Serbia has passed through a period of dramatic change during the previous fifteen years. However, this did not reflect fully on economic growth since the impact of the international financial crisis and numerous rounds of elections have slowed down necessary structural reforms in the country and led to a loose fiscal policy until 2014. More recently, there has been a greater fiscal responsibility and a reengagement on critical issues such as state owned enterprise reform, public administration reform, and public sector efficiency. In January 2014, Serbia started membership talks with the European Union (EU) after making significant progress in negotiations with Pristina, Kosovo.
Serbia has pursued these reforms while struggling to recover from the impact of the international financial crisis - which led to a 50% spike in poverty and a similar jump in unemployment in the country. As in many countries, the challenge in Serbia is translating a tenuous economic recovery into jobs and poverty reduction in a tight fiscal environment. As a result, Serbia needs to become more competitive and increase productivity in the country.
The Systematic Country Diagnostic, a comprehensive assessment carried out by the World Bank, identified six fundamental priorities as having the greatest potential impact on growth and poverty reduction in Serbia and for achieving greater shared prosperity across the society. These six priorities are:
- Restore fiscal sustainability, and maintain macroeconomic and financial stability;
- Improve governance and institutional capacity to implement and monitor reforms;
- Make the public sector more efficient by privatizing commercially oriented enterprises, restructuring large public utilities, and rightsizing the public sector;
- Improve the business climate by creating an environment conductive to private sector-led investment, growth, and job creation;
- Enhance the quality of public infrastructure to better support international, regional and domestic connectivity;
- Strengthen the labor market institutions to facilitate formal employment and create earnings opportunities for the less well-off.
Growth in Serbia for 2015 is projected at 0.5%, a small but important recovery of economy after a severe impact of floods in 2014 which led to a decline of economy of 1.8% in 2014. More robust growth rates of around 2-3% are forecasted over the medium term.
Serbia’s per-capita Gross Domestic Product (GDP) was approximately $6,181 in 2014. Poverty went up after the crisis and during the recessions of 2012 and 2014, mainly due to losses in employment and labor income. Using the standardized regional moderate poverty line of $5/day in 2005 PPP, the poverty rate peaked at 15.1 percent in 2010. After falling in 2011, poverty rose slightly again in 2012 and 2014 to an estimated 14.8 percent and 14.5 percent, respectively. Growing unemployment led to a record high unemployment rate of 25.5% in April 2012, which gradually decreased over the recent years to reach 17.9 percent in June 2015.
Serbia’s main exports are cars and other products from the automotive sector. Automotive exports have become the most important sector following significant investments from Italian carmaker FIAT. Almost 90% of all Serbian exports go to Europe—55% to the EU and about 33% to the Central European Free Trade Agreement (CEFTA) region. Exports of services are also gaining in importance, reaching 11.5% of GDP in 2014.
Going forward, Serbia’s main challenge is to improve living standards in the country and transform economic recovery into jobs in a tight fiscal environment. Increasing exports, productivity, and competitiveness are recommended actions that can help propel the country’s economic growth.