The final chapter of the collapse of former premier Josip Broz Tito’s Yugoslavia was written on May 20 when the people of Montenegro voted for a peaceful divorce from Serbia. The end of the union of the two countries removed one of the last pieces of baggage left over from the failed socialist state and has cleared the way for Serbia to concentrate on its EU accession bid.
Given the strife the region has suffered in the past decade, the divorce went surprisingly smoothly: 55.4% of Montenegrins voted to separate, which was accepted in the Serbian capital of Belgrade with little griping.
“It was a democratic vote and the majority voted for independence; the will of the Montenegrin people must be respected. Serbia and Montenegro will be good neighbours,” said Serbia’s finance minister Mladjan Dinkic from the fringe of the European Bank for Reconstruction and Development annual spring meeting in London as the results of the poll came in.
“Any other solution would have been painful. We have already been functioning for a long time as separate states. We needed a clear solution and this is a clear solution,” he added.
Mr Dinkic typifies the government’s forward-looking stance. He points to Austria’s revival following the collapse of the Austrian-Hungarian empire as a mode, and cites Ireland’s dramatic transformation as a source of inspiration for the government in Belgrade.
Good neighbours
“We are confident that we will be ready to join the EU before Montenegro – around 2012,” says Mr Dinkic. “The Serbian people shouldn’t regret [the split] as in the long term we hope that both Serbia and Montenegro will be members of the EU.”
However, Serbia is still no accession shoo-in. The EU put Serbia’s bid on hold at the end of April after it missed a deadline to arrest the former Bosnian-Serb military boss Ratko Mladic, who has been indicted for war crimes.
Mr Dinkic says the government is sincere in its efforts to bring Mr Mladic to justice and that it is unfair to tie the country’s future to the fate of one man.
In the meantime, the government has hunkered down to the job of sustaining the booming economy and getting its house in order in preparation for the eventual accession.
Serbia logged a blistering 7.8% gross domestic product growth in 2005. Foreign direct investment (FDI) doubled and the state boasts a budget surplus. Hard currency reserves have quadrupled to exceed $8bn – equivalent to eight months worth of imports – and the government decided to pay off a $1bn IMF loan earlier this year.
“The economy is going well. We are running a budget surplus and so have decided to cut taxes on labour. Corporate profit taxes are only 10% and in June we vote through a law to cut labour taxes further to attract more foreign investment,” says Mr Dinkic.
The only bugbears in the otherwise impressive performance are high unemployment and inflation. Unemployment rose 4.2% over the first four months of this year to exceed 28%. Inflation reached 5.7% over the first five months of this year, according to the National Bank of Serbia, fuelled partly by bank borrowing and rising credit activity.
Clearly on an upswing, investment has flooded in. “Five years ago, Serbia received half a billion dollars in FDI. Last year, it was $2.5bn and we are confident that this year will see an even higher figure,” says Mr Dinkic.
“We are in the fifth year of transformation and beginning to expect more and more from the process. The Czech Republic has a similar sized population but attracts $10bn a year in FDI. It started [its transformation] before us but there is no reason to expect things will go any differently for us. If anything, we should be able to grow even faster as we can learn from the mistakes of others.”
A sign of the confidence is the upcoming tender for Serbia’s leading mobile phone operator Mobtel, which is already 30% owned by Austrian investors. Despite the tender being announced after the EU said it was putting Serbia’s accession bid on ice, nine companies from across Europe have registered their intention to bid for the company. Mr Dinkic says the minimum price for the assets and licence will be set at €700m, with the licence representing 40% of that, although he is hoping the final price will be more than €1bn.
Reform package
Reform in other sectors is ongoing. The national oil company is being prepared for sale and more special economic zones are being added to encourage job-creating investment. Mr Dinkic introduced five financial reform bills to parliament in May that will improve local government operations, ease foreign currency transactions, introduce compulsory social insurance and slash labour taxes to boost employment.
“Last year, we began a reform of the pension system, which is one of the toughest items on the agenda. Now we are upgrading the energy sector because we see preparing for long-term recovery as a top priority,” he says.
“The transformation of the banking sector has been especially fast. The state has liquidated 30 state-owned banks in the last year and allowed new private sector banks to emerge. Even the state-owned banks are fetching high prices [when privatising], with some commanding multiples of six times book value.”
