## _cr09144 ## Source details **Canonical URL:** [_cr09144](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09144.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09144.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09144.pdf.json) --- ### Executive summary — assessment and strengths - Purpose: Assessment of fiscal transparency practices in Serbia against the requirements of the IMF Code of Good Practices on Fiscal Transparency (revised 2007). - Basis: Discussions with authorities and other organizations, authorities’ response to the IMF fiscal transparency questionnaire, and other sources of information. Reference to IMF Manual on Fiscal Transparency for terms and concepts. - Overall assessment: Serbia has made solid advances under all four pillars of the Fiscal Transparency Code. - Strengths identified: - Roles and responsibilities of government generally clearly defined. - Taxpayer rights governed by comprehensive laws. - Annual budget process generally clear with a precise budget calendar. - Budget documentation records developments and prospects for the whole of general government and includes medium-term fiscal policy objectives and debt sustainability analysis. - Expenditure and revenue regularly monitored and reported according to generally clear standards. - A Treasury Single Account (TSA) has been established. - Fiscal information, including debt data, is accessible to the public in a timely fashion. - Public servants are subject to a well-defined code of behavior. - A State Audit Institution (SAI) has been established (not yet fully operational). ### Major shortcomings and recommended actions (summary) - Clarify boundaries and coverage of general government: - Define and observe well-specified criteria to mark boundaries of the Republic and subnational budgets, ideally using GFSM 2001 principles. - Demarcate responsibilities by clarifying property ownership and financing of some public services. - Improve reporting of quasi-fiscal activities (QFAs) of SSOEs: - Require comprehensive reporting of QFAs and finances of state- and socially-owned enterprises (SSOEs) in budget documentation. - Strengthen realism and scrutiny of budget projections: - Subject budget projections to independent scrutiny. - Fully explain deviations of outturn data from initial budget projections in the Budget Memorandum (BM). - Include a comprehensive statement of fiscal risks and information on the distribution of privatization receipts in the BM. - Improve public communication: - Publish a clear and simple summary guide to the budget. - Publish occasional long-term reports on the economy and public finances. - Strengthen budget execution, control, and contingency frameworks: - Integrate the National Investment Plan (NIP) consistently into budget preparation and reporting. - Fully enforce commitment control to comprehensively monitor any expenditure arrears. - Rationalize contingency mechanisms in the budget. - Establish a legal and institutional framework for managing and accounting for public-private partnerships (PPPs). - Strengthen audit and internal controls: - Initiate a program for development of the SAI and clear backlog of unaudited financial statements. - Strengthen internal audit and control functions to safeguard integrity of government operations. ### General government coverage, classification, and accounting practices - Definition and coverage: - General government defined broadly consistent with GFS 1986 principles; some entities may be misclassified. - Consolidated accounts cover Republican government, subnational governments, and several extrabudgetary funds (EBFs): the mandatory social insurance organizations (MSIOs) and Republic of Serbia Roads. - Republican and subnational governments comprise direct budget beneficiaries (DBBs) and indirect budget beneficiaries (IBBs). - Government Gazette listed a total of 9,228 DBBs and IBBs in 2006. - No procedure for regularly reviewing the list of IBBs or ensuring all EBFs are reported within general government. - Budget System Law (BSL) and reporting: - Fiscal operations regulated by BSL of 2002; budgets adopted by respective legislatures. - Budget proposals/reporting include most own revenues and spending of DBBs, but less complete for own revenues and spending of IBBs (notably health institutions reporting to the Health Insurance Fund (HIF)). - Consolidated statements and projections for general government revenues, expenditures, and balances are not fully comprehensive. - TSA and accounting: - All budget beneficiaries of Republican and subnational governments, together with the MSIOs, are included under the TSA maintained by the Treasury. - Some IBBs maintain bank accounts with commercial banks for some own revenues. - All budget beneficiaries subject to government accounting and reporting standards. - Accounting basis and classification: - Accounts maintained on a cash basis; chart of accounts consistent with the budget classification. - GFSM 2001 compatible functional and economic classifications introduced for all of the general government, with exceptions related to NIP coding (551). ### Government relations with SSOEs, privatization, and QFAs - Legal and institutional framework: - Relationship with SSOEs defined by law (Law on Public Enterprises (2000)), but lines of responsibility blurred in practice among MoF, Ministry of Economy and Regional Development (MoERD), sectoral ministries, and other bodies. - No published list of SSOEs; Solvency Register of the National Bank of Serbia (NBS) publishes summary financial information from annual reports. - Profit transfers from public enterprises: - Law on Public Enterprises: distribution of profits determined by enterprises’ managing boards, subject to government approval. - Practice: transfer about 50 percent of profits to the budget in most years; some years no profits transferred after Cabinet discussion. - Privatization framework and proceeds: - Privatization legislated by Law on Privatization (2001), Law on the Privatization Agency (2001), Law on the Share Fund (2001). - Privatization Agency collects a commission of 5 percent on privatization receipts. - Typical allocations: 10 percent to the Employees Pension and Disability Fund, 5 percent to the Restitution Fund, 5 percent to the subnational government where the company is located; Autonomous Province of Vojvodina receives 50 percent if applicable. - Up to 30 percent of shares can be given free of charge to employees and other citizens. - Information on commissions and other privatization costs is not publicly available; some receipts treated as financing items rather than revenues. - Quasi-fiscal activities (QFAs): - Many nonfinancial SOEs undertake significant social expenditures on behalf of government (below cost pricing, employment and wage policies, financing culture/sports, pricing/collection dispensations). - Costs of some activities recorded as subsidies (amounting in 2007, for the Republican government, to an estimated 2 ½ percent of GDP, including restructuring costs). - Other QFAs are unsupported or supported non-transparently (pure QFAs), leading to distortions such as non-payment of taxes, social security contributions, and loans repaid from uncertain privatization receipts. - No documentation provides aggregate information on overall size of SSOE sector, its impact on general government, or fiscal risks it presents. - Consequences: unidentified fiscal risks; underreported scale of government; distorted financial positions of government and SOE sectors. ### Fiscal institutions, NBS role, and state financial enterprises - National Bank of Serbia (NBS): - Operationally independent under Law on the NBS (2003); Governor and Council appointed by National Assembly; Monetary Board determines monetary policy. - Minister of Finance participates in Monetary Board meetings without vote. - Government must maintain a TSA at the NBS; NBS acts as fiscal agent and banker for the government. - Temporary liquidity provision to the budget: loans may be granted within monetary policy framework and may not exceed 5 percent of the average current central government budget revenue over the preceding three years. - Total debt incurred on this basis may not exceed three times the minimum capital requirement of the NBS; loans need repayment by the end of the budget year. - Minimum fixed capital of the NBS: SRD 10 billion. - Special reserve funds cannot exceed fixed capital and can be replenished by appropriations of no more than 30 percent of the realized surplus of revenues over expenditures of the NBS. - Recent losses: NBS losses in recent years from high capital inflows and sterilization; in 2006, NBS losses amounted to 1.4 percent of GDP. - Services to the government provided free of charge; no interest currently (2008) being paid on government deposits. - State-owned financial enterprises and QFAs: - Evidence that some state-owned financial enterprises carry out QFAs: hold treasury bills purchased at yields considerably below comparable market terms; explicit and implicit guarantees enabled low-rate borrowing. - Trend: with government divestment, QFAs appear to be declining overall. - State ownership statistics: state ownership of the banking system about 21 percent of total bank assets in June 2006, down from 36 percent at end-2004; government ownership of the insurance sector 57 percent of total assets (insurance assets less than 5 percent of banking system assets). - Example yield disparity: yields for three-month treasury bills were below 5 percent in July 2008, compared with the NBS policy interest rate of 15 ¾ percent. ### Budget preparation, medium-term framework, and fiscal rules - Budget preparation and calendar: - Annual budget process open; timetable defined in BSL though often not observed in practice. - BM prepared by MoF’s FMAPD; limited analytical capacity in MoF’s Budget Preparation Department (BPD). - Cabinet may add spending requirements, often producing spending and revenue projections lacking consistency and realism. - Circular “Guidelines on Budget Preparation” issues indicative ceilings, wage bill coefficients, routine cost instructions, transfer and entitlement instructions, and limited guidance on investment spending. - Tight fiscal targets and high demands often result in last minute across-the-board cuts. - NIP represented over half the capital budget in 2007 and is presented as a single aggregated line-item appropriation; different cycle from main budget. - Medium-term framework and BM coverage: - BM presents broad fiscal aggregates and macro assumptions for the medium term; FMAPD constructs medium-term projections at a summary level. - BM tables do not include detailed projections expressed in RSD. - A statement on medium-term fiscal policy objectives included; debt sustainability analysis provided, including sensitivity to critical assumptions. - A comprehensive medium-term budget framework not yet developed; budget documents lacked detailed fiscal projections beyond the budget year (starting with 2009 DBBs to provide three-year presentations). - Fiscal rules and borrowing limits: - No formal fiscal rules for general government or Republic budget as a whole. - Law on Public Debt provisions: - Subnational long-term borrowing for capital investment should not exceed 50 percent of the total current revenues collected by the local government in the previous year. - Principal and interest on outstanding long-term debt falling due in any future year should not exceed 15 percent of total local government current budget revenues collected in the previous year. - Borrowing by MSIOs to finance capital investment (or HIF to finance purchase of medications) should not exceed 20 percent of total revenues collected in the previous year. - Law specifies penalties for violations (not yet tested); borrowing by MSIOs not normally explicitly guaranteed though provisions exist for Republican government guarantees if requested. ### Budget execution, commitment control, arrears, and FMIS - Cash flow planning and liquidity: - Annual cash flow plans prepared and updated quarterly; quarterly and monthly allocations (“quotas”) issued. - Quality of revenue projections low; monthly spending path relies heavily on straight-line allocation. - Short-term payments notice as short as five days; short-term liquidity management remains challenging. - Treasury can utilize TSA surplus or borrow from TSA subaccounts. - Commitment control and arrears: - Commitments not tracked centrally in a timely manner; commitments can only be entered once quotas released and often entered when payments become due or the preceding month. - Payment arrears have been a significant problem since the 1990s; while old pension and Republic budget arrears addressed, new arrears in EBFs have continued. - HIF and Road Fund have accumulated sizeable arrears; magnitude of arrears to HIF uncertain because treasury surveys do not include payment arrears owed by health institutions. - Available information on arrears not disclosed in the BM or elsewhere. - FMIS and reporting: - Since January 2008, operations supported by information supplied by the FMIS. - Treasury accounting system generates monthly financial reports at the Republic budget level; accounting is on a cash basis. - Elements of the Republic balance sheet derived from records provided by budget entities rather than general ledger; reliability of recorded stocks uncertain. - Inconsistencies in coding in the payment system make some data unreliable and difficult to interpret. ### Reporting, transparency, and public availability of fiscal information - Publication practices: - MoF publishes substantial fiscal data in Monthly Public Finances Bulletin, including monthly execution data for revenue and expenditure for Republic budget and MSIOs and main fiscal aggregates for general government. - Customs administration publishes a quarterly revenue performance report. - No advance release calendar and no legal commitment to publish fiscal data beyond final accounts. - Serbia does not meet SDDS; has expressed interest in joining GDDS. - Coverage and omissions: - Budget documents cover central government fiscal activities and provide summary aggregates for general government, but limited information on IBBs and SSOEs. - Budget documentation does not present finances of public corporations; no financial information provided about SSOEs that rely heavily on government financing and present significant fiscal risks. - Budget Memorandum discloses main fiscal aggregates for two years prior and two years beyond the budget year; three-year medium-term forecasts provided at an aggregated level. - Budget documents identify proposed loan guarantees but do not quantify contingent liabilities or systematically