Serbia Public Expenditure and Public Utilities DPL 1

The objective of this two-operation programmatic DPL is to support the government of Serbia's fiscal consolidation program through structural reforms aimed at public utilities and the public sector more generally.Serbia's growing public debt poses a threat to macroeconomic stability. The debt has grown rapidly principally due to high fiscal deficits (which have grown from 2.6 percent of GDP at the start of the economic crisis to around 6.7 percent of GDP in 2014) but also due to high state support to public utilities and SOEs. There is an urgent need to put public finances on a sustainable footing via, among others, tackling the structural issues - in particular reducing the ineffective direct state subsidies and guarantees - that have often been called -- for public utilities operating in energy (EPS), roads and railways. A sustainable reduction of the subsidies and state guarantees to these SOEs in turn requires reforms to make them financially viable and operationally effective.The government recognizes the need to tackle these structural issues. Fiscal consolidation and improved expenditure management are at the core of both the Fiscal Strategy and the National Economic Reform Program, which include the stabilization of the debt-to-GDP ratio by the end of 2017, the completion of privatization and a stop to the issuance of guarantees for liquidity purposes to the remaining SOEs. The WBG will support the government with the achievement of sustainable fiscal consolidation and expenditure management, through the proposed policy-based lending, which will be firmly anchored in the ongoing Public Finance Review (PFR) for Serbia. The PFR is to be completed by June 2015. The PFR provides a comprehensive and thorough diagnostic of the public finance issues in Serbia, including structural reform opportunities that can anchor medium to long-term debt sustainability in Serbia.