Serbia
Serbia: Macroeconomic Snapshot
1. Overview:
The current financial crisis has had a severe negative impact on Serbia, as output contracted sharply, currency has been under pressure. In May 2009, Serbian government agreed to a 3 billion euro IMF loan to shield its economy and currency from the effects of the global downturn, obliging it to keep its deficit at 3% of GDP. The government is now facing a tough choice of enforcing new spending cuts or raising taxes in order to meet the IMF's conditions and avoid a delay in IMF money disbursement. Serbia's economy contracted by 3.5% in the first quarter of 2009, with a forecast of 4% contraction on a yearly basis in 2009. External financial constraints along with a decrease in exports are projected to lead to a significant contraction of the current-account deficit. As in the rest of SEE countries, FDI flows have significantly slowed in 2009. For May 2009, FDI in Serbia was at US$ 176 million, approximately 64% less than in the year earlier period.
The current financial crisis has had a severe negative impact on Serbia, as output contracted sharply, currency has been under pressure. In May 2009, Serbian government agreed to a 3 billion euro IMF loan to shield its economy and currency from the effects of the global downturn, obliging it to keep its deficit at 3% of GDP. The government is now facing a tough choice of enforcing new spending cuts or raising taxes in order to meet the IMF's conditions and avoid a delay in IMF money disbursement. Serbia's economy contracted by 3.5% in the first quarter of 2009, with a forecast of 4% contraction on a yearly basis in 2009. External financial constraints along with a decrease in exports are projected to lead to a significant contraction of the current-account deficit. As in the rest of SEE countries, FDI flows have significantly slowed in 2009. For May 2009, FDI in Serbia was at US$ 176 million, approximately 64% less than in the year earlier period.
2. Growth Performance:
GDP real growth for 2008 was 5.4%, while there was a decrease by 3.5% year on year for the first quarter of 2009. As the EU economy is expected to go into recession in 2009-10 (the EU market accounts for 55% of its current exports), Serbian exports are projected decrease significantly, while fiscal tightening is set to dampen domestic consumption. In light of these developments, real GDP growth for 2009 is forecast to range between -2.0 and -4.0%.
3. Balance of Payments:
Current account deficit has begun to shrink sharply (by 80% y/y in January 2009) in response to a collapse in imports, although exports are plunging too. C/A gap is expected to narrow to 11% of GDP in 2009, from the estimated 17.9% in 2008 (IMF). As in the rest of SEE countries, FDI flows have significantly slowed in 2009. For May 2009, FDI in Serbia was at US$ 176 million, approximately 64% less than in the year earlier period.
4. Inflation - Monetary Policy:
Slowed to 9.1% in March 2009 with industrial output contracting to a four year low. The decline in the price of agricultural products, along with the projected fall in the prices of most commodities will bring about a series of positive supply shocks; additionally economic slowdown is expected to decrease demand. As the disinflation trend is expected to continue, average inflation is forecast to fall from 10.9% in 2008 to 9.8% in 2009 and 6.4% in 2010 (EUI). As the Ministry of Finance suggested in April, the capacities of fiscal policy have really been exhausted. The key to the future fight to ease the impact of the crisis rests on monetary policy. In July 2009 the National Bank of Serbia cut its key policy rate by 100bp to 12%, in response to slowing inflation, a more stable dinar and signs that the economic slump.
5. Fiscal Position:
Fiscal policy is dictated by the terms of the January agreement with IMF; the budget revision took place in April with a projection of budget gap to GDP at 3% up from the initial 1.75% agreed with IMF in January. Measures include a 10% work force cut in the state sector and an immediate hiring and salary freeze. They also include additional taxes on state wages, gasoline, mobile phone impulses and luxury goods. The proposed measures are expected to trigger social and political tensions.
6.Business Environment:
Survey evidence on competitiveness indicates deterioration in the regulatory framework for business in Serbia. In the 2008 World Bank Doing Business report Serbia ranked 94th in the global rankings, down from the 91st place in 2007 and 86th place in 2006. Serbian government is committed to tackle the issue of red tape and such a project, led by the Center of Regulatory Reform, is expected to yield results within 2010(EUI).