analyze fiscal risks (including QFAs, tax expenditures, PPPs). - Public availability matrix (selected items): - Central government (CG) budget estimates — Included in Budget/Report Documents: Yes — Available to the Public: Yes (Code 2.1.1). - CG QFAs — Included in Budget/Report Documents: No — Available to the Public: No (Code 2.1.3). - CG tax expenditures — Included in Budget/Report Documents: No — Available to the Public: No (Code 2.1.3). - CG contingent liabilities — Included: List of guaranteed loans — Available: Yes (Code 2.1.3). - CG debt — Included and published in Monthly Public Finances Bulletin — Available: Yes (Code 2.1.4). - CG financial assets — Included: No — Available: No (Code 2.1.4). - Sustainability analysis — Included: No — Available: No (Code 3.1.1). ### Integrity, audit, procurement, and anti-corruption - Integrity and codes: - Law on Prevention of Conflicts in the Discharge of Public Office (2004) and Law on Civil Service (2005) establish ethical frameworks and codes of conduct; some codes absent at subnational and IBB levels. - Internal audit and inspection: - Internal audit not well established; centralized in MoF’s Budget Inspection and Audit Department; limited staffing (10 in Internal Audit Unit and 5 inspectors in Inspection Unit in 2006). - Internal audit staff capacities constrained by competition from private sector; internal auditors not widely deployed to budget users. - External audit and SAI: - Law on the SAI (2005) meets INTOSAI standards; five members of Supreme Audit Council appointed September 2007 for six-year terms. - SAI not yet fully operational and has not presented reports to the legislature; public accounts for 2002 to 2007 submitted without independent audit and not formally published. - Procurement and asset sales: - Public Procurement Law (2002, amended 2004) sets thresholds and open tenders; restricted tender procedures widely used for medium-size procurements; complaints procedure slow and ineffective. - Privatization Agency records results of sales, but gross receipts, commissions, or other payments from privatization receipts are not reported in budget documents; sales by Government Property Directorate not adequately reported. - Corruption indicators: - Transparency International “Corruption Perception Index”: improved from 106 out of 133 in 2003 to 85 out of 180 in 2008. - World Bank “Control of Corruption” indicator: rose from the 30th percentile in 2002 to the 46th percentile in 2006. ### Key statistics and budget execution comparisons - Counts and aggregates: - Total number of budget beneficiaries in 2006: 9,228. - Republic budget direct budget beneficiaries (DBBs) listed: 173. - Republic budget indirect budget beneficiaries (IBBs) listed: 2,772. - Central government units with own budgets (Pension and Disability Fund, Health Insurance Fund, Employment Agency, Republic of Serbia Roads): 379 (expenditure in percent of GDP shown as 18.2). - Subnational governments expenditure (in percent of GDP): 6.9. - General government expenditure (in percent of GDP): 40.4. - Republican government subsidies in 2007: estimated 2 ½ percent of GDP. - Republic Budget — Comparison Between Budget and Execution, 2007 (figures): - Budget receipts: 581.8 - Execution receipts: 580.4 - Deviation (percentage): -0.2 - Income tax — Budget: 88.7 — Execution: 89.9 — Deviation (percentage): 1.4 - Value-added tax — Budget: 270.4 — Execution: 265.4 — Deviation (percentage): -1.8 - Customs excise and other taxes — Budget: 158.2 — Execution: 155.7 — Deviation (percentage): -1.6 - Non-tax revenues — Budget: 64.5 — Execution: 69.4 — Deviation (percentage): 7.6 - Budget outlays: 595.5 — Execution outlays: 567.2 — Deviation (percentage): -4.8 - Employment expenditures — Budget: 152.9 — Execution: 147.7 — Deviation (percentage): -3.4 - Goods and services — Budget: 42.9 — Execution: 39.2 — Deviation (percentage): -8.6 - Interest payments — Budget: 17.4 — Execution: 14.7 — Deviation (percentage): -15.5 - Subsidies — Budget: 35.5 — Execution: 35.3 — Deviation (percentage): -0.6 - Transfers to MSIOs — Budget: 147.4 — Execution: 145.1 — Deviation (percentage): -1.6 - Grants and other transfers — Budget: 56.2 — Execution: 56.6 — Deviation (percentage): 0.7 - Social protection — Budget: 72.4 — Execution: 69.4 — Deviation (percentage): -4.1 - Capital outlays (including NIP) — Budget: 70.7 — Execution: 59.1 — Deviation (percentage): -16.4 - Budget surplus/deficit 1/ — Budget: -13.7 — Execution: +13.2 - Note 1/: Defined according to BSL as “current revenues plus proceeds from sale of nonfinancial assets” less “current expenditures plus outflows for the acquisition of nonfinancial assets.” ### Near-term and longer-term recommended measures (selected, verbatim emphasis) - Near-term measures to improve fiscal transparency: - Refine the list of entities that comprise the general government (review current list of over 9,000 government entities using GFSM 2001 and SNA criteria; determine a procedure to keep the list up to date and publicly available). - Agree on a program for the development of the SAI (priority to clear backlog of unaudited financial statements; consider international experts in a transitional role). - Further develop the internal audit function (short-term training program; operationalize Central Harmonization Unit in MoF). - Integrate the NIP into the budget process (discuss and approve capital projects within the main budget cycle; classify NIP projects under normal economic classification codes rather than code 551). - Further develop budget analysis capacity (improve MoF BPD capacity; develop and introduce a comprehensive medium-term budgetary framework; strengthen program budgeting methodology). - Expand the discussion of fiscal risks in the BM into a comprehensive “fiscal risks” statement (systematic analysis of impact of alternative economic assumptions; quantification where possible of other fiscal risks including contingent liabilities, restitutions, extrabudgetary activities, and SSOEs). - Provide more detailed information in budget documentation about IBBs, EBFs, MSIOs, and SSOEs (comprehensive outturn data and realistic projections for own revenues of all IBBs; key financial information for all SSOEs that present fiscal risks). - Ensure consistency between legal basis for reporting fiscal outturns and actual practice (clarify accounting and reporting framework; reconcile debt and deficit data at least annually). - Widen scope of fiscal data collected and disclosed (strengthen reporting on arrears; report tax arrears and tax expenditures). - Publish more detail and analysis in budget documentation and work to improve realism of budget projections (prepare analysis of current and previous years’ outcomes compared with original budget proposals; subject aggregate projections and forecasting models to independent scrutiny). - Establish an overall legal and institutional framework for managing PPPs (develop methodology for accounting for PPPs and comprehensive reporting on PPPs and fiscal risks). - Improve specification of fiscal public reporting obligations (include explicit fiscal data publication requirements in BSL; publish an advance release calendar; BSL should include requirement for a mid-year report). - Ensure comprehensive and consistent coverage of privatization receipts (treat payments made directly out of privatization receipts the same as payments made directly to the treasury). - Publish a clear and simple summary guide to the budget. - Further and longer-term actions: - Reconsider roles and size of current and permanent budgetary reserves (most countries have only a single reserve subject to a cap in legislation). - Clarify responsibilities for monitoring and reporting on state-owned financial and nonfinancial enterprises (resolve overlapping responsibilities within and between treasury, MoF, NBS, MoERD, and line ministries; prepare regulations on publication of this information). - Extend FMIS to IBBs and subnational governments and introduce general ledgers for DBBs and IBBs following FMIS performance confirmation. - Publish occasional reports on long-term public finance prospects (impact of pension commitments and health care costs under alternative demographic and macroeconomic projections). - Institutional reform priorities: - Reform intergovernmental fiscal relations and strengthen PFM at subnational level (clear assignment of responsibilities and apportioning of state-owned assets; full implementation of BSL provisions). - Strengthen integrity of fiscal data and tax administration (extend mandate and institutional independence of Serbia Statistical Office; consider mechanisms for independent scrutiny of fiscal projections; legally protect tax and customs administrations from political direction). _Executive Summary and thematic extracts prepared for the IMF assessment of fiscal transparency practices in Serbia (source: _cr09144)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Introduction - Purpose: Assessment of fiscal transparency practices in Serbia against the requirements of the IMF Code of Good Practices on Fiscal Transparency (revised 2007). - Basis: Discussions with authorities and other organizations, authorities’ response to the IMF fiscal transparency questionnaire, and other sources of information. - Reference: IMF Manual on Fiscal Transparency for terms and concepts. ### Overall assessment - Serbia has made solid advances under all four pillars of the Fiscal Transparency Code. - Strengths identified: - Roles and responsibilities of government are, for the most part, clearly defined. - Relationships with the private sector, including the tax system, are governed by comprehensive laws protecting taxpayer rights. - The annual budget process is generally clear and governed by a comprehensive legal framework that includes a precise budget calendar. - Budget documentation records developments and prospects for the whole of general government, and includes medium-term fiscal policy objectives and debt sustainability. - Expenditure and revenue are regularly monitored and reported according to generally clear standards. - A Treasury Single Account (TSA) has been established. - Fiscal information, including debt data, is accessible to the public in a timely fashion. - Public servants are subject to a well-defined code of behavior. - A State Audit Institution (SAI) has been established. ### Major shortcomings and recommended actions - Clarify boundaries and coverage of general government: - Well-specified criteria should be defined and observed to mark the boundaries of the Republic and subnational budgets, ideally using GFSM 2001 principles. - Demarcate responsibilities within the general government more clearly by clarifying property ownership and the financing of some public services. - Improve reporting of quasi-fiscal activities (QFAs) of state- and socially-owned enterprises (SSOEs): - Comprehensive reporting of quasi-fiscal activities and finances of SSOEs in budget documentation is needed given their extensive mandates from the general government. - Strengthen realism and scrutiny of budget projections: - Budget projections, which have lacked realism, should be subject to independent scrutiny. - Deviations of outturn data from initial budget projections should be fully explained in the Budget Memorandum. - The Budget Memorandum should include a comprehensive statement of fiscal risks and information on the distribution of privatization receipts. - Improve public communication: - Publish a clear and simple summary guide to the budget. - Publish occasional long-term reports on the economy and public finances. - Strengthen budget execution, control, and contingency frameworks: - Integrate the National Investment Plan (NIP) consistently into budget preparation and reporting to improve prioritization and execution. - Fully enforce commitment control so that any expenditure arrears can be comprehensively monitored. - Rationalize contingency mechanisms in the budget. - Establish a legal and institutional framework for managing and accounting for public-private partnerships (PPPs). - Strengthen audit and internal controls: - Initiate a program for development of the State Audit Institution. - Strengthen internal audit and control functions to safeguard integrity of government operations. ### Detailed observations on general government coverage and practices - Definition and coverage: - General government is defined broadly consistent with Government Finance Statistics (GFS) 1986 principles, but some entities may be misclassified. - Consolidated accounts cover the Republican government, subnational governments, and several extrabudgetary funds (EBFs): the mandatory social insurance organizations (MSIOs) and Republic of Serbia Roads. - Republican and subnational governments comprise direct budget beneficiaries (DBBs) and indirect budget beneficiaries (IBBs). - The Government Gazette listed a total of 9,228 DBBs and IBBs in 2006. - Some IBBs may not satisfy GFSM inclusion principles; some entities outside the budget may belong in general government. - There is no procedure for regularly reviewing the list of IBBs or ensuring all EBFs are reported within general government. - Budget System Law (BSL) and reporting: - Fiscal operations of central government and MSIOs, and subnational governments, are regulated by BSL of 2002. - Budgets are adopted by respective legislatures. - Budget proposals and reporting include most own revenues and spending of DBBs, but are less complete for own revenues and spending of IBBs, particularly health institutions that report to the Health Insurance Fund (HIF). - Consequently, consolidated statements and projections for general government revenues, expenditures, and balances are not fully comprehensive. - Treasury Single Account (TSA) and accounting: - All budget beneficiaries of Republican and subnational governments, together with the MSIOs, are included under the TSA system maintained by the Treasury. - Some IBBs maintain bank accounts with commercial banks for some own revenues. - All budget beneficiaries are subject to government accounting and reporting standards. ### Government relations with nonfinancial SSOEs and the private sector - Legal framework and responsibilities: - Relationship between government and SSOEs is generally defined by law, but lines of responsibility are blurred in practice. - Law on Public Enterprises (2000) specifies governance arrangements for SOEs but does not clearly define limits of government intervention in management or policy decision making. - Multiple layers of responsibilities exist: Ministry of Finance (Public Enterprises and State Aid Department and Debt Department), Ministry of Economy and Regional Development (Property Office), and sectoral