undermine the balanced development of local communities

The Republic of Serbia has an asymmetric organisation of subnational levels of government. The greater part of its territory has only two levels of government: central government and local self-governments (LSGs). The constitution (Art. 188) identifies three types of LSGs: cities (grad), towns (opstina) and the City of Belgrade. The latter has a special status, as regulated by its Statute and the Law on the Capital City. In some cities, public authority is further decentralised to city municipalities (gradske opštine). In most LSG units, local communities (mesne zajednice) contribute to the decision-making process around selected local issues. The other part of the territory has three levels of government: central government, provincial government and LSG. Throughout Serbia, LSGs are organised into districts (okruzi), which are not levels of government but a form of de-concentration of the central government and a way for line ministries to co-ordinate their activities at the local level. There are also statistical regions (statistički regioni), which have no power but are necessary statistical units for planning and implementing regional policy and channelling future EU cohesion funds (Kmezić and Đulić, 2018[122]).

The competences of LSGs are numerous. They are listed in the constitution (Article 190) and in various acts. According to the Law on Local Self-Government (“Official Gazette of the Republic of Serbia”, Law No. 47/2018), competences include the construction and maintenance of local roads and the provision of all utility services (komunalne usluge) (except for electricity and telecommunications), health and social protection. LSGs are responsible for the stimulation of local economic development, environmental protection and disaster risk management. Special sectoral laws entrust LSGs with further responsibilities, some of which are shared with the central government, such as primary and secondary education are shared with the central state (OECD/UCLG, 2019[123]).24 Responsibilities “still continue to be borne at local level without proper analysis of the capacity and human/financial resources required” (European Commission, 2020[3]).

Current subnational expenditure is higher in Serbia than in the rest of the region, and capital investments remain low. In 2018, subnational expenditure accounted for 6.1% of GDP, which was more than in the Western Balkans (5.3%) but less than the OECD average (15.5%). They amount to 14.9% of total public expenditure, which is in line with the regional average (15.1%) but much lower than the OECD average (40.4%). Current expenditure amounts to 87% of total subnational spending, which is much higher than in other Western Balkan economies and is mostly made up of subsidies and current transfers (37% of total current expenditure), purchase of intermediary goods and services (30%) and compensation of employees (20%) (Figure 17.30). As a consequence, capital investments are particularly low in comparison (12.9% of total subnational expenditure) (Figure 17.31).

Figure 17.30. Subsidies, intermediate consumption and wages make up most of the subnational current expenditure

Composition of current subnational public expenditure, 2017 or nearest available year

Figure 17.31. Capital expenditure is low

Capital expenditure by local self-government entities, 2017 or nearest available year

Subnational revenues are in line with the rest of the regions but low compared to the competences of municipalities. In 2019, municipal total revenues amounted to 6.0% of GDP, in line with the rest of the region (5.6%) but much lower than the OECD average (15.9%) (NALAS, 2019[124]). Shared taxes (mainly the Wage Personal Income Tax, which the central government collects and redistributes to LSGs) accounted for 39% of total subnational revenues (NALAS, 2019[124]).25 A shrinking Wage Personal Income Tax base and rate have forced municipalities to improve the share of own resources, which represented 42% of total subnational revenues in 2019, up from 37% in 2006. Half own revenues come from local fees and charges. Revenues from property tax accounted for 38% of local own revenues, an increase of 26 percentage points since 2006 (NALAS, 2018[125]).

The framework regulating the distribution of intergovernmental transfers is arguably clearer in Serbia than in the rest of the region. In 2018, transfers accounted for 19.9% of LSGs’ revenues, out of which unconditional transfers accounted for 11%. According to the law on LSG finances, cities and municipalities have access to unconditional transfers (general transfer, equalisation transfer and compensational [kompenzacioni] transfer) and conditional transfers (functional transfers and dedicated transfers [namenski transfer u užem smislu]). Unconditional transfers are distributed according to the level of development of LSGs; the general transfers are based on population, area, number of children attending primary and secondary school, number of primary and secondary schools and number of children under social protection. Moreover, municipalities (except for the City of Belgrade) can access a Solidarity Fund, the distribution of which is based on coefficients for development.

LSG debt is low and tightly regulated, but limitations exist. In 2016, local government debt amounted to 1.7% of GDP, the lowest in the region (OECD/UCLG, 2019[123]). Liquidity borrowing should not exceed 5% of recurring revenues from the previous year. The total amount borrowed has to be repaid before the end of the budget year and cannot be refinanced or renewed. Local governments can borrow long term only to finance capital investments that are part of the local government budget. In this case, the amount borrowed cannot be higher than 50% of the recurring revenues from the previous year. The amount of principal and interest on long-term debt due in a fiscal year cannot exceed 15% of revenues generated by local governments in the previous year. Last, LSGs cannot borrow without the consent of the Ministry of Finance. Nonetheless, the current legislative and institutional framework may not be sufficiently transparent to guarantee a clear distinction between liabilities of municipalities and of local SOE debt (Živanović, Đulić and Jolović, 2020[126]), as discussed below.

After initial dynamism, the decentralisation process in Serbia lost momentum

Decentralisation has accompanied Serbia’s transition towards democracy and a market-oriented economy. Between 2000 and 2008, local authorities received new responsibilities for providing public goods and services to citizens and a new role in implementing social, economic and environmental policy. More competences were accompanied with more effective political, administrative and fiscal power, and between 2000 and 2004, local government revenues increased by over 220%. Since 2009, the 2008 global financial crisis forced the central government to raid local budgets to pursue fiscal consolidation reforms (Kmezić and Đulić, 2018[122]). Intergovernmental transfers to local governments were reduced, while municipal fees and charges were cut to reduce the fiscal burden on enterprises and improve the business environment (Bartlett, Đulić and Kmezić, 2020[127]). Since 2011, local revenues as a share of public revenues have stabilised at around 14% (16.3% in the Western Balkans, 23.5% in EU28 and 42.4% in OECD) (NALAS, 2019[124]).

Frequent regulatory changes in local public finance have made local revenues unstable and unpredictable. Moreover, the sources and amounts of local revenues changed every six months between 2009 and 2016 (Kmezić and Đulić, 2018[122]). This was also because amendments often happened through government decrees, decisions and rulebooks, which, as opposed to laws, guarantee the central policy maker enough room for frequent and ad hoc changes (Kmezić and Đulić, 2018[122]). The lack of co-ordination among line ministries, which delegate functions, and the Ministry of Finance, which allocates resources, has exacerbated the problem, curbing the capacity of local administrations to deliver quality goods and services to citizens (Kmezić and Đulić, 2018[122]).

Local long-term investments, although needed, are missing, and the use of local resources is not always efficient. Local infrastructure, such as water pipes, sewers, landfills and local roads, requires an increase in LSG investments of at least EUR 300 million per year, compared to their current level (Fiscal Council of the Republic of Serbia, 2019[128]). Instead, with the introduction of the first Law on Local Government Finance in 2007, subnational capital investments fell from EUR 112 per capita to EUR 47 per capita in 2014, and from 1.5% of GDP in 2011 to 0.9% in 2018, which is lower than the Western Balkan average (1.3% of GDP) and the OECD average (1.7%) (OECD/UCLG, 2019[123]; NALAS, 2019[124]). At the same time, resources that could be used for long-term investments are used to cover the losses of locally owned public enterprises, which get “enormous subsidies of over EUR 200 million per year” (Fiscal Council of the Republic of Serbia, 2019[128]).

Improving the transparency of LSG finances could improve the efficiency of local spending. The Standing Conference of Towns and Municipalities (SCTM), the association of LSGs, helps municipalities frame and standardise local budget plans by linking them to national and local strategic plans and assigning expected results and indicators for monitoring. According to the SCTM, around 80% of LSGs disclose information about their performance (by presenting annual plans in the context of program budgeting), although quality still needs to improve.

Serbia is rethinking the needs and scope of decentralisation. As part of the Public Administration Reform Strategy 2018-2020, the Public Administration Reform Strategy 2021-2030 and their respective Action Plans, the Ministry of Public Administration and Local Self-Government and the STCM are preparing a Program for the Reform of the Local Self-Government System. The Program aims at: 1) analysing the state of LSG; 2) assessing costs and benefits of two possible models of decentralisation; 3) taking stock of all competences and tasks devolved at the local level; and 4) guiding the next decentralisation reforms in Serbia. As of March 2021, the drafts of the Program and of the Public Administration Reform Strategy 2021-2030 have undergone public consultation.

Serbia lacks a harmonised regional development framework

Macroregions in Serbia have very limited roles. The 2007 strategy for regional development and the 2009 Law on Regional Development (together with its subsequent amendments) introduced four regions but assigned them no administrative, political or fiscal power. Regional Development Councils exist but have a consultative role with respect to ongoing or much-needed local development projects. Regions were created, rather, to channel future regional cohesion funds in view of EU accession and to play a very small role in enhancing territorial development. It is therefore hard to identify a clear framework that regulates the multi-dimensional development of local communities.

