Jorgovanka Tabaković, Governor of the National Bank of Serbia

The improving of the country’s external position as a result of a stronger export performance and higher net FDI inflows, as well as the maintaining of a stable fiscal position, will bring us closer to obtaining an upgraded credit rating

National Bank of Serbia Governor Jorgovanka Tabaković stated recently that the Serbian economy’s resilience in the face of global shocks has once again been put to the test and confirmed. This relates primarily to easing inflation, steady economic growth and good export results. However, growth figures remain far from sufficient to place Serbia on a trajectory ensuring the country’s faster convergence with the EU.

What are the key challenges preventing Serbia from achieving this kind of growth?

— According to our May projection, economic growth will stand at around 3.5% this year, while we project growth ranging from four to five per cent in the coming years. According to international financial institutions, this year Serbia’s economic growth will be among the highest in the region of Central and Southeast Europe. Those responsible for Serbia’s economic policy are striving to secure a sustainable economic growth rate over the long term that doesn’t cause a problem in terms of external and fiscal imbalances and doesn’t lead to rising inflation, and that is only possible in the way Serbia’s economic policy is currently being conducted. In the period prior to the 2008 global economic crisis, Serbia’s economic growth averaged six per cent annually, but this was unsustainable because it was based on expenditure, while investments and net exports had a contribution that was either negligible or negative. Achieving a GDP growth rate of seven per cent at this juncture would imply significantly faster growth of personal and government spending, which isn’t sustainable in the long term because it would result in rising inflation and an increasing fiscal deficit and public and external debt, as well as a poorer credit rating and sources of financing being more expensive and less available. Instead of this, we’ve decided to accelerate economic growth and increase production capacities gradually, while simultaneously ensuring a favourable growth structure.

According to your forecasts, inflation could enter the target tolerance band of 3 to 4.5 per cent as early as this month (May). However, looking back at the total increase in the cost of living over the previous period, could it really be said that Serbia’s struggle against inflation was successful?

— According to our projections, inflation is most likely to return to within the target range this month, after which it will continue to slow and will, as of next year, fluctuate around the midpoint of three per cent. Inflation has maintained a strong downward trajectory since April last year and fell by 11.2 percentage points to five per cent by the end of this April. Given the fact that we were exposed to the biggest shocks in recent history over the past three years and that rising inflation was largely driven by global cost-push pressures, but also that we managed to maintain our country’s overall macroeconomic stability even under the circumstances of the greatest global uncertainty following the outbreak of the energy crisis and the conflict in Ukraine, reducing inflation to levels close to the target range can be considered a success.

We weren’t able to prevent inflation growth from occurring, but we certainly limited that growth significantly and ensured its downward trajectory

It should be noted in particular that we succeeded in preserving the relative stability of the foreign currency exchange rate, and the anchoring of medium-term inflation expectations, throughout the entire period of the global crises that emerged one after another, while in recent months we’ve also recorded an accelerated decline in the short-term expectations of the financial and business sectors. We weren’t able to prevent inflation growth from occurring, but we certainly limited that growth significantly and ensured its downward trajectory, while simultaneously minimising the negative impact of tightening monetary conditions on economic growth and financial stability. Moreover, we have ensured the preservation of the real value of citizens’ wages and living standards as a result of the curbing of inflation and the growth of nominal income under conditions of positive economic growth expectations.

When it comes to FDI inflows, what are the key growth triggers today?

— The key factor contributing to high FDI inflows, which reached a record level of 4.5 billion euros last year, is certainly the maintaining of macroeconomic stability even during periods of the biggest challenges at the global level, while relative exchange rate stability and a healthy and stable financial sector were ensured by the favourable macroeconomic prospects of our economy, an important part of which is price stability over the medium term. Additional factors of importance for FDI inflows include structural improvements to the competitiveness of our economy, a good strategic position and close proximity to the European Union, which is still the source of the majority of investments, as well as the fact that Serbia has the largest economy in the Western Balkan region. As is often emphasised by foreign investors, it is no less important that Serbia has a high-quality and highly qualified workforce and that it has signed FTAs with the European Union, CEFTA countries, Turkey, Russia and, as of recently, China.

You recently assessed Serbia as being halfway towards the historic goal of receiving an upgraded credit rating. What represents the other half of this journey?