ministries. - No published list of SSOEs exists; the Solvency Register of the National Bank of Serbia (NBS) publishes summary financial information from annual reports required to be submitted. - Relationship with state-owned financial institutions is institutionalized; Deposit Insurance Agency monitors ownership and coordinates activities of state banks and insurance companies. ### Reporting and fiscal risks from SSOEs and quasi-fiscal activities - Insufficient reporting and disclosure: - Reporting of the impact of nonfinancial SOEs on the budget is inadequate, especially given significant quasi-fiscal activities (QFAs). - No documentation provides the National Assembly or the public with aggregate information on the overall size of the SSOE sector, its impact on general government, or the fiscal risks it presents. - No easily accessible aggregate information on holdings of private equity by the general government. - Nature and scale of quasi-fiscal activities: - Many nonfinancial SOEs undertake significant social expenditures on behalf of government, including providing essential items at below cost-recovery prices, employment and wage policies for social purposes, financing culture and sports, and granting pricing and collection dispensations to SSOEs in difficulty. - Costs of some activities are recorded in the budget as subsidies (amounting in 2007, for the Republican government, to an estimated 2 ½ percent of GDP, including restructuring costs in anticipation of privatization). - Other activities are either supported non-transparently by budget beneficiaries or EBFs or are not compensated at all by the government (pure QFAs). - Pure QFAs can place severe financial pressure on SSOEs, leading to opaque offsets and arrangements such as non-payment of taxes, social security contributions, and utility bills, and loans to be repaid from uncertain privatization receipts. - Similar problems probably occur in nonfinancial SOEs owned by local governments. - Consequences of non-recognition of QFAs: - Important fiscal risks remain unidentified. - The scale of government is underreported. - True financial positions of both the government and SOE sectors are distorted. ### Key statistics and counts (as reported) - Total number of budget beneficiaries in 2006: 9,228. - Republic budget direct budget beneficiaries (DBBs) listed: 173. - Republic budget indirect budget beneficiaries (IBBs) listed: 2,772. - Central government units with own budgets (Pension and Disability Fund, Health Insurance Fund, Employment Agency, Republic of Serbia Roads): 379 (expenditure in percent of GDP shown as 18.2). - Subnational governments expenditure (in percent of GDP): 6.9. - General government expenditure (in percent of GDP): 40.4. - Republican government subsidies in 2007: estimated 2 ½ percent of GDP. _Executive Summary prepared for the IMF assessment of fiscal transparency practices in Serbia._ ### 5. Arrangements regulating profit transfers from public enterprises to the budget ### 5. Arrangements regulating profit transfers from public enterprises to the budget ### Profit distribution from public enterprises - Law on Public Enterprises: distribution of profits determined by enterprises’ managing boards, subject to government approval. - Practice in most years: transfer about 50 percent of profits to the budget. - Exception: there have been years in which, following Cabinet discussion, no profits have been transferred. ### Regulatory framework for the nonfinancial private sector - Laws and processes are comprehensive but complex and subject to frequent change. - Regulatory bodies implementing the laws: - Do not always have adequate capacity. - Are sometimes not sufficiently independent from the government. - Consequences: substantial compliance costs, inefficiencies, limited private-sector dialogue. - World Bank “Ease of Doing Business Index” ranking: Serbia rated 94 out of 181 countries. - Notable weakness: performed very poorly on dealing with construction permits. ### National Bank of Serbia (NBS): independence and fiscal role - The NBS is operationally independent with a clearly defined and limited fiscal role (Law on the NBS (2003)). - Governor and Council appointed by the National Assembly; Monetary Board determines monetary policy. - Minister of Finance participates in Monetary Board meetings, but does not have a vote. - Government obligations: - Maintain a TSA at the NBS. - NBS acts as fiscal agent and banker for the government. - Temporary liquidity provision to the budget: - Loans may be granted within monetary policy framework and may not exceed 5 percent of the average current central government budget revenue over the preceding three years. - Total amount of debt of the fiscal sector incurred on this basis may not exceed three times the minimum capital requirement of the NBS. - Loans need to be repaid by the end of the budget year in which they are incurred. - NBS capital and reserves: - Minimum fixed capital of the NBS: SRD 10 billion. - Special reserve funds cannot exceed the value of fixed capital and can be replenished by appropriations of no more than 30 percent of the realized surplus of revenues over expenditures of the NBS. - Recent financial position: - NBS losses in recent years from high capital inflows and sterilization; in 2006, NBS losses amounted to 1.4 percent of GDP. - Services to the government are provided free of charge and no interest is currently (2008) being paid on government deposits. - Additional: NBS holds long-term claims on the government used in open-market operations; government securities were issued under the Law on Settlement of the Obligations of the Republic of Serbia to the NBS (2004). ### State-owned financial enterprises and quasi-fiscal activities (QFAs) - Evidence that some state-owned financial enterprises continue to carry out QFAs: - Hold treasury bills purchased at yields considerably below comparable market terms. - Explicit and implicit government guarantees have enabled borrowing at relatively low interest rates. - Trend: with government divestment, QFAs appear to be declining overall. - State ownership statistics: - State ownership of the banking system: about 21 percent of total bank assets in June 2006, down from 36 percent at end-2004. - Government ownership of the insurance sector: 57 percent of total assets, but the insurance sector’s assets are less than 5 percent of banking system assets. - Example of yield disparity: yields for three-month treasury bills were below 5 percent in July 2008, compared with the NBS policy interest rate of 15 ¾ percent. ### Fiscal roles among branches of government - Constitution of the Republic of Serbia (2006): - Executive proposes and executes the annual budget and taxation. - National Assembly enacts budget and tax laws. - Budget System Law (BSL) establishes budget calendar and roles for Republican and subnational governments. - Temporary financing if budget not adopted: - BSL provides for a three-month temporary financing arrangement if the budget for the fiscal year has not been adopted before the start of the fiscal year. - Temporary financing is available in proportion to funds utilized in the same period in the preceding year's budget, up to a maximum of one-fourth of the total revenues allocated in the preceding fiscal year's budget, and cannot be extended beyond three months. - Draft revision of the BSL provides for a further extension of interim financing for three months, if the budget is not adopted before March 15 of the budget year. - Cases of fraud and gross misconduct are referred to the courts; taxpayers can challenge taxation by appeal to the courts. ### Intergovernmental distribution and subnational finances - Legal framework: Constitution, BSL, Law on Local Self Government (2002), Law on Local Self Government Financing (2006), Law on Public Debt (2005). - Revenues: - Central government controls tax policy and administration. - Subnational governments entitled to collect limited local taxes and fees (property tax, lease revenues, user charges). - Local taxes and fees typically account for 37 percent of total revenues of subnational governments. - Transfers: - System comprises revenue sharing, grants, and specific purpose transfers. - Law on Local Self Government Financing fixed overall level of non-earmarked grants from central to subnational governments at 1.7 percent of the latest published level of GDP and distributes them according to a formula. - Earmarked transfers determined transparently with explicit criteria. - Equalization transfers ensure per capita tax collections in all municipalities reach at least 90 percent of the national average. - Compensational transfers offset losses from changes in tax regulation. - Constitutional requirement: at least 7 percent of the Republic budget should be reserved for Vojvadina. - Borrowing: - Restrictions on subnational borrowing relaxed to allow borrowing for capital purposes (see ¶26). - Subnational borrowing and MSIO borrowing constrained by Law on Public Debt limits on outstanding debt and debt servicing. ### Asset ownership, property, and subnational accountability - Constitution and Law on Property (2005) assign ownership of property used by subnational governments and local public enterprises to the Republic of Serbia. - Consequences: - Subnational authorities need permission from the Property Directorate of the Republic of Serbia (PDRS) to sell or rent immovable property they use, involving protracted procedures. - Limits incentives for maintenance, investment, and undermines accountability. - Potential investors concerned about expropriation risk. - Mitigation: Law on Planning and Construction (2006) allows leasing construction land for typically 99 years without consulting PDRS, but problems persist. - Draft law on Public Property, Ownership and other Property Rights (September 18, 2008) issued for public comment. ### Legal and administrative framework for budget management - BSL provides a reasonable and comprehensive framework covering key elements for management of public finances. - Implementation challenges remain (e.g., recording of commitments). - Since adoption, BSL has had several amendments; further revisions under consideration. - Article 4 of the BSL lists principles including macroeconomic stability and minimizing risks to financial position. - MoF responsibilities: - Monitor all government debt and guarantees (including local governments). - Manage servicing of Republican government debt and called guarantees. - Prepare and publish once a year a public debt management strategy in the BM. - All guarantees require MoF approval and National Assembly confirmation. - Public debt management: public debt agency (currently Public Debt Department in the treasury) responsible for operations. ### Tax policy, administration, and tax expenditures - Legislative framework includes Customs Law (2005), Law on Tax Procedure and Tax Administration (2005), Individual Income Tax Law (2001), Company Profit Tax Law (2001), Value Added Tax Law (2004), Excise Law (2006), Customs Tariff Law (2005). - Tax system has become more complex and subject to frequent changes; compliance costs not always adequately assessed. - Example: Amendment to the Personal Income Tax Law (2006) introduced exemptions with specific employment- and duration-related conditions. - Tax exemptions: - Numerous but clearly defined in tax laws; generally do not allow discretionary decision making (except some discretion under Customs Tariff Law with criteria in a separate government decision). - Information on individual tax exemptions is not disclosed. - Tax expenditures: - Tax administration routinely assesses tax expenditures for corporate income tax, excises, and the VAT. - Some estimates published in MoF reports on State Aid, but no systematic disclosure of all tax expenditures. - Administrative expenses for different types of tax are not available publicly. - Revenue administration framework is clear, with provisions for third-party information, arrears enforcement, and penalties; weaknesses in internal audit remain a concern. - Legal taxpayer rights include appeals procedures up to the Supreme Court and confidentiality protections. - Public consultation: draft laws made available on government websites. ### Contractual arrangements and PPPs - Contractual arrangements between government and private sector are generally clear and publicly accessible. - PPPs: no comprehensive legal and institutional framework yet to ensure effective risk management and disclosure, full reporting of individual PPPs, or consistent reflection of PPP operations in fiscal accounts. ### Liability and mineral extraction framework - BSL requires the Republic budget to specify annual limits on total debt incurred during the budget year. - All borrowing and guarantees by the Republic must be approved by the government and signed by the Minister of Finance. - Law on Public Debt regulates debt management for Republican government, subnational governments, MSIOs, and other legal entities founded by the Republican government. - Law on Public Debt identifies the goal of Republican debt management: decrease borrowing expenses in accordance with a prudent risk level. - Mineral sector legal framework: Law on Concessions (2003), Decree on Mineral Resources Compensation Fees (2002), Law on Mining (1995), Law on Geological Exploration (1995). - Regulatory control for minerals shared among Ministry of Mining and Energy, Ministry of Environment and Science, and Ministry of Agriculture. - Law on Mining: royalties for mineral extraction set between 1 percent and 5 percent, depending on mineral type. - Transparency limited by complexity of regulatory structure, weak policy framework, and discretionary authority. *Source: _cr09144 - 5. Arrangements regulating profit transfers from public enterprises to the budget* ### 21. The legal framework for privatization is clear. 1.2.5 ### 21. The legal framework for privatization is clear. 