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Dušan V. Popović: National economic governance in the context of Serbia’s EU accession process

1 November 2023

At the beginning of the webinar, the speaker explained the current geopolitical position of the Republic of Serbia. The Republic of Serbia, like other countries of Southeast Europe, aims to join the European Union. In 1993, the European Council in Copenhagen defined the accession criteria (also known as the Copenhagen criteria), which represent the essential conditions all candidate countries must satisfy to become an EU member state. Further to reaching adequate political stability and institutional capacity, each EU candidate country has to establish a functioning market economy and the capacity to cope with competition and market forces. Following the pre-accession experience of countries of Central and Eastern Europe, that joined the European Union in 2004 and 2007, the EU defined the Stabilization and Association Process – an enlargement policy based on the Stabilization and Association Agreements (hereinafter, the SAAs) each of SEE countries has concluded with the Union. The Stabilization and Association Agreements are modelled upon the Europe Agreements, which the European Union signed with the countries of Central and Eastern Europe in the 1990s. The SAAs are international agreements concluded with the objective of preparing the candidate or potential candidate country for the EU membership. Each SAA clearly defines the aims of the association.

The webinar continued with the presentation of the public finances in the Republic of Serbia. The public finance system in the Republic of Serbia is undergoing significant changes in recent years, in order to achieve further alignment with rules applicable in the European Union. Although the Serbian system is not fully aligned with EU law, the reforms implemented so far were estimated as sufficient for opening of EU-Serbia negotiation chapters pertaining to the public finance area. The negotiating chapter 5 on public procurement was opened in December 2016, the negotiating chapter 17 dedicated to economic and monetary policy was opened in December 2018, the negotiating chapter 29 on customs union was opened in June 2017, the negotiating chapter 32 on financial control was opened in December 2015 and the negotiating chapter 33 on financial and budgetary provisions was opened in June 2018. Following the reform of the EU’s enlargement methodology, the negotiations related to the public finance system are now part of cluster 1 entitled „Fundamentals”. Under the general fiscal rules, prescribed by the Budget System Act, the government sector debt, including the liabilities based on restitution, should not exceed 60% of the GDP, while the target medium-term fiscal deficit should represent 0.5% of the GDP. Under the principles of responsible fiscal management, the employee expenses in the government sector must be fixed on a sustainable level, so that efforts are made to keep the share of employee expenses in the government sector in GDP under 10%.

The following segment of the webinar was dedicated to state aid issues. The rules imposing state aid control in the Republic of Serbia have been introduced in line with the requirements of the SAA, CEFTA and the Energy Community Treaty. These rules are enforced by the Commission for State Aid Control, which was established under the State Aid Control Act in 2009. The Commission was first established under the auspices of the Ministry of Finance. In 2019, the institutional design of the Commission was drastically changed and improved, by its complete detachment from the Government. The Commission is now positioned as an independent authority whose members are appointed by the National Assembly. Regarding the legislative framework, the State Aid Control Act is broadly in line with the EU acquis and the relevant provisions of the SAA concluded between the EU and Serbia. The fact that the process of European integration of Serbia is ongoing leaves some limited space for an autonomous state aid policy in areas which are not yet fully aligned with EU law. In particular, the fiscal aid schemes have been identified as not being fully aligned with the EU acquis for a considerable period.

