Serbia must modernise, change its economic structure and increase its productivity and competitiveness. Existing policies don’t pay sufficient attention to these objectives
This year’s Kopaonik Business Forum (KBF) takes place in the broader context of a geopolitical and geoeconomic situation that’s continuously complex. This time around, the protracted polycrisis identified at last year’s KBF has even more sources and encompasses an array of relevant economic and social areas, ranging from slow growth, conflict tension, inflation, supply chain disruptions, slowing and fragmented world trade, falling real wages, rising inequality and delays in the implementing of the green agenda.
According to the estimation of Aleksandar Vlahović, president of the Serbian Association of Economists, the global economy is recovering slower than expected, though it is nonetheless displaying considerable resilience. “It is expected that the growth of advanced economies will improve slightly, from 1.7% in 2023 to 1.8% in 2024, and will maintain that same momentum in 2025. Estimates for 2024 reflect the stronger growth dynamics in the U.S. (2.8%) and expected weaker growth in the EU. When it comes to the forecast for 2025, the opposite is true: the U.S. economy is expected to experience slower growth (2.2%), while other advanced economies are expected to perform better compared to 2024.
“Economic developments in Europe are particularly significant for Serbia, as the continent continues to face two challenges: the first is finally overcoming inflationary pressures and restoring price stability; while the second is ensuring strong, sustainable and green growth over the long term, while managing the impact of geoeconomic fragmentation, which could further undermine Europe’s competitiveness at the global level, coupled with slow or even stalled convergence within the EU and across Europe as a whole”.
Could the Western Balkans benefit from new nearshoring and friendshoring trends?
— Throughout 2024, the Western Balkan region relied more on domestic sources of growth supported by an expansionary fiscal policy, the rising availability of credit and inflationary pressures. Alongside increased consumption and investment on the demand side, the region experienced strong growth in construction and services on the supply side.
Economic growth is expected to have reached 3.3% in 2024, compared to 2.6% in 2023. It is projected that Serbia, as the region’s largest economy, will have achieved GDP growth of 3.9% in 2024, spurred by the recovery of private consumption and investment.
Following three years of consolidation, the fiscal deficits of Western Balkan countries are expected to have grown in 2024, despite a strong income performance. This deficit growth is a consequence of great pressures on spending (social benefits, pensions and salaries) and increased investment expenditures. All in all, the region’s fiscal deficit increased by an average of one per cent of GDP.
A lack of transparency in the selecting and financing of capital projects leads to delays, exceeded budgets, poor quality works and questionable long-term effects of such investments
The region had growing trade and current account deficits over the past year, due mainly to the slow growth of exports that resulted from reduced external demand. This is a consequence of negative economic trends among the region’s key foreign trade partners of the region, and here I’m referring primarily to the zero growth achieved by Germany. It can thus be expected that domestic consumption, investment and trade within the region will become more significant sources of growth in 2025 and beyond, until EU trading partners recover fully from the crisis. The programme of structural reforms remains crucial to stimulating growth in the region aimed at increasing living standards sustainably and accelerating economic integration. In this regard, the EU Growth Plan for the Western Balkans offers a combination of new funding opportunities and advanced access to selected aspects of the Single Market in the Western Balkan region. Expanding the geographic scope of the Single Euro Payments Area (SEPA) to encompass some Western Balkan countries as early as 2025 is also important and will significantly help to support market integration and eliminate obstacles to financial flows.
Ultimately, benefiting from potential nearshoring and friendshoring trends will depend largely on future economic and trade relations between Europe and China, which we can conclude from experience will be influenced greatly by political and economic relations between the U.S. and China. It is nonetheless important to note that, without serious reforms, providing subsidies to foreign investors won’t be enough to make any Western Balkan country attractive for investment.
How capable is Serbia when it comes to avoiding the middle-income trap?
— Serbia is still a moderately developed economy with a predominantly traditional business sector. Despite major capital and foreign investments, the economy’s structure hasn’t changed markedly. Traditional sectors still employ more than half of the workforce, while their contribution to GDP has stood at a level of 43 to 44 per cent for the last 20 years. The development model implemented to date has secured insufficient economic growth to close the gap on the countries of Central and Eastern Europe that are today EU and Eurozone members.
The key drivers of our economic growth since 2016 and to this day are state capital investments and foreign direct investments. Public investments have been at a level of seven to 7.4% for the past several years, which is the maximum amount allocated for these purposes.
At the KBF in previous years, we regularly emphasised the need for capital investments to be above six per cent of GDP, and in this regard the government has made very good progress since 2018. However, the problem is that the plan to realise capital investments isn’t preceded by a clear strategy that would serve to define the basic investment corridors over the medium term.