1.2.5 ### Legal framework and institutional responsibilities - Privatization is legislated through various laws, including the Law on Privatization (2001) and accompanying decrees, the Law on the Privatization Agency (2001), and the Law on the Share Fund (2001) and subsequent amendments. - Initiation of the privatization process for large enterprises requires the approval of the MoERD. - For other entities, privatization can be initiated by: - a potential buyer, - the MoERD (which is responsible for privatization policy), or - by the company to be privatized. - Implementation of any privatization requires the involvement of the Privatization Agency, which is in charge of decisions on the privatization mechanism (auction or tender), restructuring, and enforcing procedures and sale mechanisms. - The MoERD and the National Assembly oversee the privatization process. ### Treatment of privatization proceeds and disclosures - The Privatization Agency collects a commission of 5 percent on privatization receipts. - After deduction of this commission and other costs (such as consultant fees), the Privatization Agency distributes the net funds to creditors and different beneficiary institutions on the basis of percentages established in the Law on Privatization. These payments are reported as revenues in fiscal reports. - The Law also provides that up to 30 percent of shares can be given free of charge to employees and other citizens. - Typical allocations specified: - Ten percent is generally allocated to the Employees Pension and Disability Fund, - 5 percent to the Restitution Fund, - 5 percent to the subnational government where the company is located. - If the company is in the Autonomous Province of Vojvodina, it receives 50 percent of the receipts. - The remaining funds are transferred to the Republic budget and reported as a financing item. - Information on commissions and other privatization costs is not publicly available. ### Budget preparation: openness, calendar, and practice - The annual budget process is open, and the budget calendar is clearly specified in the law. - The timetable for the preparation of the Republic budget is defined in the BSL (Box 2); however, it has often not been observed in practice. - First stage: a draft of the BM is prepared by MoF’s Fiscal and Macroeconomic Analysis and Projections Department (FMAPD) and submitted to Cabinet to reconcile spending requests with a sustainable medium-term macroeconomic scenario. - Constraints and capacity issues: - Limited analytical capacity in MoF’s Budget Preparation Department (BPD) to adjudicate between competing budgetary demands, which are often not fully costed. - Cabinet may add spending requirements, leading to spending and revenue projections in the BM that often lack consistency and realism. - Second stage: after BM is agreed and published, a circular “Guidelines on Budget Preparation” provides: - (i) indicative ceilings for each budget user derived from BM aggregates; - (ii) specific instructions related to wage bill calculation with coefficients pre-calculated by the BPD; - (iii) instructions on preparing estimates on routine costs, based on previous years’ actual indexed by inflation; - (iv) instructions on preparing transfers and social welfare entitlements based on the relevant laws; - (v) limited guidance on investment spending giving priority to ongoing projects and those financed by external grants; - (vi) any other specific changes arising out of the BM. - Tight fiscal targets and high demands often result in last minute across-the-board cuts, undermining budget reliability. - The National Investment Plan (which represented over half the capital budget in 2007) is subject to a different cycle and is presented to the National Assembly as a single aggregated line-item appropriation. ### Timetable and parliamentary process - The final budget proposals are summarized in a revised BM with updated macroeconomic context determined by revised projections made in August. - The National Assembly is given 45 days to approve the budget. - The National Assembly’s powers to amend the budget are limited by the requirement that the deficit must not exceed that set in the draft budget. - The BSL prescribes a timetable for subnational budgets (Appendix I Table 4). ### Medium-term framework, debt, and fiscal policy - Broad fiscal aggregates and underlying macroeconomic assumptions over the medium term are presented in the Budget Memorandum (BM). - FMAPD constructs medium-term projections of general government aggregates and presents these in summary form in the BM, with a broad breakdown of revenue and spending by economic category and indications of trends in major functions of expenditure. - Macroeconomic models have been developed; the NBS and Economics Institute are consulted, but no explanations are provided to the public about model use, comparison with alternative projections, or uncertainties. - Involvement of spending agencies and the BPD in development of the medium-term framework is limited. - The BM tables do not include detailed projections of revenue and spending expressed in Republic of Serbia dinars (RSD). - A statement on medium-term fiscal policy objectives is included in the budget documents, and debt sustainability issues are addressed. - A comprehensive medium-term budget framework has not yet been developed; budget documents have not contained detailed fiscal projections beyond the budget year. - Starting with the 2009 budget, DBBs will provide detailed presentations of proposed expenditures by individual strategies and capital projects for a three-year period. - The BM presents a detailed description of the composition and recent dynamics of government and government-guaranteed debt and provides a forward-looking debt sustainability analysis, including sensitivity to critical assumptions. - The BM does not discuss changes from the previous budget in medium-term forecasts for broad fiscal aggregates. ### Fiscal rules and borrowing limits - No formal fiscal rules have been established for the general government as a whole or the Republic budget. - Provisions in the Law on Public Debt limit borrowing by subnational governments and MSIOs: - Subnational government long-term borrowing for capital investment should not exceed 50 percent of the total current revenues collected by the local government in the previous year. - The amount of principal and interest on all outstanding long-term debt falling due in any future year should not exceed 15 percent of the total local government current budget revenues collected in the previous year. - Borrowing by MSIOs to finance capital investment or, in the case of the HIF, to finance purchase of medications, should not exceed 20 percent of the total revenues collected in the previous year. - The Law on Public Debt specifies penalties for violations, but this part of the legislative framework has yet to be tested. - Borrowing by MSIOs is not normally provided with an explicit government guarantee, but provisions exist for Republican government guarantees if requested. ### Assessment of new initiatives, fiscal risks, and sensitivity analysis - New fiscal initiatives, including proposals to change tax rates or concessions, are discussed separately in the BM, but their budgetary implications are generally not adequately calculated or presented. - There is no detailed assessment of expected broader economic or social impacts of new initiatives. - The budget documents do not clearly distinguish ongoing costs from new spending proposals. - Estimates of the impact on fiscal projections of changes in key macro variables (GDP, exchange rate and interest rates) are provided in the BM, but no systematic sensitivity analysis of fiscal projections is undertaken. - Some major risks to the fiscal outlook are described qualitatively, but there is no quantitative analysis of their potential consequences or measures to manage them. ### Coordination of budgetary and extrabudgetary activities - Activities and finances of MSIOs and Republic of Serbia Roads are subject to similar oversight as DBBs, and their accounts are consolidated within general government, but some revenues and expenditure of IBBs are not covered as extensively as DBBs. - Financial management of MSIOs is regulated in the BSL, including a requirement for bank accounts with the treasury. - BSL requires guidelines for Republic budget preparation to apply equally to MSIOs and budget beneficiaries; MSIOs should use the same economic assumptions as DBBs and present financial plans to the National Assembly at the same time as the Republic budget. - No documentation, other than consolidated financial accounts, aggregates and assesses expenditure, activities, and results of EBFs together with on-budget activities. - Many IBBs have characteristics of EBFs or non-market non-profit institutions and receive revenues outside the budget process; their activities are overseen and reported much less intensively than DBBs. - Own revenues of IBBs tend to be poorly forecast; some unspent revenues are not fully recorded in fiscal reports (for health institutions reporting to the HIF, own revenues are neither forecast nor recorded), restricting legislative oversight and potentially underestimating the general government sector. - Donor funding (EU, World Bank, EBRD, and others) is generally reflected in the budget under “own revenue” of individual budget beneficiaries, but execution is mostly through separate banking arrangements in commercial banks and is difficult for the treasury to track during the year; these funds are in principle reported within revenue aggregates in the Monthly Public Finances Bulletin and in the accounts. ### Clarity and control of budget execution, commitment control, and reserves - Basic accounting and internal control procedures are in place, but expenditure commitments are not tracked centrally in a timely manner; implementation needs strengthening; and the government has considerable discretion in the use of contingency reserve mechanisms. - The BSL defines main elements for budget execution control and recording, including cash flow plans, quarterly allocations, commitments, and payment processing through the TSA; directives by the Minister of Finance are required to elaborate specific procedures. - Authorities have focused on establishing quarterly (now monthly) allocations (“quotas”) and centralizing payment processing through the TSA, with limited attention to participative cash flow planning and commitment control. - Payments process centralized in the treasury for all general government entities with few exceptions (mostly payments in foreign currencies). - For IBBs, MSIOs, and subnational governments, treasury controllers perform simple checks on signatures and availability of balances; for DBBs, additional checks verify legal basis for obligations and available appropriations and quotas. - Since January 2008, operations have been supported by information supplied by the FMIS. - All DBBs are required at the start of the fiscal year to submit a financial plan and a plan of public procurement to the treasury. - Commitment control shortcomings: - The treasury cannot monitor commitments in a timely manner because commitments can only be entered into the central system once quotas have been released; commitments are typically entered when payments become due or the preceding month. - Payment arrears have been a significant problem since the 1990s; while pension and Republic budget old arrears have been addressed, accumulation of new arrears in EBFs has continued. - HIF and the Road Fund have accumulated sizeable arrears; magnitude of arrears to the HIF is uncertain because treasury surveys do not include payment arrears owed by health institutions. - Available information on arrears is not disclosed in the BM or elsewhere. - BSL rules on budget virement limit reduction in appropriations to 5 percent without National Assembly approval, but do not limit the level of increases; all virements require MoF approval and Cabinet decision. - The budget includes two contingency items: - (i) the current budget reserve, usable for unplanned spending needs, expenditure items for which initial appropriations prove insufficient, or liabilities of subnational government experiencing revenue shortfalls; - (ii) the permanent budget reserve, usable by the Republican or subnational governments for emergencies that jeopardize lives or cause large scale property damage. - The BSL does not limit the size of the current budget reserve; the permanent budget reserve may not exceed 1.5 percent of annual budget receipts. - Supplementary budgets are common, indicating that original budget estimates are unreliable. *Source: _cr09144 - 21. The legal framework for privatization is clear. 1.2.5* ### 31. Financial management practices for the Republic budget are reasonably well ### 31. Financial management practices for the Republic budget are reasonably well coordinated. ### Cash flow planning, liquidity, and short-term borrowing - Annual cash flow plans are prepared and updated quarterly, from which quarterly and monthly allocations (quotas) are issued. - Cash flow plans are based on detailed projections for tax revenues, routine spending obligations for wages, transfers (including pensions and other social welfare payments), patterns of spending on regular goods and services items such as utilities, and other information provided in the annual financial plans submitted by DBBs. - The quality of the projections for revenues is low, and the monthly path for spending relies too heavily on a straight-line allocation of the annual provisions.29 - Short-term liquidity management remains a challenge given the limited information available on commitments and the short notice (five days) for actual payments. - Short-term government borrowing from the domestic market is limited, but the treasury can utilize the TSA surplus, either by drawing directly from cash in the Republic’s account or by borrowing from the subaccounts of other TSA users. ### Recording and monitoring of debt - Recording and monitoring of domestic and external debt is fairly well established in the MoF (¶42). - The treasury can draw on TSA surplus or borrow from TSA subaccounts to manage liquidity. ### Accounting and reporting on budget execution - The treasury accounting system is capable of producing in-year reports on Republic budget users, but elements of the Republic balance sheet are derived from records provided by budget entities rather than the general ledger.2.2.1 - The chart of accounts is consistent with the budget classification. Accounts are maintained on a cash basis. - The accounting system has been prescribed for use by all general government entities (with a few minor exceptions). - The treasury accounting system generates monthly financial reports at the level of the Republic budget. - The treasury payment system provides accurate and detailed data on tax revenue collections and its sharing between the different levels of government. - The payment system includes in-year transaction data on the operations of other general government entities, based on codes entered on payment orders, but inconsistencies in coding make these data unreliable and difficult to interpret. - The Republic balance sheet includes assets and liabilities on a selective basis only and the reliability of the recorded stocks is uncertain; they are derived from records provided by budget entities rather than the general ledger.28 ### Legislative reporting and