The development of regions has a purely economic dimension. Since 2015, the Agency for Foreign Investments and Promotion of Exports and the National Agency for Regional Development merged into the Development Agency of Serbia. The agency exerts its mandate through 16 accredited regional development agencies – limited liability companies established by at least three municipalities in a statistical region. Agencies aim to “boost and implement direct investments, promoting and increasing exports, developing and improving the competitiveness of companies” (Law on Investments, Art. 27). They do not co-ordinate social, environmental or institutional development among municipalities as regional governments would normally do. Moreover, their activities are not directly accountable to citizens.

Co-ordination across LSGs is on specific issues and on a voluntary basis. According to the Law on Local Self-Government, municipalities can decide to collaborate with their neighbours to address specific issues and common development issues. The SCTM and the Ministry of Public Administration and Local Self-Government have prepared a set of models for such intermunicipal co-operation agreements. The ministry has, moreover, set up a new fund (the Fund for the Establishment and Improvement of Inter-Municipal Cooperation) to support the establishment and the improvement of intermunicipal co-operation. As a result, between 2019 and 2020, four intermunicipal partnerships were established within 33 LSG units. The existing forms of co-operation include the management of regional landfills within and across okruzi, joint social welfare centres serving two or three municipalities, joint environmental inspectorates, joint utility companies and joint public prosecutor offices (SCTM, 2017[129]). At the end of 2020, a new public call for inter-municipal partnerships was announced, and support was provided also for 2021.

A more holistic and accountable approach to regional development is needed. In the long term, the competitiveness of local communities not only depends on their attractiveness to foreign investors or capacity to export but also on the quality of local education, health and social services, high environmental standards and solid institutions. Tighter collaboration among the development agency, its regional subsidiaries and municipalities (through the SCTM, for instance) could help broaden the scope of the regional development process. Intermunicipal co-operation has to be systematised. In terms of the accountability of the regional development process, there are no institutional mechanisms to keep decisions taken above the municipal level accountable. The newly established Smart Specialisation Strategy framework (adopted in February 2020) will facilitate the bottom-up identification of local comparative advantages and obstacles to development, but it is not yet clear how agencies and municipalities will operationalise it. The country is working on the action plan to this strategy to guide the implementation phase (European Commission, 2020[3]).

There has been progress regarding the preparation of LSG Development Plans. In December 2019, five Serbian LSG (Bački Petrovac, Kuršumlija, Mali Zvornik, Petrovac na Mlavi and Sjenica), with the support of UNDP, STCM and the Government of the Slovak Republic, released their first Development Plans, prepared in line with the Law on the Planning System of Serbia and adopted in January 2020. The Development Plan of the Autonomous Province of Vojvodina was finalised at the end of 2020. In May 2020, the Public Policy Secretariat published the Guidelines on preparation of the LSG Development Plans, which are partly binding after the adoption of a specific regulation in August 2020 (“Regulation on obligatory elements of the development plan of the autonomous province and local self-government unit”, Official Gazette of the Republic of Serbia, No. 107/2020).

The public administration continues to be exposed to political influence

Serbia has adapted the legislative framework to move towards a more meritocratic and professional civil service. Amendments to the Law on Civil Servants adopted in December 2018 and new secondary legislation adopted in 2019 introduced a competency framework for the civil service. The new regime will introduce compulsory written entrance tests for all civil servants (Meyer-Sahling et al., 2019[130]). Ministries and agencies in Serbia have more autonomy in recruiting staff than in the rest of the region, which can ensure adequate administrative capacity. The general management of the pay system and the setting up of the performance appraisal system are completely centralised. Centralised and therefore even, pay scales could, in principle, trigger competition among entities, broaden opportunities for government-wide strategic human resources planning, minimise barriers to mobility inside the civil service and shield staffing decisions from political interference (OECD, 2020[107]). Following adoption of these amendments, changes in the recruitment and selection practices in the civil service have not yet been observed yet (OECD/SIGMA, 2019[32]).

The method of appointing senior civil servants creates scope for the politicisation of the administration. According to the Law on Civil Servants, senior officials are appointed for a five-year period after passing internal or public competitions. While the selection process unfolds, one or more civil servants are often called to fill vacant positions as “acting heads” for the total duration of maximum 6 months without an internal or public competition (Art. 64 of the Law on Civil Servants). In 2019, “acting heads” represented 55% of the total number of 377 senior civil service positions. “Acting heads” can be extended for an additional 3 months if the process of selection process is unsuccessful. This would seem to leave the door open for additional delays in appointment of senior management (OECD/SIGMA, 2019[32]). Moreover, appointment decisions for management positions can be overthrown by a government personnel committee after the selection process is finalised at the institutional level (European Commission, 2020[3]). The abuse of “acting position” and the opaque methods of appointing senior civil servants have two main shortcomings. First, they favour patronage and careers based on political loyalty more than merit (Meyer-Sahling et al., 2019[130]). Second, they are a major source of staff turnover and thus loss of institutional memory (European Commission, 2020[3]).

The recruitment of temporary employees and personnel “under contract” is widespread in the rest of the public sector too. According to data provided by the SORS, temporary public-sector employment increased by 2.5% per year between 2005 and 2019. In 2019, it accounted for around 4% of total public-sector employment. This practice is a significant obstacle to merit-based recruitment and creates further scope for patronage and the politicisation of the public sector. On the positive side, temporary positions of up to six months are now publicly advertised and open to competition (OECD/SIGMA, 2019[32]). Contracted personnel, moreover, are directly hired to fill positions that do not formally exist in the Rulebook on Internal Organisation and Job Systematisation, even though they can perform public service tasks (OECD/SIGMA, 2015[131]).

These practices can undermine the capacity of the state in the long term. The selection of acting senior civil servants and personnel under contract is not based on merit. Moreover, their temporary assignment may slow down the building up of institutional memory that usually drives the efficiency of the civil service in the long-term. Phasing out these types of positions and effectively implementing a merit-based civil servant recruitment system (especially at the senior level) are therefore crucial steps to enhance the capacity of the state to plan long term.

The state has not yet developed the capacity to plan and prioritise strategically

The planning process in Serbia is patchy and with a limited time horizon, but changes are ahead. As of 2021, the current national strategy is based on 67 Strategies and programs – 2 of which will expire by the end of 2021. According to interviews, these documents do not seem to be strategic per se but are rather a long list of intentions, only 60% of which are accompanied by monitorable action plans. At least four entities are in charge of the design of strategic planning and the definition and harmonisation of policy priorities (OECD, 2020[107]).26 The Law on the Planning System of the Republic of Serbia, adopted in 2018, set out clear rules for developing, monitoring and reporting on sector strategies (European Commission, 2020[3]). There is still room for significantly improving the capacity to oversee and monitor implementation and meaningfully report priorities and recommendations to top decision makers.

Serbia is optimising its strategic planning, but more effort is needed to prioritise policy action. The PPS, under the Office of the Prime Minister, is leading the implementation of the Law on the Planning System of the Republic of Serbia, in force since 2018, the Regulation on the methodology of public policy management, impact assessment of public policies and regulations and the Regulation on the methodology of drafting mid-term plans. The PPS has adopted tools to control the quality of the planning process better. A unified system for planning and monitoring the implementation of public policies has been operational since January 2019, and a hierarchy of strategic public policy documents is under development (European Commission, 2019[84]). Yet, effective quality control by the PPS remains a challenge. The comments on draft laws and planning documents that the PPS provides to institutions are not legally binding. Moreover, there is no mechanism to verify that they are effectively incorporated (European Commission, 2020[3]).

The implementation of anti-corruption strategies has been slow

Serbia has created a legal framework to fight corruption and abuse of power. The normative framework for the fight against corruption in the Republic of Serbia consists of almost 26 laws, one strategy with its operational plan and the Action Plan for Chapter 23 – Subchapter “Fight Against Corruption” (Table 17.6). The Action Plan for Chapter 23 (firstly adopted in 2016 and then revised in 2020 and its subsequent revision) is the main comprehensive strategic document. The implementation of the subchapter “Fight Against Corruption” of the Action Plan is monitored by the Agency for Prevention of Corruption (ACA - formerly Anti-Corruption Agency).27 At the political level, a new Coordinating Body for the implementation of the Operational Plan will ensure the implementation of anti-corruption activities across ministries, agencies and institutions, issue guidelines and resolve possible conflicts between institutions. It will be chaired by the Minister of Justice, and composed by the Minister of the Interior, the Minister of Finance, the Minister of Education, the Minister of Public Administration and Local Self-Government and the Minister of Health.

