IMF Resident Representative in Serbia

Sebastian Sosa: Dealing With the ‘New Normal’ Is Challenging

Serbia’s hopes for faster recovery than initially expected should be built upon the recent positive data about retail sales, industrial production and external trade. Yet adequate contingency planning for a possible downsize scenario has to be prepared. Meanwhile, structural reforms shouldn’t wait for better times to be implemented

Although we expect an economic rebound in 2021, uncertainty about the timing and pace of the recovery persists. Should the pandemic be more protracted, or its impact stronger than expected, any additional support measures will have to be well targeted to the firms and sectors most in need, as well as vulnerable households, says IMF Resident Representative in Serbia Sebastian Sosa, summarising the uncertainty confronting us. However, he suggests, there are a number of steps that the new Government could take to contain the negative effects of the pandemic and open doors to more robust recovery.

To what extent has the Serbian Government’s policy response mitigated the negative effects the COVID-19 pandemic?

– The Serbian authorities deployed a large policy response to mitigate the economic and social effects of the COVID-19 crisis. The fiscal package, which included tax deferrals, wage subsidies, universal cash transfers and a state guarantee scheme for bank loans to SMEs, amounted to about 8.5% of GDP and is among the largest in emerging Europe. The National Bank of Serbia contributed to the response by cutting the policy rate and ensuring adequate liquidity in the banking system, while introducing a moratorium on bank loan repayments. These measures mitigated the impact of the pandemic on businesses, households and employment, and to some extent explain the relatively lower contraction of economic activity in Serbia compared to other countries in the region. A recent IMF empirical study using firm-level data suggests that, while the COVID-19 crisis will have an adverse effect on the financial position and employment of Serbian firms, the effect is countered by the fiscal and monetary policy response.

Which factors are affecting the contraction of the economy the most?

– The COVID-19 shock has hit Serbia’s economy through various channels. Lower external demand has affected exports, which – prior to the outbreak – were projected to grow by eight per cent in 2020 and are now expected to fall by almost 10 per cent this year. Private investment, including by foreign companies, has also contracted amid high uncertainty. Private consumption has also been impacted negatively, partly due to weaker remittances, which fell by 28 per cent in the first half of 2020 compared to the same period of 2019. Moreover, disruptions in regional supply chains, due to the lockdowns in several countries, have affected sectors such as the automotive industry, hurting both investment and exports.

Which policies are available to the government in order to contain some of the negative impacts, given that the crisis is also hitting our major export markets?

– After already putting in place a large policy response, available fiscal space is now more limited. Therefore, should the pandemic be more protracted or its impact stronger than expected, any additional support measures will have to be well targeted to the firms and sectors most in need, as well as vulnerable households. Regarding monetary policy, an accommodative stance is warranted as long as inflation and inflation expectations remain well below the three per cent target, and the central bank [NBS] should maintain liquidity support for banks and financial markets as required. Although we expect an economic rebound in 2021, uncertainty about the timing and pace of the recovery persists. In this context, adequate contingency planning and active preparations for a possible downsize scenario are important in the case that this materialises.

How much are existing foreign investors contributing to the resilience of the Serbian economy in terms of output and advice?

– Foreign companies have not escaped disruption from the COVID- 19 pandemic, but they have generally weathered the crisis relatively well. In April and May, a sharp fall in demand due to mobility restrictions, precautionary behaviour and extremely high uncertainty reduced consumer spending and corporate orders, depressing the sales of foreign companies, especially in sectors such as tourism, travel, entertainment and construction.

Sebastijan Sosa

On the supply side, supply chain disruptions hampered access to raw materials and intermediate inputs. In some sectors, movement restrictions, coupled with other containment measures and the need for alternative work arrangements had an adverse impact on labour productivity. As a consequence, output contracted sharply in the second quarter. However, activity – with the exceptions of a few specific sectors – has rebounded since May, and foreign companies have generally traversed the crisis without cutting jobs. And while some foreign investors decided to postpone planned investments, those investments generally weren’t cancelled. Interestingly, several companies have seized the opportunity of the pandemic to prioritise investments in digitalisation and digital technologies, which will support the recovery and generate productivity gains in the medium term.

In that respect, how would you assess the expertise and the contribution of the FIC in drafting optimal policy measures for the ‘new normal’?