final accounts - The legislature does not receive in-year reports on budget outturns or mid-year reviews, but the regularity of supplementary budget proposals means an update of the fiscal outlook is generally available during the second half of the year.2.2.2, 2.2.3 - The BSL does not call for submission of in-year reports on budget outturn to the National Assembly and none is provided. Execution data are summarized in the Monthly Public Finances Bulletin, which the National Assembly can access from the MoF website. - The National Assembly has been unable to approve the final accounts, pending establishment and full operation of the State Audit Institution (SAI).2.2.4 - The BSL requires annual final accounts of the Republic budget, subnational government budgets, and financial plans of the MSIOs to be submitted to the National Assembly within 10 months of the end of the year, including financial statements, explanations of large discrepancies between approved funds and execution, and a report on guarantees issued during the fiscal year. - The Republican government has provided final accounts to the National Assembly for the years 2002 to 2007, but the legislature has been unable to endorse these accounts because they have not been subject to independent audit pending the full operation of the SAI. - The final accounts have included information on both execution and approved funds (and similar information for revenue projections), but no explanations or analysis of the differences have been provided to the National Assembly. ### Public availability of fiscal information - Fiscal data are in practice published in a regular and timely fashion, but there is no advance release calendar, and no legal commitment to publish fiscal data beyond publication of the final accounts.3.3.1, 3.3.2 - MoF publishes a substantial amount of fiscal data on a regular basis in its Monthly Public Finances Bulletin, including detailed monthly execution data for revenue and expenditure on the Republic budget and MSIOs and the main fiscal aggregates for general government. - The customs administration has initiated publication of a quarterly report on its revenue performance. - Neither MoF nor Customs Administration has formally committed to a publication schedule; the only legal requirement to publish fiscal data is the provision in the BLS (Article 76) to release the final accounts. - Serbia does not meet Special Data Dissemination Standards (SDDS) for the dissemination of fiscal data, but it has recently expressed interest in joining the General Data Dissemination Standard (GDDS).30 ### Coverage and quality of budget documents - Budget documents cover central government fiscal activities, including major revenue sources, and provide summary aggregates for the general government, but information is limited on indirect budget beneficiaries and state- and socially-owned enterprises that benefit from budgetary support.3.1.1, 3.1.4 - Documents submitted to the National Assembly consist of the BM, the budget summary of revenues and expenditure (including the principal domestic revenue sources) and detailed spending proposals by each budgetary institution (including the usage of foreign assistance) in the format required for voting in the National Assembly, and an explanatory document with brief details for each ministry and government agency.31 - Information provided on IBBs is limited, particularly in respect of own revenues. No detailed breakdown is presented of the projected financing of the projected deficit. - The MSIOs and Republic of Serbia Roads present their financial plans to the National Assembly. - Coverage in budget documentation of the impact of the financial position of SSOEs is limited to the aggregated cost of subsidies and net lending to the Republic budget. - The level of detail in the budget consists of organization and sub-organizations, functional classification, and item level economic classification. Projects are separately identified. - The resulting budget consists of over 2,000 lines which form the basis of the vote and in-year appropriation control. - Budget documents, including the BM and the explanatory document, are published on the government website. ### Defense and public corporations reporting - Defense expenditures are reported in the budget with the same level of detail as other spending; the defense budget is broken down by economic item, but different segments of the armed forces are not separately identified.3.1.1 - Annual fiscal reporting covers the consolidated general government, including MSIOs and Serbia Roads; the finances of public corporations are not presented in budget documentation.3.1.4, 3.1.6 - The treasury has published a consolidated final account for the general government since 2005. - IBBs prepare financial statements and send them to line ministries, which produce consolidated statements (including spending funded by own revenues) and forward them to the treasury; the HIF and other MSIOs and Republic of Serbia Roads Company follow similar procedures. - The treasury consolidates these with the annual financial reports of the Republic budget to produce reports for the whole general government sector. - No financial information is provided about state- and socially-owned enterprises, many of which rely heavily on government financing and present significant fiscal risks.32 - In the absence of a centralized accounting system and an external audit function (¶60) it is difficult to assess the reliability of data presented in financial statements. - There is some inconsistency in the use of the chart of accounts across general government entities, particularly in respect of the physical assets code (551) (¶46). - Quality of the data is expected to improve with full utilization of the new financial management information system (FMIS), which includes accounting. ### Past and forecast fiscal data in the budget - The Budget Memorandum discloses the main fiscal aggregates for two years prior to the budget year, and two years beyond the budget year.3.1.2 - Highly aggregated estimates are provided in the BM of the expected outturn for the year prior to the budget year, and the outturn for the preceding year, for general government expenditure, revenue, and surplus/deficits. - Broad breakdowns by function and economic classification are shown, expressed as a percentage of GDP. - Three-year medium-term forecasts are provided in the BM at a similar, highly aggregated level. - More detailed information on the budget year proposals is provided in the main budget document. ### Treatment and disclosure of fiscal risks - Budget documents identify all proposed loan guarantees and describe other forms of contingent liabilities and fiscal risks, but they do not quantify them.3.1.3 - The Republic budget includes a list of debt guarantees that the government plans to issue during the year.33 - Other fiscal risks (macroeconomic risks and risks from implicit contingent liabilities, e.g., possible restitutions for property nationalized after 1945) are discussed in the BM, but coverage is not comprehensive or systematic. - Fiscal risks arising from extrabudgetary activities (such as borrowing by the Development Fund) and activities of nonfinancial public corporations are not explored; nor are quasi-fiscal activities or tax expenditures. - The outstanding stock of loan guarantees is identified only in the report on the debt stock published in the Monthly Public Finances Bulletin. - Apart from the impact on debt service liabilities of deviations from forecast of interest rates and the exchange rate, there is no quantification of fiscal risks such as a systematic sensitivity analysis (¶28). - The program of public-private partnerships (PPPs) is still small.34 - Various types of subsidized lending and guarantees are provided for small and medium-size enterprises and housing projects.3.1.3 - The Development Fund provides finance for small and medium enterprises at below-market rates. - The Housing Loan Fund provides loans for housing projects. - The National Mortgage Insurance Agency provides loan guarantees on housing projects. - These extrabudgetary activities, funded from market borrowing at fine rates, the funds’ current activities, accumulated reserves, and, in the case of the Development Fund, their share in past privatization receipts, are not systematically monitored. ### Debt, liabilities, and financial assets publication - Information on the gross public debt of the Republic is largely complete and published, but it is not reconciled with data on income and expenditure.3.1.5 - The definition of public debt used in Republic budget documents is the sum of direct and government guaranteed debt of the central government, both broken down into internally and externally held components.35 - Inclusion of government guaranteed debt and exclusion of some debt arising from extrabudgetary activities does not conform to GFSM 2001 and ESA 95 standards.36 - Foreign debt is distinguished by lender; domestic debt is classified by instrument and maturity. This information is published in summary form in MoF’s Monthly Public Finances Bulletin. - Projections of future debt service are included in the annual BM. - There is no regular reconciliation of debt information with deficit data and no information disclosed on debt swaps, netting out operations, and any debt arrears. - There is no consolidated debt report for the general government. - Information on general government financial assets is compiled but not published.3.1.5 - The treasury consolidates information on financial and nonfinancial assets from annual reports provided by DBBs, IBBs, MSIOs, and local governments. - As part of the final accounts, a balance sheet for the Republic is prepared, but the lack of an auditing agency since 2002 has delayed auditing of the accounts and no data on assets of either the Republic or other parts of the general government have been published.32 ### Long-term fiscal analysis and public guidance - Analysis of the long-term outlook for public finances is neither undertaken nor published.3.1.7 - The BM contains a forward-looking debt sustainability analysis, including an account of its sensitivity to changes in critical assumptions, but no detailed medium- or long-term fiscal projections are made available. - There is no clear and simple guide to the budget made accessible to the general public.3.2.1 - Although the full text of the BM is published on the MoF website, it is not supported by material in plain language and charts to clarify context and objectives for the average citizen. - A separate “citizen’s guide” is not provided. ### Budget classification and program budgeting - With the exception of the National Investment Plan, the classifications for revenue, expenditure, and financing used in the annual budget presentation are broadly consistent with international standards.3.2.2 - GFSM 2001 compatible functional and economic classifications have been introduced for all of the general government. - Limited control and discipline over application of classifications during budget preparation and accounting have led to problems: - Use of salaries codes for transfers earmarked for salary payments to indirect budget users instead of appropriate transfers codes. - All project spending under the National Investment Plan (NIP)—which covers about half of the capital budget—is classified under a special NIP tracking code (551) rather than under the relevant current, capital or lending items. - Administrative classifications exist at two levels: in the budget and as a structured list for all entities of the general government, grouped by sectors. - A pilot project was launched in 2005 to develop program budgets in five line ministries (Health, Education, Religion, Public Administration and Local Government, and Trade and Services); these were utilized in the 2008 budget, but methodology was applied differently across pilot ministries and NIP projects were not included. ### General government balance monitoring - The overall balance of general government, the main indicator of the fiscal position, is monitored on a monthly basis during the year, together with gross public debt.3.2.3 - The BM now defines the overall balance similarly to the cash-based overall deficit/surplus of the general government described in GFSM 1986. - A recent change treats items designated as “net acquisition of financial assets for policy purposes” as expenditure (i.e., above the line). - MoF’s Monthly Public Finances Bulletin monitors the cumulative consolidated overall balance of the general government through the year. - No other indicators of the fiscal position are routinely assessed, although MoF also continues to publish overall balance figures on a formal basis for consistency over time. - This definition of the overall balance is not specified in the BSL (2002) or recent draft revisions; the BSL requires the “budget balance” for the Republic budget in annual financial statements to be presented according to a different definition, creating confusion amplified by internal inconsistencies in definitions used in the BSL. - Figures for gross public debt are published in the Monthly Public Finances Bulletin; while the definition of gross public debt does not correspond with accepted international practice and no data are produced for net debt, the series for gross public debt provides useful information to assess and monitor sustainability. *Source: _cr09144 - 31. Financial management practices for the Republic budget are reasonably well* ### 48. Budget documents discuss the objectives and expected results from government ### _cr09144 - 48. Budget documents discuss the objectives and expected results from government ### Program budgeting and performance orientation - Budget documents describe key policy objectives and identify related budget allocations, and the explanatory part of the budget provides descriptive information on recent developments and on policy directions, with objectives and targets for the budget year. - There is no agreed, consistent classification of the whole budget by program, nor identification of intended outcomes—necessary steps to link spending, activities, outputs, and outcomes. - A pilot project on program budgets involves five ministries, but those ministries have used different approaches in defining their programs. - Prerequisites for performance-based budgeting remain under development: - greater responsibilities and accountability of implementing agencies for results; - a well-developed internal auditing system. - External evaluation capacity is limited because the SAI is not yet fully operational. ### Integrity of budget and accounting processes - Republic budget estimates are not yet