— We take great care in analysing every recommendation of ratings agencies in areas requiring further improvement, which we address responsibly and systematically. Ratings agencies are essentially seeking that we merely continue applying sound and sustainable economic policies. It is precisely due to the fact that countries were confronted by multiple crises over the previous four years that credit rating agencies are currently taking into consideration the ways economic policymakers reacted under such circumstances.

The strengthening of Serbia’s economic position during the aforementioned period, as well as the resilience against shocks from the international environment demonstrated by our economy, provide us with reason for optimism that Serbia could receive an investment grade in the near future. Factors potentially leading to an upgraded credit rating include an improved external position of the country under the conditions of a stronger export performance and higher net FDI inflows, as well as maintaining an orderly fiscal position. One of the recommendations that’s under the jurisdiction of the NBS relates to the need to make further progress in the area of dinarisation. With an awareness that this is a long-term process, we are working with a commitment to ensuring the future continuation of the positive trend of dinarisation, which has undoubtedly been present since 2012.

Despite investments being generally high, there have essentially been no changes in the former main investment sectors, such as the banking and insurance sectors, except if we exclude the departure of foreign banks and the reinforcement of the positions of domestic ones. How would you explain this?

— Thanks to decisive and essential reforms, as well as intensive regulatory activities, we have established a suitable operational framework for banks and insurance companies, as well as a favourable environment for the arrival and operations of credible and creditworthy investors. The changes of ownership and status that led to the consolidation of the domestic banking sector in the previous period were dependent on the individual decisions and business policies of shareholders, who were guided by the legislating of a competitive market and their own business interests, as well as the NBS’s assessment of the economic justification of those status changes and their impact on the state of the financial market. From our perspective, it is crucial that bank owners be committed to effectively supervising their own operations, regardless of whether they are under foreign or domestic ownership. This is achieved by ensuring the professional management of banks that focus on both business results and stable growth in the value and quality of the assets those banks manage, but that focus above all on the interests of the clients that they live from. The same principles also apply to the insurance sector.

We are recording good current account deficit coverage, very good export results and the growth of foreign currency reserves. Is that sufficient for us to consider it unnecessary to worry about the growth of debt in general, and particularly towards large creditors such as China?

— When it comes to the indebtedness of the state, the economy or individuals, it is important to bear in mind what these funds will be used for, the debt repayment deadline, the borrowing conditions and currency, and primarily whether it will be able to be utilised to service our obligations. Our economy’s external debt possesses all of these desirable aspects, as supported by the declining trajectory of that debt, the good currency compatibility of the government debt with the currency structure of foreign reserves and the predominant debt of the economy in euros, in which export revenues are also generated.

The nbs provides strong support, in the political format of the talks, to finding a solution and ensuring the use of the dinar in our southern province

When it comes to the debt to China, it accounts for approximately 10% of our total foreign debt, and the lion’s share of that debt belongs to the government, which relates entirely to loans for projects in the fields of transport, energy and utility infrastructure. The infrastructure that it provides will contribute to building our production and export capacities, and thus also to generating income that we will be able to utilise to service our existing debt repayment obligations.

What is your stance with regard to the position of the dinar in Kosovo and possible outcomes?

— Our position has remained unchanged from the outset. We most strongly condemn the illegal measures taken by the Provisional Institutions of Self-Government in Kosovo and Metohija, which prohibit the use of dinars in our southern province. These measures were adopted hastily, covertly, under the pretext of various quasi-monetary and quasi-financial excuses, and without any legal and legitimate basis. These measures don’t only contravene elementary international finance and banking standards, as well as agreements made to date and the way dinar cash flows have been unfolding for years, but are rather directly intended to deny the basic income earned in dinars by the population and businesses in Kosovo and Metohija. The institutions of the Republic of Serbia are exerting huge efforts to ensure an effective solution to the problem that has arisen. And in discussions to date, under extremely difficult circumstances, they have demonstrated exceptional constructiveness and willingness to reach an agreement and solve the problem, which has unfortunately been lacking on the Priština side so far. The NBS provides strong support – in the political format of the discussions and within the dialogue at the existing level – to providing an effective solution, without delay, to the problem caused by the adoption of these discriminatory, illegal and unprecedented measures, and to providing protection to the Serbian people in Kosovo and Metohija.