Europe

Serbia
Last Reviewed: 11 December 2008

Country information

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ECONOMY

Source: Serbian Statistical Office, unless otherwise stated
GDP (billions): US$ 39.9 (2007 est.); US$ 29.6 (2006)
GDP real growth rate: 7.1% (2007 est.); 5.6% (2006)
GDP per capita: US$ 5399 (2007 est.); US$ 3994 (2006)
Population below poverty line: 6.6% (2007). National poverty line defined at approximately US$ 130 per month.
Registered unemployment rate: 24.4% (September 2007)
Inflation: 10.1% (2007) – source: National Bank of Serbia
Official Currency: Serbian Dinar (RSD)
Major industries: Agriculture, machine building, metallurgy, mining, consumer goods, automotive, pharmaceuticals, petroleum products and chemicals.
Major trading partners: Russia, Italy, Germany, France, the former Yugoslav Republics and neighbouring EU states (Hungary, Bulgaria and Romania).
Further information about Serbia's economy and investment opportunities can be found on the UK Trade and Investment website

Economic Overview

Since 2000, Serbia’s economy has been going through recovery from conflict and isolation in the 1990s, and through transformation towards a fully functioning market economy. Successive governments have introduced reforms designed to liberalise the market, although progress has been intermittent owing to political uncertainty. Nevertheless, the economy has grown at an average rate of 6%, and both foreign investment and particularly trade have shown strong increases.

Continuing integration with the European Union, with the goal of eventual membership, will increase the pace of reform and provide an additional boost to the economy. As part of its ongoing reforms, the country is nearing the end of a programme of privatisation of state and socially owned companies. One of the most successful sectors to benefit from this programme has been banking, over 80% of which is now foreign owned. New financial products and an increased trust in banks among the public (destroyed by successive banking crises in the Milošević era) led to a consumer boom and a sharp increase in imports. The Government expects to complete the privatisation process in 2009, although several large state monopolies (such as electricity, gas and telecommunications) will be gradually opened up to competition in successive years. Those companies that fail to attract a buyer after three attempts at a sale will go into liquidation.

A product of the privatisation programme is the high unemployment rate, as companies are restructured or liquidated. This has become one of the main economic and political challenges for the Government, as Serbia’s unemployment rate remains in excess of 20%. The Government has responded by looking to encourage greenfield investment, an area that Serbia has so far failed to develop. The Government is now offering financial incentives to investors who site their business and create employment opportunities in Serbia. In this way the Government hopes not only to begin to tackle the unemployment problem, but also to redress the growing trade gap by attracting export-driven industries.

Serbia’s economy is in the process of becoming more closely integrated with the region and the wider world. In September 2007, Serbia ratified the Central Europe Free Trade Agreement (CEFTA). Besides Serbia, CEFTA includes Croatia, Bosnia, Montenegro, Macedonia, Albania, Moldova and Kosovo. The Agreement creates a regional free trade area of around 29 million people. Serbia is also one of the only countries outside the former Soviet Union that enjoys a free trade agreement with Russia, a market of 143 million, although this has yet to be exploited to its full potential. Serbia is negotiating to join the WTO, and hopes to do so in 2009.

The economic crisis

As a result of the country’s growing integration with regional and world markets, Serbia has started to feel the effects of the current global economic crisis. As mentioned above, access to personal and corporate credit has led to a steep rise in imports. Coupled with high government spending, the result has been that Serbia has had to deal with an increasingly wide current account deficit (expected to be in excess of 18% of GDP in 2008). Until now, this gap has been covered with privatisation receipts and international credit. However, the tough economic crisis has deterred investors and made credit more expensive. Realising the fragility of the situation, the government recently turned to the IMF for advice on planning its budget for 2009. After almost three weeks of negotiations in November, the IMF and the government agreed to a reduced budget deficit of 1.5%, through restricting wage and pension increases and cutting state subsidies. The remaining deficit reflects expected lower levels of economic activity, rather than continued high levels of government spending. The IMF and the government also agreed a so-called “stand-by arrangement”, whereby the IMF would make available a loan of US$516 million, should the need arise. The loan would serve to bolster the country’s foreign currency reserves, rather than to support current spending. The IMF predicted that the Serbian economy would continue to grow at a rate of 3% in 2009, down from the expected 7% in 2008.

The government agreed to sign a Memorandum of Understanding with the National Bank of Serbia, in a joint effort to keep inflation under control. High levels of government spending in the past two years had fuelled inflation, only partially contained by the Bank’s strict monetary policy. As of October 2008, Serbia’s headline inflation rate stood at 12.3%.

The economic crisis has also affected the Serbian Dinar (RSD), as reduced flows of foreign funds into the country have lessened demand for the currency. By mid-November, the Dinar had lost almost 15% of its value against the Euro since its high in August. The National Bank has responded with a policy of intervention in the exchange market to prevent excessive fluctuation, without seeking to reverse the downward trend of the Dinar. Although the Bank had injected almost €400 million of its reserves to slow the decline, overall reserves remained healthy at over €10 billion at the end of October 2008.

