Term 1 Flashcards
Economic growth + International business cycle
(policies)
The key policy rate of 3.0%, applied by the NBS in its open market operations, represents an operating target for short-term interest rates in the money market. Its role as the operating target is supported by the corridor of ±1.5 pp on interest rates for deposit and lending facilities.
The government implemented new fiscal rules at the end of 2022 to guarantee the future sustainability of public finances. These rules include a “high debt–low deficit” policy, which activates the debt brake at 60% of GDP. This threshold requires a balanced state budget once the level of debt surpasses it.
In December 2019, the government announced the new National Investment Plan, allocating approximately $14 billion for major development projects to be completed by 2025. A large portion of the funds are going to infrastructure projects, including road, rail, air, and water upgrades.
Economic growth + International business cycle evaluation
Serbia’s GDP has grown at 2.5x the rate of the EU, increasing by 26.5% from 2018 to 2024 compared to 10.2% for the EU. In 2024, growth is expected to accelerate further, with full-year economic growth expected to reach 3.5%. Over the medium term, the economy is projected to grow steadily at around 3-4% annually, supported by increases in consumption and investment (consumption up by 15% in 2024 and consumer credit up 1%) , and a continued strong performance of industrial exports, specifically in automobiles, base metals and machinery. Consumer price inflation in Serbia averaged 3.7% in the ten years to 2022, below the Eastern Europe regional average of 7.7%.
These robust fiscal buffers allowed policy makers to effectively manage real shocks such as the recent COVID-19 and energy crises. The fiscal deficit was reduced from 8% to 2.2% of GDP between 2020-2023, while public sector debt, during the same period, declined from 57.8% to 52.6% of GDP. Lower regional energy prices and resilient exports supported a sharp narrowing of the fiscal deficit to 2.6% of GDP in 2023, from 3% in 2022. The current account deficit also shrank from 6.9% in 2022 to 2.6% in 2023. Thanks to continuous strong FDI inflows, foreign exchange reserves now exceed EUR 25bn, an all-time high. Inflation is expected to fall within the National Bank of Serbia’s target range by the summer of 2024. Financial stability has been broadly maintained
According to the Western Balkan’s Competitiveness Outlook 2024 by the OECD, Serbia’s score has slightly improved in investment policy and promotion sections with an overall score of 4.0. Serbia outperforms the region (Balkan 6 with an average score of 3.4 for 2024) in all three sub-dimensions (1. Investment policy framework 2. Investment promotion and facilitation 3. Mobilising sustainable investment) and remains among the best-performing economies in the Western Balkan region for investment policy and promotion.
Distribution of income and wealth policies
Serbia is a signatory to the Council of Europe’s Civil Law Convention on Corruption, and it has ratified the Council’s Criminal Law Convention on Corruption. Serbia also is a member of the Group of States against Corruption (GRECO), a peer-monitoring organization.
Serbia’s financial sector relies heavily on the banking industry, which constitutes 91.1% of total financial system assets in 2022, a slight decrease from 91.6% in 2015 (National Bank of Serbia, 2022
Distribution of income and wealth evaluation
Surveys consistently show that corruption remains an issue of concern. Transparency International (TI) ranked Serbia 104th out of 180 countries on its Corruption Perception Index (CPI) for 2023, a drop of three places versus 101st place in 2022, after dropping from the 96th spot in 2021. In Serbia’s EU accession process, the European Commission has repeatedly noted that Serbia must do more to fight corruption and improve transparency. Arrests and investigations for official corruption charges generally focus on low or mid-level officials, and corruption-related trials are typically drawn out and subject to lengthy appeal processes.
Serbia has relatively stringent lending requirements. While both tangible and intangible assets (except trademarks) can be used to secure loans, small and medium-sized enterprises (SMEs) do not benefit from lighter requirements. However, NBS regulations lighten provisioning requirements regarding SME lending through decreased risk-weight coefficients specific to these loans, which could support SME corporate lending.
Quality of life and eco. development
policies
Serbia created the Office for IT and e-Government in 2017, which specifically aims to harmonise the development of digital infrastructure for state administration bodies and Government services. It is also dedicated in providing services for designing, developing and functioning of Internet access, Internet services and other centralised electronic services. Emerging as a regional leader, Serbia adopted the AI Strategy in 2019 in collaboration with the United Nations Development Programme. Through a dedicated project, UNDP has been actively supporting the government’s ambitious AI agenda, which has included things like establishing the Artificial Intelligence Institute and adopting an Ethical framework for Responsible AI Development.
