“Although gross domestic product (GDP) growth was recorded in the first quarter, the latest data from the Republic Bureau of Statistics show a strong decline in activity in almost all economic activities, so we should expect a double-digit decline in GDP in April-June to end up ‘in the red’, that is, as politicians prefer to say, with a negative GDP growth of 3 percent,” says Milojko Arsic, professor at the Faculty of Economics in Belgrade, for Nova.
The first data indicating the strength with which the coronacrisis hit the Serbian economy are for April, and the Republic Bureau of Statistics published them on Friday, May 29, when the Ministry of Finance used the opportunity to boast of the second set of results, but for – first quarter of this year, when the epidemic was still far from Europe.
Thus, at the same time, “good news” was published that the gross domestic product of Serbia increased by 5.1 percent in the first three months of this year, ie “that we are the absolute leaders in the region in terms of economic growth,” said Finance Minister Sinisa Mali but also the April statistics, which recorded a decline in industrial production of 16.6 percent, turnover in stores by 20.1 percent and the number of tourist arrivals of as much as 97.9 percent compared to the same period last year.
For Milojko Arsic, a professor at the Faculty of Economics in Belgrade, the April data are those that indicate the intensity of the crisis that our economy is facing due to the appearance of the coronavirus.
What can the April figures tell us about the trends in the economy by the end of the year?
The relatively strong decline that we recorded in April was felt by other countries already in March, so the April results were expected, especially when it comes to industrial production or tourism. We do not have data for traffic yet, but we can assume that there has been a significant drop in activity.
The only activities that have been “spared” are construction and agriculture. I expect that the May statistics will be somewhat more favorable than the April ones, since some epidemiological measures have been mitigated during the month, which will probably spill over into June as well. However, in the second quarter, we should most likely count on a double-digit decline in GDP, so that in the next part of the year there will be a gradual recovery, which will certainly not cover all activities equally.
That is why I estimate that we will end this year with a GDP in the minus of 3%, or as politicians like to say, with negative economic growth.
What trends should be expected when it comes to employment?
For now, data for the first quarter have been published, but at that time there was no deterioration in the labor market. That deterioration, by the way, is always behind the deterioration of economic activity.
Unemployment will rise throughout this and part of next year, even as the economy begins to recover. The postponement of employment growth was influenced by the measure of payment of the minimum wage to employers, so we will not record an increase in unemployment while it lasts, but the layoffs will continue during the third and fourth quarters of this year.
The state recently took on debt to finance an “anti-corona” package of measures. Is public debt growing too fast?
Indebtedness increased by a total of 2.5 billion euros in the previous part of the year, which is a large increase in public debt, but it is sustainable. I expect that at the end of the year, we will have a slightly larger budget deficit than the government planned, because the collection of contributions and payroll taxes will be lower, and some expenditures will also increase.
For example, the government planned around 500 million euros for the payment of one hundred euros to the citizens, but in the end that amount will probably be closer to the amount of 600 million euros. There will also probably be a need to adopt additional stimulus measures for the most vulnerable sectors of the economy, which will again cause additional budget costs. That is why I estimate that this year the state will have to borrow a total of 7.5 to 8 billion euros.
What are the consequences of so much borrowing?
Although for now it is a matter of sustainable growth of public debt, from which other countries that are trying to mitigate the consequences of the pandemic are not running away, in the next year we will have to reduce the budget deficit relatively abruptly. This means that one should refrain from announcing large investments, or increasing salaries. Of course, this is the pre-election period, so great promises are present.
If such promises were to be realized, then next year they would face a high deficit and, consequently, further growth of public debt.
Measures from the Government’s “Assistance Package” worth 5.1 billion euros are being implemented. Which of them hit, and which missed the set goal?
The state has adopted a relatively comprehensive package of measures, which are well chosen, but what I think is not good is that there is a lack of selectivity. This can be seen, for example, in the fact that all companies in the private sector have had their taxes deferred, but not all of them have been affected by the crisis, and some have recorded an increase in activity, especially in the food or pharmaceutical industry.
It is similar with the measure of payment of one hundred euros to citizens. The consequence of non-selectivity is that more money was spent than was necessary, and those who did not need help were also helped. It would have been better if the poorer or those who lost their jobs were given more money, but political arguments clearly prevailed, so everyone received the same amount of help, including those who did not need it.
Instead of fine-tuning, we got a “same for everyone” approach, which is not true because not only did we spend more money than we should, but at the same time we reduced the financial space to apply new incentives in the second half of the year.
Do you think that it will be necessary to implement additional support measures for special sectors, such as hoteliers and caterers?
In most countries, “sectoral” packages of measures have been designed and implemented, but in our country it is said that such an approach is complicated. I would say that behind that is an incompetent state and its administration, which refrains from “fine-tuning” support.
I think that we will still have to take some measures to help the most endangered sectors, such as hoteliers or caterers, whose work was practically disabled due to epidemiological reasons. In such cases, where there has indeed been a serious drop in income, the delay in tax collection should be extended, as well as the payment of the minimum wage for employees in the sector. The state, however, should start looking for evidence of a serious business downturn, as a precondition for the payment of aid, because only in that way can it focus funds on those who really need them.
You recently assessed that events like a pandemic can be a crossroads after which the world or individual countries take a different path. Is Serbia moving in a well-known or new way when it comes to its economy “after the corona”?
Trends in Serbia largely depend on trends throughout Europe. If there is a consolidation of the European Union and a reduction of autocratic tendencies in some of the member states, then it will spill over to us, perhaps under pressure from the Union. On the other hand, if its autocracy weakens and strengthens, then the same, perhaps even to a greater extent, should be expected in our country as well.
The direction in which the economic system in Serbia will move will depend on the basic political changes in the country, but even after the epidemic, the same problems await us that have burdened us for the past decades. It is about the fact that Serbia has basically a bad economic environment, with a high degree of corruption, in which businessmen are not treated equally, but those close to the government have a privileged position, while others are discriminated against and sometimes racketed.
So, what is connected with political changes is whether we will deviate from such a system and move towards equal market competition.
