Overall Economic Context
Macroeconomic trends in 2018 are generally favourable, but the Serbian economy still has numerous structural weaknesses. Economic growth in 2018 is assessed at 4.4% – the highest rate of GDP growth in Serbia since the outbreak of the crisis in 2008. Inflation in 2018 was low and stable (on average around 2% annually), and the current deficit of the balance of payments (assessed at around 5% of the GDP) is covered by an influx of foreign direct investment (FDI). Furthermore, trends in the labour market are positive (gradual increase in employment and average salary).
The Republic of Serbia finished 2017 with an estimated real economic growth of 1.9%. After 2014, when a real decrease of 1.8% occurred, the Serbian economy has shown signs of moderate recovery (achieving an economic growth of 0.8% in 2015, and 2.8% in 2016).
According to forecasts presented in the Fiscal Strategy for 2018, with Projections for 2019 and 2020, and the Economic Reform Programme (ERP) for the period 2018-2020, an acceleration is expected in the recovery with growth rates of 3.5%, 3.5% and 4%, respectively, during the three-year period (2018-2020).
The Government has undertaken certain steps to resolve the numerous obstacles impeding growth. A new three-year programme of fiscal consolidation was started in late 2014, envisaging budget savings and comprehensive structural reform. The fiscal consolidation measures have reduced public expenditures and moderately increased tax revenues with changes to their structure, implying changes to the structure of aggregate demand. The Progress Report for 2018 by the EC notes that the chosen combination of macroeconomic policies was correct and led to macroeconomic stability and improvements in the key economic indicators. Although there are still significant economic challenges, the main being that economic growth is slow, the restrictive fiscal policy and adaptable monetary policy have ensured price stability, stimulated investment activities, increased employment and reduced the risk premium for the country. Full implementation of reforms in the public sector and strengthening of key fiscal institutions will help maintain these results and the convergence with EU.
After the successfully completed precautionary stand-by arrangement during the period 2015-2017, in July 2018 the Executive Board of the International Monetary Fund (IMF) approved a new 30-month cooperation programme for Serbia, the Policy Coordination Instrument (PCI). It has an advisory character and does not envisage the use of funds. The goal of the instrument is sustaining macroeconomic and financial stability and a continuation of structural and institutional reform to stimulate faster and more comprehensive growth, the creation of new jobs and improvement of living standards. After the IMF mission for discussions on the first audit of the arrangement under the Policy Coordination Instrument (PCI) in October 2018, it was concluded that further progress was achieved in the implementation of structural reform, but that additional efforts are required to maintain the high growth date during coming years.
The main goals and guidelines of the economic policy of the Republic of Serbia have been recognized in the Fiscal Strategy for 2018 with Projections for 2019 and 2020:
- Maintenance of fiscal stability with support for growth;
- Macroeconomic sustainable and inclusive growth of the economy; and
- EU accession process.
Fiscal trends in late 2017 show a surplus of the consolidated state sector of 1.2% of the GDP. According to projections presented in the Fiscal Strategy in 2018, the deficit of the consolidated state sector with the application of fiscal consolidation measures will be 0.7% of the GDP, with additional decreases in 2019 and 2020, when it should be at 0.5% of the GDP. Due to fiscal consolidation measures a fiscal space was created for new policies, to be used in 2018 to increase capital investments, increase pensions and salaries in part of the public sector, and reduce taxes on revenues. These measures and their fiscal implications have been designed so as not to endanger the stability of public finance and the tempo of decrease of foreign debt, while on the other hand they should increase the living standard of the population, stimulate private spending and accelerate economic development.
An additional goal of the fiscal policy for the coming period is a further decrease in the share of public debt in the GDP. The trajectory of public debt was overturned in 2016, when the share of public debt in the GDP started to decrease. The public debt of the central level of the government on 31 December 2016 was 71.9%, whereas one year later it was 61.6% of the GDP. A reduction of the share of debt is tightly linked to decreasing the deficit as the main debt factor, so that the dynamics of decreasing the deficit are also decisive for changes to the debt trend. Financial transactions, such as the exchange of an expensive debt for a cheaper one, and an improved positioning of the state in the international financial market, may also contribute to further decreases in debt.
Inter-annual inflation has been reduced from 7.8% in 2013 to 1.2% in 2016, i.e. 3% in 2017. These trends are keeping inflation below the lower limit of permitted deviations from the goal (3±1.5%).
|GDP, EUR bln||31.7||34.3||33.3||33.5||34.6||36.8|
|GDP, per capita, EUR||4,400||4,781||4,672||4,720||4,904||5,226|
|GDP, real growth in %||-1.0||2.6||-1.8||0.8||2.8||1.9|
|Inflation, growth rate in %, period average||7.8||7.8||2.9||1.9||1.2||3.0|
|RSD/EUR exchange rate, period average||113.1||113.1||117.3||120.7||123.1||121.3|
|Current account deficit, % GDP||-11.6||-6.1||-6.0||-3.7||-3.1||-5.7|
|Foreign direct investments, net % GDP||2.4||3.8||3.7||5.4||5.5||6.6|
|NBS reserves, EUR bln||10.9||11.2||9.9||10.4||10.2||9.9|
|Consolidated fiscal deficit, % GDP||-6.8||-5.5||-6.6||-3.7||-1.3||1.2|
|Public debt, % GDP||56.2||59.6||70.4||74.7||71.9||31.6|
Source: MF, updated on 10 September 2018
For more information on economic developments in Serbia, see:
- Third National Report on Social Inclusion and Poverty Reduction in the Republic of Serbia for the Period 2014–2017
- Macroeconomic data from the Ministry of Finance
- Statistics by the National Bank of Serbia
- Evaluation of the Fiscal Policy by the Fiscal Council
- Quarterly Monitor of Economic Trends and Policies in Serbia
Overall Social Context
A total of 7,001,444 persons lived in the Republic of Serbia on 1 January 2018. In a demographic sense, Serbia is characterized by an expressed depopulation trend (the Republic of Serbia lost 147,736 persons during the period between 1 January 2014 and 1 January 2018), low fertility, relatively high (in an European framework) specific mortality rate, high average population age (43 years) and unfavourable age structure.