One brighter element in the economy is the banking sector, which remains strong despite the financial turmoil. One of the National Bank’s policies to contain inflation had been to demand a high reserve rate on foreign currency deposits and credits, to the extent that total reserves more than adequately cover overall deposits. Banks in Serbia are therefore in a stronger position than others in the region and further afield.

Trade

Serbia’s trade results in 2007 show a total of US$ 27.2 billion in foreign trade, a 38.6% increase in comparison to 2006. Exports reached US$ 8.82 billion, which represents a growth of 37.3% over the previous year. The value of imports reached US$ 18.35 billion, which is 39.3% higher than in 2006. However, the macroeconomic and investment climate is still somewhat fragile with the current account deficit remaining high (expected to grow to over 18% of GDP in 2008) and the foreign trade deficit amounting to over US$ 9.7 billion in 2007.

Direct trade between the UK and Serbia in 2007 stood at approximately US$ 357.4 million (source – Serbian Statistical Office). UK imports from Serbia amounted to $150.1 million, while UK exports to Serbia totalled $207.3 million. It is worth noting that significant volumes of British exports to Serbia are routed via third countries and therefore not captured by direct trade statistics. Major UK investment in Serbia occurred in 2003 with the acquisition of the second largest tobacco manufacturer by British American Tobacco for approximately €87 million. The UK ranks in the top 10 investors in Serbia with cumulative 2000 – 2006 investments amounting to over US$ 307 million. Numerous UK service providers are successfully doing business in Serbia in areas such as law, accountancy, real estate, construction, engineering, marketing and public relations.

International Assistance

Following the fall of Milosevic in October 2000, many international donors started working in Serbia, providing important assistance to the new pro-reform government.

Although it is a middle income country, Serbia is still a significant recipient of international aid, which come from more than 20 international donors’ organizations that are having active programmes in Serbia.

From 2000 to date, international assistance totalling €4.5 billion has been committed to Serbia.

Disbursed international assistance and its share in GDP in millions of Euros

Years	2001	2002	2003	2004	2005	2006	2007
Disbursed Intl. assist.	868.55	726.35	686.22	450.58	713.21	551.35	379.98
Disbursed assist. as % GDP	6.60%	4.30%	3.80%	2.30%	3.40%	2.20%	1.20%

Source: GoS ISDACON database

The biggest providers of international assistance in 2007 are: the European Commission, The World Bank, European Investment Bank, European Bank for Reconstruction and Development, Germany and the USA.

Sectors with the highest share in the total disbursed international assistance are energy and transport, the third largest is the public administration sector.
The international assistance is provided through well developed mechanism for coordination of donors’ assistance (DACU) which Government of Serbia established in 2002. DACU plays an important role in helping Ministries to prepare and implement priority projects and coordinate donors’ assistance with them.

EU assistance to Serbia is provided in a context of EU accession process and from 2007, it is given through the Instrument for pre-accession (IPA), which has been adopted for the period 2007-2013.

Financial assistance from IPA funds is/will be use for supporting the transition process and institution building, as well as for cross-border activities between our country and neighbouring countries-assistance beneficiaries, as well as with the EU member countries.

Projection of IPA funding for Serbia is the following:

IPA budget for Serbia	2007	2008	2009	2010
Component 1 and 2	186.7	190.9	194.8	198.7

Source: European Commission

As for the World Bank assistance, it is provided in a form of EBRD loans. The World Bank support, which is projected to be 600 million of Euros in next four years (2008 – 2011), is directed towards further economic growth and accession to EU standards.

EU member countries (including the UK) are running bilateral programmes of development assistance.

For more information of the UK assistance to Serbia (provided through DFID), please visit www.dfid.gov.uk/countries/serbia.

The main expected tendencies in international assistance disbursement are growth of EU funds whereas bilateral assistance is expected to stay at approximately the same level until 2010.

The capacity of domestic institutions to successfully use donor funds which has been significantly affecting the level of international support provided to Serbia so far would imply further improvement in the following years.

Environmental Assistance

The United Nations Environment Programme – Post Conflict Clean Up of Environmental Hotspots.

In May 1999, the UNEP established a post-conflict Balkans Task Force, which would assess the environmental consequences of NATO’s bombing campaign in Serbia. The bombing of chemical factories and oil refineries had caused air, soil and water pollution. UNEP identified four heavily polluted ‘hotspots’ in Serbia: Pancevo, Kragujevac, Novi Sad and Bor; and implemented a US $12.5 million clean-up programme. By working closely with the environmental authorities in Serbia, UNEP implemented a series of technical projects to: decontaminate soil and water; remove and transport for final treatment tons of hazardous waste; rehabilitate wastewater capacities at industrial sites; and install water and air quality monitoring stations.

In 2004, UNEP handed the clean-up programme over to the national authorities, principally the Ministry for Science and Environmental Protection. Although Kragujevac and Novi Sad are no longer considered ‘hotspots’, problems still remain.

For further information, please consult the following websites:

World Bank - Serbia

Europa

European Bank