Republic of Serbia: Selected Issues

High capital inflows and rising vulnerabilities underscore the importance of a comprehensive approach to ensuring stability. Standard balance sheet indicators mask a substantial build-up of exposures to exchange rate, maturity, and rollover risks. Household balance sheet risks originate from currency mismatches owing to credit euroization. The fiscal balance has a strong and significant impact on the current account in Serbia. The model is broadly able to reproduce recent economic and policy developments in Serbia. The analysis indicates that privatization can result in sizable fiscal savings.

Abstract

High capital inflows and rising vulnerabilities underscore the importance of a comprehensive approach to ensuring stability. Standard balance sheet indicators mask a substantial build-up of exposures to exchange rate, maturity, and rollover risks. Household balance sheet risks originate from currency mismatches owing to credit euroization. The fiscal balance has a strong and significant impact on the current account in Serbia. The model is broadly able to reproduce recent economic and policy developments in Serbia. The analysis indicates that privatization can result in sizable fiscal savings.

VII. The Fiscal Impact of Privatization50

Objective: To assess the potential budgetary impact of privatization based on a sample of 30 socially owned enterprises privatized in Serbia in 2005.

Main results: The fiscal contribution of privatization in terms of increased collection of taxes and social security contributions, reduced government subsidies and arrears to public utilities, and interest savings can be sizeable.

Policy implications: Privatization, in addition to raising the efficiency of companies and the economy, is likely to have a significant positive impact on fiscal performance.

126. Privatization of state- and socially owned companies is an important element of transition reform. Its main objectives are to enhance economic efficiency and accelerate income growth, and to improve the fiscal performance of the public sector. Using Serbian data, this chapter looks at the latter objective. It concludes that privatization strengthens the public sector budget by:

  • Strengthening the tax base, which comes from increased profitability and liquidity of the privatized companies, which are then more able to pay taxes;

  • Reducing fiscal subsidies and other forms of public financial support;

  • Using privatization proceeds to reduce budget financing requirements through debt; and

  • Reducing quasi-fiscal activities of state-owned utilities.

127. This chapter is structured as follows. Section A presents the analysis, Section B discusses the results, and Section C concludes and points to some caveats and directions for further work.

A. Analysis

128. We quantify the impact of privatization on fiscal performance by observing financial flows in 2003–07 between the public sector and a sample of 30 companies (out of about 200) privatized in 20 05.51, 52 These flows (the “fiscal contribution”) consist of tax revenues, government subsidies, interest costs, and other quasi-fiscal deficits (QFD). Written in annual differences, we have:

Δ Fiscal contribution = Δ Tax revenue – Δ Subsidies – Δ Budget financing costs – Δ Quasi-fiscal deficits

B. Findings

129. The total fiscal contribution of the sample improved significantly during the period observed. Table 1 summarizes the results.

Table 1.

Fiscal Contribution of Sample Companies, 2003–07 H1

(RSD million)

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Sources: Ministry of Finance, Tax Administration, Ministry of Economy and Regional Development, Privatization Agency, Share fund, Statistical Office, and staff calculations.

Discount rates used: 15.50%, 14.44%, 6.01%. Those are multiplied by the annual stock of cash accumulated from privatization of our sample during the period of observation.

First 9 months in 2007.

Corrected in 2005 for debt-write offs of 2.7 million RSD.

130. Corporate income taxes collected from our sample rose strongly after privatization. CIT collections were boosted over the observed period, as the sample firms increased output and profitability with rationalization and measures to improve operating efficiency.55 The improvement of the sample CIT performance is also significant if measured as a share of total CIT collections in Serbia (Table 2). This measure is insensitive to structural breaks, such as changes in the CIT rate,56 as presumably these structural changes impact all companies equally.

Table 2.

Corporate Income Taxes of Sample Companies

(RSD million)

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Source: Ministry of Finance, Tax Administration.

131. Privatization boosted payments of wage taxes and social security contributions (SSC). Total collections of the sample companies doubled in the observed period, although employment numbers fell by 23 percent. As a result, each employee of our sample contributed 3 times more to social security in 2006 than the average Serbian worker (Table 3).

Table 3.

