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DE RUEHBW #1228/01 2961250
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R 231249Z OCT 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0314
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BELGRADE 001228 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA'S PENDING PUBLIC SECTOR REFORM NOT ENOUGH 
 
Summary 
------- 
 
¶1.  (SBU) Serbia is moving forward in cutting its bloated state 
bureaucracy in an effort to pacify the IMF's calls for Serbia to 
shrink its budget deficit.  In its first step, the Serbian Government 
adopted a draft law that cuts state administration by 10% and sent it 
to the Parliament with the promise that this is just the beginning of 
serious public sector reform.  Independent trade unions and analysts 
accused the Government of hastily doing such a complex task only to 
please the IMF, without any real consideration of the impact. 
Officials in the Finance Ministry told us the action would have a 
minimal impact on budget costs since it excluded core spending in 
education, health, and security institutions.  Experts claim this 
would be a small - and easy - step in the right direction, but the 
desperately needed public sector reform had to be much broader.  End 
summary. 
 
Law on Reducing State Employees Sent to Parliament 
--------------------------------------------- ----- 
 
¶2. (U) On October 9, the government agreed to send a draft Law on 
Establishing the Maximum Number of Employees in Administration to the 
Parliament for adoption.  This was the first step in public sector 
reform, Prime Minister Cvetkovic told the press after the government 
session.  Cvetkovic said the law would cut administration by 10%, or 
by 3,400 employees, by January 1, 2010.  The cut would include all 
agencies and ministries except Interior, Defense, the State Security 
Agency (BIA), and prison administration (part of the Justice 
Ministry).  The proposed law would also restrict the total number of 
full time employees working for the state administration to 28,400, 
and the number of part-time employees to 2,840 (10% of the number of 
permanent employees).  Parliament plans to debate the law by the end 
of October. 
 
¶3. (SBU) In addition to this draft law, on October 22 Government 
forwarded to the Parliament the draft Law on Establishing the Maximum 
Number of Employees in Local Administration limiting it to four 
employees per 1,000 citizens, what would result in 5,468 job cuts. 
Several local mayors told us on October 19 that the government had 
done little to consult with them on these potential local cuts.  In 
addition, Cvetkovic said that separate from the central and local 
administration cuts, the Government had adopted plans to lay-off 
2,500 persons from the judicial system. 
 
The State Keeps Growing and Growing 
----------------------------------- 
 
¶4.  (U) Local press reported that since the end of the Milosevic era, 
Serbia's central administration has grown from 8,100 employees in 
2000 to over 30,000 in 2009.  Currently there are an estimated 34,000 
workers supporting the administrative work of the government 
ministries.  Essentially these are policy people and support staff 
based primarily in Belgrade.   While some of this growth was due to 
unchecked political patronage, a significant portion of the growth is 
because the Serbian state apparatus assumed many functions from the 
former federal administration (around 12,000 employees) after the 
dissolution of At that time, Serbia assumed responsibility for the 
Ministries of Foreign Affairs and Defense, as well as various 
offices, such as the Weather Service. 
 
¶5.  (U) Serbia's public sector (i.e. state administration, local 
governments and public companies) employs roughly one quarter 
(619,000) of the 2.6 million persons currently working in Serbia, 
World Bank Country Economist Lazar Sestovic told us on October 20. 
Out of this number, the Central Government employs 34,000 in central 
administration.  Local self-government (municipalities) have 38,000 
employees paid from their local budgets.  The police, military and 
security agencies employ around 90,000 people.  Education and health 
services have around 130,000 employees each.  Public companies, 
including local utilities and state companies such as JAT Airways, 
Serbian Railways, Serbian Electric Power(EPS), Telekom, and Srbijagas 
have over 170,000 people on their payrolls. 
 
Objective Standards, But No Savings until 2011 
--------------------------------------------- --- 
 
¶6.  (U) Staff cuts would be determined by the "necessity of the 
position" and the "professional and unbiased evaluation" of each 
employee, Deputy Prime Minister Mladjen Dinkic told the press on 
October 9.  To compensate for the hit, laid-off workers would receive 
severance packages, while employees with less than five years until 
retirement would not be cut.  Both PM Cvetkovic and DPM Dinkic 
avoided stating the actual savings for the upcoming 2010 budget and 
would not speculate as to whether the cut would be enough to satisfy 
 
BELGRADE 00001228  002 OF 003 
 
 
the IMF's request for Serbia to cut its projected 2010 budget deficit 
by 0.5% of GDP to 3.5%.  Instead, Cvetkovic and Dinkic explained that 
the real savings would be visible beginning in 2011 and that the job 
cuts would bring more indirect savings by simplifying procedures for 
citizens and businesses by reducing bureaucracy.  Cvetkovic said he 
hoped that Serbia would gain more credibility with the IMF once it 
showed it was serious about reform. 
 
