Serbia's central bank governor outlines how the country's robust fiscal policies have set it on course to achieve economic growth in 2021 despite the Covid-19 pandemic.

Jorgovanka Tabakovic

Xenophon of Athens believed that the technique of household management depended both on the art of managing the polis and on the art of managing oneself. For him, the economy (oikonomia) was not conditioned by political fortune and misfortune alone, but also by character — i.e. the virtues and flaws of those managing their households.

The same could be said for states in the time of crisis. A comprehensive package of measures, with which Serbia responded to the crisis caused by the global coronavirus pandemic, exceeded in its scope and depth the measures that were introduced as a response to the global economic crisis of 2008. This was made possible owing to the responsible conduct of economic policy in the past eight years.

Compared to the pre-2012 period, Serbia is a completely different country. From a country teetering on the edge of bankruptcy, with inflation exceeding 12% and an unpredictable exchange rate, we now have a country where inflation is reined in at an average 2%, the exchange rate is relatively stable and public finances are in order. 

The achieved stability and full coordination of policies — i.e. the alignment of the monetary and fiscal policies — have played a key role in this matter. Stability is the common thread that has led and marked the path of success of the Serbian economy for the past eight years. It is on this foundation of political and economic stability and co-operation, laid down by Aleksandar Vučić first as the prime minister and now as the president of Serbia, that we are building the future for our children.

The overall progress has resulted in a record-low country risk premium, as well as in Serbia’s credit rating being raised to a step away from investment grade. These results, and the successfully implemented reforms, have been acknowledged by international institutions and investors who say that Serbia’s policies have improved significantly since 2012, but most importantly, the effects of the changed policies are felt by our citizens who experience a better living standard and feel the certainty that allows them to do business and make plans more easily.

Serbia's new economy

Investors go to countries with a safe and predictable business environment and, in recent years, this is what Serbia has managed to ensure by successfully implementing reforms, to which the National Bank of Serbia (NBS) gave a significant contribution with its monetary policy. We have ensured the sustainability of investment-driven economic growth. With full coordination of the NBS and the Serbian government, we have fortified our economy on a lasting basis. That Serbia is an attractive investment destination is shown by the fact that, in 2019, it drew around 60% of all foreign direct investment (FDI) in the Western Balkans — more than all other countries combined. The net FDI inflow equalled €3.6bn ($4.3bn) last year, which is a record level for Serbia.

The continuity of responsible policy and macroeconomic stability will be of crucial importance in mitigating the effects of Covid-19 and the global crisis on Serbia. In 2018 and 2019, the Serbian economy grew at an average annual rate of 4.3%, and the best performance was recorded in the fourth quarter of 2019, when Serbia achieved a growth rate of 6.2%. In this period, growth was mainly investment-driven.

Despite the first phase of the coronavirus pandemic, which was mirrored in March's data, high economic growth continued in the first quarter of 2020, when the Serbian economy recorded growth of 5.0%. As expected, due to the necessary containment measures introduced in all countries, economic activity declined in the second quarter, though the decrease was among the lowest in Europe. The drop in economic activity measured 6.5% year-on-year, meaning that the reduction was much lower than in the majority of European countries.

The NBS expects most of this fall to be offset already by the third quarter, before a full economic recovery sets in by the year-end or in the first quarter of 2021 at the latest. Observed at the annual level, we expect Serbia’s real gross domestic product (GDP) to dip by only 1.5% this year, and to post growth of 6% next year. If Serbia achieves this result — and for the time being, the data is better than expected — there is a huge possibility that we will outperform all other European countries. 

A key contribution to such an outcome will come from the package of monetary and fiscal measures, which exceeds 12% of GDP and targets both the supply and demand sides. Such an extensive package could not have been adopted had the NBS, together with the Serbian government, not achieved and maintained overall macroeconomic and financial stability in the prior period.

Regarding the NBS, its main role in the previous years was to achieve, and then to preserve price and financial stability. Inflation was brought down from double-digit levels to a level comparable with that in other European countries. Over the past seven years, it has been maintained at around 2%. By keeping inflation firmly under control, we have reduced the costs of financing for businesses, government and households. Low inflation and confidence in the NBS have laid the groundwork for monetary policy easing. The key policy rate was cut by 10.5 percentage point, from 11.75% in May 2013 to the present 1.25% — its lowest level in the inflation-targeting regime. Considerably lower interest rates boosted the disposable income of firms and households, and supported lending, which stoked investment, economic activity and employment. 

Maintaining course

We have maintained financial stability and resolved the legacy of non-performing loans (NPLs) in a systemic way. At end of July, their share was 3.6% or 18.6 percentage points lower than in 2015 when the NPL resolution strategy was adopted. Since 2015, their stock has been slashed by around 80%. A systemic approach to NPL resolution and solid macroeconomic results yielded their full effect on this front too, which is why Serbia is now globally recognised as a country that dealt with NPLs in the best way.

Notwithstanding the global economic crisis and uncertainty caused by the coronavirus, savings in Serbia continue to rise, pointing unequivocally to citizens’ unwavering confidence in the stability and safety of the domestic financial system. Dinar savings almost quintupled over the past eight years. Continuous growth in dinar and foreign currency savings, against the backdrop of lower interest rates on time household savings and the coronavirus crisis, clearly shows that citizens’ confidence in the Serbian banking system is high. Savings growth and the rising share of dinar loans to businesses and households testify to the progress in the field of dinarisation. Robust growth in foreign exchange reserves has increased the country’s safety and resilience to shocks. Effective reserve management and well-timed purchase of gold in the international market has underpinned the increase in foreign exchange reserves, which was particularly challenging in an environment of low, or even negative, interest rates that have been prevailing in the global financial market for quite some time already.

The NBS’s support of the country’s economic policy came strongly to the fore during the coronavirus pandemic. At the very start of the pandemic the NBS introduced a three-month moratorium on all loans, which was subsequently extended by an additional two months. Also, several regulations were adopted to facilitate loan approval and repayment. We lowered the key policy rate in three steps by 100 basis points in total, contributing thereby to the further fall in the cost of financing for businesses, government and households, and to the rise in disposable income. By organising repo purchase of dinar government securities and ad hoc swap auctions, the NBS supplied additional dinar and foreign exchange liquidity to banks so as to support their smooth lending to the corporate and household sectors. 

The benefits of the creation of a modern legal framework for payment services, whereby citizens and businesses have a greater offer of innovative payment services under more favourable conditions, were also shown during the coronavirus pandemic as payments could be made and received in a fast, simple and safe way. In this regard, the NBS operates the instant payments system, whose main advantages include payments from any place and at any time, and money transfers within a few seconds. The NBS instant payment system was launched on October 22, 2018, which means that we introduced instant payments before the European Central Bank (November 2018) and the Federal Reserve. On top of this, Serbia has already enabled instant payments at brick-and-mortar and online points-of-sale, a practice emerging at the EU level.

Two millennia after Xenophon, the great poet Petar Petrović Njegoš rendered into verse the memorable words of wisdom: “When things go well, 'tis easy to be good; adversity reveals who the hero is.” Serbia has faced this adversity in a much better macroeconomic position, owing to the narrowing in internal and external imbalances, and the structural reforms implemented in the past period. Building on solid foundations of stability and co-operation, both in good and bad times, Serbia proved that it has put an end to the policy of consuming the future in advance. This created room for the adoption of robust monetary and fiscal measures, even in the conditions of the current global crisis triggered by the coronavirus, and for the adoption of any future measures if necessary.

Jorgovanka Tabaković is the governor of the National Bank of Serbia.


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