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Serbia’s Borrowing Criteria and its Implications on Public Debt

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In 2024, Serbia will have to borrow around 6.5 billion euros to finance the deficit and repay old debt, but under less favorable conditions than before, warns the Fiscal Council. In the past, old debts were repaid at a rate of 3 percent, while now the interest rates are between 6 and 7 percent.

The Ministry of Finance emphasizes that public finances are stable, raising questions about why the country is borrowing under such conditions and whether it could have a negative impact on the public debt ratio. By the end of the year, it expects the public debt to be around 53 percent compared to the gross domestic product.

The money from loans is invested in developmental projects aimed at contributing to the country’s development and improving the quality of life. Finance Minister Sinisa Mali assures citizens that there is no reason to worry.

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‘We have no problem with public debt. Our interest rates are still far lower than in all neighboring countries. If we need to borrow, we can. We only borrow excessively for those projects that are, I say, important capital projects,’ said Mali.

The Fiscal Council explains that Serbia’s less favorable borrowing is a result of the global rise in interest rates and the increase in the Euribor. They confirm that the public debt is not dramatically high, but they contradict the minister regarding the level of interest rates on loans.

“When we look at Central and Eastern European countries, there are still slightly higher average interest rates. For instance, our current yields on bonds are around 6 percent, while Central and Eastern Europe averages around 4-4.5 percent. There are a few countries in a similar position to us, like Romania, but there are also many better ones, such as Slovenia and Croatia. So, there are aspects related to ourselves, that the risk of Serbia itself is somewhat higher compared to similar countries,” said Slobodan Minić from the Fiscal Council for Euronews Serbia.

“Serbia does not face a debt crisis”

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The data from the Fiscal Council shows that the average interest rate on Serbia’s debt is among the highest within the European Union member states.

The Fiscal Council emphasizes that despite high interest rates on new loans, Serbia does not face a debt crisis. However, they underline that the cost of public debt is becoming increasingly significant, as around one and a half billion euros will be paid for interest this year, an amount equivalent to the total subsidies the state provides to the economy.

On the question of under what conditions Serbia borrows, economist Aleksandar Stevanović told Euronews Serbia that it depends on which loan has come due, and then financing is done by borrowing again.

He mentioned that interest rates are currently at a very high level because more or less the whole world has been fighting inflation quite successfully, and one of the instruments for that has been raising interest rates.

“At this moment, we are paying the price for successfully controlling inflation, and this and probably the next year, interest rates will be much higher than what we’ve been accustomed to in the last ten years. These are normal cycles in the movement of interest rates as one of the fundamental prices in the global market. We can expect that after these record-high years, we will enter a calmer period in 2025 and 2026 when things should start returning to normal, and Euribor, as our basic benchmark interest rate, should decline,” said Stevanović.

He stated that with 51 or 52 percent debt to GDP ratio, Serbia is a country on the verge of a safe haven, while some EU countries can endure much higher debt and are undoubtedly a secure place for fund placement.

When asked where cheap money can be found today, Stevanović said that Serbia has managed to access somewhat cheaper funds through some interstate agreements, but the Serbian economy will continue to grow, and Serbia will increasingly have to rely solely on the market.

He mentioned that one of the basic instruments, which has also been quite effective and used by Serbia during the period of low interest rates, is extending the maturity, so instead of borrowing on average for 10 or 15 years, the maturity is extended to 20-30 years, thus reducing the total annual repayment burden.

“However, in times of high-interest rates, this is not particularly a good strategy. So, in that regard, we are waiting for better days, then we will see a fairly good step in the other direction, namely reducing the annual repayment burdens, although the debt will continue to grow as a percentage of GDP. It will probably remain below 60 percent, and we will continue to be a country with a lower debt ratio than most countries using the euro today, which is quite paradoxical, and that is already an EU matter,” Stevanović believes.

How will the development plan be financed?

Regarding the announced investments in the next four years totaling 17.8 billion euros, equivalent to the annual budget, as outlined in the development plan “Leap into the Future,” and the question of how these funds will be secured, Stevanović mentioned that Serbia will have to achieve this through borrowing.

“Some of it may be realized through inflows of foreign investments, but borrowing will be one of the most important factors for this to happen,” says Stevanović, noting that these funds are not only intended for investments within the framework of the EXPO 2027 exhibition but that EXPO has been chosen as a driver to create a large investment plan in infrastructure.

“Serbia already invests relatively heavily in infrastructure, and it is expected that the culmination will happen in the coming years. It would happen even without Expo with all the planned infrastructure projects. What is new now is that they want to do it relatively quickly, and I’m not sure that everything announced will be built, as the characteristic of our infrastructure investments is that they are done slowly, relatively expensive, but eventually completed,” stated Stevanović.

He added that a good part of it will be completed by Expo, and thanks to these investments, Serbia will look quite different in 2027.

“Whether all these investments will bring growth and development after 2027 and improve the business environment, or some of them will become dead capital, will largely depend on the skill of those managing these investments,” said Stevanović.

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