National Anti-Corruption Strategy for the period 2013-2018 (“Official Gazette of RS“, No. 57/13)

Revised Action plan for the implementation of the National Anti-Corruption Strategy for the period 2013-2018 (“Official Gazette of RS“, No. 61/2016)

Action Plan for Chapter 23

Law on Financing of Political Activities (“Official Gazette of RS”, No. 43/11, 123/14 and 88/19)

Law on Prevention of Corruption - in force since September 1, 2020 ("Official Gazette of RS", No. 35/2019 and 88/19)

Law on Lobbying ("Official Gazette of RS", No. 87/2018)

Criminal Code ("Official Gazette of RS", No. 85/05 88/05, 107/05, 72/09, 111 / 09,121 / 12, 104/13, 108/14, 94/16 and 35/19)

Law on Free Access to Information of Public Importance ("Official Gazette of RS", No. 120/04, 54/07, 104/09 and 36/10)

Law on Public Procurement - in force since July 1, 2020 ("Official Gazette of RS", No. 91/19)

Law on Privatization ("Official Gazette of RS" No. 83/14, 46/15, 112/15 and 20/16 - authentic interpretation)

Criminal Procedure Code (“Official Gazette of RS”, No. 72/11, 101/11, 121/12, 32/13, 45/13, 55/14 and 35/19)

Law on State Audit Institution (“Official Gazette of RS”, No. 101/2005, 54/2007, 36/2010 and 44/2018 - other law)

Law on Seizure and Confiscation of the Proceeds from Crime (“Official Gazette of RS“, No 32/13, 94/16 and 35/19)

Law on Liability of Legal Persons for Criminal Offenses (“Official Gazette of RS“, No. 97/2008)

Law on International Legal Assistance in Criminal Matters ("Official Gazette of RS", No. 20/2009)

Law on the Program for the Protection of Participants in Criminal Proceedings ("Official Gazette of the RS", No. 85/2005)

Law on the Organization of State Bodies in the Suppression of Organized Crime, Terrorism and Corruption ("Official Gazette of the RS" No. 94/16 and 87/18)

Law on Public Prosecutor's Office ("Official Gazette of RS" No. 116/08, 104/09, 101/10, 78/11, 101/11, 38/12 - Decision of the Constitutional Court 121/12 and 101/13, 111/14 - Decision of the US RS, 117/14, 106/15 and 63/16 - Decision of the US RS)

Law on the State Prosecutors' Council ("Official Gazette of RS", No. 116/08, 101/10 and 88/11 and 106/15)

Law on Police ("Official Gazette of RS", No. 6/2016, 24/18 and 87/18)

Law on Property Origin and Special Tax - in force since March 11, 2021 ("Official Gazette of RS", No. 18/2020)

Law on Tax Procedure and Tax Administration ( "Official Gazette of RS", Nos. 80/02, 84/02 - corr., 23/03 - corr., 70/03, 55/04, 61/05, 85/05 - dr. law, 62/06 -. law, 63/06 - corr. dr. law, 61/07, 20/09, 72/09 - dr. law, 53/10, 101/11, 2/12 - corrected, 93/12, 47/13, 108/13, 68/14, 105/14, 91/15, 112/15, 15/16 108/16, 30/18, 95/18 and 86/19)

Law on Protection of Whistleblowers ("Official Gazette of RS" No. 128/2014)

Law on Ratification of the United Nations Convention against Corruption ("Official Gazette of Serbia and Montenegro - International Agreements, No. 12/2005)

Law on Ratification of the Criminal Law Convention on Corruption (“Official Gazette of the FRY - International Agreements”, No. 2/2002 and “Official Gazette of Serbia and Montenegro - International Agreements”, No. 18/2005)

Law on Ratification of the Additional Protocol to the Criminal Law Convention on Corruption ("Official Gazette of RS - International Agreements", No. 102/2007)

Law on Ratification of the Civil Law Convention on Corruption (“Official Gazette of RS - International Agreements”, No. 102/2007)

Law on Ratification of the United Nations Convention against Transnational Organized Crime and Additional Protocols ("Official Gazette of the FRY - International Agreements", No. 6/2001)

Source: Republic of Serbia, Negotiating Group for Chapter 23. Action Plan for Chapter 23 (June 2020), www.mpravde.gov.rs/files/Revised%20AP23.docx.

Prevention and repression of corruption involves a number of actors. The most important bodies in charge of preventing corruption are the Anti-Corruption Council, the Anti-Corruption Agency (ACA), the Commissioner for Information of Public Importance and Personal Data Protection and the State Audit Institution. The ACA is an independent state authority that reports to the National Assembly and has, among others, the following roles: (i) it resolves the incompatibility of public offices and conflict of interest; (ii) controls the assets of public officials; (iii) investigates the financing of political subjects; (iv) performs tasks in accordance with the law governing lobbying; (v) supervises the adoption and implementation of integrity plans; (vi) supervises the implementation of strategic documents; (vii) addresses the complaints of citizens and raises awareness about corruption practices; and (viii) adopts the training programme and instructions in the field of prevention of corruption and monitors the implementation of training in public authorities. The 2019 Law on the Prevention of Corruption (in force since September 2020) requires the ACA to carry out corruption risk analyses of public authorities and laws and to recommend solutions for risk management. Police, public prosecutors and courts handle the repression of criminal activities.

In spite of these efforts, corruption is still a major constraint to development in the country. Perceptions of corruption in Serbia are higher than in economies with a similar GDP per capita (Figure 15.2) and have been increasing over the past five years. According to Transparency International’s 2019 Corruption Perceptions Index, Serbia ranks 91st out of 180 economies.

The normative framework has not always been followed up by concrete actions, but implementation of the National Anti-Corruption Strategy has been slowly improving. The strategy set 53 goals and identified 177 measures for their fulfilment. The ACA, however, reports that only 26% of the measures had been implemented by the end of 2017 (European Commission, 2019[84]). A Revised Action Plan for the period 2016-18 envisaged 113 measures and 250 activities: 37% were realised as expected; 60% were not (assessment for the remaining activities was not possible) (ACA, 2019[132]). The prevention arm of the anti-corruption framework is weak. The ACA has neither inspection nor investigation powers and is short of financial and human resources. The State Audit Institution prepared reports, which the national assembly has not discussed since 2013 (BTI, 2020[119]; OHCHR, 2019[133]). The lack of a harmonised database and record of criminal offenses with elements of corruption undermines repression (ACA, 2018[134]).

Public procurement is one of the most critical areas of corruption. The level of competition in the public procurement process remains limited: the average number of bids per tender fell from 3.0 in 2017 to 2.5 in 2018, the lowest level in the last five years. At the local level, the average is even lower (2.1 bids per tender) (World Bank, 2020[70]). A new procurement law was adopted in 2019 to strengthen the transparency of public procurement processes and their resilience to corruption. However, the institutions supervising the process (the Public Procurement Office and the Commission for the Protection of Rights in Public Procurement Procedures) lack human capacity and do not always co-ordinate (ACA, 2018[134]). Moreover, a new law adopted in February 2020 allows the government to exempt linear infrastructure projects of “special importance for the Republic of Serbia” from the application of public procurement rules, undermining the implementation of the 2019 law with regards to oversight and to the contestability of public procurement opportunities (European Commission, 2020[3]).

Serbia has seen stark improvement in statistical capacity but can still strengthen statistical independence and processes to ensure confidentiality

In addition to the Statistical Office of the Republic of Serbia (SORS), the system of official statistics in Serbia includes the National Bank of Serbia, the city administration of the City of Belgrade and a list of over 30 authorised producers of official statistics. According to the Statistical Law adopted in 2009, the SORS is the main producer and disseminator of official statistics, as well as the authorised professional agent, organiser and co-ordinator of the statistical system of the Republic of Serbia (SORS, 2009[135]). The SORS performs statistical activities according to the five-year programme and annual plans. Serbia’s statistical council consists of 17 members, including the director of the SORS and representatives from various government ministries, the National Bank of Serbia, scientific and education institutions, the Chamber of Commerce and the Statistical Society of Serbia.

Over the past decade, Serbia has seen a stark improvement of its statistical capacity. The World Bank measured an increase in statistical capacity from 75.6 out of 100 in 2010 to 88.9 in 2019 (World Bank, 2020[136]). The SORS implemented a range of innovative organisational reforms. For instance, it modernised its data production processes by establishing an integrated system for data entry and data processing. The system facilitates computer-assisted telephone interviews (CATI), computer-assisted personal interviews and computer-assisted web surveys (CAW). Today, around 90% of surveys are collected via the system (Gerziunaite, Hackl and Redmond, 2017[137]).

The SORS improved data quality standards. Serbia is a member of the IMF’s Enhanced General Data Dissemination System (e-GDDS), expressing its voluntary commitment to act on upgrading the quality of data collected and distributed through statistical systems (IMF, 2020[138]). The SORS also adopted transparent data dissemination and communication practices. It publishes a release calendar and quarterly press releases and is active on social media (PARIS21, 2020[139]). Its website is highly accessible in English and Serbian and provides a database that allows users to generate tables interactively. Since 2013, the SORS has conducted biannual user satisfaction surveys. The SORS receives the highest external funding to statistical capacity development in the region, amounting to USD 991 436 in 2017 (PARIS21, 2019[140]).

