ISSN: 2560-1601

Vol. 7, No. 2 (RS)

May 2018

Serbia Economy briefing: Encouraging Trends in Serbian Economy IIPE

1052 Budapest Petőfi Sándor utca 11.

+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. office@-cee.eu Szerkesztésért felelős személy: Chen Xin Kiadásért felelős személy: Huang Ping china-cee.eu Encouraging Trends in Serbian Economy in April 2018

Current developments Current developments in the economy of are favorable ones. Main trends are encouraging. (GDP) is growing at a rate highest in the last decade. In the first quarter of 2018 the increase amounted to 4.5% compared to the same period in the previous year. Foreign trade, foreign direct investments and foreign exchange reserves have been growing too. The Program of financial consolidation has been being realized successfully.

Industry Industrial production in March 2018 was for 4.1% higher than in March 2017. Compared to last year's average it increased by 6.8%. In the period January – March 2018 it was for 5.9% higher than in the same period in 2017. Manufacturing industry in the first quarter of 2018 was higher by 5.5% compared to the first quarter of 2017. In the first quarter of 2018, compared with the same period in the previous year, the following results were achieved by types of activities: electricity supply, gas, steam and air conditioning supply recorded a growth of 10.9%; manufacturing sector 5%; 3%. Production of capital goods declined by 4.5%; and non-durable consumer goods by 0.4%. In recent years Serbia has made the facilities of 100 megawatts of renewable energy. In this year she will get new 250 megawatts of electricity from renewable energy sources, mostly from wind farms. The objective of Serbia is to reach the EU target of 27% of the electricity from renewable sources in total electricity consumption by 2020. Until then we will have 600 to 650 megawatts of electricity from renewable sources. Government has been approved two programs of 400 million dinars to support technological innovation. The first one is for the micro and small

1 companies. State is funding up to 85% of the value of the project and gives 10 million dinars per project. Another program is the co-financing of innovation, designed for micro, small and medium-sized enterprises (SMEs), where State is funding up to 70% of the value of the project and gives 36 million dinars.

Foreign trade The foreign trade has been growing on both sides, the exports and the imports. The value of total turnover in the period January – March 2018 amounted to 10,918.6 million dollars, by 27.7% more than in the same period of previous year. The value of exports of goods amounted to 4,695.3 million dollars, by 25.3% percent more than during the same period of the previous year. The value of imports of goods amounted to 6,223.3 million dollars, by 29.5% more than in the same period of the previous year. Foreign trade expressed in looks something else. The total turnover amounted to 8,885.6 million euros, increasing by 10.7% compared with the same period of the previous year. Exports of goods amounted to 3,821 million euros, increasing by 8.7% compared to the same period in the previous year. The value of imports of goods amounted to 5,064.6 million euros, up to 12.3% in the same period the previous year. The deficit in foreign trade amounted to 1,528 million dollars, by 44.5% more than in the same period of the previous year. Expressed in euros, the deficit amounted to 1,243.6 million, by 25.4% more than during the same period the previous year. Coverage of imports by exports is 75.4%. During the same period in the previous year it amounted to 78%.

Prices The market is stable. The turnover of goods in retail trade in the first quarter of 2018, compared with the same period of the previous year, increased by 4.6% at current prices, and by 3.2% at constant prices. The growth of prices and services in April 2018 amounted to 0.4% compared to March of that year.

2 The consumer prices in April 2018, compared with the same month the previous year, increased by 1.1%, while compared to December 2017 increased to 1.2%. In April 2018, compared to the previous month, the growth of prices was: clothing and footwear 2.1%; food and non-alcoholic drinks 0.7%; transport 0.6%; communication 0.3%; and furniture, household goods 0.2%. The price drop was registered in the group alcoholic beverages and tobacco, and recreation and culture by 0.1%. Prices of other products and services have not significantly changed.

Small companies On April 25, 2018 Government invited tenders, for the fifth year in a row, to apply for the program of financial support for small enterprises – co-financing for buying new production equipment and tools. For this purpose in 2018 year is foreseen a grant of 556 million dinars, twice higher than in previous year. I.e. the ceiling of grants has increased from 2.5 million dinars to 5 million. Every company can compete for this grants unlimited times as it is modernizing its equipment. Co-financing partner institutions, participating in the financing of these programs, may insure their investment by taking as collateral only the purchased equipment. The co-financed is reserved only for buying equipment and tools, as the purpose is the developing of productive companies in Serbia. In the program of the equipment purchasing the grants cover up to 25% of the total value of the equipment. The participation of the entrepreneurs is 5%, and a favorable credit of co-financing partners cover the remaining 70%. The purpose is to boost the development of small enterprises and entrepreneurs working to modernize the production. The most interested are the companies engaged in the following activities: manufacture of food products; metal constructions; textiles and clothing; processing of rubber, plastic and wood; printing, manufacture of furniture, articles of paper and paperboard, building materials.

3 Finance Foreign exchange reserves of the (NBS) at the end of April 2018 amounted to 10,429.3 million euros, for 194.4 million euros more than at the end of March of the same year. In absolute terms, this is not a particularly high amount, but is sufficient for a small economy. It provides coverage of money supply M1 by 189%, and more than five months of imports of goods and services. It is almost twice higher than the standards specifying adequate for the level of imports of goods and services in foreign reserves. In April 2018 occurred a nominal appreciation of dinar of 0.2%. The NBS in April intervened on the inter-banking foreign exchange market buying 205 millions of euros to preclude the excessive short-term fluctuations in exchange rate of dinar. Total foreign debt of Serbia on March 31, 2018 amounted to 24.1 billion euros, or 29.6 billion of USA dollars. So foreign debt has amounted to 59.0% of GDP, which is within the convergence criteria of the EMU. The program of fiscal consolidation was realized successfully. Instead of a budget deficit of 6.6% in earlier years, a surplus of 1.2% of the GDP is reached. In the first quarter of 2018 a budget surplus reached 6.5 billion dinars. The growth rate in economy ranges between 3.5% and 4% year-on-year. Unemployment has been reduced by more than 10 percentage points. The deficit of the current balance sheet in its entirety is covered by foreign direct investments that are forecast at about 2.6 billion euros for 2018. The business environment is improved. The position of Serbia in international financial markets is improved too. The costs and interest rates of foreign debt are significantly reduced.

Quadratura circuli Reducing public sector wages and pensions was introduced by law in November 2014. That law is still in application. Its effect on the economy are ambiguous. On the one hand, it is positive. It contributed to financial

4 consolidation. On the other hand, it had a deflationary effect, slowing down the conjuncture. That increases pressure for its abolition. The Government argues that total amount of pension must be below 11% of GDP. This means that the restoration of pensions can only be done from the increments of GDP. Otherwise, results of financial consolidation could be jeopardized. But persisting on pension abatement is slowing down conjuncture, and thus economic growth. The fact is that the economy of Serbia needs a reflation. One way is emission of money, and the other augmenting credits. The first way is flawed: there is no control on the use of additional amounts of money in circulation. It can result in the growth of prices and the trade deficit. Even the modest augmenting of wages and pensions has led to a rise in imports. The reflation through credit system has great advantages. First, increase of purchasing power is under control, because the loans are granted for specific purposes. Second, the credits are used for opening of new or expand existing businesses. The effect is the increase the GDP and hence of the public revenues. The corollary is protection of domestic market permitted by regulations of EU and WTO. Under such condition additional money in circulation would not be used for purchasing of imported products, and equilibrium of supply and demand would be reestablished. Finally, the increase of GDP would enable the State to raise wages and pensions without fear of and of current balance deficit.

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