Serbia: A Close Examination of its Economy

A successful implementation of the Ohrid accord on normalization with Kosovo would bring in inflows of European Union (EU) money and investment. Serbia, the largest economy in the Western Balkans with 6.9 million people, underperformed expectations in 2022 despite rapid growth and wage increases following the overthrow of President Slobodan Milosevic in 2000. Growth in 2021 reached 7.4%, but below the Wii Institute for International Economics (wiiw) forecast for 2022, with GDP growing just 2.3%. Higher minimum wages and public sector salaries bolstered household consumption in 2022, while the government lifted or raised price caps on food, electricity and energy, which subsequently boosted inflation. Inflation in 2022 averaged 11.9%, the lowest in the region, but reached 16.2% in March 2023. The unemployment rate has declined but is still high at 10%. Serbia currently has a long-term issuer default rating of BB+ from Fitch.

Public investment fell by 3% in 2022, but Serbia’s public investment is still the highest in Central, Eastern and South Eastern Europe (CESEE), accounting for 7.2% of GDP due to the government’s investment in public infrastructure. However, total investment remains close to the regional average at just under 23% of GDP, and domestic private investment remains low. The composition of foreign direct investment (FDI) inflows to Serbia differs significantly from its neighbors, with China and Russia playing a more prominent role. FDI from the EU fell to just 33% of total FDI as Serbia’s continued ties with Russia created uncertainty. FDI from Russia and China fill the gap left by declining EU investment. FDI from Russia increased eight-fold to 8% of total FDI, while FDI from China tripled to 32% of total FDI.

Dr. Branimir Jovanovic, author of wiiw’s April forecast for Serbia, said, “Serbia has great investment needs in both industry and infrastructure. China, on the other hand, has abundant funds and a strategy of global expansion, and Serbia, geographically close to the EU, is a good opportunity not only for economic reasons but also for political reasons.” There are three main categories of FDI from China in Serbia: opening factories, expanding activities in Serbia, and investments related to infrastructure projects that Serbia is carrying out in partnership with China, such as the Belgrade Metro, solid waste treatment projects in 65 municipalities, and bypasses around Belgrade.

The catalyst for China’s increase in FDI was largely generated by political uncertainty over Serbia’s EU future, so the implementation of the normalization agreement with Kosovo would remove a major obstacle to Serbia’s accession to the EU. In March, the leaders of Serbia and Kosovo agreed to a verbal agreement to normalize relations in Ohrid, North Macedonia, and a joint oversight committee was established to implement the agreement.

The EU offers Serbia a carrot and a stick. “If the agreement is fully implemented, it will certainly have a positive impact on Serbia,” said Dr. Yovanovic. “In that case, not only would the EU agree to hold a donor meeting, which would result in significant infrastructure investment in the country, but it would also reduce the political uncertainty currently surrounding Serbia.” An infusion of funds and a long-term reduction in political uncertainty could provide much-needed aid to Serbia. The wiiw forecasts that Serbia’s GDP growth in 2023 will be the lowest in the Western Balkans at just 1.5%.

Leave a Reply