Recently, Serbia’s Parliament elected a new government, maintaining continuity with the coalition of parties and movements in power since 2012. Although there’s a new prime minister and some fresh faces among ministers, the fundamental coalition remains unchanged. What are the critical issues facing this new government?
Economic focus
Given Serbia’s status as an underdeveloped economy, economic concerns continue to dominate public priorities. Citizens prioritize issues such as improving quality of life, employment rates, wages, and job quality over other political matters.
Despite appearances of economic robustness—such as decreasing inflation, low unemployment, and high investment inflows—Serbia faces numerous challenges. In the short term, these include sustainable management of public finances, enhancing state administration, and reforming tax policies. Looking ahead, the looming challenge is escaping the middle-income trap.
Public finances and state enterprises
Serbia’s public finances initially appear stable, yet they are vulnerable due to the country’s relatively high public debt compared to its economic fragility. Before the pandemic, public debt stood at 24.3 billion euros; today, it exceeds 36.5 billion euros, with a current GDP ratio of 48%. This significant debt increase poses challenges, exacerbated by debts due for repayment totaling over 2.8 billion euros by 2025.
Rising interest rates make financing more expensive, underscoring the need for responsible fiscal policy. Effective management of state-owned enterprises, particularly EPS and Srbijagas, is critical to avoid burdening the budget further. Prioritizing state investments in essential infrastructure over politically driven projects is essential for sustainable economic growth.
Long-term challenges
The middle-income trap is expected to define Serbia’s economic landscape in the coming decade. This phenomenon occurs when an economy leverages existing advantages to achieve middle-income status but struggles to identify new avenues for growth. Examples include Brazil, Argentina, and Mexico, which face similar challenges. In contrast, countries like Japan, Taiwan, and Singapore have successfully navigated this trap.
Serbia faces a gradual shift as its advantage of abundant low-cost labor diminishes due to tightening labor markets, demographic challenges, and high emigration. Wage increases could render certain industries uncompetitive, potentially leading to their relocation to cheaper labor markets. Therefore, it is crucial to attract investments in technologically advanced, export-oriented sectors that enhance productivity. Currently, only a small portion of foreign investments target these crucial sectors, with the majority directed towards non-export industries.
Political dynamics
Reducing political tensions stemming from irregularities in December’s elections is paramount. The elections’ contentious nature drew international attention, prompting political conditions that the ruling party reluctantly accepted. The recent local elections in Belgrade served as a litmus test, revealing unresolved political crises despite efforts to improve electoral processes.
Alignment with the west
Despite anti-Western rhetoric in pro-government media, Serbia’s actions increasingly align with Western interests. Hosting Chinese President Xi Jinping and negotiating the purchase of French military aircraft while supporting Ukrainian forces illustrate Serbia’s diplomatic balancing act. However, bridging the gap between rhetoric and action remains a challenge, particularly in aligning with Western values such as human rights, democracy, and rule of law.
In conclusion, Serbia’s new government faces a complex array of challenges, from economic stability and public finance management to navigating political tensions and international alignments. Successfully addressing these issues will define Serbia’s trajectory in the coming years.
