The World Bank Board of Directors last week approved two Development Policy Loans (DPLs) of $100 million for Serbia to improve the efficiency of the country’s public sector and to further strengthen the environment for private sector led growth.

The DPLs are a concrete example of the Serbia Country Partnership Progress Report, which was also discussed today at the Board and which provides for the three year allocation of World Bank funds for Serbia to be increased from $600 million to $900 million to help the country respond to the economic crisis.

The Country Partnership Strategy Progress Report (CPS-PR) assesses progress in implementing the Country Partnership Strategy (CPS) originally discussed by the Board on December 13, 2007.

Given domestic and external developments resulting from the crisis, the Government asked the Bank to reprogram the investment lending to assist a major road corridor infrastructure project, and to continue with budgetary support through a series of Development Policy Loans (DPLs) totaling US$450 million.

These operations will concentrate on reforms that are crucial for the sustainability and equity of economic development in Serbia.

“The lending program was designed to permit a flexible response to events and emerging country needs,” said Simon Gray, the World Bank’s Country Manager in Serbia. “This flexibility has helped to ensure that CPS support is timely, relevant, and demand-driven, particularly given Serbia’s commitment to respond to the immediate financial crisis, while reinforcing its path toward EU integration and its longer term competitiveness within the European market. Looking forward, the Government should seize this opportunity to rationalize public expenditures and strengthen the business environment.”

Since Serbia had a relatively large public sector going into the crisis, expenditure reprioritization and a reduction of current spending will be critical over the coming years, especially amid Government plans to increase expenses on needed infrastructure.

The Serbian Ministry of Finance requested the World Bank’s assistance on how to develop a more efficient public sector, one which will provide better quality services. In response, the Bank has prepared a Public Expenditure Review (PER) “Serbia: Doing More with Less”.

It analyzes important areas of public expenses, such as pensions, health, education, social assistance, infrastructure, agriculture, and industry. The recommendations from the PER are picked up by the Programmatic Public Expenditure Development Policy Loan (PE DPL).

PE DPL aims to support reforms that will help improve the productivity of public spending, structured around three key policy areas: (i) public expenditure management reforms to address poorly managed fiscal spending and to help improve fiduciary conditions; (ii) public expenditure allocation reforms to improve the quality of spending in the largest spending sectors; and (iii) social assistance, especially for cushioning the impact of the economic crisis and enhancing the coverage of the social assistance programs going forward.

“With layoffs in the public sector and rising poverty due to the crisis, private sector development becomes even more important to restarting economic activity and employment generation,” explained Jane Armitage, World Bank Country Director and Regional Coordinator for South East Europe. “Serbia has already made substantial progress in crafting a more favorable business environment. The privatization program and measures to strengthen fiscal discipline implemented in recent years (often supported by World Bank operations) have increased productivity and job creation. The Government’s commitment to deepen these reforms will help Serbia restore the hard-won momentum toward sustainable and equitably shared economic growth.”

Building on the findings of the analytical work, such as the Investment Climate Assessment and the Private Sector Note, and the first Private Sector Development Policy Loan (PF DPL1), the World Bank team developed the second such operation – PF DPL2.

It played one of the vital roles in creating a one-stop-shop for business registration. While the first operation helped reduce the time needed to start a business from 51 to 23 days, additional reforms cut the days to 13.

A complete electronic database on business entities and entrepreneurs is now in place. In addition to business registration, the Serbian Business Registers Agency also maintains the records of leasing deals, pledges, bankruptcies, and liquidation. A set of interventions will, among other things, enhance competition; advance effectiveness of contract enforcement; simplify the process of obtaining construction permits; and strengthen corporate governance.

The Serbian banking system faced some hiccups at the beginning of the financial crisis, but managed to bounce back in 2009. Although the overall system proved resilient, some areas require further strengthening, such as crisis preparedness capacity, regulations dealing with risk management, deposit insurance, and capital markets. PF DPL2 will help authorities strengthen these functions, making the Serbian financial system ever stronger.