Despite this progress, Serbia has room for improvement in social statistics. World Bank data show that there has been no health survey available for the past five years (World Justice Project, 2020[118]). The European Health Interview Survey, conducted in 2019 under IPA funding will rectify this particular gap. Preliminary results of this survey were published in December 2020. Serbia lags behind in tracking progress towards the SDGs. Only 31% of the indicators (75 out of 244) are reported on line (SORS, 2020[8]).

Serbia needs to improve its practices to ensure confidentiality in data collection. According to Eurostat, penalty provisions for confidentiality breaches are quite weak. For instance, there is no provision in the case a staff member breaches the confidentiality of official statistics, and provisions in existing policies state that enterprise employment and production data are not confidential (Gerziunaite, Hackl and Redmond, 2017[137]) which can affect the quality of the primary data collected.

Planet – conserving nature

The Planet pillar of the 2030 Agenda for Sustainable Development reflects the need to find the right balance between socio-economic progress and capacity to sustain the planet’s resources and ecosystems and to combat climate change. The Planet section in this chapter identifies three major constraints Serbia faces in its development path. First, Serbia is prone to natural hazards, such as droughts, floods and extreme temperatures. Second, the environmental quality of life of all citizens of Serbia is threatened due to unsolved challenges in waste management, high levels of air and water pollution and poor-quality drinking water. Third, Serbia needs to create a lower carbon energy sector. Serbia is highly dependent on coal and continues to prioritise the development of coal power plants, despite the environmental and climate challenges the country is facing. Defining a coherent long-term strategy that combines energy and climate targets will be key for Serbia’s development path; the country is currently already working on a strategic document.28 Overall, environmental concerns have yet to be become an integral part the growth agenda. The process of accession to the European Union could help raise environmental awareness and be a driver of environmental reforms (Table 17.7).

1. Serbia is exposed and vulnerable to natural hazards.

2. Poor environmental quality affects the lives of all citizens of Serbia.

3. High dependence on coal is holding back sustainable development.

Serbia is exposed and vulnerable to multiple natural hazards

Serbia is prone to natural hazards, such as droughts, floods, earthquakes, landslides and fires. Over the past two decades, droughts, floods and weather-related extreme events have caused major damages and losses to the country’s infrastructure and economic sectors, especially agriculture, and have affected many people’s lives.

Flooding in particular poses a threat to livelihoods. From 2006 to 2019, there were ten natural hazards, eight of them floods: 2007, 2009, twice in 2010, twice in 2013, 2014 and 2019. The floods in May 2014 were particularly severe, affecting 22% of the population (1.6 million people) in two-thirds of municipalities (most located in Central and Western Serbia). Damage amounted to EUR 1.5 billion, based on Post-Disaster Needs Assessment methodology (EU Serbia/United Nations/World Bank, 2014[141]). The 2014 floods had a significant impact on the energy and mining sectors, causing EUR 494 million in damages. Around 90% of the damages were in the coal and power generation sectors (for example, the Kolubara coal mining basin was flooded), followed by the power distribution sector (EU Serbia/United Nations/World Bank, 2014[141]).

Climate change may intensify the frequency and impact of floods and other natural hazards. The cost of extreme weather events in Serbia since 2000 exceeds EUR 5 billion. More than 70% of the losses are associated with droughts and extreme temperatures (Government of the Republic of Serbia, 2015[142]). Serbia, like the whole Western Balkans, is expected to become warmer and drier due to projected scarce precipitation. Serbia’s climate is moderate-continental. A continental climate dominates in the mountainous regions, and Mediterranean, subtropical and continental climates prevail in the southwestern part of the country. Serbia is vulnerable to climate change, with observed temperature increase for all representative concentration pathway (RCP) scenarios. The variation depends on the global efforts in greenhouse gas (GHG) emissions reduction (Table 17.8).

	Albania		Bosnia and Herzegovina		Kosovo		Montenegro		North Macedonia		Serbia
RCP	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5
2016 - 2035	0.5-1.0	0.5-1.0	0.5-1.0	0.5-1.0	0.5-1.0	0.5-1.5	0.5-1.0	0.5-1.5	0.5-1.0	0.5-1.5	0.5-1.0	0.5-1.5
2046 - 2065	1.0-2.0	1.5-3.0	1.0-2.0	1.5-3.0	1.5-2.0	2.0-3.0	1.0-2.0	1.5-3.0	1.5-2.0	2.0-3.0	1.0-2.0	1.5-3.0
2081 - 2100	1.5-2.0	4.0-5.0	1.5-3.0	4.0-5.0	2.0-3.0	4.0-5.0	1.5-3.0	4.0-5.0	2.0-3.0	4.0-5.0	1.5-3.0	4.0-5.0

Notes: The mean annual temperature corresponds to the average of the maximum and minimum temperatures of a year, taking the mean average of the coldest month of the year and averaging it with the mean average of the hottest month of the year. The RCP 4.5 refers to a stabilisation scenario and RCP 8.5 to a continuous rise scenario of GHG emissions.

Source: RCC (2018[143]), Study on Climate Change in the Western Balkans Region, www.rcc.int/pubs/62.

The deterioration of the environmental quality of life of all citizens of Serbia

Air pollution is a serious threat, and the level of some pollutants, especially acidifying gases, remains unchanged since 1990

The population of Serbia is exposed to the highest concentration of air pollution in Europe. The annual exposure to particulate matter (PM 2.5) air pollution decreased from 29.8 µg/m³ in 2005 to 25.1 µg/m³ 2017, but it remains almost double the EU average (13.1 µg/m³) and the OECD average (12.5 µg/m³) and more than double the World Health Organization (WHO) recommended maximum (10 µg/m³) (Figure 17.32 – Panel A). Belgrade and Niš are more exposed than other European cities (Figure 17.32 – Panel B). Based on the country’s inventory, provided by the Serbian Environmental Protection Agency (SEPA), there were no significant changes in nitrogen oxides (NO_x) or ammonia (NH₃) emissions between 1990 and 2017 and only a slight decrease in sulphur oxides (SO_x, SO₂) emissions (SEPA, 2019[144]).29 Pollution is considered a serious problem by 67% of people in Serbia and a very serious problem by 32%, which are in line with regional averages (RCC, 2019[145]).

Figure 17.32. The population in Serbia is exposed to high concentrations of air pollution compared to Europe and other benchmarks

Air pollution poses a significant threat to the health of the population and has significant costs. Air pollution is estimated to cause 6 592 deaths per year, the highest rate in the Western Balkans and among the highest in Europe. Exposure to PM2.5 accounts for 3 585 premature deaths per year, approximately 50.1% of which are in Belgrade. The estimated health costs based on annual emissions from the country’s coal power plants alone is between EUR 0.89 billion and EUR 1.682 billion, the highest in the Western Balkans (Health and Environment Alliance/Climate Action Network, 2017[148]).

The energy sector and traffic are the main sources of air pollution in Serbia. Heating plants and individual heating account for 57% of total PM10 emissions and 77% of total PM2.5 emissions. Energy generation and distribution is also the most significant contributor to acidifying gases (53% of all NO_x emissions and 90% of all SO₂ emissions) (SEPA, 2020[149]). Several of the most polluting coal power plants in Europe are located in Serbia: Nikola Tesla A (97 557 tonnes of SO₂ emissions in 2019), Nikola Tesla B (78 839 tonnes), Kostolac B (79 112 tonnes) and Kostolac A (52 710 tonnes), were the four largest emitters of SO₂ in 2019 (EPS, 2020[150]; EEA, 2020[151]). To reduce pollution from power plants and extend their lifetime under improved environmental standards, desulphurisation systems are currently being installed at Kostolac B30 and Nikola Tesla A, and the plants are being modernised with sizeable investments (reaching approximately EUR 300 million for desulphurisation alone in the two power plants) (Serbia Energy, 2020[152]). However, the deadline for the finalisation of the desulphurisation systems in Nikola Tesla A was recently pushed back to 2022 from 2020/21 (Balkan Green Energy News, 2020[153]). Other polluting sectors are the mineral industry (13% of total PM10 emissions and 9% of total PM2.5 emissions) (SEPA, 2019[144]) and the transport sector. Road transport accounts for around 6% of total PM10 emissions. The age of privately owned vehicles and the ageing of the vehicle fleet of public transport companies in the largest cities contribute to the deterioration of air quality. Agriculture is responsible for almost 83% of total gaseous ammonia emissions and 10% of total PM10 emissions (SEPA, 2019[144]).

In 2009, Serbia adopted a normative framework on air protection, but implementation is lacking. Serbia’s legislation on air pollution has a high degree of alignment with the EU acquis (European Commission, 2020[3]). The Law on Air Protection and its subsequent amendments define measures for the protection and improvement of air quality, set responsibilities regarding air quality monitoring and require the adoption of local air quality plans for areas where the air is excessively polluted. However, this legislation needs to be fully implemented, and the monitoring of air quality needs to be strengthened (European Commission, 2020[3]). The network of stations detecting pollution in Serbia provides better coverage than in the rest of the Western Balkans,31 but not all monitoring stations are regularly maintained, and the annual measurement of some pollutants remains limited, undermining the capacity to produce complete health assessments throughout the country (WHO, 2019[154]).32 So far, only Belgrade, Bor, Novi Sad, Smederevo, Pančevo, and Užice have adopted local air quality plans, although a number of others are in preparation (UNECE, 2015[155]).

