Normalization after a strong recovery

A solid economic recovery characterized 2021. While a lockdown was implemented in early 2021, the relatively strong focus of the Serbian economy on agriculture (8% of GDP), construction (7% of the GDP), and manufacturing (25%, actual products such as food and metals), helped to cushion the impact on the economy, which still grew dynamically at the beginning of the year. In addition, the vaccination campaign was very successful in the first half of 2021 but slowed down a lot in early December. The vaccination level did not save Serbia from two big COVID-19 waves last year. This year the economy should cool and return to a more gradual growth path. Investments (22% of GDP) and private consumption (68% of GDP) should be the main drivers of economic growth. Public and private investments are supported by big projects like the construction of the first metro network in Belgrade, which started in November 2021 and will continue until 2026. Alongside further investments in automotive manufacturing, the mining group Rio Tinto announced a USD 2.4 billion investment into the Jadar lithium mine in the summer of 2021, which has a potential production of 58,000 tonnes annually from 2026 onwards. However, due to protests, the future of this project is unclear. Private consumption should benefit from a high savings rate (15.5% average in the first half of 2021) and some progress in the labor market, with the participation rate already reaching an all-time high in autumn 2021. This should encourage wage growth. However, the purchasing power will decrease due to the substantial rise of the inflation rate, which should peak above 8% this spring, because of high energy and food prices and high import prices. This price pressure should then slowly decrease, but the inflation rate will remain above the National Bank of Serbia (NBS) inflation target of 3% +/-1.5 percentage points until autumn. Therefore, the SNB could increase its key interest rate by 50 basis points up to 1.5% in the first half of the year, which is still noticeably below the pre-COVID-19 level of 2.25%. While the more substantial increase in consumption should further pull imports, the expected recovery in the European manufacturing sector, especially in the second half of the year, should favor exports. Nevertheless, net exports should still weigh on the growth outlook, but less than in 2021. 

Consolidating public finances 

In April 2021, Serbia signed a new Policy Coordination Instrument with the IMF, which will be in force until 2023. While it includes no financing, it still incentivizes the government for a sustainable budget. In 2022, most pandemic-related support measures will have expired, while revenues should further increase due to higher tax income (economic recovery + payment of postponed taxes from 2020/21). This should push the public deficit below the Maastricht target of 3% and stabilize the public debt below 60%. The structural trade-in-goods deficit should decrease slightly in 2022, with their exports somewhat accelerating. Only cosmetic changes are expected in the structural net primary income outflow (repatriated foreign investors’ dividends and interests), which will still be more than offset by expatriated workers’ remittances. Services trade will remain in surplus. The external and foreign currency debt stocks remain high (62% and 77% of GDP, respectively). 

Environmental issues are becoming a problem for the authoritarian government 

President Aleksandar Vučić is leading the country with his Progressive Party (SNS), which had, in late 2021, 173 out of 250 seats in the parliament. Including the other coalition and support parties, the alliance has 92% of all hearts. The main reason for this colossal majority was the boycott of the last elections in 2020 by significant opposition groups that resulted in a weak turnout (48%). However, the power of the SNS, which has firm control over the media and judiciary, crumbled in late 2021. From mid-September, thousands of people demonstrated on the streets to protest against the lithium mining project of Rio Tinto due to the fear of resulting water and earth pollution and new legislation allowing the seizure of private property more easily for public projects. Although Vučić announced the road blockades were illegal, he suspended two essential laws that would help the lithium-mining project, maybe to calm the public ahead of the next legislative election that was advanced to April 2022 to coincide with the presidential and municipal elections. In the meantime, Serbia made no progress in its EU’s accession process in 2021 and in the dialogue to normalize its relationship with Kosovo, whose independence Serbia does not accept. Serbia is not in NATO and has close ties with Russia and China.