– The FIC plays a very active role in promoting a competitive, predictable and sustainable business environment in Serbia. I’ve seen in previous few years how it has helped shape policy measures and relevant regulations. In particular, the FIC White Book has proved to be a useful vehicle to draw attention to the main obstacles that limit business investment and growth, and to propose concrete policy actions to tackle those issues. In the ‘new normal’ after the COVID-19 crisis, I would expect the FIC to continue to play a leading role in supporting the reform process, which will make doing business in Serbia easier and more attractive, and ultimately boost economic growth and better living standards for Serbian citizens.

Many believe that Serbia needs to design a new growth model by exerting greater efforts to supporting domestic companies. How feasible is that given the current state of economic affairs?

– Serbia has been quite successful at boosting employment across a range of sectors and opening new markets. However, despite progress in recent years, Serbia’s economy still exhibits some structural weaknesses that are reflected in a relatively low stock of capital per worker, a large and inefficient SOE sector, and slow productivity growth. These weaknesses limit potential growth and prevent a faster and more sustainable convergence with EU income levels. Tackling them requires accelerating the implementation of key structural reforms. A priority area is to boost investment (public and private, foreign and domestic), including green investments. Achieving this goal will require more efforts to improve the business and investment climate, including by addressing infrastructure gaps, improving the efficiency of public administration and the quality of public services, reducing the size of the informal sector, and addressing skills shortages and mismatches in the labour market. A favourable investment climate also needs stronger rule of law, enhanced governance and reduced corruption, as well as a more efficient and independent judicial system.

How, then, do policy incentives toward existing and prospective investors have to be redesigned?

– In the short term, policy measures should focus on ensuring a strong and sustainable economic recovery from the COVID-19 crisis, focusing support on those companies and sectors that are hardest hit, as well as vulnerable households. On investment incentives, it would be important to assess the cost-effectiveness of existing schemes in attracting incremental investments— that is, investments that would not have been implemented in the absence of these incentives. More generally, investment incentives should be transparent and predictable, ensuring a level-playing field for all potential investors. Having said that, we should keep in mind that foreign investors typically base their investment decisions on a wide range of factors, including political and macroeconomic stability, rule of law, the quality of public infrastructure and the availability of skilled labour. Subsidies and other type of incentives are usually not the most critical driver of investment.

What policy interventions are needed the most in order for the Serbian economy to stay on the reform path and pro-EU accession trajectory?

– While the implementation of structural reforms is progressing, it needs to be accelerated to transform Serbia into a dynamic, private sector-driven market economy able to compete successfully in the European Single Market when Serbia joins the EU. Achieving this goal will require efforts in several areas. Sustaining macroeconomic and financial stability remains a precondition for sustainable growth. A priority is improving the quality of institutions and governance, which includes having well-governed and managed SOEs.


Sebastian Sosa, IMF Resident Representative in Serbia

Sound Fiscal Policy Remains A Priority

If the global crisis deepens, it will further impact Serbia through weaker external demand, the continued disruption of supply chains and tighter financing conditions....

Sebastian Sosa, IMF Resident Representative In Belgrade

Government Must Maintain Good Work

Most of the previous economic programmes in Serbia succeeded in achieving short-term macroeconomic stabilisation, but failed to resolve the underlying weaknesses of the economy....

Further addressing Serbia’s infrastructure gaps would help to support competitiveness, foreign investment and integration into regional and global value chains. Fighting informality would not only facilitate doing business, but also generate fiscal revenues. Finally, a credible commitment to fighting corruption, enhancing rule of law and strengthening regional cooperation would be important both in terms of the EU accession process and in supporting long-term economic growth.

Given the current mildly positive trends in the economy, would you consider revising the prognosis for 2021?

– While the contraction of economic activity in the second quarter of 2020 was severe, at 6.4% compared to the same quarter of 2019, the output was somewhat better than we initially expected. Monthly economic indicators of retail sales, industrial production and external trade for July and August suggest that activity rebounded in the third quarter. These recent data would suggest that the output contraction in 2020 could be somewhat smaller than the minus three per cent envisaged in our previous projections. A smaller contraction this year may imply a slightly smaller rebound in 2021, compared with our previous projection of six per cent growth 


The implementation of structural reforms needs to be accelerated in order to transform Serbia into a dynamic, private sector-driven market economy


A favourable investment climate needs stronger rule of law, enhanced governance, reduced corruption and a more efficient and independent judicial system


While the COVID-19 crisis will have an adverse impact on the financial position and employment of Serbian firms, that effect is countered by the fiscal and monetary policy response

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