Waste management is a challenge in Serbia in terms of collection, treatment and reporting

Serbia has been improving its legislation on waste management, but implementation must be strengthened. Serbia’s legislation on waste management is largely aligned with the EU acquis. In 2019, Serbia adopted a number of new regulations on waste management. A national waste management strategy and a national sludge management strategy are currently in the adoption process. A by-law on the treatment of equipment and waste containing polychlorinated biphenyl is also in the adoption process and will fully transpose the EU directive on waste management once adopted. Serbia must improve the implementation of waste management legislation (European Commission, 2020[3]).

Waste production is relatively low, but data reliability is questionable. Each citizen of Serbia produces, on average, 319 kg of waste per year, which is below the OECD (525 kg), EU (492 kg) and Western Balkan (365 kg) averages (Eurostat, 2018[1]). However, local data on municipal waste generation are provided by Serbian local self-government units, and both the Ministry of Environment and the Fiscal Council of the Republic of Serbia consider them unreliable (Ministry of Environmental Protection, 2010[156]).

Waste collection rate and fees are low. While the figures are outdated, organised collection of municipal solid waste covered about 80% of generated waste in 2013 (UNECE, 2015[155]) with particularly limited collection in non-urban areas (Ministry of Environmental Protection, 2010[156]). The collection rate is notably low among households. In general, municipal waste collection fees are based on the amount of waste collected (in m²), the number of household members or the number of families in a building, and they only partially cover operating costs.

Much of solid waste is not disposed of correctly. According to the National Waste Management Strategy for the period 2010-2019, there are 164 registered landfills (Ministry of Environmental Protection, 2010[156]). Around 70% do not meet basic operational standards and are functioning without previous environmental impact assessment studies or the required permits. Some present high environmental and human health risks due to their location: 12 are located less than 100 m from a human settlement and 25 are located less than 50 m from a lake or river bank (Ministry of Environmental Protection, 2010[156]). Last, not all municipal waste collected is disposed of correctly, and part of it ends up in illegal dumpsites. There are around 4 481 such dumpsites, located mainly in non-urban areas, which receive about 40% of municipal waste and are located mainly in non-urban areas (Ministry of Environmental Protection, 2010[156]).

Separate collecting, sorting and recycling of waste is not systematically organised. The share of waste recycled in Serbia (2.59%) is lower than in the rest of the region and the EU average (36.2%) (Eurostat, 2020[47]). Separate waste collection occurs sporadically in Bajina Bašta, Belgrade, Čačak, Leskovac, Mitrovica and Sremska Leskovac (Fiscal Council of the Republic of Serbia, 2019[103]).

Poor-quality drinking water and water pollution affect public health in Serbia

Serbia has abundant water resources and shares most of them with neighbouring economies. The country has 21 493 m³ of total renewable water resources per capita per year, which is higher than the regional and EU averages (Figure 17.34). Approximately 90% of the Serbian territory lies in the Danube River Basin (International Commission for the Protection of the Danube River, 2020[157]), the second largest river basin in Europe and the most international in the world, flowing through the territories of 19 economies. Serbia shares other transboundary basins, such as the Drina, Sava and Tisza. Transboundary river-basin management is therefore crucial for sustainable water policy development.33

Serbia has good access to drinking water, with proven water service continuity. The relatively good coverage is mainly due to the infrastructure and investments inherited from the former Yugoslavia (Fiscal Council of the Republic of Serbia, 2019[103]). Municipal public utilities are responsible for water distribution. They propose tariffs, which are approved by local government competent bodies, (municipal assemblies in most cases).

Water quality is low, especially in non-urban areas. The quality of drinking water has been slightly improving (SEPA, 2019[144]), but remains low compared to the rest of the region and the European Union. The level of satisfaction with water quality in Serbia is, moreover, much lower than in other economies with a similar income per capita (Figure 15.2). According to annual evaluations by the Institute of Public Health, under the Ministry of Health, 56% of drinking water met minimum quality requirements in urban areas vs. 37% in non-urban areas. Since monitoring is discontinuous, the situation might further deteriorate (WHO et al., 2017[158]; Fiscal Council of the Republic of Serbia, 2019[103]).34 Drinking water quality seems to be particularly poor in the Autonomous Province of Vojvodina due to high concentration of arsenic in the groundwater – the main source of abstracted drinking water.35 Around half the population of the province is potentially affected.

Securing safe water and sanitation remains problematic in Serbia. The large number of illegal dumpsites, uncontrolled waste deposit, continuous discharges of urban and industrial wastewater into rivers and pollution from agriculture have significantly contributed to water pollution. As a result, only 7% of surface water in Serbia is classified as at least decent, compared to 50% in Europe (Fiscal Council of the Republic of Serbia, 2019[103]). For example, the 118 km Great Bačka Canal, which runs from Bezdan (Danube River) to Bečej (Tisza River), is one of the most polluted watercourses in Europe. Around industrial towns like Kula and Vrbas Crvenka, the river is no longer navigable because of its pollution levels.36 Moreover, Serbia suffers from waterborne diseases more than other economies in the region (Figure 17.33). Water pollution may also expose the population to higher cancerogenic risks and may affect cognitive development among children.

Figure 17.33. Securing safe water and sanitation in Serbia remains an issue compared to other regional and benchmark economies

Mortality rate attributed to unsafe water, unsafe sanitation and lack of hygiene (exposure to unsafe WASH services) per 100 000 population in 2016

Wastewater treatment plants are sporadic and rarely operational. Around 58% of the population is connected to public sewerage systems, but only 10.5% is connected to public sewerage served by a wastewater treatment plant. This percentage is higher than the Western Balkan average (6.5%) but lower than the EU average (86%). In 2018, only 16.8% of the 400 million m³ discharged wastewater was treated (SEPA, 2019[144]). Households accounted for 71.4% of the wastewater discharged, followed by industry (14.6%) and other sectors (14%). According to SEPA, 42 municipal wastewater treatment plants were operational in 2018, but they worked at a lower efficiency level than designed, and 18 were still under construction or reconstruction (SEPA, 2019[144]). Unlike other Western Balkan economies, the country’s capital does not have a wastewater treatment plant (World Bank, 2020[70]). Based on the estimation of the Fiscal Council, the construction of new wastewater treatment facilities with supporting infrastructure, such as the main wastewater collection infrastructure, will cost about EUR 600 million (Fiscal Council of the Republic of Serbia, 2019[103]).

Figure 17.34. Serbia has relatively abundant freshwater resources compared to other regional economies and the EU average

Total renewable water resources per capita (m³/inhab/year), 2017

Governance issues and inefficiencies undermine the quality of the water supply

Governance of the water sector in Serbia remains very fragmented, and the legislation for water management must be strengthened. There are 152 municipal public utilities and 6 ministries in charge of the water sector (Government of the Republic of Serbia, 2017[161]).37 Unlike other economies in the region, Serbia has no autonomous regulatory authority in the water sector. Water management legislation needs to be better enforced and fully aligned with the EU acquis (European Commission, 2020[3]).

The efficiency of water service providers could be improved. Due to infrastructural gaps and administrative issues, non-revenue water amounts to around 38% of the water provided. Based on the estimation of the Fiscal Council, over EUR 800 million are needed for the expansion and rehabilitation of the water supply network (Fiscal Council of the Republic of Serbia, 2019[103]). The billing collection rate remains low (Salvetti, 2015[162]), although tariffs for water services remain affordable (0.9% to 1.1% of monthly household income in 2018, depending on the region) (Table 17.9) (SORS, 2019[163]). The tariffs do not allow the recovery of cost for water supply services. Around 40% of public water utilities were unable to generate tariff revenues to ensure the maintenance of the water infrastructure and network (UNECE, 2015[155]).

	Belgrade Region	Vojvodina Region	Šumadija and Western Serbia Region	Southern and Eastern Serbia	Serbia
Housing, water, electricity and gas	17.3	16.7	16.4	16.3	16.7
Water supply	0.9	1.1	0.9	1.1	1.0
Waste collection	0.4	0.5	0.4	0.5	0.4
Sewage collection	0.3	0.1	0.0	0.0	0.1
Electricity	5.3	5.6	5.8	6.0	5.6
Gas	0.2	1.3	0.2	0.0	0.5
Central heating	3.9	1.4	0.8	1.0	1.9
Total	11.0	10.0	8.1	8.6	9.5

Note: “Housing, water, electricity and gas” includes rentals, fuels and dwelling. "Total" includes only the part corresponding to communal services, except fuels and dwelling.

Source: SORS (2019[163]), Bulletin: Household Budget Survey, 2018, https://publikacije.stat.gov.rs/G2019/PdfE/G20195652.pdf.

