Serbia : Decentralization and Local Service Delivery

Abstract

Serbia's ability to achieve macroeconomic stabilization and restructure its public finances has been, and will continue to be, impacted by the policy actions of its sub-national governments. For the purposes of this paper, these include the province of Vojvodina and municipal governments. In many countries, the fiscal performance of sub-national governments has created problems for macroeconomic management through the running of deficits, accumulation of arrears, or the incurring of debts which must eventually be covered by the central government. This chapter examines the experience to date and the institutional mechanisms for macroeconomic management at the sub-national level in Serbia. The next section of this chapter reviews the fiscal performance of Serbian sub-national governments, especially in relation to the Republican government's ongoing efforts to restructure the public sector. A key finding is that the composition of public expenditures evolved quite differently at the Republican and sub-national levels, especially during the successful fiscal consolidation of 2003-2005, when control of spending on wages and salaries and on enterprise subsidies at the central level was not matched at the sub-national level. The increase in subsidies to municipal enterprises, combined with the growing arrears of such firms, points to a need to focus on their restructuring and governance. The third section reviews the institutional framework for macroeconomic management in the sub-national governments. Since 2002, a number of important laws have strengthened the framework for regulating the finances and borrowing of sub-national governments. The capacity of the Ministry of Finance to monitor and report on fiscal outcomes has also improved significantly. As a result, over the last several years, sub-national governments have broadly adhered to their spending and debt limits. However, further delays in the restructuring of municipal enterprises, coupled with the likely emergence or growth of new financing sources for sub-national governments (including borrowing and the proceeds from privatization and other asset sales), could create additional spending pressure and lead to larger deficits at the sub-national level. The fourth and final section summarizes the main conclusions of this chapter.