fully reliable, and no analysis of differences between planned and actual outturns is made available to the public. - Available data for the Republic budget and MSIOs for 2003-06 indicate substantial deviations between budget and outturn figures for major components of expenditure and revenue. Most budgets were subject to mid-year revisions; revised budget estimates were closer to final outturns. - Performance in 2007 was generally better, but: - expenditure outlays (particularly on capital projects and interest payments) were well below budget projections; - non-tax revenues were much higher than expected. - The only document that regularly presents both planned and actual outturns is a summary table in the annual financial statement of the Republic budget (¶34); that table does not include any analysis. - Authorities do not publish summary tables comparing projections and estimated outturns for general government as a whole. ### Accounting policy and reconciliation practices - Budget documents do not include statements on accounting policy other than that a cash basis is used throughout. - Some definitions and practices are publicized through regulations printed in the Government Gazette and supplemented by notes in the BM. - Accounts of Republican government entities are reconciled with budget appropriations and bank accounts on a regular basis, but: - consolidated accounts do not regularly reconcile monetary and fiscal data, nor debt and deficit data; - there is no publicly available report on any level of reconciliation; - discrepancies have been noted in the fiscal accounts. - Consolidated monthly reports of the general government, based on estimates provided to the IMF, deviate significantly from the preliminary final accounts produced for 2005 by 2.8 percent of GDP for spending, and by 2.4 percent of GDP for revenue. - It is now regular practice to provide full explanations of changes in coverage or classification, and to revise historical fiscal data to current definitions while continuing to provide information according to former definitions when necessary. ### Internal oversight, codes of conduct, and corruption perceptions - The Law on Prevention of Conflicts in the Discharge of Public Office (2004) establishes an ethical framework; implemented by the independent Republican Committee for Resolving Conflicts of Interests, which maintains a register of public officials’ property and issues reports. - The Law on Civil Service (2005) sets out a code of conduct for civil servants employed by the Republican government; separate codes exist for customs and tax officers. - No code of conduct currently exists for other public service employees in subnational governments, indirect budget users, or EBFs. - National anti-corruption steps: - 2005: National Assembly adopted a National Anti-Corruption Strategy; government established an advisory Anti-Corruption Council. - 2008: National Assembly approved formation of an Anti-Corruption Agency and amendments to the law on financing political parties. - Perceptions and indicators: - Transparency International “Corruption Perception Index”: improved from 106 out of 133 surveyed countries in 2003 to 85 out of 180 countries in 2008. - World Bank “Control of Corruption” indicator: Serbia rose from the 30th percentile in 2002 to the 46th percentile in 2006. ### Civil service rules and payroll control - Civil service employment rules strengthened under the Law on the Civil Service (2005); similar arrangements planned for the rest of the general government. - Salary structures are well defined with coefficients, annual increments, and identified allowances. - Centralized payroll is in place for direct budget users of the Republican government; payroll control at subnational government and indirect budget user level is being addressed only gradually. ### Procurement, asset sales, and reporting - Public Procurement Law (2002, amended 2004) and regulations set thresholds requiring open tenders; in practice: - rules generally followed for large tenders; - restricted tender procedures are widely used for medium-size procurements even when not justified. - Complaints procedure exists but is slow and ineffective. - Sigma report (June 2007) noted the legal framework promotes transparency but requires modernization and simplification, and institutions and training need strengthening. - Privatization and asset sales: - Privatization Agency submits monthly progress reports to MoERD and National Assembly and maintains a website database of companies in restructuring and privatization; results of each sale are recorded. - Gross receipts, commissions, or other payments from privatization receipts are not reported in the budget documents. - Competition in bids is not always achieved: tenders or auctions may continue with a single buyer if conditions are met. - Sales of government assets by the Government Property Directorate are not adequately reported. ### Internal audit and inspection - Internal audit is not well established despite recent development efforts in line with the BSL and international best practice. - Staff capacities are limited due to competition from the private sector; some training of trainers undertaken; internal auditors have not been deployed to budget users. - Internal audit function is centralized in the MoF’s Budget Inspection and Audit Department and has focused on ex-post controls on budget users. - In 2006, there were 10 staff in the Internal Audit Unit and 5 inspectors in the traditional Inspection Unit. - Inspection reports are sent to the budget user and the Minister of Finance; MoF reports twice yearly to the National Assembly on inspections and publishes an annual report on inspection findings. - Systems control is not yet implemented; budget controllers perform ex-ante verification of payment order accounting documentation (¶30). ### Tax and customs administration independence and controls - Efforts to limit discretion of tax and customs officials include organizing administrations along functional lines, administrative appeal procedures, and telephone hotlines for complaints and reporting of corruption and fraud. - Tax and customs administrations have internal control and audit units, but activities are not well defined and lack coordination with the MoF’s Budget Inspection and Audit Department. - Corruption in tax and customs administration remains a concern; evidence on improvement is mixed. - Revenue administration heads have no legal protection from removal and no fixed term of appointment; administrations are not financially independent—bulk of financing comes from the budget despite some retention and fee revenues. ### External audit, SAI, and statistics - Law on the SAI (adopted in 2005) meets INTOSAI standards; provides for financial and operational independence, reporting to the National Assembly, and audit coverage of all public sector activities. - Five members of the Supreme Audit Council were appointed in September 2007 for six-year terms; the Law requires auditees to indicate remedial actions within fixed timeframes. - The Supreme Audit Council of the SAI is not yet fully operational and has not presented reports to the legislature; focus has been on accommodation, recruiting, and training staff. - Public accounts for 2002 to 2007 were submitted to parliament without independent audit and have not been formally published. - MoF (FMAPD) consults NBS and the Economics Institute on macroeconomic assumptions used in the BM; FMAPD has used a macroeconomic and forecasting model developed with external assistance for the last three BMs. - Serbia Statistical Office (SSO) does not verify fiscal data, does not produce or disseminate fiscal data, and does not have statutory independence; institutional arrangements are in transition and a new law is being drafted. ### IMF staff commentary — progress and remaining challenges - Serbia has made solid advances in fiscal transparency, including: - adoption of a legal framework for fiscal financial management; - creation of a treasury single account (TSA); - routine disclosure of fiscal information; - establishment of an independent state audit institution. - Key remaining issues and challenges: - assignment of some roles and responsibilities across government; - relationship between the Republic budget and the rest of general government and the public sector as a whole; - quality, coverage, and comprehensiveness of fiscal data; - internal and external audit and control. - The ROSC identifies elements for a strategy to address fiscal transparency problems and highlights measures that could yield substantial transparency gains in the short term. - Budget System Law (BSL) of 2002 and amendments: - introduced a modern legal framework for budgetary management, focusing on the Republic budget but setting the basis for public finance management across general government; - defines responsibilities and dates for the budget cycle, prescribes budgetary and accounting classification, raises standards of budget documentation, establishes a common payment system around TSA principles, and provides legal basis for modern accounting standards, internal controls, and audit. - Treasury and FMIS developments: - a comprehensive system of treasury subaccounts under a TSA has been established; - public payments function moved to the treasury at end-2002; - centralized accounting system can generate monthly accounts; - FMIS reporting modules rolled out in January 2008 to capture stages of budget execution and provide cash and debt management facilities. *Source: _cr09144 - 48. Budget documents discuss the objectives and expected results from government* ### 68. The extent, regularity, and accessibility of information to the public has ### 68. The extent, regularity, and accessibility of information to the public has ### Improvements in public information - Updated laws and relevant decrees are generally readily available from government websites. - The MoF has expanded the BM to include medium-term projections, a list of proposed loan guarantees, a more comprehensive discussion of the objectives and the macroeconomic context of the budget, debt sustainability analysis, and a discussion of fiscal risks. - The BM and budget are published on the MoF website. - The MoF routinely publishes monthly reports on the execution of the Republic budget in its Monthly Public Finances Bulletin (http://www.mfin.sr.gov.yu). - Other government agencies use the internet to inform the public (example: Privatization Agency publishes information on enterprises being offered (www.priv.yu)). ### Major shortcomings relative to fiscal transparency good practices - Budget estimates are not yet fully reliable; and fiscal operations, sensitivity analysis and other fiscal risks are not adequately reflected in budget documentation. - Coverage of the fiscal activities of the government and fiscal risks is incomplete; the definition of general government is not fully observed and is not in line with GFSM 2001. - Budget documentation on the outturn and prospects for the Republican and general government sectors is limited in detail, with inadequate information on the finances, performance and objectives of indirect budget beneficiaries (IBBs). - No comprehensive assessment of the financial position of state- and socially-owned enterprises (SSOEs) or associated fiscal risks. ### Budget projections, quasi-fiscal activities, and fiscal risks - Although budget outcomes have been closer to initial budget projections in recent years, there are still substantial deviations in some major components of both expenditure and revenue; no analysis is presented of the reliability of the budget projections or why deviations occurred. - Quasi-fiscal activities (QFAs) are significant, but are not routinely identified, quantified, or disclosed. - SSOEs perform functions on behalf of government at both Republican and subnational levels for which they are only partly compensated through budget subsidies. - Impact of QFAs on SSOEs is often obscured by non-transparent arrangements (offsets against tax or payments to other SSOEs), obscuring social spending, encumbering future one-off privatization receipts, and reducing accountability because the National Assembly does not vote on them. - Discussion and quantification of other fiscal risks is limited: - Very little quantification of the potential impact of deviations in economic assumptions on the fiscal outlook. - Tax expenditures are not reported. - No comprehensive assessment of the impact of PPPs or other innovative financing arrangements. ### Monitoring of budget execution, arrears, and investment management - Budget execution and accounting systems do not fully capture commitments and arrears in a timely fashion. - Reporting to the treasury of commitments made by budget beneficiaries is impaired by the requirement that they can only be entered against the current or following month’s payment quota. - Lack of a reliable system for monitoring and verification of arrears entails risks for the future. - Separate reporting mechanisms are being developed for DBBs but not for IBBs; arrears may still be accumulating in IBBs and EBFs, including self-managed health care institutions funded through the Health Insurance Fund (HIF), which have accumulated significant payment arrears. - Disclosure of collection arrears on taxes and social contributions is inadequate. - The National Investment Plan (NIP) has obscured budgeting and recording of capital expenditure: - Different budgetary cycle for the NIP and lack of transparent economic classification for identifying project inputs complicate expenditure tracking and distort fiscal analysis. - MoF lacks a comprehensive view of capital projects, transparent prioritization criteria, and budget appropriations lack sufficient information for scrutiny or monitoring by the National Assembly. ### Legal framework, intergovernmental relations, and reserves - Legal framework determining relations between different levels of government is still evolving, leading to blurred lines of responsibility and accountability. - Frequent amendments to the BSL reflect numerous changes to intergovernmental relationships. - Dual financing (from the Republic and local government budgets) remains practice for many indirect budget users (e.g., schools and hospitals). - Many entities collect and use own revenue with management inadequately defined in the BSL. - Complexities in property ownership definition obscure division of responsibilities; Republican government controls ownership decisions of state and former socially-owned assets, including property in use by local governments and subordinated bodies. - Lack of specification of a formal ceiling for the current budget reserve in