During times of great uncertainty and deeply disrupted international economic and political relations, Serbia should seek additional forms of economic connection that complement its strategic commitment to EU membership
Independently of the various scenarios of future relations with Russia, Serbia is already enduring the negative consequences of the Russian-Ukrainian conflict that are spilling over onto the Serbian economy.
Firstly, the Serbian economy is strongly integrated into the EU according to all economic parameters. The EU contributes over 60% to Serbia’s total foreign trade exchange and accounts for 70% of foreign direct investment, with EU partners operating around 24,000 companies in the country, employing close to 900,000 workers, while the largest part of the remittances of Serbian citizens – equating to approximately 8% of GDP – arrive from Germany and other European countries. The Serbian banking sector is also dominated by European-owned banks, while the Serbian dinar is pegged to the euro. The strong, longterm connection between the two economies has been established empirically: when the EU advances well in economic terms, that reflects positively on Serbia’s economic growth, employment and the standard of living of Serbian citizens. The opposite situation, however, also applies, which is precisely the case now.
Disrupted global supply chains, coupled with dramatic rises in energy and food prices, lead to a slowdown in investment activity and economic growth, pushing inflation and exerting pressure on the budgets of European countries. All these negative effects partly spill over to hit the Serbian economy. FDI inflows are already lower this year, the foreign trade deficit is increasing, inflation has exceeded 10%, alongside a pronounced increase in prices of food and energy, while interest rates on loans to businesses and households have increased. It is this year necessary to allocate a huge 1.7% of GDP to cover the interest on public debt repayment, while the cost of future borrowing on financial markets remains uncertain.
An important priority for the future government should be mitigating the ramifications of the energy crisis caused by the Russian-Ukrainian conflict, but also by the unprofessional managing of the domestic energy sector
That’s why it’s important, during such times of great uncertainty and deeply disrupted international economic and political relations, for Serbia to seek additional forms of economic connection that complement its strategic commitment to EU membership. One such form is the regional Open Balkan initiative, which – with its basic guiding idea of the free flow of goods, services, labour, capital and technology – strengthens all participating countries and increases their competitiveness internationally.
The future government’s second priority should be mitigating the ramifications of the energy crisis caused by the Russian- Ukrainian conflict, but also by the unprofessional managing of the domestic energy sector. The unacceptably poor management of the largest thermal power plant, which under normal conditions produces 40% of all electricity for domestic needs and export, has led to the need to make intervention imports at extremely high prices and unnecessarily spend hundreds of millions of euros that will ultimately be paid by Serbian citizens. Around two years and significant investments will be need to stabilise the situation. When it comes to gas prices, Serbia has a favourable three-year arrangement on the import of Russian gas, but that only covers three-quarters of the required amount, with the remainder needing to be paid at higher, market, prices. However, here again Serbia has unnecessarily aggravated the situation by failing to ensure the timely expansion of its own gas storage capacities, which forced it to secure the required quantities, at an additional cost, from Hungarian storage facilities. Finally, Serbia covers about 75% of its oil needs from imports, the main problem of which – at least for now – is represented by very high prices.
Considering that such unfavourable situations cannot change quickly, the Government must – at least temporarily – ease the operations of businesses and protect the living standard of citizens through tax breaks and controlling the prices of key energy sources, while simultaneously extending its interventions from commodity reserves and controlling prices of basic foodstuffs.