Enforcement and implementation of environmental legislation remains weak, and the decision-making process and funding for environmental matters lack transparency

The Ministry of Environmental Protection was established in 2017 but plays a secondary role within the government in terms of size and budget. The Ministry of Environmental Protection has existed since the 1990s, but its area of work has been moved several times to other ministries (including the Ministry of Science and the Ministry of Energy). In 2014, it was abolished. The latest institutional change was the separation of the Ministry of Agriculture and the Ministry of Environmental Protection in 2017. Funding for environmental protection and climate change was identified as a main concern.38 The Green Fund was formally established in 2016 (Government of the Republic of Serbia, 2016[164]) and became operational in 2018 with the adoption of the by-laws on its operation and management.39 Since 2018, the Green Fund has financed several environmental protection projects, but improvement of its institutional and legislative framework are necessary in order to establish a sustainable environmental financing system. An efficient and transparent system for financing environmental protection is an issue at both the national and local levels (Koalicija 27, 2019[165]).

Lack of regular and systematic monitoring hampers the enforcement of environmental legislation at both the national and subnational levels. Monitoring of landfills is almost non-existent, and only 20% of surface and ground water are regularly monitored. The capacity of inspectors is also problematic. According to the Fiscal Council, there are fewer inspectors than what efficient monitoring and supervision require (Fiscal Council of the Republic of Serbia, 2019[103]). International donors are active in reinforcing the capacities and competences of environmental inspectors, especially at the local level. The lack of reporting on inspection and permitting activities at the local level undermines the effectiveness of the environmental inspectorate (UNECE, 2015[155]).

The administrative and penal liability for damage to the environment is underdeveloped in Serbia and makes the polluter-pays principle ineffective. Due to lack of knowledge and information, environmental inspectors do not use administrative fines at the local level in practice, although the corresponding legislative framework is in place. Moreover, judges are not sufficiently familiarised and trained in environmental law (see the Peace and institutions section in this chapter). Increasing their awareness about environmental issues and the corresponding challenges regarding the enforcement of environmental legislation is essential. Last, the absence of data on concluded administrative, civil and penal cases related to environmental issues at country level undermines adequate monitoring of environmental legislation.

Greater transparency would help support effective compliance with environmental legislation at both the national and subnational levels. The decision-making process in environmental matters is not participatory. Given the need to diversify its energy mix, Serbia has incentivised the construction of small hydropower plants, about which environmental concerns can arise. Failures in the concession and permitting process, for example, led to some plants being built without the appropriate clearance from nature conservation authorities. The concentration of recipients of the associated concessions has raised concerns among some observers, which more participatory and publicised processes could help address. The main recipient of feed-in tariff payments was EPS, but 80% of other payments went to a single group of companies (Gallop, Vejnovic and Pehchevski, 2019[166]).

Serbia is highly dependent on coal and lacks a coherent long-term strategy that combines energy and climate targets

The Serbian economy remains very energy intensive. The energy intensity has been decreasing slightly over the last decade, but at 0.166 toe/USD 1 000, it is higher than the Western Balkan average (0.126 toe/USD 1 000) and remains very high compared to the EU and OECD averages (Figure 17.35).

Figure 17.35. Serbia’s economy is very energy intensive compared to the EU and OECD averages

TPES/GDP (toe/USD 1 000 in 2010 USD PPP), 2017 and 2010

High dependency on domestic and heavily polluting coal production continues to be prioritised, despite existing environmental and climate challenges

The primary energy production in Serbia was 10 025 million toe in 2018, by far the largest in the region. In 2018, 65.9% of the primary energy production was from solid fuels, around 9.7% was from crude oil, 3.6% was from gas and around 20.8% was from renewables (hydro, wind, geothermal, biomass, solar and biogas) (Eurostat, 2018[7]). Like other economies in the region, Serbia is a net importer of energy. Net imports supplied, on average, one-third of gross inland energy consumption of Serbia (Eurostat, 2018[7]).

In common with many other economies in the region, Serbia relies on domestic coal-fired electricity production provided by outdated power plants. In 2019, some 70.4% of domestic electricity production came from thermal power plans (using coal (lignite) and gas), 27.0% from hydropower, and around 2.6% from other renewable sources (wind, biomass and solar together) (Elektromreža Srbije, 2020[168]). Electricity from coal is generated in old thermal power plants (located in two main coal basins: Kolubara and Kostolac)40 that are owned and managed by subsidiaries of EPS.

Despite existing climate and environmental challenges, Serbia continues to prioritise investments in the replacement of existing coal power plants and the construction of new ones. A new lignite power plant (Kostolac B3) located close to Pozarevac with 350 MW of power was approved by the government to be built before 2025 (Gallop and Cluta, 2017[169]). Serbia’s 2016 Energy Sector Development Strategy and the Implementation Programme for the period 2017-2023 define three main priorities for the energy sector: improvement of energy security, development of the energy market and sustainable development (Government of the Republic of Serbia, 2017[170]; Ministry of Mining and Energy, 2016[171]).

Serbia has moved to diversify its energy mix through hydropower, wind, solar, biomass and biogas, but electricity production still takes a toll on the environment

Serbia adopted some measures to support the development of renewable energy sources, but except for hydro, power generation from renewables is marginal in the country. Thanks to hydro, the overall share of renewable energy in gross final consumption of energy in Serbia was 20.3% in 2018, below the Western Balkan average (28.81%), slightly higher than the EU average (18.9%) (Eurostat, 2018[1]), but well below the renewables target of 27% by 2020 set by Serbia and even lower than the renewable energy share (21%) in the 2009 baseline year.41 Other sources of renewable energy – solar and wind energy – are insufficiently developed, even with the recent connections to the grid of 264 MW of wind power in 2018 and 398 MW in 2019 (Energy Community Secretariat, 2019[172]).42 To improve the take-up of renewable energies, the system of support schemes for wind and solar would need to be revised, including, for example, by introducing auctions43 and by reviewing capacity caps initially set in Serbia’s National Renewable Energy Action Plan (Government of the Republic of Serbia, 2013[173]). For this purpose, the European Bank for Reconstruction and Development (EBRD) is currently advising the government on policies for the competitive procurement of renewable energies in order to increase the share of renewables in Serbia’s energy mix (EBRD, 2020[174]). Fully transposing the EU acquis on energy in Serbia’s energy legislation could play an important role in raising the share of renewables in Serbia’s energy mix (European Commission, 2020[3]). Work on a draft Law on Renewable Energy has begun as of January 2021. Support schemes for renewables are in place, but the part of renewable incentives continues to be modest compared to coal subsidies (Figure 17.36). Incentives for coal were extended in January 2020, while stimulus measures for renewables expired in December 2019 (Balkan Green Energy News, 2020[175]).44 Corresponding regulation to promote prosumers in Serbia is missing, although the Energy Law includes the possibility for households to produce electricity from renewable sources (Government of the Republic of Serbia, 2014[176]).

Figure 17.36. Coal continues to benefit from higher incentives than renewables in Serbia

Comparison of paid incentives (in EUR/MWh) for electricity from renewables and from coal in end-user prices in the Western Balkans, 2017

Serbia’s energy production based on lignite and the development of small hydropower plants have a detrimental impact on the environment and water resources. The mushrooming of hydropower plants has an impact on water resources and on the preservation of biodiversity. Several of the already-built and planned plants are in protected areas (Gallop, Vejnovic and Pehchevski, 2019[166]). For example, in the Kopaonik National Park, Josanicka Banka and Stara Planina Nature Park (close to Bulgaria). The Knesevici plant near the Kopaonik National Park has an impact on available water resources and on their deterioration (Vejnović, 2018[179]). Amendments to the Law on Nature Protection were under discussion in 2019 and should ban the construction of small hydropower plants in protected areas, but those already built will not be demolished (Government of the Republic of Serbia, 2010[180]). The alignment of Serbian legislation with the EU environmental acquis could play an important role in limiting the negative impact of new hydropower plants on the environment (European Commission, 2020[3]).

The construction of new coal power plants sidesteps required environmental impact assessments. For example, in the case of the Drmno mine’s 30% increase in annual production, the government decided not to realise a new environmental impact assessment.45 In the case of Kostolac B3, the assessment realised in 2013 suffered numerous deficiencies, such as the absence of transboundary impact, although the new plant is located 15 km from the Romanian border.46 A new environmental impact assessment for the construction of Kostolac B3, which included consultations with the Serbian and Romanian public, was conducted in June 2017.

Serbia should aim to make its energy supply more reliable

Access to electricity is a significant concern for businesses in Serbia. The country ranks 94th in the world for ease of getting electricity, with an average time of 125 days (World Bank, 2019[181]). Due to degraded and old electricity transmission and distribution networks, secure, reliable and constant supply is a challenge. More than 15% of firms in Serbia considered electricity a major constraint in 2019 (World Bank/EBRD/EIB, 2019[182]) (see the Prosperity and Peace and Institutions sections in this chapter). In 2019, 49.5% of firms experienced electrical outages, more than the Western Balkan average of 48.9% (World Bank/EBRD/EIB, 2019[182]). To tackle these challenges, new electricity distribution networks are currently under construction. Power transmission and distribution losses fell from 14% in 2016 to 11.91% in 2019 (Republic of Serbia, 2019[183]; Republic of Serbia, 2016[184]) below the regional average (16.63%) but higher than the EU and OECD averages (around 6.44% and 6.29%, respectively).