The webinar continued with the analysis of tax law issues. The Serbian tax law does not recognize explicitly the abuse of law principle. Instead, one may rely on the substance over form doctrine, prescribed under the Act on Tax Procedure and Tax Administration. The Act lays down the principle of facticity as one of the general principles of tax procedure. Both administrative and judicial case law related to the application of the principle of facticity are rather limited. The reference to the principle of facticity can frequently be found in the opinions issued by the Ministry of Finance. However, it remains unclear what the relationship between the contents of an opinion and the reference made to the facticity principle is. The Serbian legal doctrine considers this reference to be ‘abstract’, with the only purpose of reminding the Tax Authority that it is solely responsible to solve an individual tax affair, and that it cannot transfer this responsibility to the Department for Fiscal System within the Ministry of Finance. The speaker also analyzed the issue of tax competition, which is one of the most important indicators of overall competitiveness. However, tax competition may lead to the ‘race to the bottom’ between the states. Many investors bargain with different governments to get the best incentive package, and governments generally fear that the investment would be lost if the demanded tax incentive is not provided. Data on the structure of tax revenues show that in Serbia tax burden is almost equally split between (personal and corporate) income taxes and consumption taxes, while in the Central and Eastern European countries and especially in Western European countries, income taxes account for much larger share of the total tax revenues.

The final part of the webinar was dedicated to monetary policy. The speaker particularly analyzed the national ‘dinarisation’ policy. Although dinar is the only official currency in Serbia, both citizens and businesses tend to use euro as a reference currency. This is one of the consequences of a turbulent period the country went through at the end of the twentieth century, characterized by high level of inflation. This led the central bank and the Government of the Republic of Serbia to sign in 2012 the Memorandum on the Strategy of Dinarisation of the Serbian Financial System. Their commitments were re-affirmed in 2018. The Memorandum defined the steps that the two institutions need to undertake in order to boost the use of the dinar in Serbia and it rests on three inter-connected pillars: (1) strengthening of the macroeconomic environment characterised by low and stable inflation, stable financial system and sustainable economic growth; (2) promotion of dinar instruments and markets, with special emphasis on the development of the dinar securities market; and (3) development and improvement of FX hedging instruments in the non-banking sector. The two memorandum signatories have committed to monitoring and analysing the degree of dinarisation and to regularly informing the public about the measures and activities which are being taken, as well as about progress achieved in the process of dinarisation. For that purpose, the central bank publishes the quarterly Report on Dinarisation of the Serbian Financial System. In the report corresponding to the first quarter of 2023, the central bank indicated that the share of dinar in total corporate and household deposits increased in Q1 2023 to a record high. Observing only new deposits in Q1 2023, this share dropped. At end-Q1 2023, the degree of dinarisation of Serbia’s public debt went down compared to the end of the previous quarter (to 22.9%), a trend initiated in Q3 2021.

Following the analysis of the relevant legislative sources and relevant case-law, the webinar continued with a Q&A session. The speaker answered several questions asked by the online attendees in the chat-box, which were related to energy and the COVID-19 crisis. Indeed, the two main challenges the national authorities faced in recent years were the COVID-19 crisis and the energy crisis. Both the NBS and the Government undertook measures in response to the COVID-19 pandemic. The NBS measures consisted of monetary policy measures and the moratorium on debt payments. Further to the measures of the central bank, the Government of Serbia adopted the Program of economic measures for reducing the negative effects caused by the COVID-19 pandemic and supporting the Serbian economy. The program included tax policy measures, direct assistance to the private sector, measures to preserve liquidity for the private sector and other measures. The COVID-19 crisis was complemented by the energy crisis, which is further highlighted by the recent geopolitical developments. The energy sector in Serbia is dominated by companies that are partly or fully owned by the state, which limits their capacity to invest, given that their pricing policy is heavily influenced by the Government’s social welfare objectives. The energy prices in Serbia are low, which is especially true for the price of the electricity. In Serbia, there is already budget assistance intended for energy-jeopardized customers to pay electricity and gas bills. In May 2023, the European Bank for Reconstruction and Development approved a financing package of 300 million EUR to help support Serbia’s electricity sector. The energy situation in Serbia is particularly complex with respect to the supply of natural gas. Serbia imports more than 90% of the gas it consumes from the Russian Federation. The speaker emphasized that the Government, with the support of the EU, Norway and EBRD, undertook steps to diversify the supply of natural gas, which would contribute to the energy stability and energy security of the country.

Kérjük, ossza meg cikkünket a kedvenc csatornáján, vagy küldje el ismerőseinek.

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