the BSL, and the existence of a separate permanent budget reserve, could permit considerable executive discretion over in-year spending and reduce parliament’s control and budget realism. ### Reconciliation, external scrutiny, and audit functions - Aggregate reconciliation of fiscal and monetary data is not conducted on a regular basis; government does not routinely undertake reconciliations with monetary data despite accounting system ties to the comprehensive TSA. - External independent assessment of the budget projections is limited; opportunities for independent experts exist only on an informal basis and no formal procedures for independent external scrutiny have been established. - External audit: - An external audit function has been put in place but is not yet fully operational; final accounts are still not being subject to audit. - Absence of an operational external audit institution has limited the government’s ability to address identified issues and the National Assembly’s oversight. - Internal audit: - Internal audit function is still being developed; internal control functions focus on ex-ante verification and compliance. - Budget inspection continues as ex-post investigative function. - Plans to introduce advisory-focused internal audit are underway but capacity is limited, centralized in the MoF, and insufficiently developed. ### Near-term measures to improve fiscal transparency (action to be initiated) - Refine the list of entities that comprise the general government: - Review the current list of over 9,000 government entities on the basis of GFSM 2001 and SNA criteria to determine which meet criteria for classification as part of the general government. - Consider consistency with ESA 95. - Remove entities that do not meet criteria, add those omitted, and determine a procedure to keep the list up to date and publicly available. - Agree on a program for the development of the State Audit Institution (SAI): - Priority to clear backlog of unaudited financial statements. - Make the SAI fully effective; international experts might have a transitional role. - Manage external support for SAI capacity building; develop mechanisms for monitoring responses to reports presented to the legislature. - Further develop the internal audit function: - Short-term training program drawing on donors, internal audit staff from other countries, and the Institute of Internal Auditors. - Operationalize the Central Harmonization Unit in the MoF to oversee financial management, inspection, and internal audit. - Strengthen audit via collaboration with neighboring and EU countries, professional attachments, and establishment of a professional association of auditors. - Strengthening internal control and audit to safeguard correct use of economic classification in accounting, particularly in local governments and indirect budget entities. - Integrate the NIP into the budget process: - All capital projects should be discussed and approved within the main budget cycle. - NIP projects should be classified under normal economic classification codes for budget and reporting rather than the 551 code. - Oversight for planning of investment should be placed with the MoF to coordinate with the rest of the budget, including recurrent spending. - Further develop budget analysis capacity: - Improve MoF Budget Preparation Department capacity to challenge bids of spending departments and NIP projects. - Develop and introduce a comprehensive medium-term budgetary framework. - Strengthen program budgeting methodology, improve consistency and comprehensiveness of program design (including the NIP) across ministries, and introduce a budget review process to lay foundation for performance-oriented budgeting. - Expand the discussion of fiscal risks in the BM into a comprehensive “fiscal risks” statement: - Systematic analysis of impact on fiscal projections of alternative economic assumptions. - Quantification, where possible, of other fiscal risks including likely costs of meeting contingent liabilities, restitutions and other compensation claims, and potential fiscal impact of extrabudgetary activities and SSOEs. - Fiscal risks associated with PPPs should be carefully assessed, fully disclosed, and integrated into the budget. - Provide more detailed information in budget documentation about IBBs, EBFs, MSIOs, and SSOEs: - Comprehensive outturn data and realistic projections for own revenues of all IBBs. - Extend MSIO presentations to cover IBBs. - Provide key financial information for all SSOEs that present fiscal risks. - Ensure consistency between legal basis for reporting fiscal outturns and actual practice: - Overall balance of the general government is reported monthly on a cash basis and used as main indicator, but there is no mention of this indicator in the BLS. - Clarify accounting and reporting framework and agree a strategy including changes to the BLS and methodology to develop financial statements consistent with legislation. - Reconcile debt and deficit data for the general government at least on an annual basis. - Widen the scope of fiscal data collected and disclosed: - Strengthen reporting on arrears by improving monitoring of commitments by DBBs and including health institutions in treasury surveys, and more rigorous monitoring of IBBs and local governments. - Report tax arrears and tax expenditures. - Publish more detail and analysis in budget documentation on expenditure and revenue prospects and debt management policy, and work to improve realism of budget projections: - Prepare analysis of current and previous years’ outcomes compared with original budget proposals, subject to independent scrutiny, and publish in the BM. - Subject aggregate projections and forecasting models to independent scrutiny. - Comprehensively explain and justify budget appropriations and aggregate projections in the BM. - Support proposals for new measures with projections of fiscal, economic and social impact; evaluate results and broader impacts of past measures. - Extend debt management strategies to elucidate objectives, including for the domestic debt market, and propose specific options for funding expected borrowing requirement. - Establish an overall legal and institutional framework for managing PPPs: - Develop a robust methodology for accounting for PPPs and for comprehensive reporting on PPPs and their fiscal risks. - Improve specification of fiscal public reporting obligations: - Include explicit fiscal data publication requirements in the BSL. - Publish an advance release calendar on the MoF website. - BSL should include a requirement for a mid-year report on the budget to be presented to the National Assembly. - Ensure comprehensive and consistent coverage of privatization receipts: - Payments made directly out of privatization receipts to the Privatization Agency (other than to cover direct expenditure), Employees Pension and Disability Fund, Restitution Fund, and subnational governments should be treated the same as payments made directly to the treasury (now recorded as financing items rather than revenues). - Publish a clear and simple summary guide to the budget. ### Further and longer-term actions - Reconsider the roles and size of the current and permanent budgetary reserves: - Most countries have only a single reserve subject to a cap in legislation. - Clarify responsibilities for monitoring and reporting on state-owned financial and nonfinancial enterprises: - Resolve overlapping responsibilities within and between the treasury and other parts of the MoF, NBS, the Ministry of Economy and Regional Development, and line ministries. - Oversight for monitoring and policy advice with respect to state-owned enterprises should include QFAs, guarantees, implicit and explicit subsidies, and monitoring of financial statements. - Prepare regulations on publication of this information to ensure budget documentation includes comprehensive reports on financial outturns and prospects. - Extend the FMIS to IBBs and subnational governments, and introduce general ledgers for DBBs and IBBs, following confirmation that current FMIS rollout phases are performing effectively. - Publish occasional reports on prospects for public finances over the long term to analyze issues like the impact of pension commitments and costs of financing health care under alternative demographic and macroeconomic projections. ### Institutional reform priorities - Reform intergovernmental fiscal relations and strengthen PFM at the subnational level: - Clear assignment of responsibilities and apportioning of state-owned assets. - Full implementation of BSL provisions and development of appropriate PFM regulations and procedures in subnational governments. - Strengthen integrity of fiscal data and tax administration: - Extend the mandate of the Serbia Statistical Office to cover quality and methodology of fiscal data and give it institutional independence. - Consider mechanisms for subjecting fiscal projections to independent scrutiny before finalization. - Legally protect the tax and customs administrations from political direction. *Source: _cr09144 - 68. The extent, regularity, and accessibility of information to the public has* ### APPENDIX I Table 1. Serbia: A Summary Assessment of Practices ### APPENDIX I Table 1. Serbia: A Summary Assessment of Practices ### 1.1 Institutional and fiscal structure - Summary assessment: Largely Observed - Key findings: - The general government is defined broadly consistently with the principles of Government Finance Statistics (GFS) 1986, but some entities may be misclassified. - Using the principles of GFSM 2001, and the criteria of the Systems of National Accounts (SNA), the current list of over 9,000 government entities should be reviewed to determine which entities fully meet the criteria for classification as part of the general government. - While GFSM 1986 principles are applied in theory, there is no procedure for regularly reviewing the list of IBBs or for ensuring that all EBFs are reported within the general government sector. - The fiscal roles of the executive, legislative, and judicial branches are clearly defined in the Constitution. - Responsibilities of different levels of government are clearly defined in various laws, but are numerous and complex; accountability is complicated by divided responsibilities between levels of government. - Relationships between government and state- and socially-owned enterprises are generally defined by law, but lines of responsibility are blurred in practice; reporting of the impact of nonfinancial state-owned enterprises on the budget is inadequate. - The National Bank of Serbia is operationally independent and has a clearly defined and limited fiscal role. - Local public enterprises do not own the assets they use, complicating operations and blurring accountability. - Recommendations: - Review the list of over 9,000 government entities using GFSM 2001 and SNA criteria to ensure correct classification. - Reform intergovernmental fiscal relations, particularly assignment of responsibilities and apportioning of state-owned assets. - Strengthen PFM at the subnational level to fully implement provisions in the BSL; develop appropriate PFM regulations and procedures. - Clarify responsibilities for monitoring and reporting on state-owned financial and nonfinancial enterprises, including QFAs, guarantees, implicit and explicit subsidies, and monitoring of financial statements. ### 1.2 Legal, regulatory, and administrative framework - Summary assessment: Largely Observed - Key findings: - The legal framework for management of public funds is reasonably clear and comprehensive, although it has been subject to frequent changes. - The tax system is fairly comprehensive, with a clear legislative basis, but it is complex and subject to frequent changes; taxpayers’ legal rights, including appeals procedures, are well defined. - Public opinion is normally sought in advance concerning proposed laws, regulatory changes, and broader policy changes. - Contractual arrangements between the government and the private sector and other parts of the public sector are generally clear and publicly accessible. - Liability management and granting of rights for mineral extraction are governed by legislation; the legal framework for privatization is clear. - Recommendation: - Establish an overall legal and institutional framework for managing and accounting for PPPs. ### 2.1 Budget preparation, macro framework, and documentation - Summary assessment: Largely Observed - Key findings: - The annual budget process is open and the budget calendar is clearly specified in the Law; adequate time is allowed for consideration by the National Assembly. - The National Investment Plan (NIP) should be fully integrated into the budget process. - Broad fiscal aggregates and macro assumptions for the medium term are presented in the Budget Memorandum. - Republic budget estimates are not yet fully reliable; no fiscal rules have been specified for the Republic budget. - Estimates of new initiatives and ongoing costs are not always adequately calculated and presented in the budget documents. - A statement on medium-term fiscal policy objectives is included; debt sustainability issues are addressed, but there is no systematic sensitivity analysis or broader disclosure of fiscal risks. - Recommendations: - Fully integrate the NIP into the budget process. - Comprehensively explain and justify budget appropriations and aggregate projections. - Develop capacity for budget analysis, strengthen MoF Budget Preparation Department to challenge spending bids and NIP projects, rationalize program budgeting, and introduce a comprehensive medium-term budgetary framework. - Require proposals for new measures to be supported by projections of fiscal, economic, and social impact. - Systematically analyze and disclose sensitivity of fiscal projections to deviations in macroeconomic assumptions. - Improve coordination and reporting of activities and finances of indirect budget beneficiaries. ### 2.2 Budget execution, monitoring, and reporting - Summary assessment: Largely Not Observed - Key findings: - Basic accounting and internal control procedures are in place, but expenditure commitments are not tracked centrally and implementation needs strengthening. - The treasury accounting system can produce in-year reports for the Republic budget, but elements of the annual balance sheet are derived from records provided by budget entities rather than the general ledger. - Reporting on arrears could be strengthened; monitoring of commitments by DBBs, IBBs, local governments, and health institutions needs improvement. - The National Assembly does not receive in-year reports or mid-year reviews, though supplementary