Impact of Privatization on Social Security Contributions (SSC)

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Source: Tax Administration, Ministry of Finance, Statistical Office Republic of Serbia, Solvency Centre.

Excluding the agricultural producers pension fund.

Annual average.

Excluding agriculture.

132. Government subsidies to our sample ceased after privatization.57 This is especially notable given that before privatization, subsidies distributed to the sample were higher than the CIT collected from it (Table 1).

133. The sample companies were sold for a total of €89.1 million. However, because the privatization law allows for installment payments, actual cash collections were lower.58 We calculated that these receipts reduced domestic financing costs significantly (by €5.3 million in 2005, by €10.0 million in 2006 and by €4.2 million in the first half of 2007).

134. The contribution of our sample to the quasi-fiscal deficit fell during the period except in 2005. Privatization seems to have improved payment discipline significantly, except during the year of privatization (perhaps due incentives to boost expenditures and debt before the expected privatization and its associated debt write-offs). This is visible in the drop in the stock of arrears of the companies in the sample towards the state-owned electricity provider EPS.

Table 4.

Stock of Arrears towards EPS (Sample Companies)

(RSD million)

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Source: EPS.

C. Concluding remarks

135. The analysis above, based on a small sample of privatized industries in various classes, indicates that privatization can result in sizeable fiscal savings. A linear extrapolation of the sample results for these 30 companies to the total population of enterprises privatized in 2005 of about 200 companies would result in a potential fiscal contribution of about ¾ of one percent of GDP in 2006. A number of important caveats, however, apply:

  • Such a calculation would assume that the sample is representative of the total pool of privatized companies, which may not be the case. This argument applies in particular to the increased efficiency as a result of the privatization. Expanding the sample and observation period would allow a better assessment of the validity of the findings.

  • The analysis only captures the direct impact of privatization on the tax base. However, here are indications that there are also secondary effects, i.e., that privatization triggered contracting out to existing or new private companies, thereby potentially further boosting tax payments.

  • The reduction in subsidies may be underestimated. The data only captures the distribution of subsidies through the Development Fund. There is a lack of information as to whether some of the companies from the sample received subsidies and financial support from other government levels and institutions. If so, it can assumed that they would shrink or cease as well.

  • A comprehensive quantification of quasi-fiscal activities was not possible due to a lack of readily available data. The analysis excludes arrears to locally owned companies, mainly utilities, and to the state-owned oil company NIS.

References

  • Barnett, Steven A., 2000, “Evidence on the Fiscal and Macroeconomic Impact of Privatization,” IMF Working Paper No. 00/130 (Washington: IMF).

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  • Goldberg, Itzhak, Radulovic, Branko, and Schaffer, Mark, 2005, “Productivity, Ownership and the Investment Climate: International Lessons for Priorities in Serbia,” World Bank Policy Research Working Paper No. 3681 (Washington: The World Bank).

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50

Prepared by Ivan Bjelicic and Dusan Demek (IMF Office in Belgrade) under the supervision of Harald Hirschhofer (Resident Representative). This section provides background information and analysis in support of section E of the Serbia Staff Report.

51

The 30 companies were randomly selected, with 10 from each group of large, medium, and small enterprises. Classification criteria follow the Law on Accounting and Auditing (average number of employees, annual total income, and average property value).

52

The tax administration does not have detailed data on taxes collected before 2003.

53

Barnett (2000) finds that this relationship is about one-for-one in transition economies (the study does not include Serbia).

54

For our calculations, we use the average discount rate from the mid-year treasury bill auction in June; the rates are multiplied by the annual stock of cash accumulated from privatization of our sample over the period.

55

There is a large increase in the output per employee one year after privatization as operating revenue rose by 44 percent (Table 2) and employment fell by 11 percent. World Bank research (2005) shows that the productivity of privatized firms in Serbia is 60 percent higher than that of the benchmark socially owned firms.

56

The CIT rate was lowered in 2004 from 14 to 10 percent.

57

Only 5 companies from our sample received subsidies from the Development Fund.

58

Cash collections amounted to €34.2 million in 2005, €34.9 million in 2006 and around €0.2 million in the first half of 2007.