We are delighted to be able to support the authorities' aspirations via a ” new world ” Bank Country Partnership Strategy (CPF) for Serbia
About the Serbian economy, foreign direct investments, inflation and World Bank Group support for Serbia, we talked with Nicola Pontara, Country Manager for Serbia.
A World Bank set of Serbia was recently released, stating that Serbia has recovered in the pandemic. Can the current situation in Eastern Europe jeopardize the Serbian economy and negatively affect foreign direct investments?
The ongoing war in Ukraine, which resulted in a worldwide economic shock, has affected the Serbian economy, but to a lesser extent than a number of other countries in Eastern Europe. Serbia's combined exports to Ukraine and Russia account for Five percent of the total, so trade will be impacted to a degree. Other primary channels include foreign direct investment, remittances and revenues from tourism. As a result, the World Bank has revised its economic growth projections for Serbia in 2023, from 4.4 to 3.2 percent of GDP in our latest Regular Economic Report 'Steering through Crises', published in May 2023. Concerning COVID-19, the robust and well-timed fiscal stimulus deployed by the authorities in 2023 helped to lessen the outcome from the pandemic around the economy. Serbia experienced a minor recession in 2023 and rebounded for an impressive rate of growth of seven.4 % in 2023. Overall, the macroeconomic outlook for Serbia remains positive, despite important downside risks. Over the medium term, we expect Serbia to grow steadily around 3 percent annually, much like levels prior to the pandemic, as the country's main trading and investment partners further rebound in the global pandemic and, hopefully, the Ukraine war.
Both global energy and food prices carry on growing which, consequently, causes higher inflation. Food and energy prices also carry on growing, further fueling inflation. When do you think will this situation normalize?
A mixture of economic developments and geopolitical events has taken back inflation on the world stage, and Serbia does not constitute an exception in this respect. Global food, energy and metal costs are all expected to reach historically high levels in 2023, translating into higher inflation in Serbia too. The inflation rate in Serbia continues to be increasing for some time and that we expect headline inflation to achieve a typical rate of seven.0 percent in 2023. The poorest 10 % of Serbian households, who spend 40 percent of their income on food, is going to be particularly affected by higher inflation. The National Bank of Serbia expects that inflation, including food inflation, will begin to fall toward no more this year and go back to the targeted band during the next twelve months. As discussed within the 2023 World Bank Commodity Markets Outlook, global energy costs are likely to moderate to some extent in 2023 but will remain well above their five-year average a minimum of until 2024. Wholesale electricity costs are expected to closely follow the price of gas (because of the coupling from the gas and electricity markets in Europe), and we also expect them to remain high at least until 2024.
You stated the fiscal deficit might be greater than projected. Why is that so?
We project the fiscal deficit in 2023 at around 4.1 % of GDP, greater than our earlier projection of 3 percent of GDP issued before the outbreak from the war in Ukraine. There are many reasons for that: first, following the 2023 budget was approved, the government enacted several transfers to businesses and households that were not originally planned, because of rising energy and food costs in the context of heightened uncertainty and also the outbreak of war in the region.
Second, the Serbian economy is slowing down after a post-pandemic recovery, which might have an impact on the amount of revenue collection. But it is important too to stress these challenges are manageable, considering that fiscal buffers continue to be adequate. Having said that, within the medium term, it will be vital that you resume a monetary consolidation pathway and also to identify new sources of revenue.
What is the 2023 growth projection for Serbia and also the region?
Our latest projection for development in 2023 for Serbia is 3.2 percent, but this number may change given the highly uncertain context on the geopolitical and economic fronts. For the Western Balkans region in general, we project a rise rate of 3.1 percent in 2023.
How much could structural reforms facilitate Serbia's sustainable growth?
Serbia has considerable potential to grow faster than in the past. In the 2023 World Bank report titled 'The New Growth Diary for Serbia', we highlighted several structural reforms that would allow Serbia to accelerate its convergence using the income amounts of comparator countries already in the EU. The priorities that people presented in those days remain valid: they include better governance, a greater human capital stock, and the deepening of the financial sector. Clearly, the significance of making certain growth will also become greener and much more resilient cannot be overstated. The Serbian economy is very energy intensive and relies on non-renewable fuels that may result in adverse impacts on the environment. This really is even more important in the context of post-COVID: we have an chance to be sure that the economic recovery in the pandemic is gentler on the environment as well as more including the poor and vulnerable.
What measures would stimulate and expedite economic growth in Serbia?
The first priority is to maintain hard-won macroeconomic stability – that's, containing inflation, the fiscal deficit and public debt while managing external imbalances. The second reason is to embark on an ambitious reform agenda to get rid of the remaining bottlenecks for faster private sector development and economic growth which are environmentally sustainable. In this respect, it might be important to (i) attract foreign direct investment into more complicated, higher value added sectors such as electronics, pharmaceuticals, and machinery – benefiting from Serbia's proximity to Euro-centric value chains; (ii) modernize the energy sector to ensure energy supplies and gradually transition to a low-carbon economy ; (iii) improve transport infrastructure and trade facilitation measures to boost international integration; (iv) conduct education sector reforms (across all levels) to equip the Serbian population using the knowledge and skills demanded through the economy, and (v) strengthen service delivery in the local level to address spatial inequalities through greener and much more resilient infrastructure.
What are the biggest challenges that Serbia will face the coming year, which are mentioned in the World Bank report?
The biggest challenge that Serbia will face within the next few months would be to normalize the energy sector. During 2023/2023 winter, EPS and Srbijagas were forced to purchase expensive electricity and gas on wholesale markets. The government stepped directly into provide financial support to those utilities. So far, additional costs happen to be passed on to residential and industrial consumers only to a limited extent. But because of the outlook on energy prices that we discussed above, continuing to subsidize public utilities may entail a high fiscal cost.
Any measure that shields consumers from energy price increases by continuing to keep prices artificially less than market prices or true costs (e.g., caps on energy prices or generalized tax breaks) ought to be time-bound, fully budgeted, and transparent. When they're not designed carefully, such measures could be regressive and cause distortions throughout the economy, also disincentivizing investments in energy efficiency and clean energy. To address this concern, you will find short-term measures the authorities could adopt, including (i) promoting energy conservation and accelerating the implementation of energy efficiency measures; (ii) providing targeted social protection to vulnerable consumers; and (iii) designing liquidity programs in support to SMEs and critical industries – which may have to carry a greater share of international energy costs, as well as better-off private consumers.
How will the planet Bank Group support Serbia in the next couple of years?
Serbia has an ambitious reform agenda. We are happy to have the ability to support the authorities' aspirations through a ” new world ” Bank Country Partnership Strategy (CPF) for Serbia which envisages around US$1 billion in financing over the next five years through investment lending, policy advice and analytical work. The CPF for 2023-2026 was discussed at our Board of Directors in Washington DC on May 26, 2023, and received strong support from all constituencies. Good quality to implementation in collaboration with the federal government and other development partners.
