Serbia has long been able to defend exchange rate stability, but that is not enough for economic progress

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Serbia can defend the dinar exchange rate for a long time, and that depends on the amount of foreign capital inflow in the form of direct foreign investments, Faculty of Economics professor Milojko Arsic told H1, commenting on the news that the National Bank has spent almost a billion euros on defense of the dinar.

He added that in the long run, Serbia has a deficit in trade with the world, and that is being solved by a large inflow of foreign investments, but also by borrowing from the state abroad.

“Exchange rate stability, however, is not enough for economic progress, because overestimated prices include overestimated labor costs,” Arsic said.

According to him, a stable dinar exchange rate against the euro can be maintained for a relatively long time thanks to high foreign exchange reserves, which are now over 15 billion euros, but it is also possible because with each sale of foreign currency dinars are withdrawn and the amount of dinars in circulation decreases.

“This, however, reduces the liquidity of the economy and acts as a recession. The proof that the currency is overestimated in relation to the relative competitive strength of the economy is that the state has a deficit in trade with the world for a long time, which is maintained by a relatively large inflow of capital from abroad, “Arsić pointed out.

According to him, the consequences are that the economy becomes less competitive when this overestimation increases, which is exactly what is happening in Serbia, because inflation is relatively high and the exchange rate is stable.

“We will also have a relatively large deficit in trade with the world, which was previously financed by government borrowing and foreign loans.” And, it is not certain that it will always be possible, “Arsić explained.

He pointed out that Serbia is thus highly dependent on the inflow of foreign capital.

“And if that doesn’t happen – foreign exchange reserves are spent. “Which can maintain the exchange rate, provided that the dinar is not inserted in some other way,” Arsić pointed out.

According to him, if Serbia decides to pursue a monetary policy like some neighboring countries such as Croatia, Northern Macedonia, BiH, the exchange rate could remain at the same level permanently.

“But that would mean giving up the current model and adopting a fixed exchange rate policy that does not ensure economic growth.” An overestimated exchange rate hinders economic progress. This is the case with Croatia, which has not had significant investments in industry for 25 years. It has a stable currency, without significant economic growth. “Prices in Croatia are overestimated in euros, including the price of labor,” Arsic told H1, Danas reports.