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Public Disclosure Authorized Report No Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 132007-YF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP FRAMEWORK Public Disclosure Authorized FOR REPUBLIC OF SERBIA FOR THE PERIOD FY16-FY20 February 13, 2019 Western Balkans Country Unit Europe and Central Asia Region International Finance Corporation Public Disclosure Authorized Europe and Central Asia Department The Multilateral Investment Guarantee Agency Economics and Sustainability Group Public Disclosure Authorized This document will be made publicly available after the Board consideration in accordance with the Bank’s policy on Access to Information. 0 The date of the last Country Partnership Framework was May 22, 2015 (Report No. 98687-YF) FISCAL YEAR January 1-December 31 CURRENCY EQUIVALENTS Exchange Rate Effective January 31, 2019 Currency Unit – Serbian Dinar (RSD) 100.00 = US$ 0.96 WEIGHTS AND MEASURES Metric system ABBREVIATIONS AND ACRONYMS ASA Analytical Advisory Services IFI International Financial Institution CAP Common Agriculture Policy (EU) IMF International Monetary Fund CCB Climate co-benefits IPF Investment Project Financing CMU Country Management Unit MIGA Multilateral Investment Guarantee Agency CPF Country Partnership Framework MoF Ministry of Finance DIA Deposit Insurance Agency NBS National Bank of Serbia DFI Development Finance Institution NES National Employment Service DLIs Disbursement Linked Indicators NPLs Nonperforming Loans DPL Development Policy Lending PEFA Public Expenditures and Financial Accountability ECA Europe and Central Asia PforR Program for Results EC European Commission PLR Performance and Learning Review EPS Elektroprivreda Srbije PPPs Public-Private Partnership EIB European Investment Bank RAS Reimbursable Advisory Services EU European Union SCD Systematic Country Diagnostic EBRD European Bank for Reconstruction and SILC Surveys of Income and Living Conditions Development SOE State-Owned Enterprise FDI Foreign Direct Investment SORT Standardized Operations Risk-rating Tool GDP Gross Domestic Product STEP Skills and Training Enhancement Project GTFP Global Trade Finance Program TFs Trust Funds IBRD International Bank for Reconstruction and UN United Nations Development WBG World Bank Group IFC International Finance Corporation IBRD IFC MIGA Vice President: Cyril E. Mueller Georgina E. Baker Keiko Honda, EVP Director: Linda Van Gelder Wiebke Schloemer Merli M. Baroudi Task Team Leader: Sanela Ljuca Thomas Lubeck Gianfilippo Carboni Levent Karadayi Olga Vybornaia i PERFORMANCE AND LEARNING REVIEW FY16–20 Country Partnership Framework REPUBLIC OF SERBIA TABLE OF CONTENTS I. INTRODUCTION II. MAIN CHANGES IN COUNTRY CONTEXT III. SUMMARY OF PROGRAM IMPLEMENTATION IV. EMERGING LESSONS V. ADJUSTMENTS TO THE COUNTRY PARTNERSHIP FRAMEWORK VI. RISKS TO CPF PROGRAM TABLES Table 1: Revised CPF Lending Program Table 2: Systematic Operations Risk-Rating Tool ANNEXES Annex 1: Updated Results Matrix Annex 2: Changes to the Original CPF Result Matrix Annex 3: Detailed Progress as per the Original CPF Results Matrix Annex 4: Detailed Progress per CPF Focus Areas Annex 5: Citizen Engagement ii I. INTRODUCTION 1. This Performance and Learning Review (PLR) summarizes the performance of, and presents the changes to, the Serbia Country Partnership Framework (CPF) for FY16-FY20. While a few adjustments to the program are proposed, the PLR confirms that the CPF’s overall objective to assist Serbia to create a competitive and inclusive economy, and promote the country’s integration into the EU, remains relevant and obtainable during the remaining CPF period. The Program remains well aligned with the Government’s medium and long-term strategies and consistent with the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity. The PLR is based on a Country Portfolio Performance Review and extensive internal consultation, as well as consultations with government officials. 2. Overall, implementation of the CPF to date has been satisfactory and the Serbia-World Bank Group partnership has strengthened. There has been progress in strengthening public financial management and improving fiscal sustainability, strengthening financial sector, enhancing business environment, improving efficiency of land and property markets, as well as in energy and transport sectors. Limited progress has been made against the CPF objectives concerning reducing barriers to labor participation and closing skills gaps, as well as privatization. 