In June 2021 The Government of Serbia adopted the Strategy for the Development of Education in Serbia by 2030, aimed at the harmonisation of the regulations in education with international documents and initiatives (documents of the UN, EU, Council of Europe, etc.). In pre-university education, standards of achievements based on the newly introduced competence-based concept were developed and are pending for adoption; in university education, documents aimed at achieving an increased level of compliance of NAB quality assurance documents and procedures.
The Government’s main concern has not been to tackle inequality and poverty, but rather to carry out fiscal consolidation, preserve macroeconomic stability and incentivize growth and investment. Investments aimed at closing the existing infrastructure gap have surged and are expected to further accelerate under the ambitious “Leap into the Future – Serbia 2027” development plan.
Democratic changes in 2000 and the adoption of the “Health Policy of Serbia” in 2002 initiated significant progress in health policy in the country., supported by funding from donor agencies and loans from development banks. For example, the Ministry of Health carried out the health project “Development of Serbia - additional funding” in accordance with the Loan Agreement between the Republic of Serbia and the International Bank for Reconstruction and Development. It was guided by the goal to support capacity building in order to develop a sustainable healthcare system aimed at results, in which providers of health services rewards for quality and efficiency and where health insurance provides access to affordable and effective healthcare. The World Bank also contributed to the ‘Additional Financing for Second Serbia Health Project’ (P166025) which strived to fix the issues of inefficiency and the fragmentation of services within the hospital system. For example, hospitals offering ER services, even in large catchment areas, often did not have a full range of required specialties, necessitating re‐referrals and leading to delays in starting appropriate treatments.
Quality of life and eco. development evaluation
In 2023, RSD 32 000 000 000 of budget funds were spent for research and development (R&D) activities, an increase of 15.8% compared to 2022.The share of total budgetary funds for R&D in GDP reached 0.4% in 2023. Yet, despite progress in promoting innovation and entrepreneurship programs, budget allocations for R&D are still less than half of the EU average of 2.27% of GDP.
According to the World Bank’s Human Capital Index, the average child can expect to complete 13.3 years of school by the age of 18, but after factoring in learning outcomes, this drops to 9.8 years, one year behind the EU average. Serbia’s population is declining and aging due to low birth rates and out migration.Serbia’s poor and disadvantaged groups face inequality and unequal opportunities. The Gini coefficient was 32.0 in 2022, reflecting unequal access to opportunities by women and girls, Roma, and young adults. Children from Roma communities are underrepresented at all education levels from early childhood, have lower educational attainment, and fewer opportunities to earn a good income later in life. Several structural barriers limit Roma access to education ranging from affordability, accessibility and legal constraints to discriminatory practices and social norms.
Living standards have markedly improved, with poverty (income under USD 6.85/day in 2017 PPP) falling from 28.3% in 2013 to an estimated 7.1% in 2023. Yet despite this, unemployment remains high, with a significant number of individuals working in the shadow economy and in precarious jobs. Income inequality is high, with nearly a quarter of the population at risk of poverty and social exclusion and 7% of the population living in absolute poverty. Slow economic growth poses a serious problem, as incomes fail to converge with the EU average (Serbia - $1300USD per month while EU - $2000 USD). The public sector remains bloated, unaccountable and inefficient. Although the overall business environment is favorable, state-owned enterprises continue to be tightly controlled by political authorities, and the government maintains a significant presence in the economy.
Life expectancy in Serbia has continued to increase since 2000, reaching 75.5 years in 2022, but it is still below the average of European Union countries 81.5 years). Positive trends can be seen in falling incidence rates for tuberculosis, HIV as well as infant and maternal mortality. However, cancer rates have increased and health inequalities persist. Total health spending reached 8.8% of GDP in 2017. However, private spending, mainly related to out-of-pocket payments, has increased over time, reaching 42.4% of total health expenditure in 2017.
Trade, investment (FDI and portfolio investment) and transnational corporations
policies
Serbia is a member of the Central European Free Trade Agreement (CEFTA), and enjoys free-trade status for almost all products exported to the European Customs Area. Serbia is not a WTO member, however it conforms with WTO standards, including eliminating import quotas, reducing import licensing and prohibitions, and streamlining customs procedures.
Serbia has attracted foreign TNCs with streamlined residence permits, preferential tax regimes in free zones, and a 15% profit tax. However, concerns arose over investor rights when public protests by environmentalists led the government to revoke the license for multinational mining company Rio Tinto’s $2.4 billion lithium mine project in 2021, despite its potential to supply 10% of global lithium demand.