budgets provide fiscal outlook updates in the second half of the year. - Supplementary budget proposals are presented consistently with original budget presentation. - The National Assembly has been unable to approve the final accounts, pending establishment and full operation of the State Audit Institution (SAI). - Recommendations: - Strengthen monitoring of commitments and consider extending the FMIS to indirect budget users and subnational governments after confirming initial FMIS phases perform effectively. - Reconsider roles of current and permanent budgetary reserves. - Include a mid-year reporting requirement in the BSL. - Prioritize clearing the backlog of unaudited financial statements by the SAI. ### 3.1 Coverage, transparency, and fiscal risks - Summary assessment: Largely Not Observed - Key findings: - Budget documents cover central government fiscal activities and provide summary aggregates for the general government, but information is limited on indirect budget beneficiaries and SSOEs that benefit from budgetary support. - The Budget Memorandum discloses main fiscal aggregates for two years prior to the budget year and two years beyond the budget year. - Budget documents identify proposed loan guarantees and describe other contingent liabilities and fiscal risks, but do not quantify them. - QFAs are significant but not identified or costed in budget documents; various subsidized lending and guarantees exist for SMEs and housing projects. - Statements on tax expenditures are not included. - Information on the gross public debt of the Republic is largely complete and published; information on general government financial assets is compiled but not published. - Annual fiscal reporting covers consolidated general government including MSIOs and Serbia Roads; the finances of public corporations are not presented. - Analysis of the long-term outlook for public finances is neither undertaken nor published. - Recommendations: - Provide additional information on tax arrears, tax expenditures, and estimates of contingent liabilities. - Provide key financial information for all SSOEs that present fiscal risks. - Expand the statement on fiscal risks into a comprehensive “fiscal risks” statement with some quantification. - Publish comprehensive outturn data and realistic projections for the own revenues of all IBBs. - Prepare regulations for publication of detailed financial information about state-owned enterprises. - Publish occasional reports on long-term public finances. ### 3.2 Presentation, classification, and performance information - Summary assessment: Largely Not Observed - Key findings: - There is no clear and simple guide to the budget made accessible to the general public. - Classifications for revenue, expenditure, and financing used in the annual budget presentation are broadly consistent with international standards, with the exception of the NIP. - Internal control and audit should be strengthened to safeguard correct use of economic classifications, particularly in local governments and indirect budget entities, and in respect of the 551 code for the NIP. - The overall balance of the general government is monitored monthly during the year, together with gross public debt. - Budget documents discuss objectives and expected results in general terms but do not systematically evaluate outcomes. - Recommendations: - Publish a “citizen’s guide” to the budget. - Ensure consistency between legal basis for reporting fiscal outturns and actual practice; clarify accounting and reporting framework. - Evaluate and publish results and broader economic and social impacts of past measures in the Budget Memorandum. ### 3.3 Timeliness of fiscal information - Summary assessment: Not Observed - Key findings: - There is no legal commitment to publish fiscal outturn information beyond publication of the final accounts. - Although fiscal data are, in practice, published regularly and timely, there is no advance release calendar. - Recommendations: - Include explicit requirements in the BSL for main fiscal data (annual, quarterly, and monthly) to be published regularly and timely. - Publish an advance release calendar on the MoF website. ### 4.1 Data quality - Summary assessment: Largely Not Observed - Key findings: - Republic budget estimates are not yet fully reliable; no analysis of differences between planned and actual outturns is made available to the public. - Statements on accounting policy are not included in the budget. - The process of accounts reconciliation is not always effective; debt and deficit data are not reconciled. - Major revisions to historical fiscal data and any changes to data classification are explained. - Recommendations: - Provide analysis of previous years’ outcomes compared with original budget proposals. - Clarify and describe the accounting and reporting framework of the budget in budget documents and reports. - Reconcile debt and deficit data for the general government, at least on an annual basis. ### 4.2 Internal controls, oversight, and safeguards - Summary assessment: Largely Not Observed - Key findings: - Public servants are subject to a well-defined code of behavior; corruption is perceived to have declined in recent years but remains a matter of concern. - Civil service employment rules are well established for the Republican government; plans exist to establish similar arrangements for the rest of the general government. - Procurement procedures are being improved, but much remains to be done. - Sales of public assets are subject to well-defined processes, including reporting of all major transactions, but bids are not always subject to competition. - Internal audit is not well established. - The tax and customs administrations are not given legal protection from political interference; internal monitoring and control mechanisms are still being strengthened. - Recommendations: - Provide comprehensive coverage in budget documentation of privatization receipts, including information on how all proceeds are distributed and consistent treatment in the financial accounts. - Further develop the internal audit function; introduce a training program drawing on donors, internal audit staff from other countries, and the Institute of Internal Auditors. - Strengthen collaboration with neighboring and EU countries, establish a professional association of auditors. - Legally protect the tax and customs administrations from political direction. ### 4.3 External scrutiny and audit - Summary assessment: Not Observed - Key findings: - External audit, as defined in the Law on the State Audit Institution, is independent and its mandate covers all public sector activities, but the SAI is not yet fully operational. - The Supreme Audit Council of the SAI is not yet fully operational and has not presented any reports to the legislature. - Government bodies with independent status (including the National Bank of Serbia) are consulted about macroeconomic models and assumptions, but they do not scrutinize material in advance of publication. - The Serbia Statistical Office does not verify fiscal data and does not have legal assurance of independence. - Recommendations: - Initiate a program for development of the State Audit Institution; consider transitional roles for international experts and manage external support to maximize learning for new auditors. - Develop mechanisms for the SAI to monitor responses to reports it presents to the legislature. - Consider mechanisms for subjecting fiscal projections to independent scrutiny before finalization. - Extend the mandate of the Serbia Statistical Office to cover the quality and methodology of fiscal data and give it institutional independence. *Source: _cr09144 - APPENDIX I Table 1. Serbia: A Summary Assessment of Practices* ### APPENDIX I Table 2. Serbia: Public Availability of Information—A Summary ### APPENDIX I Table 2. Serbia: Public Availability of Information—A Summary ### Budget and Fiscal: Public availability matrix (selected items) - 1. Central government (CG) budget estimates — Included in Budget/Report Documents: Yes. — Available to the Public: Yes — Code Reference: 2.1.1 - 2. CG defense expenditures — Included in Budget/Report Documents: Yes. — Available to the Public: Yes — Code Reference: 2.1.1 - 3. Extrabudgetary funds — Included in Budget/Report Documents: Only the MSIOs and Road Fund. — Available to the Public: Yes — Code Reference: 2.1.1 - 4. CG budget outturns — Included in Budget/Report Documents: Yes. These appear in the Monthly Public Finances Bulletin. — Available to the Public: Yes — Code Reference: 2.1.2 - 5. CG budget forecasts — Included in Budget/Report Documents: Yes. These are in the Budget Memorandum at an aggregate level for three years. — Available to the Public: Yes — Code Reference: 2.1.2 - 6. CG contingent liabilities — Included in Budget/Report Documents: List provided of guaranteed loans. — Available to the Public: Yes — Code Reference: 2.1.3 - 7. CG tax expenditures — Included in Budget/Report Documents: No. — Available to the Public: No — Code Reference: 2.1.3 - 8. CG QFAs — Included in Budget/Report Documents: No. — Available to the Public: No — Code Reference: 2.1.3 - 9. Macroeconomic assumptions — Included in Budget/Report Documents: Yes. These are presented in the Budget Memorandum. — Available to the Public: Yes — Code Reference: 3.1.3 - 10. Fiscal risk/sensitivity analysis — Included in Budget/Report Documents: No substantive analysis. — Available to the Public: No — Code Reference: 3.1.5 - 11. CG debt — Included in Budget/Report Documents: Yes. Public debt data appear in the Monthly Public Finances Bulletin. — Available to the Public: Yes — Code Reference: 2.1.4 - 12. CG financial assets — Included in Budget/Report Documents: No. — Available to the Public: No — Code Reference: 2.1.4 - 13. Sustainability analysis — Included in Budget/Report Documents: No. — Available to the Public: No — Code Reference: 3.1.1 - 14. General government budget estimates — Included in Budget/Report Documents: Yes. — Available to the Public: Yes — Code Reference: 2.1.5 - 15. CG monthly/quarterly reports on fiscal outturn — Included in Budget/Report Documents: Yes. These appear in the Monthly Public Finances Bulletin. There is no mid-term review document. — Available to the Public: Yes — Code Reference: 3.4.1 - 16. General government monthly/quarterly reports on fiscal outturn — Included in Budget/Report Documents: Yes. These appear in the Monthly Public Finances Bulletin. — Available to the Public: Yes — Code Reference: 3.4.1 - 17. CG final accounts — Included in Budget/Report Documents: Provisional (unaudited) accounts only. — Code Reference: 3.4.2 - 18. Consolidated general government final accounts — Included in Budget/Report Documents: Provisional (unaudited) accounts only. — Code Reference: 3.4.2 ### State-Owned Enterprises and the Nonfinancial Sectors of the Economy (2005) - Agriculture, hunting, and forestry, and water management — Percentage of total assets in sector: 35.6 - Construction — Percentage of total assets in sector: 9.6 - Generation and supply of electric power — Percentage of total assets in sector: 57.1 - Wholesale and retail trade; repair — Percentage of total assets in sector: 29.3 - Manufacturing industry — Percentage of total assets in sector: 0.3 - Activities related to real estate; renting — Percentage of total assets in sector: 4.7 - Government administration and defense; mandatory social insurance — Percentage of total assets in sector: 8.0 - Health and social care — Percentage of total assets in sector: 3.3 - Other utilities; social and personal service activities — Percentage of total assets in sector: 66.0 - Ore and stone extraction — Percentage of total assets in sector: 22.6 - Hotels and restaurants — Percentage of total assets in sector: 0.1 - Transport, warehousing and communications — Percentage of total assets in sector: 60.1 - Weighted Average — 26.2 - Source of data: Solvency Agency (2006), and IMF staff calculations. ### The Budget Preparation Process for Subnational Governments (key dates and activities) - Fiscal year: set on a calendar-year basis by the Constitution. - Legal framework: The BSL sets out the following main steps in the process: - June 15 — the local government body responsible for finance shall issue instructions for preparing their proposed budgets. — Budget System Law - July 15 — direct beneficiaries of local budget funds shall submit financial plans to the local body responsible for finance. — Budget System Law - October 15 — the local government body responsible for finance shall submit the proposed budget to the executive local government body. — Budget System Law - November 1 — the executive local government body shall submit the proposed budget to the local assembly and to the Ministry. — Budget System Law - December 20 — the local assembly shall enact local budget. — Budget System Law - December 25 — the local government body responsible for finance shall submit the approved local government budget to Minister. — Budget System Law ### Republic Budget — Comparison Between Budget and Execution, 2007 - Budget receipts: 581.8 - Execution receipts: 580.4 - Deviation (percentage): -0.2 - Income tax — Budget: 88.7 — Execution: 89.9 — Deviation (percentage): 1.4 - Value-added tax — Budget: 270.4 — Execution: 265.4 — Deviation (percentage): -1.8 - Customs excise and other taxes — Budget: 158.2 — Execution: 155.7 — Deviation (percentage): -1.6 - Non-tax revenues — Budget: 64.5 — Execution: 69.4 — Deviation (percentage): 7.6 - Budget outlays: 595.5 — Execution outlays: 567.2 — Deviation (percentage): -4.8 - Employment expenditures — Budget: 152.9 — Execution: 147.7 — Deviation (percentage): -3.4 - Goods and services — Budget: 42.9 — Execution: 39.2 — Deviation (percentage): -8.6 - Interest payments — Budget: 17.4 — Execution: 14.7 — Deviation (percentage): -15.5 - Subsidies — Budget: 35.5 — Execution: 35.3 — Deviation (percentage): -0.6 - Transfers to MSIOs — Budget: 147.4 — Execution: 145.1 — Deviation (percentage): -1.6 - Grants and other transfers — Budget: 56.2 — Execution: 56.6 — Deviation (percentage): 0.7 - Social protection — Budget: 72.4 — Execution: 69.4 — Deviation (percentage): -4.1 - Capital outlays (including NIP) — Budget: 70.7 — Execution: 59.1 — Deviation (percentage): -16.4 - Budget surplus/deficit 1/ — Budget: -13.7 — Execution: +13.2 - Note 1/: Defined according to BSL as “current revenues plus proceeds from sale of nonfinancial assets” less “current expenditures plus outflows for the acquisition of nonfinancial assets.” *Source: Extracted from the provided PDF content (_cr09144 - APPENDIX I Table 2. Serbia: Public Availability of Information—A Summary).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09144.pdf_