The public finances in Serbia are in a solid state, with the main budget expenditures under control and taxes being collected regularly. However, the state borrowed considerably in 2023 at a high-interest rate, which will cost around 1.5 billion euros this year, as stated by Danko Brčerević, the chief economist of the Fiscal Council in an interview with Betа.
“The state’s borrowing was significantly influenced by certain non-standard state expenditures that should not be part of the regular budget. One such expense was the assistance to Srbijagas, totaling over 500 million euros, partly directly from the budget and partly through guaranteed loans, which also increased the public debt,” stated Brčerević.
He mentioned that another reason for the state’s borrowing was an extraordinary payment to citizens, which he deemed economically and socially questionable – 20,000 dinars for all pensioners, 10,000 dinars for children up to 16 years old, and 10,000 dinars for high school students.
He emphasized that due to these payments, which “exploded” before the parliamentary and local elections on December 17, the state borrowed significantly more in the previous year than it needed to.
The interest amounts to around 1.5 billion
“The interest on loans from the budget amounted to about 1.3 billion euros in 2023,” stated Brčerević, the Chief Economist of the Fiscal Council. “This year, due to new debt and rising interest rates, we will pay even more, around 1.5 billion euros.”
“These are huge, unproductive expenditures that clearly indicate the need for more prudence and moderation in the country’s borrowing in the past few years, especially regarding the indiscriminate distribution of money to citizens,” added Brčerević.
“He added that the analyses by the Fiscal Council confirm that the budget deficit and public debt in 2023 will be slightly lower than planned. The initial plan was for the budget deficit to reach 2.8 percent of the Gross Domestic Product (GDP) or 1.9 billion euros.
“Currently, the President (Aleksandar Vučić) states that the budget deficit will be around 2.3-2.4 percent of the GDP, roughly 1.6 billion euros. Similarly, instead of the planned public debt of 53.3 percent of the GDP, equivalent to 36.8 billion euros, it is now expected that the debt will be approximately 52.5 percent of the GDP, about 36.3 billion euros. This is good, but the improvements are still moderate. I wouldn’t be surprised if the year-end results turn out slightly better than the President’s latest expectations,” stated Danko Brčerević.”
It was necessary to plan for a lower deficit
“He mentioned that the Fiscal Council maintains its assessment that for 2024, a lower deficit should have been planned, below the projected 2.2 percent of GDP.
According to him, this can be easily explained by analyzing the deficit from 2023 because around half of the fiscal deficit from 2023 consists of extraordinary expenses, such as aid to Srbijagas, Elektrodistribucija Srbije, and subsidies to the population. These costs should not continue in 2024.
During 2023, there was a significant increase in gas and electricity prices. Therefore, in 2024, the budget support to energy companies will be eliminated or dramatically reduced. Additionally, there haven’t been any announcements regarding new indiscriminate cash handouts to the population for 2024, and such measures of economic policy should not be continued.”
“Therefore, in 2024, it was estimated that with minimal effort, the budget deficit could have been below 1.5% of GDP, leading to reduced borrowing by Serbia accordingly.
“I hope, therefore, that following the formation of the new government, the budget will be revised, resulting in a reduction of Serbia’s fiscal deficit in 2024, just as we recommended,” stated the chief economist of the Fiscal Council, Danko Brčerević.
He added that, according to the latest data, economic growth in 2023 is expected to be around 2.5% of GDP, which, given the global uncertainties and high interest rates, could be considered a solid outcome.”
A significant portion of the growth is due to specific circumstances
“The Central and Eastern European (CEE) countries comparable to Serbia are projected to have economic growth of less than one percent in 2023,” stated Brčerević. “However, it’s important to note that a significant portion of Serbia’s economic growth in 2023 is due to specific circumstances.
“Agriculture saw high growth of around 10% due to comparison with the drought of 2022, and there is also high growth in electricity production due to very favorable hydrological conditions and comparisons with the low base from 2022 when EPS (Electric Power Industry of Serbia) faced significant challenges. Excluding these extraordinary factors, Serbia’s GDP growth would be similar to that of comparable countries,” stated Brčerević.
Inflation in Serbia reached its peak in March 2023, surpassing 16%, but by November, it had slowed to around 8%, and it is highly likely that the year will end with a growth in prices slightly lower than 8%.
