Serbia: Economy

Since the fall of Slobodan Milosevic, Serbia’s economic progress has been substantial, but economic reform and restructuring are continuing challenges for the Serbian Government. Unemployment, corruption, and labor unrest remain ongoing political and economic problems. The dinar has fallen by more than a third against the Euro since the onset of the global financial crisis in 2008, highlighting Serbia’s fragile and structurally weak economy. The economic crisis, and a concern over Serbia’s external financing gaps, also led Serbia to seek a $4 billion Stand-By Arrangement (SBA) with the International Monetary Fund (IMF), which was approved in May 2009. The IMF conducted a series of periodic reviews of Serbia’s economic performance under the SBA and generally concluded that Serbia met most SBA conditions. The current SBA expires at the end of April 2011, and as of late March 2011 the Serbian Government had not yet decided whether to request a follow-on agreement with the IMF.

Serbia experienced relatively healthy GDP growth rates in 2007 (6.9%) and 2008 (5.5%), but the global economic crisis caused Serbia’s GDP to tumble 3% in 2009. A slow economic recovery commenced in 2010 (1.8% GDP growth), and the IMF projects growth to accelerate modestly in 2011 (3% GDP growth). In late 2010, Serbia adopted a new model of economic growth based on increased savings, investment, production in tradable goods, and exports. The model has achieved some success. Exports, for example, rose by 26% in 2010, due in significant measure to the depreciation of the dinar and the incipient recovery of the global economy.

Inflation is a growing concern, reaching 12.6% year-on-year in February 2011, significantly above the National Bank of Serbia’s (NBS) 3%-6% target range for this year. In response, the NBS has raised its benchmark interest rate several times since the summer of 2010. As of March 10, 2011, the NBS benchmark rate stood at 12.25%, the highest in Europe, which has helped curb rising inflation but also tended to inhibit domestic investment and growth. Growing inflation and official price increases for controlled products and services, such as public transportation, electricity, and natural gas, have compounded the economic difficulties facing Serbian citizens, whose average net incomes (minus taxes, medical insurance, and retirement contributions) have remained stagnant at approximately $440 per month. Poverty levels have risen steadily since the onset of the global financial crises, reaching approximately 8.8% of the population at the end of 2010. The official unemployment rate stood at 19.2% as of October 2010, and unemployment levels in many provincial cities and among women and minorities exceeds 30%. The projected 3% GDP growth rate for 2011 is not sufficiently robust to have a significant impact on reducing unemployment this year.

Foreign direct investment (FDI) was relatively strong prior to the global financial crisis ($2.2 billion in 2007 and $2.3 billion in 2008), but fell off in 2009 ($1.9 billion) and has remained at disappointing levels ($1 billion in 2010). Efforts to attract additional FDI were dealt a setback in March 2011, when a tender to sell a majority stake in the state telecommunications company, Telekom Srbija, failed to attract a minimally acceptable bid. On the other hand, a number of leading foreign investors, including Italian automotive manufacturer Fiat, U.S. Steel, and Ball Packaging, have recently announced significant expansions of their operations in Serbia. Total U.S. investment in Serbia exceeds $1.5 billion. Among the leading U.S. investors are Philip Morris, U.S. Steel, Ball Packaging, Coca-Cola, and Van Drunen Farms. Many other leading U.S. firms, from a broad variety of industrial and service sectors, have a significant presence in Serbia. Other major international investors include Norway’s Telenor, with well over $1 billion invested, and Russia’s Gazprom Neft, which acquired a majority stake in the formerly state-owned oil company, Naftna Industrija Srbija, for 400 million Euros ($555 million at the prevailing exchange rate) in 2008.

Economic reform has been moving forward in many areas, driven largely by Serbia’s decision to seek membership in the European Union (EU) and in the World Trade Organization. Serbia’s accomplishments in modernizing legislation to conform to EU and international standards in nearly all areas affecting the economy, from intellectual property rights to foreign trade, have been impressive. Implementation of these new laws, however, remains inconsistent. In addition, important sectors of the Serbian economy and society, such as education, health, and energy, have yet to undergo serious structural reforms. Political appointees preside over large, inefficient state enterprises that are run more as social welfare organizations than as modern businesses. Much of the economy and employment structure remains dominated by an inefficient public sector. More than 25% of all people employed in Serbia work for state-owned enterprises or the central and local governments. The World Bank estimates that two-thirds of all university graduates in Serbia work for the public sector, and only one-third in private enterprises. Privatization is far from complete. In addition to the unsuccessful effort to privatize Telekom Srbija in 2011, approximately 100 “socially-owned” companies whose privatization was scheduled to be completed by the end of 2008 remain under state stewardship. Competition remains limited in some key economic sectors, including certain agricultural subsectors (sugar, sunflower oil, soybean products, wheat seeds, mineral fertilizers, and some dairy products), food retailing, and energy, which are dominated by a handful of major market players. Property rights remain unsettled to a significant degree. Serbia has yet to adopt a restitution law to address the state’s seizure of private assets since the onset of World War II, and many structures in Serbia have been built without licenses or proper registration in official property records, tending to inhibit real estate development and other investment projects.

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