A similar economic absurdity has been clearly visible for the past few seasons, but last year it reached surprising proportions. This achieved the goal of the current government – the stability of the domestic currency in relation to convertible currencies.Â
Of course, the dinar’s purchasing power has weakened by the amount of inflation of 15.9 percent.
As the consumption of poorer citizens has been reduced to the most existentially essential products, the price growth of which is significantly higher, it is precisely for this segment of the population that the purchasing power of dinar has decreased significantly more.
Stable dinar
The government, of course, boasts about the stability of the domestic currency. However, the fact that out of around 15 billion euros of citizens’ savings, only 750 million euros are in dinars, which is approximately five percent, shows that the public still lacks confidence in the long-term stability of the domestic currency. For the same reason, real estate is sold exclusively in euros.
It is interesting that the government manages to maintain the exchange rate of the dinar, regardless of last year’s minus in the commodity foreign trade exchange of a record 11 billion euros, even four times more than in the previous season.Â
True, about two billion are extraordinary costs due to the incident in Obrenovac and the abundant import of electricity in the first half of the year, as well as due to extremely high gas prices on the world market. The fact is that the “hole” of nine billion is too big for a poor and technologically underdeveloped country like Serbia.
Excessive oscillations
As soon as there are no changes in the exchange rate, it means that foreign currency is arriving in Serbia in sufficient value. There are standard inflows from remittances from our guest workers, which amount to 3.3 billion euros, as well as about 4.4 billion foreign investments. The once almost negligible income from tourism amounted to 1.8 billion last year.
The latest trump card of the current government is the export of IT services worth as much as 2.7 billion euros, when the import of services from the same sector is subtracted, plus another two billion euros. All in all, this is enough to overcome the severe commodity deficit.
There is even 1.3 billion left for the increase of foreign exchange reserves, which is not enough for public investments, so Serbia, like every year, borrows a lot.
If we look back, in six years, Serbia bought 5.4 billion euros more on the market than it sold, and one could think that it is doing well with foreign exchange liquidity. However, the trouble is in the pronounced instability of foreign exchange sources, so things often turn around with the inflow of euros, dollars, pounds and other currencies.Â
An example is the year 2020, when the corona pandemic changed life. Income from foreign exchange fell sharply, and during those 12 months, Serbia had to spend 1.5 billion euros from foreign exchange reserves to maintain the exchange rate of its currency.
IT sector as a trump card
How much the inflow of foreign exchange fluctuates can be seen from the fact that in recent seasons the annual surplus amounted to around 1.4 billion euros, while in the first year of the global contagion there was a 1.5 billion deficit. The difference is almost three billion. As for the next seasons, it is realistic to expect a drop in investments.
The reason is the crisis in the economies of all European countries, and therefore it can be expected that in the future, foreign investors will pay more dividends and interest on the basis of past investments than they will repeat the practice of reinvestment. Forecasts are that the foreign currency remittances of our citizens from abroad will slowly decrease, while the rise of tourism is constant, but relatively slow.
The trump card of the current government is the IT sector, which is expected to bring in perhaps four billion euros per year in just two seasons. It seems like a lot, but it is difficult that even such a large income of “digital people” can cover the pronounced oscillatory nature of Serbia’s foreign exchange inflow.Â
Let’s recall that last year, when during the first three months due to the conflict in Ukraine, there were economic disturbances on the entire continent, Serbia had to “withdraw” close to 1.1 billion from the foreign exchange reserve to defend the exchange rate. It is precisely the high volatility of the inflow of foreign currency that is the main reason why citizens do not have confidence in the long-term stability of the currency.
Fall in production
On the other hand, there is also a large import, which is increasing every year. Last year, partly due to extremely high energy prices, it amounted to almost 38 percent. Appeals that “money should not be spent on imported products” do not yield results. It is not surprising that growing imports are due to decreasing domestic production, which is reflected in commodity measures.
Even the produced value of the agrocomplex is continuously decreasing, last year by eight percent. Domestic entrepreneurs emphasize the insufficient support of the state and remind that the state subsidizes foreign investments abundantly, but not domestic ones.Â
The consequence is a decline in domestic production even in some traditional sectors, such as agriculture.
Therefore, the answer to the logical question of whether the dinar exchange rate will continue to be stable is not easy to give. The exchange rate has been kept at the same level for several years, but many believe that the domestic currency is “overvalued”.
The decline in domestic production, the large foreign trade deficit and the marked volatility of the foreign exchange inflow indicate that the current government is improvising more in the management of the economy than having a well thought-out development policy. Such a situation hardly inspires hope.
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