Structural Adjustment Credit 2 (SAC 2) (Serbia)

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The Second Structural Adjustment Credit Project will support the Republic of Serbia in deepening the reform process necessary to place the economy on a sustainable growth path, moving closer to European structures. In line with the priorities set out in the Serbia Poverty Reduction Strategy Paper (PRSP) - directed at improving the business climate; enhancing the performance in the energy sector; strengthening social protection; and, improving public administration, the successful implementation of these policy measures should a) enhance fiscal discipline; b) encourage a strong private sector response, and employment creation; c) set the stage for deeper reforms aimed at improving public administration; d) address the problem of low-coverage, and under-funding of Serbia's well-targeted social assistance programs; and, e) mitigate the adverse impact of the energy sector reform measures on the poor. There are, however, a number of issues to be sorted out among ruling coalition partners, and the party of the newly elected President, which has not joined the coalition. The challenges of ruling as a minority coalition could undermine the Government's cohesiveness, and effectiveness, without which commitment to reforms would diminish, and the capacity for policy implementation would weaken. Therefore, risks may obscure the envisaged fiscal adjustment, and macroeconomic performance could be adversely affected by slippages in program implementation. Specifically, failure to attain durable cuts in non-interest current expenditures, could undermine the credibility of the fiscal adjustment, thereby jeopardizing the implementation of the overall reform program. In addition, Serbia's exports are concentrated in unskilled, and natural resource intensive products, increasing the economy's exposure to terms of trade shocks. A severe deterioration of terms of trade, or lower-than-expected foreign investment flows, coupled with higher-than-expected oil prices, might adversely affect economic activity and macroeconomic stability, thereby undermining the implementation pace of the reform agenda.