AmCham Macedonia Winter 2014 (Issue 40) - Page 20

ANALYSIS Serbian Public Sector Payments Improve Somewhat, Illiquidity Remains Macedonia recently adopted “Financial Discipline” legislation very similar to that adopted in Serbia roughly one year ago. The legislation in both countries sets maximum payment terms for all contracts and introduces fines and penalties imposed by government institutions above and beyond those agreed between contract parties. Before the law was passed in Macedonia, AmCham Macedonia argued that the law’s provisions were likely to reduce economic freedom, increase confusion among legal practitioners and business people as well as stress on already struggling businesses. Here, we speak with AmCham Serbia members, Karanovic & Nikolic, to learn more about the impact of the law in Serbia. Karanovic & Nikolic is a leading full service commercial law firm covering Serbia, Bosnia & Herzegovina, Croatia, Macedonia and Montenegro. EM: Based on your experience, what are the main drivers of Serbia’s liquidity problem? Can legislation remedy these problems? One of the main drivers for liquidity problems in Serbia is low industrial production, which has resulted in the lack of export competitiveness of Serbian products on international markets. Also, a lack of foreign direct investment in previous years has also significantly impacted liquidity in Serbian companies. A decrease of credit supply and high interest rates are also some of the factors causing liquidity difficulties. Also, the effects of the global financial crisis, which has significantly influenced the reduction of capital inflow into Serbia, cannot be excluded. With the above in mind, it is obvious that legislation can only partially remedy these problems. Several economic and political factors must be changed in order to resolve liquidity issues. EM: In a late 2013 AmCham Serbia survey, companies said liquidity remained the 2nd biggest problem they face while 60% of respondents said they see liquidity as a big issue. Is this evidence that the Serbian law failed to meet its objective? Not necessarily. Legislation can only partially resolve late payment problems, which are considerable. 20 Before the legislation was enacted commercial payment terms exceeded 130 days on average and companies felt compelled to accept extremely long payment terms in order to win public sector contracts, leading to their own debt overload and often insolvency. Shorter payment terms for the entire public sector won’t be fully in force until January 1, 2015, so it’s too early to assess the full effect of the law. We should also bear in mind that the law cannot remedy existing debt – including public debt toward the private sector – which also impacts private company liquidity. At any rate, the law has not met its objective entirely, and could not have been expected to do so given these factors. A new economic climate has emerged, however, where commercial entities seek more stable partners to ensure their ability to consistently meet payment obligations. EM: What have been some of the more problematic aspects of implementing this law in Serbia? How have companies coped? The first problem of implementation of the law in Serbia was the fact that it was not completely clear how the payment deadline was supposed to be calculated (e.g., from the date an invoice was issued Emerging Macedonia Winter 2014 Issue 40