Resistance By Ministers: No Cuts In My Ministry 
--------------------------------------------- -- 
 
¶7.  (SBU) The government's draft law will likely face strong debate 
in the Parliament.  Opposition Democratic Party of Serbia (DSS) has 
already called for the Parliament to oversee the cuts, while several 
members of the ruling coalition have criticized the draft law as 
well.  Infrastructure Minister Milutin Mrkonjic, from the Socialist 
Party of Serbia (SPS), stated on September 18 that he was against the 
cuts and that he would vote against them at the government session. 
"I have 190 employees in my Ministry, they all work and I am happy 
with them.  The Serbian government's duty is to hire all of its 
citizens, and I don't see what we get by firing people," Mrkonjic 
said.  Dragan Markovic Palma, leader of United Serbia party, said on 
September 28 that he was against cuts in any department and that the 
government should look for possibilities to create new jobs instead. 
However, Palma said he would respect the decision if the law was 
adopted.  Even Milan Markovic, Minister of State Administration and 
Local Self-Government and member of the Democratic Party (DS), stated 
in an interview to daily Politika on September 16 that he would not 
cut staff in his ministry since it did not have any excess labor. 
Rather than cutting staff, many in government have submitted requests 
to expand the size of ministries.  The head of the Finance Ministry's 
budget preparation department Svetlana Anokic told us that she had 
received requests for 8,800 new jobs in state administration. 
 
State Secretary, Budget Office Head: Not Enough 
--------------------------------------------- -- 
 
¶8.  (SBU) Finance Ministry State Secretary Vuk Djokovic told us 
unofficially on October 14 that this law touches "only the tip of the 
iceberg" and does not go deep into reforms.  "We are not touching 
education, health, defense, police, where the big numbers are.  This 
is just a cosmetic change done at the wrong time, at a moment when we 
need to work on accession to the EU which is a huge task for the 
administration," Djokovoic said.  Anokic told us on October 15 that 
the actual savings that this cut would bring to the 2010 budget was 
minimal, due to the need to pay severance packages.  As a result, the 
government would save in 2010 just $14.3 million compared to an 
expected deficit of $1.7 billion.  She claimed this would be 
insufficient to satisfy the IMF's demand to cut the projected 2010 
deficit to 3.5% of GDP, or $215 million. 
 
Trade Union Nezavisnost: Against Draft Law 
------------------------------------------ 
 
¶9.  (U) Trade unions are typically divided on the proposed law: while 
the largest trade union (SSSS) supported the draft law, the second 
largest trade union Nezavisnost (Independence) rejected the draft and 
accused SSSS of always nodding yes to the government.  At an October 
15 round table, Nezavisnost leader Branislav Canak stated that the 
draft law was "very frivolous, irresponsible, hasty and not 
statesmanlike" and in direct opposition to Serbia's labor law and 
parts of the General Collective Agreement.  Instead of taking a few 
years for such an important strategic reform, the Government was 
doing this quickly on the eve of the IMF visit, Canak said.  He 
speculated that the IMF would not swallow this and would only give 
its support to Serbia under unfavorable terms.  Canak said that party 
membership would be the key criteria for keeping positions.  This 
would leave the administration full of incapable employees who had 
jobs only because of their party membership, said Canak. 
 
¶10.  (U) Justice and police trade union leaders complained at the 
round table they were not even invited to the dialogue with the 
government, and claimed this was not a good time to reform the state 
when Serbia's unemployment rate was already more than 16%.  However, 
all union representatives at the round table agreed that public 
sector was too large for the size of Serbia's economy and that 
eventual rationalization was necessary.  The unions, however, said 
they were responsible to employees and claimed there were other ways 
to save budget funds such as addressing corruption and the gray 
economy. 
 
Experts: Reform Must Be Much Broader 
------------------------------------ 
 
¶11.  (SBU) Miladin Kovacevic of the Economic Institute think-tank 
 
BELGRADE 00001228  003 OF 003 
 
 
told us on October 16 that this law was just "one small step in the 
right direction."  Kovacevic said cutting state administration was 
one small part of three goals for wider reform: reducing public 
consumption; increasing public sector efficiency; and establishing 
sustainable social functions of the state with regard to pension and 
health funds.  Kovacevic explained that for Serbia, public sector 
reform was a must and that Serbia had hit the wall since the current 
growth model based on the inflow of foreign funds, previously fueled 
by privatizations and FDI, had been exhausted.  If Serbia does not 
reform its public sector it will "continue to face an economic 
crisis, including debt crisis as soon as next year.  Serbia will 
remain a poor country of poor citizens and pensioners," Kovacevic 
said. 
 
COMMENT 
------- 
 
¶12.  (SBU) While Serbia's first attempt at public sector reform is 
laudable, real reform needs to be much deeper and broader.  Serbia 
cannot expect to claw its way out of the economic crisis solely by 
trimming the margins of its budget.  Only with comprehensive reform 
that seeks to reduce the public sector's role in the overall economy 
can Serbia reposition itself for a post-crisis economy.  To do that 
will require greater political will and a firm stance by the IMF 
during upcoming negotiations.  End Comment. 
BRUSH