According to assessments, Serbia is currently experiencing a significant slowdown in inflation, a trend that is also present in other European countries. In November, inflation in the Eurozone had already dropped to 2.4%, while in countries more similar to Serbia (Central and Eastern Europe and the Western Balkans), it averaged around 5%.
There are several reasons why inflation in Serbia remains higher than in other European countries. One factor is the delay in raising gas and electricity prices, mostly implemented in Serbia throughout 2023, while in other European countries, this process concluded in 2022.
Brčerević highlighted that another reason for high inflation in Serbia is the substantial fiscal spending. He mentioned that instead of directing state resources solely towards the most vulnerable, they were unjustifiably distributed to wealthier citizens, which has fueled inflation. He emphasized that with further reductions in the fiscal deficit, favorable international trends, and appropriate policies by the National Bank of Serbia (NBS), a significant slowdown in inflation in Serbia in 2024 is almost certain.
Real exchange rate of the dinar
Brčerević mentioned that the dinar’s exchange rate is realistic, and there are no concerns about a significant decline in its value in the short term. He stated that in Serbia, the dinar’s exchange rate is primarily dictated by the market, reflecting the inflow and outflow of foreign currencies. The National Bank of Serbia (NBS) plays a role in overseeing and, if necessary, intervening in these flows.
In 2023, according to Danko Brčerević, global energy prices significantly decreased, reducing the outflow of foreign currencies from Serbia. Additionally, the country retained substantial foreign investment and capital inflows. These market trends influenced Serbia to experience a higher inflow than outflow of foreign currencies last year, leading the NBS to purchase surplus euros to prevent the dinar from strengthening excessively.
“In the longer term, these factors could, as he stated to Beta, reverse and put pressure on the weakening of the dinar, ‘which is entirely normal in a country with a flexible exchange rate. However, for now, there are no indications that this might happen soon, and the NBS has sufficient foreign exchange reserves at its disposal to prevent any overly rapid change in the dinar’s exchange rate.’
Brčerević stated that in times of great global instability, it is difficult to reliably predict GDP growth even in the short term, and the current forecast by the Fiscal Council is that growth this year could be around three percent. However, it’s possible that the forecast may change during the year.”
The problematic extraordinary increase in pensions
He assessed that the increase in pensions and public sector salaries planned in the 2024 budget is in line with the law and based on realistic grounds. However, he explained the problematic aspect of the “extraordinary increase in pensions of 5.5 percent in October 2023, which was not grounded in achieved economic results or in the current legal regulations.”
The chief economist of the Fiscal Council recalled that a similar decision was made in 2008 when pensions were twice extraordinarily increased by 11 and 10 percent due to political pressures from PUPS (Party of United Pensioners of Serbia), not due to economic growth. Consequently, the overall pension growth was more than 35 percent, which burdened the budget, and pensions were reduced in 2014 as a result.
“The extraordinary increase in pensions from October 2023 is far less than in 2008, and thus it will not fundamentally jeopardize the budget. However, it is very dangerous for pension growth in Serbia to be determined arbitrarily again, rather than according to the law and objective economic principles,” stated Brčerević. He emphasized that “there is room for greater allocations in healthcare and education, provided that the budget is managed responsibly.”
“The state should precisely invest in these areas and avoid the arbitrary distribution of funds to selected groups of citizens or ‘pouring’ them into unsuccessful state-owned enterprises,” Danko Brčerević told Betа.
Stadiums or hospitals and schools
He pointed out that the priorities for selecting state projects should be re-evaluated and questioned whether Serbia needs the construction of football stadiums instead of investing in healthcare and education.
Regarding environmental protection, he mentioned that “there has not been enough investment for decades, and the situation, without exaggeration, is catastrophic.” In previous years’ budgets, as per his statements, approximately 200 million euros were allocated for environmental protection investments, but the actual implementation was only around 50 percent.
As per the Fiscal Council’s thorough analysis conducted in 2018, he stated that annual investments of around 500 million euros are required in this field.
“Due to inflation, the required investment amount is now certainly much higher. Therefore, a substantial increase in state investments is necessary, and it should be one of the fiscal policy priorities. Achieving European standards in environmental protection is likely the most expensive aspect of Serbia’s EU accession, but it shouldn’t be done solely for the EU; it should be done to preserve citizens’ health,” said Danko Brčerević, the Chief Economist of the Fiscal Council.
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