3. While the CPF Program’s focus areas remain highly relevant, the PLR takes the opportunity to introduce a few adjustments deemed necessary in response to the country’s changed economic context and to improve alignment with government priorities and delivery of results. To that end, the program of support for FY19-20 is clearly defined. Agriculture, which was a priority area identified under the Systematic Country Diagnostic (SCD) undertaken in FY16, is added as an area for analytical and lending support. The planned FY20 lending program includes an operation in the mining sector that emerged from a longstanding WBG engagement in the overall SOE reform agenda and sector dialogue in energy, mining and transport, as well as an operation on innovation and entrepreneurship that builds on a decade-long engagement in this sector. The lending program is expected to stay within the original CPF envelope, depending on country demand and IBRD’s financial capacity. IFC has invested a total of US$248.8million in long term funds and mobilized an additional US$239.2 million, reflecting good progress in private infrastructure projects but also lower demand in the financial sector. No extension to the CPF period is proposed. The Results Matrix of the CPF is adjusted, taking into account the evolving country context and bringing into focus outcomes that the WBG program can realistically achieve in the remaining period. II. MAIN CHANGES IN COUNTRY CONTEXT A. Key Political Developments 4. Serbia has experienced a relatively stable political situation during this CPF period, yet there have been impactful changes at high levels. The strong-majority Government created after the 2014 elections was expected to provide Serbia an opportunity to overcome growing political fragmentation and build momentum for reform. For the most part, these expectations were realized. However, there were several changes in the composition of the government, including changes in key counterparts to the WBG. The spring 2017 presidential election led to a major change in the Government, including of the prime minister (as the incumbent became Serbia’s new president), ministers, deputy ministers and senior public administration officers. 5. The negotiations towards Serbia’s accession to the European Union (EU), the country’s officially stated objective, remain largely on track. At the CPF approval time, the country had a self-declared objective, though noted to be very ambitious, of accessing the EU by 2020. To date, Serbia has opened 16 out of 35 negotiation chapters, of which two have been provisionally closed. As per recent discussions of the EU Enlargement Policy, and as reflected in the EU-Western Balkans Strategy1, however, the EU holds that Serbia 1 EU-Western Balkans Strategy – ‘A credible enlargement perspective for and enhanced EU engagement with the Western Balkans’, adopted by the EU Commission on February 6, 2018 1 could become a full member by 2025. The strategy explains the steps that need to be taken by Serbia to complete the accession process by 2025 and this perspective ultimately depends on strong political will, the delivery of real and sustained reforms, and definitive solutions to disputes with neighbors. The latter entails meeting interim benchmarks (towards a legally-binding agreement) related to the normalization of relations with Kosovo. B. Recent Economic Developments and Emerging Issues 6. Following years of recession and slow growth, the Serbian economy expanded by 1.8 percent on average over the previous three years (2015-2017), while a stronger growth of 4.2 percent is expected for 2018. Over the previous three years, growth started to recover on the back of higher investment (average annual growth of 8.3 percent annually) and strong growth of exports (up 10.7 percent annually in real terms). Consumption recovered as well, but at a slower pace (at 1 percent annually in real terms). Growth of the industry and services sectors contributed most to the overall growth of the economy over the previous three years, while agriculture had a negative contribution to growth in 2015 and 2017. For 2018, growth was broad- based with all three major sectors growing faster than last year. As a result, the new projected growth for 2018 is at 4.2 percent, although there is a possibility that this projection would be revised upwards. The medium-term growth projections depend crucially on deeper and timelier structural reforms and progress with EU accession. 7. With the return to growth, labor market performance improved as well. Labor force participation rate increased to 54 percent in 2017, the highest level since 2005. The average 2017 employment rate reached 46.7 percent, led by services, which created 33,000 new jobs (a quarter of them in wholesale and retail trade), spurred by higher consumption and fast-growing services exports. Manufacturing created another
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