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Serbia will not be the leader of the Balkans this year when it comes to economic growth

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Economic growth in Serbia in 2023 will be 1.5 percent and the weakest in the Western Balkans, in contrast to 2020 and 2021, when, in terms of growth, Serbia was the leader in that region, said an expert on the Western Balkans at the Vienna Institute for international economic studies (The Vienna Institute for International Economic Studies) Branimir Jovanović.

In an interview with Betty, he said that there are two reasons for the slowdown in growth, the first of which is that “Serbia has not quite managed the crisis caused by the war in Ukraine”.

“It was clear that the war would affect Serbia more than others in the region, due to stronger economic and political ties with Russia, but Serbia could try to be some kind of mediator between Russia and Ukraine, as Turkey tried, which would improve its international reputation “, Jovanovic said.

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Serbia, as he said, chose to be a passive observer, and that ambivalent attitude is not liked by Western investors, who were the carriers of Serbia’s growth in the past years, so foreign investments from the EU fell by about 18 percent in 2022.

Another reason for the slower growth, he said, is that Serbia chose an economic model that economic growth is based on foreign investments as the main engine of growth, which cannot bring about long-term and sustainable development.

In his opinion, foreign investments are desirable, but they are not enough, because in order to achieve long-term and sustainable development, domestic private investments are also needed, and there are almost none of them in Serbia.

As he said, poverty should also be eradicated and class differences should be reduced, but in Serbia nothing is being done on these issues, and no investment is being made in green transformation either.

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Answering the question why inflation in Serbia is higher than in Europe and is increasing while it is falling in Europe, Jovanović said that Serbia, like all the economies of the Western Balkans, has a higher share of food in the consumer price index.

According to him, poorer people spend more money on food and that is why inflation is high in Serbia, and the main question is why it is still growing, in March it was 16.2 percent, while in December it was 15.1 percent, in a situation where inflation is slowing almost everywhere in the region and Europe.
“The answer is that Serbia increased the price of electricity and gas and that the government unfroze the prices of some food products, which were frozen last year. I think that this was done too soon, that we should have waited a little longer. That is why our institute last year increased the projection for inflation in Serbia this year, from nine to 10 percent,” said Jovanović.

When asked whether economic growth is sufficient for Serbia to pay back its debts and raise salaries and pensions, Jovanović said that, due to high inflation, this is currently not a problem.

Inflation is known as a hidden tax, because it increases the prices, salaries and profits of companies, and thus the revenues that the state collects from taxes on them. That is why the budget revenues in 2022 in Serbia increased by 13.4 percent, and the public debt decreased from 57.1 percent of gross domestic product (GDP) to 55.6 percent, however, in a few years, when inflation stabilizes at two to three percent, and interest rates on international capital markets remain elevated, debt servicing and salary and pension increases will not to go so easily,” Jovanović said.

He added that the increase in salaries and pensions is justified in “inflationary episodes from both the social and macroeconomic side”. If, as he said, salaries and pensions do not increase when prices rise, this further increases the already high poverty rate.

According to him, inflation reduces people’s real incomes, which reduces consumption and slows down economic activity, and this is prevented by increasing salaries and pensions.

“Nevertheless, it is also necessary to understand that increasing wages and pensions is not enough to reduce poverty and ensure higher growth rates. It is necessary so that the situation does not worsen, but it is not enough to improve the situation. Structural reforms are also needed, such as which is the reform of the social protection system, which would reduce social problems, as well as the industrial and innovation policy, which would encourage domestic investments,” said Jovanović.

He pointed out that the external debt is currently not too high, it is slightly lower than 70 percent of GDP, which is much lower than in the EU, where it is 118 percent of GDP.

In addition, as he said, the public debt has been stable in Serbia for the last ten years, constantly fluctuating around that level, but there are risks because the higher interest rates expected in the coming years may lead to the debt starting to grow again, like in 2010. . As he said, this can happen even if economic growth remains at the current level of one to two percent per year.

Speaking about public investments, Jovanović said that “they have been around seven percent of GDP in the last couple of years, which is perhaps the highest in all of Europe, certainly much more than in the European Union, where the average is around 3.5 percent, but the majority these investments are directed to roads, and there are very few investments in green transformation, which is a big problem”.

Investment in renewable energy, as he said, is almost non-existent, so Serbia, along with Poland, has the largest share of coal in electricity production (around 70 percent), and that share has increased over the last year.

“It is necessary to invest a lot more in renewable energy and everything else that is connected with the green transformation and move from words to actions,” said Jovanović.

When asked whether all qualified labor will leave Serbia, and semi-skilled labor will come from Pakistan, India… Jovanovic said that he thinks that this story is “inflated” on the one hand, because the unemployment rate in Serbia only recently fell below ten percent.

“You can’t talk about a lack of workers, when unemployment is almost in double digits. But on the other hand, there are certainly problems. Serbia is less by about 50,000 people every year, mainly because people emigrate,” said Jovanović.

According to him, there are several reasons for emigration, salaries are low, working conditions are bad, and they often leave for a better quality of life despite relatively good salaries.

Jovanović estimated that until the overall quality of life is improved, people will continue to leave and that in five to ten years it could really happen that Serbia has no more unemployed people.

“Regarding the arrival of foreign workers, it would be good if they came, because it would mean that Serbia becomes an attractive destination for foreigners. Unfortunately, I am not convinced that this will happen, because I do not see that anyone from India would come and stay in Serbia, while Slovenia and Austria are only a few hundred kilometers away, and they have much higher salaries and offer a much better life,” said Jovanović. He added that he does not like the stories about the organized import of cheap labor from Asia, “because it reminds of the former import of slaves”.

He assessed that it would be tragic for Serbia if it became a country where foreign companies would open factories, so that “lowly” paid workers from Asia would work in them. According to him, that would be a new form of slave-owning neo-colonialism. As he said, the Balkans has been a kind of economic colony of large foreign companies until now, “but this would be another level”.

According to him, the problem with the Electric Power Company of Serbia (EPS) is a classic example of bad management by unprofessional party personnel.

“But the solution is not in privatization, but in the appointment of professional and independent management. EPS must not be privatized for both economic and strategic reasons. This crisis has clearly shown how important energy is for the stability and security of a country. Without energy, the country collapses , so the energy system must not be allowed to be controlled by someone else,” Jovanović believes.

He added that the price of energy will probably increase even more in the coming years due to the energy separation of Europe from Russia and the green transformation.

“If the state invests in energy production, it will be an investment that will pay off many times over. Serbia is fortunate to have a large unused potential for the production of renewable energy, unlike many EU countries, but politicians are still not aware of that potential,” said Jovanovic.

 

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