At the end of July, the Serbian Assembly discussed several laws concerning additional borrowing, including loans from domestic commercial banks. These loans are intended for infrastructure projects, particularly road construction, which has become increasingly common.
The Parliament recently approved three major borrowing laws. The first law authorizes borrowing 11.7 billion dinars from Unicredit Bank for the Ruma – Šabac – Loznica road project. The second law permits a loan of 15 billion dinars from Bank Intesa for the same project, and the third law involves borrowing 12 billion dinars from OTP Bank for the Kragujevac ring road.
These laws were enacted based on long-term investment lending agreements with the banks mentioned. The conditions for these loans are similar and involve dinar-denominated borrowing.
Cost of borrowing
The interest rates for these loans are noteworthy. For the loan from Unicredit Bank, the interest rate includes a margin of 2.9 percent over the six-month BELIBOR rate. The Intesa loan is pegged to the three-month BELIBOR, while the OTP Bank loan has a margin of 3.05 percent. This results in a total interest rate of just over 8 percent when combining the margin and BELIBOR rates.
These recent loans, totaling 38.7 billion dinars (approximately 330 million euros), continue a trend of borrowing from commercial banks for road infrastructure, a departure from previous practices.
Analysis of commercial bank borrowing
Forbes Serbia explored the reasons behind the state’s increasing reliance on commercial bank loans, which are generally less favorable compared to bilateral agreements or bond issuance. The Fiscal Council of Serbia’s analysis indicates that such borrowing is the most expensive option. Between November 2020 and June 2023, the state secured five loans for road projects, with total borrowing exceeding 600 million euros and interest rates between 8 and 9 percent.
The Fiscal Council attributes the high cost to the loans being denominated in dinars, which typically have higher interest rates compared to euro-denominated bonds. Additionally, these loans were often obtained as a last resort due to delays in financing from other sources and unfavorable market conditions.
Impact and concerns
The significant interest rates on these dinar loans are a concern. With inflation projected around 3 percent in the medium term, borrowing costs between 8 and 9 percent are considered high. This trend could have broader economic implications, potentially increasing bank interest rates and competing with other economic sectors and consumers for financing.
Despite the high costs, the state appears to prefer these commercial loans for their speed and simplicity. However, this could be a temporary solution, and the government might need to explore alternative financing options in the future.
Ongoing projects
The Ruma – Šabac – Loznica highway project, which began in 2019 with Azvirt from Azerbaijan, has seen sections completed, with the entire route expected to be finished by the end of this year. The initial contract price of 467.5 million euros was increased by nearly 90 million euros last year.
The Danube highway project, specifically the Požarevac – Golubac road, is being handled by China Shangdong International Economic and Technical Cooperation Group.
Overall, the reliance on expensive commercial loans for infrastructure projects highlights the need for a strategic review of Serbia’s borrowing practices and financing options for future development.
