Economic Reform Programme for the period 2020-2022 Belgrade, January 2020 ECONOMIC REFORM PROGRAMME FOR THE PERIOD 2020-2022 3 CONTENTS 1. OVERALL PUBLIC POLICY FRAMEWORK AND MAIN OBJECTIVES ..................5 2. IMPLEMENTATION OF THE POLICY GUIDANCE ......................................................7 3. MACROECONOMIC FRAMEWORK ............................................................................14 3.1. FORECASTS FOR THE INTERNATIONAL ECONOMIC ENVIRONMENT ................................................................................................14 3.2. RECENT MACRO ECONOMIC DEVELOPMENTS .......................................17 3.3. MEDIUM-TERM MACROECONOMIC SCENARIO .......................................26 3.4. ALTERNATIVE SCENARIOS AND RISKS ......................................................34 4. FISCAL FRAMEWORK .................................................................................................37 4.1. PUBLIC POLICY STRATEGY AND MEDIUM-TERM OBJECTIVES ...........37 4.2. BUDGET EXECUTION IN 2019 .......................................................................38 4.3. BUDGET PLANS FOR 2020 AND MEDIUM-TERM BUDGET FRAMEWORK ...................................................................................48 4.4. CYCLICALLY-ADJUSTED FISCAL BALANCE .............................................57 4.5. DEBT LEVEL AND DEVELOPMENTS ............................................................60 4.6. SENSITIVITY ANALYSIS AND A COMPARISON WITH THE PREVIOUS PROGRAMME ................................62 4.7. FISCAL MANAGEMENT AND BUDGETARY FRAMEWORK .....................76 5. STRUCTURAL REFORMS IN THE PERIOD FROM 2020 TO 2022 ...........................79 5.1. IDENTIFICATION OF KEY OBSTACLES TO COMPETITIVENESS AND INCLUSIVE GROWTH .......................................79 5.2. STRUCTURAL REFORMS SUMMARY ..........................................................82 5.3. ANALYSIS BY AREA AND STRUCTURAL REFORMS ................................93 5.3.1. Area ENERGY AND TRANSPORT MARKET REFORM ......................................93 5.3.2. Area AGRICULTURE, INDUSTRY AND SERVICES ..........................................109 5.3.3. Area BUSINESS ENVIRONMENT AND REDUCTION OF THE INFORMAL ECONOMY ...............................................................................121 5.3.4. Area RESEARCH, DEVELOPMENT AND INNOVATION AND THE DIGITAL ECONOMY ..........................................................................134 5.3.5. Area TRADE-RELATED REFORMS.....................................................................151 5.3.6. Area EDUCATION AND SKILLS ..........................................................................157 5.3.7. Area EMPLOYMENT AND LABOUR MARKET ................................................166 5.3.8. Area SOCIAL PROTECTION AND INCLUSION ................................................173 6. BUDGETARY IMPLICATIONS OF STRUCTURAL REFORMS ...............................178 7. INSTITUTIONAL MATTERS AND STAKEHOLDER PARTICIPATION ..................179 4 ECONOMIC REFORM PROGRAMME FOR THE PERIOD 2020-2022 8. ANNEXES ......................................................................................................................181 Table 1: Macroeconomic framework ...................................................................................181 Table 2: General government budgetary prospects ..............................................................190 Table 3: General government expenditure by function (bn NCU) ........................................195 Table 4: General government debt developments ................................................................197 Table 5: Cyclical developments ............................................................................................198 Table 6: Divergence from previous programme ...................................................................199 Table 7: Long-term sustainability of public finances (% GDP) ............................................200 Table 8: Basic assumptions on external economic environment [1] ....................................202 Table 9: Selected employment and social indicators .............................................................203 Table 10a: Costing of structural reform measure for the period 2019-2021 in EUR ............205 Table 11: Implementation report on structural reforms for ERP 2019-2021.........................211 Annex 1: Contribution of Civil Society Representatives to ERP 2020-2022 .......................244 Annex 2 – The list of institutions participating in preparation of the ERP ...........................251 ECONOMIC REFORM PROGRAMME FOR THE PERIOD 2020-2022 5 1. OVERALL PUBLIC POLICY FRAMEWORK AND MAIN OBJECTIVES Owing to a complex set