The World Bank Group program is defined by a joint strategy for Serbia, the Country Partnership Framework (CPF) FY 2022-2026, approved in May 2022. The CPF aims to support the country in strengthening its institutions to accelerate economic growth through maintaining hard-won macroeconomic stability and reforming the public sector.
Trade, investment (FDI and portfolio investment) and transnational corporations evaluation
Serbia maintained good relations with both the East and West, attracting FDI from Europe, China, and the UAE. According to the National Bank of Serbia, the country attracted USD 4.4 billion of foreign direct investment in 2023, equivalent to around 6.1% of GDP. Almost four-fifths of FDIs took the form of equity and reinvested earnings, with the bulk of investments concentrated in manufacturing, construction, mining, and trade. Serbia has attracted over $46 billion of foreign direct investment since 2007, according to RAS. Serbia’s strong FDI track-record is substantiated by international awards. Serbia was ranked at the top of the Financial Times’ FDI 2019 Europe list, based on the criteria of Greenfield investments relative to the size of the economy (Financial Times, FDI Report 2020). “IBM Global Location Trends 2020” ranked Serbia first globally for the fourth consecutive year for creating the most FDI-related jobs per million inhabitants.
Despite progress, Serbia is still not converging quickly enough with the EU. Serbia would converge with the average per capita income of the EU only in 2074 if it continues to grow at an average annual rate of 3%. The country’s price competitiveness, traditionally driven by low-cost energy and labor in lower value-added sectors, is eroding.
Serbia’s involvement with the World Bank Group program has granted it more opportunities to seek global investment. In May 2024, European authorities approved the setting up of the Reform and Growth Facility in support of the Plan, under which Serbia could receive up to EUR 1.7bn until 2027. Besides providing financial support, the Plan can accelerate integration into the Single Market before Serbia achieves full EU membership. It also aims at completing the Common Regional Market. In support of the Plan, Serbia has formulated a comprehensive agenda, articulated around reforms focusing on the business environment, the green and digital transitions, human capital, and growth fundamentals – including governance, justice sector, and the rule of law.The scheme targets a minimum of 30% of the lending volume towards environmental sustainability purposes to encourage SMEs to take positive actions in support of the climate change agenda. 70% of available funds support strategic long term investment, such as investments in tangible or intangible assets, machinery or equipment, research and development, business expansion and premises improvement
Environmental sustainability strategies
Serbia ratified the Paris Agreement in 2017 which entails its agenda of reducing greenhouse gas emissions by 13.2% compared to 2010 levels (or 33.3% when compared to 1990) by 2030.
Belgrade WtE (waste to energy) - SPV Vinca (US$76m) is a market based policy that combined a complete overhaul of the Vinča landfill and the management of its legacy pollution with the creation of sustainable, revenue-generating, environmentally conscious waste management – and circular economy transformation of ‘waste-to-value’ – infrastructure. Funded by €260 million in financing and guarantees from the IFC and the The Multilateral Investment Guarantee Agency (MIGA).
Environmental taxes are also used as an economic instrument for controlling pollution and managing resources, and they are conceived to influence the behaviour of business subjects, producers and consumers.
Environmental sustainability evaluation
The annual average PM2.5 concentration in Serbia is above the EU limit value, as well as the WHO guidelines. In 2019, PM2.5 pollution was responsible for an estimated 12,500 premature deaths, or 144 deaths per 100,000 population, and the annual costs of health damages amounted to 18.9% of GDP, the highest share worldwide.
Air pollution is perceived as the most damaging aspect contributing to people’s health (71%) and is amongst the top issues where government performance is considered inadequate.
The recycling rate for municipal waste is meager at only 4% and is largely achieved by informal resource collectors. As a result, the potential of a circular economy in waste management remains largely unused. Weak institutional capacity makes implementing policies and measures to address deteriorating environmental quality difficult.
In 2021, revenue from environmental taxes amounted to RSD 245 000 mill, presenting an increase of 12% relative to 2020. The greatest share in revenue structure was related to energy taxes at 87.4% and taxes on transport 6.9%, while taxes on pollution and resources participated with 4.2% and 1.5%, respectively.. In 2021, the share of environmental tax revenues in GDP was 3.9%, while the share of environmental tax revenues in total taxes and social contributions amounted to 9.8%.