Figure 17.37. Serbia generates more than two-thirds of its domestic electricity from coal and almost one-third from hydropower

Electricity generation mix (in %), 2018

Serbia’s electricity market is fully liberalised, in line with the Third Energy Package,47 and the liberalisation of the gas sector is ongoing. The process to finalise unbundling in electricity is making good progress in Serbia (Energy Community Secretariat, 2018[186]). In the gas sector, Srbijagas, the state-owned natural gas provider, has been working on the creation of the business, financial and technical preconditions for the sustainable functioning of unbundled energy entities in open market conditions, including through the procurement of a telemetry system and the creation in October 2019 of an independent transport system operator, Transportgas Serbia. The development of competition in the sector could result in better quality service and more secure energy supply.

Energy efficiency policies, including in electricity generation, should complement shifts in the energy mix

Energy efficiency policies can do a lot more to reduce the environmental impact of growth in Serbia. The transposition of the relevant EU acquis on energy efficiency in the Law on Efficient Use of Energy and secondary legislation has already allowed the implementation of energy efficiency projects, such as increasing the efficiency of street lighting in Belgrade. Full implementation of the Energy Efficiency Directive and appropriate financial and human resources to encourage the implementation of energy efficiency projects will be necessary to achieve the Energy Community energy efficiency targets (Energy Community Secretariat, 2018[186]; European Commission, 2019[84]; Government of the Republlic of Serbia, 2013[187]). In particular, it is important to align Serbian legislation and regulations with the EU Directive on Energy Performance of Buildings and to implement consumption-based metering and billing in district heating on a large scale as a prerequisite for implementing energy efficiency measures in residential buildings (European Commission, 2020[3]).

As the energy sector is responsible for almost 80% of GHG emissions, the sector will be crucial for mitigation. As of today, the government does not possess a long-term strategy that combines energy and climate targets and is in line with the EU 2030 framework for climate and energy policies and the EU climate acquis. The legislation on monitoring, reporting and verifying GHG emissions has not yet been aligned with the EU emissions trading system and EU Effort Sharing Regulation (European Commission, 2020[3]). However, a strategic document, which will include GHG emissions targets, is currently under preparation. In 2018, the Energy Community adopted a recommendation on the preparation of National Energy and Climate Plans (NECPs) by the members of the Energy Community. In line with this recommendation, the Ministry of Mining and Energy is currently working on a NECP for Serbia, which is planned to be a key document in defining Serbia’s climate policies.48 The creation of a Department on Climate Change within the Ministry of Environmental Protection is encouraging and will be key in designing a more ambitious update of the Nationally Determined Contribution (NDC) for the period 2021-2030, with mitigation measures that better target the energy sector. Serbia ratified the Paris Agreement in May 2017 and submitted a National Communication on climate change in 2010 (Government of the Republic of Serbia, 2010[188]) and in 2017 (Government of the Republic of Serbia, 2017[189]). In its NDC, Serbia committed to reducing its GHG emissions by 9.8% compared to 1990 levels by 2030 (Government of the Republic of Serbia, 2015[142]) and has already started.

Serbia adopted a National Emissions Reduction Plan (NERP) in January 2020, but its enforcement remains a challenge. The National Plan for the Reduction of the Main Pollutant Emissions from Old Large Combustion Plants aims to harmonise these emissions from Serbia’s large old combustion plants with the limits set out in the European Union’s Industrial Emissions Directive by 2027 (Government of the Republic of Serbia, 2020[190]). The NERP had been on hold since 2016, and Serbia only proceeded to its adoption shortly after the Energy Community launched a dispute procedure against the country. The document lacks an enforcement framework and sanction mechanisms should Serbia not honour its commitments (Balkan Green Energy News, 2020[153]).

Serbia has the opportunity to reduce energy consumption and, consequently, carbon emissions. Relatively low electricity prices in Serbia do not provide incentives for investing in energy efficiency or for saving energy. Serbia’s electricity prices (approximately EUR 0.05/kWh for households)49 are considered among the lowest in Europe (Fiscal Council of the Republic of Serbia, 2019[103]). Electricity tariffs remain affordable and corresponded, on average, to between 5.3% and 6.0% of monthly household income in 2018, depending on the region (SORS, 2019[163]).The current electricity tariffs for households do not reflect real costs needed, for example, to invest in infrastructure and thus guarantee security of supply.50 Moreover, they do not include charges that would lead consumers to internalise the environmental impact of coal power plants. However, in contrast to other economies in the region, bill collection rates in Serbia are significant for households (95%) and lower for companies (89%) (UNECE, 2015[155]). Regarding heating, bills are based on m² rather than real-time consumption and do not encourage energy savings. Like electricity tariffs, heating tariffs do not reflect real costs and corresponded, on average, to between 0.8% and 3.9% of monthly household income in 2018, depending on the region (SORS, 2019[163]).

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Notes

← 1. The Multiple Indicator Cluster Survey survey asks household heads about their ethnic origin. This group corresponds to households whose heads identify as Bosniak (Bošnjak) in their responses to the survey.

← 2. A complaint relating to the banning of the 2009 Belgrade Pride Parade by the Government of Serbia (due to police being unable to ensure the right to peaceful assembly) was submitted to the European Court of Human Rights (ECtHR). The 2017 ruling of the ECtHR did not decide on whether the ban breached the European Convention on Human Rights when it came to Freedom of Peaceful Assembly and Freedom of Expression as the government had granted permission for subsequent Pride parades to take place from 2014 to 2016, thus citing positive developments.

← 3. Official data on hate crimes based on sexual orientation and gender identity do not exist. Police, courts and prosecutor’s offices should actively collate information relating to such crimes.

← 4. Information provided by the Ministry of Labour, Employment, Veteran and Social Affairs of the Republic of Serbia.

← 5. EUR 68.90 for a single-person household and EUR 103.30 for two adults in 2017.

← 6. Estimated data are for 2015 (Bartlett and Oruč, 2018[193]).

← 7. The total duration of compulsory education in Serbia is nine years. Children enter compulsory education at age 5.5 and leave it at age 14.5 (European Commission, 2018[192]).

← 8. Some 43% of Serbian STEM graduates are women.

← 9. Defined as students who scored at or above Level 5 in the PISA.

← 10. A teacher’s maximum annual basic gross statutory salary in Serbia in 2014 was 149.3% of the GDP per capita in primary education, compared to 225.3% in North Macedonia and 193.8% in Montenegro in 2015 (European Commission/EACEA/Eurydice, 2016[200]).

← 11. Continuous training of teachers must be organised by municipalities, which do not always have enough resources to implement this requirement (see the Peace and institutions section in this chapter).

← 12. Measured by DALYs or the number of years lost due to ill-health, disability or early death.

← 13. Information provided by the American Chamber of Commerce in Serbia.

← 14. Employees who lose healthcare insurance due to such evasions of the law are obliged to pay full price for healthcare services. The situation is more complex for farmers, who have accumulated high arrears of all social insurance contributions. The government is currently looking into ways to write off farmers’ debts for healthcare insurance.

← 15. Exact figures on informal payments for medical care are hard to come by. A systematic review of corruption in the healthcare sector in the Western Balkan region estimates that, in the entire Serbian healthcare system, patients pay informally 7% to 23% of the time, compared to 4% to 13% in North Macedonia at the lower end and 19% to 91% in Albania at the higher end. In some studies, reported payments can be as high as EUR 500 (Mejsner and Karlsson, 2017[191]). In addition, 61% of Serbian healthcare users reported being requested to bring (and pay for) their own goods (e.g. pharmaceuticals, materials, equipment, bed linen, meals), even though these should be free and provided at the point of care. These “brought and bought good” payments are estimated to constitute up to 10% of total healthcare expenditure for close to 60% of users (Arsenijevic, Pavlova and Groot, 2015[195]).

← 16. The cost of the average minimum consumer basket (for a three-person household) varies significantly among municipalities, ranging from EUR 268 per month in Leskovac to EUR 541 per month in the City of Belgrade in 2017.

← 17. Data on lost earnings are determined on the basis of the possibility of employment of an individual, the frequency of employment, the wage levels for a particular job, and the possibility of leasing real estate (Information provided by the Ministry of Labour, Employment, Veteran and Social Affairs of the Republic of Serbia).

← 18. Many of the administrative obstacles are expected to be eliminated with the Law on Social Card, which was passed in February 2021 and with the establishment of the Social Card Register. The application of the register or law will begin on 1 March 2022, when all the records, necessary for determining the socio-economic status of a person, will be connected (Information provided by the Ministry of Labour, Employment, Veteran and Social Affairs of the Republic of Serbia).