of adequately measured, timely implemented and harmonised mac- roeconomic measures, the Serbian economy exited the vicious circle in which it found itself in early 2010s. Twin deficits, the threat posed by the high public debt, the unemployment rate among the highest in Europe and double-digit inflation were the challenges which were rel- atively quickly resolved with success. After attaining fiscal stability and dynamic econom- ic growth rates, the Government of the Republic of Serbia focused on the intensification of initiated systemic reforms, aimed at achieving structural balance of the economy. With these activities, functional shortcomings and constraints will be neutralised, while available resourc- es and capacities will be employed more efficiently, which will accelerate convergence to the advanced countries and ultimately ensure higher standard of living of the population. The medium–term macroeconomic framework is designed in line with the efforts to preserve the results achieved so far, with concrete investment incentives. Continued foreign direct in- vestment (hereinafter: FDI) inflow growth and significantly higher efficiency of public infra- structural project implementation will be accompanied in the following period by stronger do- mestic investment, primarily by small and medium-sized enterprises. In the light of the fourth industrial revolution, apart from concrete reform processes, digitalisa- tion and innovative activity have been recognised as important tools for aligning the structure of the economy with the needs of society and modern civilisation developments. Clear measures have thus been defined and taken with the aim of accelerating the process of digitalisation and promotion of innovative initiatives. Social inequalities have been identified as an important constraint on economic growth, as well as overall social progress. Education reform, regional dispersion of FDIs, employment incentives for youth as well as vulnerable groups, support to social entrepreneurship, gender budgeting and new increase in the minimum price of labour are only some of the measures that should ensure inclusive growth equitably distributed from the social point of view and resulting in poverty reduction through the established environment characterised by social cohesion. In February 2018, the Republic of Serbia successfully completed the fiscal consolidation pro- gramme which was the focus of a three-year precautionary arrangement with the IMF. With the successful implementation of the programme, the set goals were achieved ahead of sched- ule. The Government's new economic programme and reform efforts will be supported by the IMF's Policy Coordination Instrument, which includes the advisory role of this institution in a 30-month period, without financial support, since sustained fiscal improvements have been achieved. It is precisely the attained sustainability of fiscal improvements that has enabled the abolish- ment of the Law on Temporary Reduction of Pensions, increase in public sector wages, and, above all, significant increase in funds earmarked for investment. The reduction of burden on the economy has been initiated with concrete measures: raising the personal tax allowance, reducing the contribution rate and changing the method of tax depreci- ation calculation. Additionally, the reform of the Customs Administration and the Tax Adminis- tration will support the process of reducing the burden on economic operators, as well as ensure 6 ECONOMIC REFORM PROGRAMME FOR THE PERIOD 2020-2022 greater efficiency in combating the informal economy. The Government also remains committed to full membership in the European Union (here- inafter: EU) as its strategic goal. Chapters 13 – Fisheries and 33 – Financial and budgetary provisions were opened in mid-2018, with two chapters opened in December: Chapter 17 – Economic and monetary policy and Chapter 18 – Statistics, while two chapters were opened in 2019: 9 – Financial services and 4 – Free movement of capital. Regular political and economic dialogue on open issues from the Stabilisation and Association Agreement (hereinafter: SAA) between the European Communities and their member states, on the one hand, and the Republic of Serbia, on the other, as well as the adoption of general and sectoral national development strategies are aimed at Serbia’s fulfilment of economic requirements for membership laid down in the acquis communautaire in the shortest time possible. ECONOMIC REFORM PROGRAMME FOR THE PERIOD 2020-2022 7 2. IMPLEMENTATION OF THE POLICY GUIDANCE Fulfillment of Recommendation (Policy guidance – PG) for individual policies as part of the Joint Conclusions on the Economic Reform Program (ERP) 2019-2021, adopted at the ECOF- IN Council meeting held on