An increase in subsidies with the budget rebalance is a desperate attempt to somehow compensate for the threatening small foreign exchange inflow from exports and guest remittances with foreign investment. However, it is a path that can only sometimes yield results in the short term; for a long term, it is a matter of falling into ruin. High subsidies exclusively to foreign investors have been tempting the Serbian public for years. While some point out a significant number, among them larger ones, of new factories from Subotica to Tabanovce, others point out that domestic entrepreneurs have been completely suppressed.
The first link of GDP growth to the more frequent arrival of foreign manufacturers, while others point out that almost complete reliance on foreign capital has led to growth in both external borrowing and public debt.
Foreign trade deficit
The pandemic has further contributed to the Serbian government relying even more on foreign capital. Although last year the foreign trade deficit was 900 million less than the previous season, the minus of 4.9 billion euros is significant for the Serbian economy.
All the more so as guest remittances dropped from 3.3 to 2.7 billion euros last year, and foreign investments by 20 percent, to 2.5 billion euros. When taken together, these two foreign exchange inflows exceed the foreign trade deficit by half a billion, but about 3.1 billion euros left Serbia last year in the form of dividends from foreign investors and interest on loans. The deficit of 2.6 billion countries was compensated by new debt.
As the pandemic continues, not a small number of our guest workers lost their jobs, a good part of the rest for part-time work or for a lower price of labor. It is therefore not realistic to hope for an increase in remittances; on the contrary, it is more realistic to expect a further smaller decline.
A fourfold increase in subsidies
Also, the economies of European countries are still downhill and reducing import orders, especially Italy and Germany, our two largest economic partners. It is difficult to expect more serious growth of Serbian exports in such circumstances.
In contrast, foreign exchange expenditures are high. Vaccines, respirators, reagents are paid for numerous costs, vaccine factories and new hospitals are being built. Despite all that, oil, which was record cheap last year, has a higher price on the stock market every day, and we import 2.6 million tons and another 1.9 billion cubic meters of gas.
In order for the new borrowing of the state of Serbia not to exceed three and a half billion euros, the Government of Serbia has decided to partially compensate the threatening foreign exchange deficit with an additional inflow from foreign investments. For that purpose, it fiercely increased subsidies from 170 to as much as 750 million, as much as 440 percent.
Most of the incentives are intended for foreign investments, around 320 million. So, it is true that foreign investments lead to GDP growth and considerable employment, but an equally important reason for subsidies is that they partly provide coverage of the foreign trade deficit and foreign exchange liquidity.
Rate and dividend
But let’s look at the effect of foreign investment from a different position, the structure of state tax revenues. Eleven years ago, when subsidies were significantly more modest, the tax revenue of production realized on the domestic market was around 920 million, while they amounted to two billion euros from imported goods. Last year, the first item was 650 million, lower by 30 percent, while imported goods brought 4.4 billion, 220 percent more than a decade earlier.
The figures speak strikingly about the negative effect of strong subsidies on foreign investment on domestic entrepreneurs. It is certainly good to have foreign investment. However, for the quality of the arrival of foreign investments, the arrival of newer and more final production technologies is much more important than the impact on GDP growth. Of the number of foreign workers directly engaged in capital, the development of the local network of suppliers and subcontractors is more significant.
In particular, it is a short-term attempt to achieve foreign exchange liquidity by relying on foreign investment. Unlike a loan, the money invested in the investment is not returned in annual installments. But, of course, it returns to the investor through dividends.
From the point of view of foreign exchange liquidity, it is the same for one country whether the outflow of euros and dollars is based on the arrival of the deadline for repayment of the installment or on the basis of the investor’s right to dispose of the dividend as he wishes.
Exports bring foreign exchange
In other words, foreign exchange liquidity is achieved by strengthening exports, either of labor, as in the case of guest workers, or of goods and services. It is up to the state to provide favorable conditions for exports, primarily the dinar exchange rate, an example to the most successful segment of the economy, exporters.
Last year, the National Bank spent 1.45 billion euros on foreign exchange interventions on the market, which maintained the current level of 117.5 dinars per euro. That money was essentially obtained through 2.5 billion of last year’s new debts.
If it does not provide a real exchange rate, it can provide external liquidity for some time on the basis of high foreign investment. But, with investments, dividends are growing rapidly, and interest rates will not be as low as today, so in two or three years it is realistic to plan that the annual outflow on this basis will be not 3.2 but at least 6.4 billion euros.
And that is an amount that can only be covered by a strong export boom, BiF reports.