That’s why we suggest the precise defining of project selection methodology and analysis of the socioeconomic justification of those projects, i.e. multiplier analysis of projects’ positive impact on overall economic activity – not only in the period of realising capital investments, but also during the usage period of completed infrastructure facilities. A special problem is represented by the process of making decisions on the financing method, contractor selection and supervision. Since 2018 and to this day, practically all major projects have been implemented according to special procedures, without applying the Law on Public Procurement and without the possibility of ensuring a more effective way of spending the money provided for these purposes in a procedure that’s transparent for the state and taxpayers. The consequence of this approach is that additional costs regularly appear, planned project budgets are exceeded significantly, implementation is delayed and the quality of implemented works is often questionable.
The period of fiscal consolidation was followed by significant FDI growth. And those investments, together with other economic policy measures, contributed to our country’s macroeconomic stabilisation. With this FDI amounting to five per cent of GDP or more since 2019, it has been possible to significantly reduce unemployment levels and increase the employment rate. As a consequence, the level of foreign investment has so far ensured the full coverage of the current account deficit, or the country’s foreign currency liquidity. FDI has been largely directed towards traditional sectors of the economy (more than 60%), while a proportionally smaller amount has been directed towards advanced, hightech sectors. It will be difficult to sustain the amount of FDI attracted with this structure in the future. Firstly, the availability of labour is today already problematic, while labour costs are simultaneously rising significantly. It is thus important that the state implements active industrial policies that direct FDI towards advanced branches of the economy, which would then also spread knowledge and advanced technologies to the domestic economy. This implies abandoning the policy of indiscriminately subsidising FDI. Secondly, Serbia will have a rising trade deficit in this year and the years ahead, resulting in a current account deficit. The latter deficit has to date been financed through net FDI inflows, but by last year these inflows had already fallen below the realised current account deficit. Given that outflows from dividends grow gradually, an unchanged FDI structure will inevitably result in a long-term deficit coverage problem.
A lack of transparency in the selecting and financing of capital projects leads to delays, exceeded budgets, poor quality works and questionable long-term effects of such investments
It is good that credit rating agency S&P Global Ratings gave Serbia an investment rating of BBB- with a stable outlook last October, for the first time ever. This will certainly impact on borrowing on the international financial market being more favourable for Serbia, and this news will also have a positive influence on foreign investors. Fitch Ratings recently confirmed its previously defined credit rating of BB+ with a stable outlook, without assigning an investment rating. This is certainly good news for our country. On the flip side, Transparency International’s recent report doesn’t favour reform processes in our country, given that Serbia ranks 105th out of 180 countries on the corruption perception index in the public sector, with a total of 35 points. Only four European countries rank worse than us: Ukraine, Belarus, Bosnia and Herzegovina and Russia. Moreover, Serbia has been in constant decline according to this annual report since 2016, ranking worse with each passing year, which moves our country further away from the global and European average, but also further away from the goal – set by the government in its Strategy for Combating Corruption – of reaching an index rating of 43 over the next three years. For example, reaching the goal set would rank us in 76th place, alongside Bulgaria, China and Moldova, while in Europe we would have a better rating than not only the four aforementioned countries, but also Albania, Hungary and North Macedonia.
In order for Serbia to avoid the middle- income trap over the short term, it is essential to maintain a solid monetary policy position as long as is necessary, and for the goals of deficit reduction, debt control and the restoration of fiscal buffers to be respected, in combination with fiscal consolidation. This unfortunately doesn’t seem to be a priority of the Government at present, given that larger fiscal deficits are planned and that the fiscal rules have been de facto suspended until 2029. In other words, there is no satisfactory synchronisation of monetary and fiscal policy and we thus shouldn’t expect the National Bank of Serbia to engage in further monetary easing.
Serbia must modernise, change its economic structure and increase its productivity and competitiveness. The robust growth that’s desired won’t be possible without a higher level of quality when it comes to domestic private investments. Unfortunately, domestic private investments are stagnating with each passing year.
How does the Kopaonik Business Forum innovate itself in accordance with the needs of participants?
— The Kopaonik Business Forum is the region’s most important conference. This is confirmed year after year by the broad list of participants that includes domestic and international representatives of the business and academic communities. By choosing modern and current topics, we strive to keep pace with the times, and to enable all participants to have interesting discussions that don’t relate only to classic macroeconomic topics. That’s why the coverage of our KBF topics is such that it provides a platform to analyse all important aspects of the development of society, and not just the economic aspect. Our success is the result of dedicated work on the preparation of each subsequent edition of the Forum, and preparation work begins as early as April of the current year. It’s a given that each year’s KBF concludes with an extensive survey of participants, where in the summarising of results we hear suggestions of what else we need to offer for the next year’s event. We leave nothing to chance, though some events still manage to surprise us even with such a serious approach. For example, this year we will have the second consecutive KBF with a government of Serbia that has a technical mandate, and we couldn’t have predicted that no matter how detailed our preparations.