← 19. The PPS has prepared a Consultation Manual to guide policy making bodies in consulting with the public and relevant stakeholders, as mandated by the Law on the Planning System of the Republic of Serbia.

← 20. The Action Plan for the Implementation of the Government Programme 2020-22 was adopted by the Government of Serbia on 28 January 2021.

← 21. The average annual growth of public-sector employees between 2011 and 2018 was positive, in spite of the freeze on public-sector hiring introduced in 2014. According to interviews with OECD/SIGMA and the IMF, this could be explained by a spike in hiring before the introduction of the embargo and by a relatively slow implementation of the freeze. The embargo, moreover, does not concern temporary employees, whose numbers have been increasing lately, with consequences to the politicisation of the public sector.

← 22. According to the European Union-funded INFORM survey, 40% of interviewees in Serbia have relied on gifts and connections to get employment, as much as in North Macedonia, and 45% of them used gifts to get treatment in public hospitals. Almost 45% provided gifts to obtain services from the courts, the second highest share in the region after Bosnia and Herzegovina (47%) (Krasniqi, 2019[115]).

← 23. The High Judicial Council appoints first-time judges to permanent office depending on the candidate’s performance assessment (Law on Judges, Art. 52).

← 24. The central government pays the salaries of school principals and teachers and funds capital investments. Municipalities cover costs related to the maintenance of school facilities and utility bills, early childhood education and additional support programmes for students with special education needs. Municipalities are also responsible for funding the professional development of teachers and other school staff (Maghnouj et al., 2019[10]). Concerning social services, the central government finances residential care for people with disabilities, orphans and other vulnerable groups; municipalities are in charge of day care centres and other non-residential types of services (Avlijaš and Bartlett, 2011[194])

← 25. According to the 2007 Law on Local Government Finance (amended in 2016), municipalities receive 74% of the Wage Personal Income Tax levied by the central government. The City of Belgrade and cities receive 66% and 77% of the Wage Personal Income, respectively (OECD/UCLG, 2019[123]).

← 26. These are the Office of Prime Minister, the General Secretariat of the Government, the Republic Secretariat for Legislation and the PPS. By contrast, in Albania, the Office of Prime Minister co-ordinates and supervises the planning process. The head of the Office of Prime Minister has the status of a civil servant (OECD, 2020[107]).

← 27. Chapter 23 includes sub-chapters on the judiciary, fight against corruption, and fundamental rights. A Coordination Body for implementation oversees the Action Plan as a whole, while the Agency for Prevention of Corruption supervises only the implementation of the Subchapter Fight against Corruption of the Action Plan for Chapter 23.

← 28. The Ministry of Mining and Energy is currently working on a National Energy and Climate Plan (NECP) for Serbia. However, the government has not yet fixed targets or objectives (based on an interview in February 2020).

← 29. In 1990-2017, there was a decrease in carbon monoxide and a very slight decrease in non-methane volatile organic compounds (NMVOC) (SEPA, 2019[144]).

← 30. The installation of a flue-gas desulphurization (FGD) system in Kostolac B is completed but its operation is still only on a trial basis.

← 31. There are 47 stations; 33 stations are part of the national SEPA network, and 14 are part of local networks (SEPA, 2020[196]). The air quality monitoring network in Serbia is distributed across three zones and eight agglomerations: Beočin, Beograd, Bor, Čačak, Kikinda, Kopaonik, Kosjerić, Kostolac, Kragujevac, Kraljevo, Kruševac, Loznica, Mitrovica, Niš, Novi Sad, Obrenovac, Pančevo, Paraćin, Šabac, Smederevo, Sombor, Subotica, Uzice, Valjevo, Vranje and Zaječar.

← 32. In 2016, exposure to PM2.5 was measured in only three stations: two in Belgrade and one in Novi Sad (WHO, 2019[154]).

← 33. Serbia is a member of the International Commission for the Protection of the Danube River and participates in the preparation of the Update of the Danube River Basin Management Plan (International Commission for the Protection of the Danube River, 2020[157]). It is also a member of the International Sava River Basin, participating in the preparation of the Sava River Basin Management Plan, and of the Tisza River Basin Forum.

← 34. Based on the recent assessment provided by the WHO, water is not controlled in various small-scale water supply networks in non-urban areas due to unsolved issues of competences and unknown ownership (WHO et al., 2017[158]). This is the case for 88% of non-urban water supply networks (Fiscal Council of the Republic of Serbia, 2018[198]).

← 35. In the rest of the country, groundwater is the source of two-thirds of abstracted water; the rest is taken from surface water (SEPA, 2019[144]; UNECE, 2015[155]).

← 36. In 2008, the Ministry of Environmental Protection of Serbia declared the Great Bačka Canal one of the three black spots of the Serbian environment. A project of remediation was adopted but never completed (Fiscal Council of the Republic of Serbia, 2018[198]). Information on the project is available at www.ppf.rs/en/projects/ppf8-vbk-en.

← 37. The Ministry of Agriculture designs water resource policies; the Ministry of Finance revises tariffs set by public water utilities; the Ministry of Health monitors water quality; the Ministry of Construction, Transport and Infrastructure inspects and supervises public water utilities; the Ministry of Public Administration and Local Self-Government supervises LSGs and their management of public water utilities; the Ministry of Mining and Energy manages groundwater resources and oversees the Geological Survey of the Republic of Serbia, which conducts basic hydrological groundwater exploration and maintains the groundwater cadastre.

← 38. Interview with the Environmental Working Group in February 2020.

← 39. The Decree on the conditions that must be met by users of funds of the Green Fund of the Republic of Serbia, conditions of the distribution of funds, criteria for assessing requests for funds, monitoring of the use of funds and rights and obligations of users of funds (“Official Gazette of the Republic of Serbia”, No. 25/18); and Rulebook on detailed conditions for the allocation and use of funds of the Green Fund of the Republic of Serbia (“Official Gazette of the Republic of Serbia”, No. 31/18).

← 40. The Kolubara Mining Basin produces between 29 million tonnes and 31 million tonnes of lignite annually, which is supplied to the Kolubara A, Morava and Nicola Tesla power plants. It provides approximately 75% of the lignite used for EPS thermal generation. The Drmno Mining Basin close to Kostalac produces around 9 million tonnes of lignite annually, which is supplied to Kostalac A and Kostalac B plants. It represents the rest of the 25% (https://bankwatch.org/beyond-coal/the-energy-sector-in-serbia).

← 41. EU target of 20% share of renewable energy in gross final consumption of energy as fixed by the 2009 Renewable Energy Directive (299/28/EC).

← 42. The measured share of renewable energy in gross final consumption would be greater if it could account for the use of geothermal energy for heating and cooling. However, there is no cadaster of the heat pumps installed in Serbia that would allow accounting for the energy so produced.

← 43. Renewable energy auctions are a type of support mechanism for renewable energy technologies and generally opened by the government of a country. They generally specify the capacity (kW) or the electricity generation (kWh) that is up for auction, as well as the generation technology (e.g. wind, solar) and sometimes the generation location. Project developers then submit a bid to the auction, outlining their project proposal and stating the price per unit of electricity at which they will be able to realise it. The government evaluates the bids based on price and other criteria and selects the best offer (IRENA, 2013[197]).

← 44. In January 2020, the decree on the special fee to incentivise preferential electricity producers was extended. Consumers keep paying a surcharge of RSD 0.093 per kWh or EUR 0.79/MWh (Balkan Green Energy News, 2020[175]).

← 45. Registered complaint to the Energy Community Secretariat: www.energy-community.org/legal/cases/2018/case0918RS.html. An environmental impact assessment study for the Drmno mine was conducted in 2009 (Decision of the Ministry of Environmental Protection, No. 353-02-0360/2008-02 of 10 April 2009 approving the environmental impact assessment). However, when the mine’s annual production was later increased, the Ministry of Environmental Protection decided it was not necessary to prepare a new environmental impact assessment, given that the borders of the mine were unchanged.

← 46. In June 2016, the administrative court decided that the environmental impact assessment realised in 2013 should be revoked.

← 47. The European Union’s Third Energy Package aimed at liberalisation of the gas and electricity markets and empowering energy consumers.

← 48. The government has not yet fixed targets or objectives (based on an interview in February 2020). The Ministry of Mining and Energy set up a project, Further Development of Energy Planning Capacity Project (follow up IPA 2013), to define targets for 2030 and 2050 to contribute to the EU targets for 2030, support the preparation of the NECP and to further develop and improve Serbia’s energy policy.

← 49. There is a bill discount for vulnerable customers (Decree on Energy Vulnerable Customer, January 2016, amended in 2018, https://www.paragraf.rs/propisi/uredba-o-energetski-ugrozenom-kupcu-republike-srbije.html). In 2019, 76 888 customers were granted bill discounts but takeup is low: between 300 000 and 400 000 households would probably be eligible for the bill discount (AERS, 2020[199]).

← 50. The electricity tariff for households and small customers exercising their right to remain under regulated tariffs are not deemed to reflect costs, while in the remaining segment of the market (around 50% of total consumption) price-setting is subject to competition.

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