EU acknowledges Serbia’s economic progress

Orbis Mercure Belgrade Excelsior, Serbia (Accor Hotels, Public domain)

The European Commission (EC) issued a report on the Serbia’s progress in reforms and praises Serbian economic developments. Good progress is achieved in some major areas, particularly with regard to the budget deficit.

According to the report, growth fundamentals are sound and macroeconomic stability is preserved, inflation contained, labor market conditions improved. Overall, Serbia is moderately prepared to develop a functioning market economy, although there are still serious challenges. The government debt is still high and the budgetary framework and its governance need to be strengthened. In the EC report there is a strong warning that the major structural reforms remain incomplete, especially in the areas of public administration, tax authority and state-owned companies. Serbia has a large problem with informal employment, unemployment and economic inactivity, particularly among women and youth.

In Serbia, the report has been welcomed as a sign of country’s progress. The Serbian president Aleksandar Vučić claims that the public debt will be below 52 per cent of GDP until the end of the year. He pointed out that the budget has recorded a surplus for the third year, which “had never had before”. When he became Prime Minister, the public debt was 77 per cent of GDP, today it is 57. He added that when he became prime minister, the average salary was EUR340, while today it is EUR425. The president said the average salary will be between EUR480-500 before the end of the year and praised how “Serbia no longer needs any loans”, and that a loan of USD700m will be repaid before the end of the year.

The economy has recorded its greatest success, partially because reforms focused on it. Serbia had high inflation, frequent changes of currency exchanges, and almost blocked economic activity. In the last three or four years, exports have grown at a pace that is among the highest in the world. Indeed, Serbia has achieved significant economic growth despite severe austerity measures. This progress is additionally confirmed by the International Research Centre of Banca Intesa Sanpaolo, which concluded that Serbia succeeded to overturn difficult economic situation since the recession of 2014.

IMF also praises Serbia

Good reports from the European Union (EU) come after the International Monetary Fund (IMF) had positive conclusions of Serbian economy in the last year. The fiscal situation is, in particularly, improved, with the budget deficit reduced from 7 per cent of GDP to projected 1.1 per cent of GDP in 2017, the lowest level since 2005, and public debt is falling faster than projected. The IMF points out that fiscal consolidation goes ahead of the plan and is accompanied by faster growth, which reflects the confidence that ensued from decisively resolving the issue of public debt sustainability. The IMF in its current conclusions kept the projection of GDP growth to 3 per cent for 2017, with the reserve that these projections were based on economic indicators that were available by June last year.

Monetary policy of the National Bank of Serbia (NBS) was successful in maintaining inflation under control and preserving a stable financial system. IMF is positively assessing that the NBS allowed strengthening of the dinar. Base inflation remained stable and low, a stable exchange rate was maintained, which contributed to the strengthening of fiscal policy and trust, and enabled the widespread use of EUR in the Serbian economy to decrease. The NBS strategy gave results that are reflected in the stability of the financial system, good capitalization and liquidity of banks and the reduction of problem loans by seven percentage points. The successful implementation of the NBS monetary policy provides greater flexibility, adding that this is important for targeting innings for the next period. Still, there is a need to continue with the process of dinarization, and further reforms of the financial system, as well as efforts to further reduce the problematic credits, as well as to continue efforts to develop capital markets and SMEs’ access to this market.

Both financial institutions and EU see the overwhelming vulnerability in reforms of public and state enterprises, and a need to strengthen institutions in order to provide better competitiveness and entrepreneurial ambient. The implementation of fiscal consolidation has not disrupted economic growth, but it is necessary to consolidate fiscal results in the medium term, since there are fiscal risks from potential old debts and liabilities of state-owned enterprises. Structural weaknesses arise from the delay in the reform of public and state enterprises, state administration and the burden of the economy from the informal economic sector. The delay, however, does not mean that there has been no progress, especially in the utility companies and railways, for example, that have improved financial situation, and subsidies to state enterprises have fallen. However, the state-guaranteed guarantees for these enterprises are still significant.

Polish investments in Serbia

Serbia is also building its investments potentials. In the last three years, Serbia received almost EUR7bn of FDI. Serbia had never had a better environment, incentive for both business and investment. In its offer for investors there is a serious package of financial incentives — from state subsidies, through tax and customs facilities, to lower operating costs than at competitive locations. And what is especially important and for which investors first ask — Serbia has a competitive, trained and qualified workforce, whose quality and accessibility has further strengthened the introduction of dual education into the school system. Companies can count on state subsidies of EUR3,000-7,000 per employee, depending on the amount of investment, the number of open positions and the development of the municipality in which the project is being implemented. At the same time, municipalities and cities are struggling for investors to reduce or completely release from payment of certain local taxes, various benefits for the lease or construction of a facility, cheaper connections to local infrastructure, etc. Investors whose investments exceed EUR8.5m and employ 100 FTEs are exempt from profits tax for ten years. Investors are also refunded with part of the paid taxes and contributions to the salaries of newly employed workers, who were previously in the employment register for more than half a year. Also, the loss recorded in the balance sheet can be transferred for five years in the next accounting period to the account of a decrease in profit.

Poland is one of the biggest investors in Serbia. Nevertheless, the potential of economic cooperation has not yet been fully exploited. The economic exchange of the two countries is at a high level and is constantly increasing. Since 2010 it has increased more than double. According to Polish statistical data, the mutual trade exchange reached EUR952.5m in 2016, while in January-August 2017 it increased by an additional 18 per cent. Polish companies are seeing the potential of Serbia and beyond the previously defined business roads, so the Reserved, CCC, 4F brands are present in the clothing and footwear industry. Cosmetics of Polish brands are also available on the Serbian market: Ziaja, Inglot, Eveline, Dr Irena Eris. Polish Orbis has recently opened a hotel in downtown Belgrade, GTC continues to invest in the construction of a shopping center, Solaris promotes its buses.

Polish investors are interested in the investment potential of Serbia, having in mind the role of Serbia in the region, but also the similarity in the structure of our economies. On political levels, the need for intensifying economic cooperation, including the increase in Polish investments in the field of mining and energy, machinery and equipment, tourism, and the increase of cooperation between small and medium enterprises in both countries, was emphasized. The companies interested in the Serbian market come from different sectors, such as: manufacturing, agriculture and food production, healthcare, and green technology. Polish companies are interested in the pharmaceutical sector in Serbia, food processing, and agriculture.

Serbia is moderately prepared to cope with competitive pressure and market forces within the EU. Some progress was made to increase competitiveness. However, the level of investment activity is still below the economy’s needs. Despite some improvements, companies face a number of challenges, including an unpredictable business environment, a high level of para‑fiscal charges, and difficult and costly access to finance.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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