The year 2017 was the twenty-sixth year in a row marking negative population growth in the Republic of Serbia. Observed relatively across a population of one thousand, the population growth rate was -5.5‰. The true scale of the negative population growth can be analysed at the municipal level. During 2017 negative population growth was registered in as many as 163 of the total of 169 towns and municipalities.
The trend of increase in life expectancy at birth for both sexes has continued. The achieved value of this indicator was 77.9 years for women and 73 years for men in 2017. Despite the achieved historical maximum, life expectancy in the Republic of Serbia is more than five years shorter than the EU average. The dependence index of the elderly population in 2017 was 29.7, with projects of achieving the value of 36.3% in 2041.
Rough estimates based on data from different sources indicate an average annual negative balance of external migration of at least 15,000 persons (data from countries most frequently receiving migrants from the Republic of Serbia, the Statistical Office of the Republic of Serbia and the Commissariat for Refugees and Migrations).
Trends in salaries and pensions during the period 2014-2017 were under the influence of the measures of fiscal consolidation and the overall macroeconomic situation in the country. Pensions and salaries in the public sector have registered a sharp real decline during the first two years of the observed period, a slight growth in 2016, and another real decline during 2017. The increase of the real amount of net salaries in 2017 compared to 2016 was -0.9%, while during the same period pensions went through a real decline of 1.2%. In absolute amounts the average net earnings in 2017 were RSD 47,893 (EUR 395), and the average pension RSD 23,913 (EUR 197).
According to data from the Labour Force Survey, employment in the Republic of Serbia during 2017 has increased by 75,300 (+2.8%), half the value of growth registered during 2016 (by 145,200, i.e. +5.6%). The decrease of the unemployment rate, started in 2013, was continued in 2017. The unemployment rate was 13.5%, representing a decrease of 1.8 percentage points (p.p.) compared to 2016. The increase of employment and decrease of unemployment in 2017 was also followed by a slight decrease of inactivity. The inactivity rate was 46.0%, or 0.7 p.p. less than for the previous year.
Key labour market indicators 2012-2017 (working-age population 15-64)
Source: FS respective years, SORS
Poverty remained significant, both expressed in absolute terms (the share of people whose consumption is below the threshold required to meet basic needs – 7.3% in 2016), and in relative terms (the share of people at risk of poverty stood at 25.5% in 2016). Regardless of the methodological concept applied, the profile of the poor does not differ significantly according to the concept of absolute poverty or relative poverty. Judging by the profile of the poor, the living standard is decisively influenced by the following elements: employment status, education attainment, household size and type (households consisting of a single parent with several children are particularly vulnerable) and residence outside urban areas.
The at-risk-of-poverty-or-social-exclusion (AROPE) rate, the key monitoring indicator for the Europe 2020 strategy, is at 38.7% in Serbia in 2016. This value is significantly higher than the average value for the EU 28 countries (23.5%). A higher percentage of population at risk of poverty or social exclusion than in the Republic of Serbia has only been registered in Bulgaria (40.4%) and Romania (38.8%).
The at-risk-of-poverty rate by the most frequent activity status (held for more than six months) shows that the unemployed are in the worst situation (48.0% or almost one out of two unemployed people is at risk of poverty). Employment reduces the risk of poverty considerably, but quality of employment remains the key factor for exiting poverty (the self-employed have a significantly higher at-risk-of-poverty rate than those in dependent employment – 32.4% and 9.0% respectively). After those in dependent employment, pensioners are in the most favourable position, with the risk of poverty approximately equal to that of total employed people (15.4%). Education is a decisive factor for the economic status and income-generating capacity; it is, therefore, not surprising that people with lower educational attainment levels are at an above-average risk of poverty. In 2016, the highest at-risk-of-poverty rate was recorded among the population with primary education and below (39.1%), while the population with college or university education had the lowest at-risk-of-poverty rate (10.3%). This distribution of the population at risk of poverty by educational attainment level clearly indicates that education is worthwhile, given that the highly educated are rewarded in the labour market.
Even though consumption inequality measured by the Household Budget Survey (HBS) indicates that Serbia can be classified among countries with an even distribution (the Gini coefficient stood at 26.1 in 2016), the values obtained through a comparable methodology (SILC) point to a highly pronounced problem of income distribution inequality (Gini 38.6). Part of the explanation for differences in the values of the Gini coefficient based on the two surveys are due to the SILC survey in Serbia registering negative values of income for self-employed persons, while the HBS survey does not record losses.
Income distribution inequality measured by another indicator – income quintile share ratio – stood at 9.7, which means that in 2016 the equivalised income of the richest 20% in the Republic of Serbia was nearly 10 times higher than that of the poorest 20%. The value of this indicator measured in recent years was substantially higher than the average for the 28 EU Member States, amounting to just 5.1, but also higher than the highest values registered in Bulgaria (7.9), Romania (7.2) and Lithuania (7.1).