Serbia To Establish Development Bank

By Ivana Jovanovic

The Serbian government hopes that a new state development bank will prop up the nation’s struggling economy by distributing money to businesses that are having trouble getting commercial bank loans.

The economy has been crippled by the global downturn, 24% unemployment and faltering steel prices.

On Tuesday (January 31st), US Steel sold its unprofitable mill, Sartid, for a symbolic $1 to the Serbian government, which plans to seek another investor and salvage the mill’s 5,400 jobs, according to media reports.

Tatijana Isakovic, an advisor to Prime Minister Mirko Cvetkovic, said the development bank will open in the fourth quarter of 2012. It still must be approved by parliament.

“We will focus on small- and medium-sized enterprises because they constitute 90% of the Serbian economy and employ the highest percentage of the economically-active population,” Isakovic told SETimes.

The bank will also target exporters and assist businesses trying to enter foreign markets — such as construction companies — by providing guarantees the commercial banks are not often willing to provide, she said.

The new bank will offer approved credit arrangements exclusively through commercial banks to encourage them to build ties with businesses. The arrangement will also allow commercial banks to secure adequate profit margins.

Some critics have already voiced concerns about establishing the development bank.

“The institution is unnecessary because a development fund already exists, which needs to be advanced [by having] its credit facilities strengthened and new control mechanisms introduced,” Association of Banks Vice-President Veroljub Dugalic told SETimes.

Dugalic said commercial banks would have no problem offering the new institution’s credit arrangements, in addition to doing their regular work.

“This development bank will offer state guarantees, meaning the commercial banks will do what is easiest when somebody does not repay their loans — activate the guarantees at the state’s expense,” Dugalic said.

Others see the part of the draft law establishing the new bank — which was sent to parliament for approval on January 11th — that turns the new institution into a guarantee fund for commercial banks, as problematic.

Dragan Marjanovic, president of the Serbian Employers’ Union, said the development bank may ignore potential businesses in poor areas of Serbia, as well as companies that have been idled — or those who had their accounts frozen — to regain productivity.

Marjanovic said commercial banks will make profit, but will not be stimulated to reduce interest rates for corporate loans. “The development bank should encourage competition among commercial banks, rather than establish their position more firmly,” he said.

In a broader interpretation of the law, attorney Igor Isailovic told SETimes that the development bank should be a catalyst of available state funds for various industries.

“I am sure that by establishing the development bank the state will reduce interest rates and create a much better economic climate … and the project itself will create opponents that will be, in some way, linked with the commercial banks,” Isailovic said.

The bank will be launched with funds from the Development Fund and the Agency for Export Insurance. The republican budget will set aside 400m euros over the next three years in order to maintain the majority of ownership.

But earlier this month, Chairman of the Serbian Chamber of Commerce (PKS) Milos Bugarin told reporters that this budget is insufficient, and the bank will need at least 1 billion euros to foster economic development.