Serbia's currency

Serbia’s economy threatened by rising rates, inflation, fuel prices


Interest rates hikes, a spike in inflation and rising international energy prices pose the biggest risk to Serbia’s economy in 2022, threatening the projected gross domestic product (GDP) growth rate of 4.5%, an analysis published in Kvartalni Monitor (Quarterly Monitor) warns.

Two major trends – a relatively strong economic recovery and a relatively strong acceleration of inflation – were present in the Serbian economy this year, the authors of the latest issue of Quarterly Monitor said, a bulletin of economic trends and policies in Serbia, published since 2005 by the Belgrade Faculty of Economics and the Foundation for Development of the Economic Science.

The authors also noted that these trends characterized other economies worldwide, but more intensive Serbia. The Balkan country has seen a relatively high inflow of foreign capital this year – in the form of Foreign Direct Investment (FDI) as well as in the form of borrowing abroad – and that the inflow had helped a solid economic recovery in 2021.

However, the authors warned the external trade deficit was rising following unexpectedly good Q1 2021 results that were due to a good short-term ratio between export and import prices. They noted that, in 2020 and 2021, Serbia had seen relatively high growth of external debt as a result of government and private sector borrowing that had also contributed to the inflow of foreign capital.

Serbia was one of the best performers in the entire emerging Europe region with its economy contracting by a relatively mild 1% in 2020. Key to the well managed economic slowdown in 2020 was the generous fiscal support, as Serbia provided the Western Balkans region’s biggest stimulus packages since the start of the crisis, and continued to do so in 2021.

“Serbia has coped relatively well with the COVID-19 pandemic. The hard-won macroeconomic stability that was achieved prior to the crisis, and the large policy support package that was deployed as the crisis hit, helped mitigate the adverse impact of the pandemic on economic activity” commented Tao Zhang, deputy managing director and acting chair of the IMF, in June, at the conclusion of the latest Article IV consultation with Serbia.

In October, an IMF mission, led by Jan Kees Martijn, held virtual and in-person meetings with the Serbian authorities. “An economic recovery in Serbia is underway supported by the authorities’ substantial policy response….Rising international energy prices present risks to inflation and economic growth” Martijn stated at the conclusion of the mission.

serbia inflation

Serbia’s GDP expanded by 7.7% year-on-year in the third quarter of 2021, following a 13.7% advance in the previous three-month period, which was the fastest since the last quarter of 2001. It was the third consecutive quarter of growth, but at a slower pace.

Last month, the annual inflation rate climbed to 7.5% from 6.6% in October and above market expectations of 6.5%. It was the highest reading since July of 2013. Consumer prices advanced at a faster pace for food & non-alcoholic beverages, housing & utilities, transport, furnishings, household equipment and routine household maintenance, restaurants & hotels and clothing and footwear.

Last month, the government adopted the 2022 draft budget, which projects a 3.0% fiscal deficit. A key element of the budget is infrastructure investment, which should improve growth potential. The plan was greenlighted by parliament in late November.