The impact on Serbia’s economy caused by the war in Ukraine is likely to remain moderate. However, the war will adversely affect all macroeconomic indicators. Growth forecasts have been downgraded because of sharply higher inflation, trade exposure to Russia and a weaker European economy. Serbia’s central bank has carried out only moderate monetary tightening so far, expecting that the jump in inflation will be short-lived. External accounts are likely to deteriorate because of the wider current account deficit and a possible slowdown in foreign direct investment flows, but the central bank should still be able to defend the dinar stability. This is crucial for Serbia’s macroeconomic stability given that commercial bank balance sheets and government debt are highly exposed to the euro
The Serbian economy was only moderately affected by the consequences of the Covid-19 pandemic in 2020. Activity barely contracted, whilst the central bank maintained an adequate level of foreign-currency liquidity against a background of significant euroisation of the economy. These good performances can be linked to the economy’s attractiveness for international investors, as well as to past fiscal consolidation measures, which meant that the government had more scope to support the economy last year. In the short term, the recovery is likely to be strong, in particular thanks to exports, and inflation should remain under control. Looking further ahead, the ability of the authorities to maintain the economy’s competitiveness will be crucial in reducing currency risk.
Serbia is a market economy but the public sector remains significant in certain areas and a number of institutional reforms are required. The economy relies on manufacturing and exports, driven largely by foreign investment. Despite some progress towards EU membership, it remains a distant objective. Public debt remains at a fairly high level. A large part of the economy is euro-based (67% of total loans). The SRD is likely to remain broadly stable in the short term given central bank interventions to prevent harmful depreciation.
In the medium term, socio-political constraints will continue to put a limit on the pace of reform. Unfavourable demographic trends (as in the other Western Balkan countries) is a constraint on potential growth. The country entered the pandemic in a relatively favourable economic situation. Economic activity was resilient to the consequences of the pandemic (-0.9% in 2020), but the fiscal deficit rose to a high level.
