Nicola Pontara, World Bank Country Manager for Serbia

Very clear steps exist that would enable Serbia to boost its economic growth rates. They imply the implementing of measures for switching to a fully-fledged market economy, strengthening human capital, institutions and governance, as well as accelerating trade with the region and the EU

Serbia has achieved remarkable macroeconomic stability, sustained economic growth and improved living standards in recent years.

“Yet, the country is not converging quickly enough with the EU,” says Nicola Pontara, World Bank Country Manager for Serbia, before illustrating his point by insisting that Serbia would only converge with the EU’s average per capita income in 2074 if it continues to grow at an average annual rate of 3.2% – the country’s average growth rate over the previous five years.

“We think that Serbia’s annual GDP growth rate could double if ambitious structural reforms are implemented. How? In our 2024 Policy Notes, we highlighted four areas for action: (i) conduct “second generation” reforms to transition to a fully-fledged market economy; (ii) boost human capital to increase productivity, which has stagnated; (iii) strengthen institutions and governance; and (iv) accelerate trade and integration with the EU and the region.”

“At the same time, warns our interlocutor, Serbia will have to embark on a green transition so that growth is not only faster, but also sustainable. The country’s heavy reliance on fossil fuels jeopardises both the quality of its environment and the international competitiveness of the economy – calling for gradual but firm efforts on decarbonisation, while preserving energy security,” says Pontara.

What kinds of long-term strategies are needed to sustain recent economic successes?

— The first condition is to maintain the hard-won macroeconomic stability, but that isn’t sufficient for rapid and sustained growth. Let me go back to the four policy areas. Second generation reforms refer to policies aimed at ensuring a conducive business environment; improving competition in product markets; promoting deeper integration of financial markets; attracting FDI in higher value-added sectors; and placing SOEs on a financially sustainable path.

On the human capital front, it would be important to raise the labour force participation rate of women, young adults and ethnic minorities; safeguard and increase public spending on human development; and strengthen the skill set of the labour force during the lifecycle.

All public investments should be prioritised on the basis of alignment with the country’s strategic goals, being climate-smart and generating robust economic rates of return

Improvements on the institutional front can result in greater volumes of private investment and ensure public investment is geared towards environmentally sustainable projects, generating robust economic returns. I have also mentioned integration with the European Single Market and the region. For instance, the implementation of ‘green lanes’ at EU borders can foster the development and resilience of international supply chains, notably in manufacturing, where Serbia has a comparative advantage. Moreover, the completion of the Common Regional Market, supported by CEFTA, can further increase trade volumes. Financial integration, through participation in the SEPA, can reduce the cost of doing business and increase both the efficiency of financial services and the attractiveness of Serbia to investors.

With large investments planned under the EU Growth Plan for the Western Balkans, how can Serbia maximise the benefits of public investments for its economy?

— Under the Growth Plan for the Western Balkans, Serbia could benefit from up to €1.7 billion until 2027. There are also big infrastructure investments announced by the government in the context of the “Leap into the Future – Serbia 2027”. What we have emphasised is that all public investments should be prioritised on the basis of alignment with the country’s strategic goals, being climate-smart and generating robust economic rates of return. We are working with the authorities to help them strengthen Serbia’s Public Investment Management (PIM) system. When they work well, PIM systems can really make a difference in ensuring efficiency, transparency and accountability in the use of public resources, while maximising benefits for citizens. The goal for Serbia is to increase the proportion of public investment that is carried out to regular PIM procedures, rather than exceptional ones.

What should Serbia’s long-term approach be when it comes to combining economic growth with environmental sustainability?

— The World Bank just published a comprehensive study focusing on the nexus between development and climate – the Country Climate and Development Report (CCDR). Estimates from the CCDR suggest that, on the mitigation front, the incremental investments required for Serbia to meet net zero emissions by 2050 would be USD 10.4 billion. This is equivalent to 1.6% of GDP annually.

On the adaptation front, costs are estimated at USD 21.5 billion by 2050, equivalent to 2.3% of GDP per year – focusing mostly on the water and transport sectors. In the absence of significant investments in adaptation, the impact of climatic events could reduce GDP by 16% by 2050.

Considering the magnitude of these incremental investments, moreover, we think that the role of the private sector is likely to be prominent and should be facilitated. It would be important for Serbia to meet the targets of a 40.3% reduction in emissions by 2030 (compared to 1990), as per its updated Nationally Determined Contribution.

Beyond 2030, significant transformations would be required, including the decommissioning of coal-fired electricity generation by 2040, a substantial increase in the penetration of renewables, transformation of transport and buildings sectors, and significant shifts in industry, including the use of carbon capture and storage.

What are some effective strategies for developing infrastructure that enhance Serbia’s resilience to climate change?

— It would firstly be important to ensure that the PIM system is robust, and that most public investments ‘transit’ through it – this is key to ensuring that projects are chosen based on their environmental sustainability and that they support economic growth.

Secondly, Serbia can mobilise a wide array of hybrid financing and exploit the synergy between public and private capital for public infrastructure – what we mean here is public-private partnerships (PPPs), blended finance programmes and local currency financing facilities.

Infrastructure investment in Serbia to date has been conducted through public funds: the government’s reliance on budget allocations and loans from third parties can be complemented by increased private investment and diversified sources of financing. We have some successful examples of PPPs, such as Belgrade’s Nikola Tesla Airport and the Waste to Energy Project at Vinča. Moving forward, attracting some funding for infrastructure from the private sector could lessen the impact on public finances and ensure consistency with the deficit and public debt targets under the new fiscal rule.

How can Serbia’s government work together with international organisations and the private sector in pursuing green transition goals?

— The green transition is not something that governments can do alone. It will require public commitment and funding, for sure, but also much more active participation from the private sector and the support of the international community. In Serbia, things are beginning to move. We have seen some good progress on the renewable front, with the first auctions launched in 2023. But there are challenges that need to be tackled. Serbia’s distorted price signals and policies on energy and other environmentally harmful activities drive its high environmental footprint. Prices that do not factor in environmental costs to society encourage businesses and households to waste energy, water and other resources, and decrease their own financial costs by increasing environmental costs, which are borne by society as a whole.

In the absence of significant investments in adaptation, the impact of climatic events could reduce Serbia’s GDP by 16% by 2050

It is for these reasons that we’ve suggested the authorities introduce carbon pricing instrument(s) in carbon-intensive sectors likely to be impacted by the EU Carbon Border Adjustment Mechanism, such as ferrous metals. Carbon pricing would help reduce GHG emissions, enable Serbia to prepare for the EU CBAM and generate domestic revenues. The role of international organisations, such as the World Bank, is not only to provide competitive financing, but also to help the government think through and implement green policies via the provision of technical assistance and analytical work.

It seems that better conditions for private investments are needed across the Western Balkans. What specific measures should Serbia take to address this long-standing issue?

— Serbia would do well to continue improving the business environment so that greater amounts of private sector investment can be mobilised in support of economic growth. Key policy measures here include, but are not limited to, fostering greater predictability of the legal and regulatory framework for new and existing businesses; continuing to streamline and digitalise Government-to-Business services; and improving the efficiency of commercial courts in settling cases, bankruptcy procedures and other disputes. There is room to strengthen incentives for private companies to grow and innovate; attract higher quality FDI in higher-value-added sectors, more efficiently integrate local companies into global value chains and increase their productivity.