The World Bank In Serbia

Country Context

Serbia’s economic growth accelerated in the second half of 2023, bringing GDP growth for the year to 2.5%, thanks to a better-than-expected performance of the agriculture and construction sectors, and a strong recovery of the energy sector, after the 2022 crisis. On the expenditure side, net exports and, to a lesser extent, consumption, were the main drivers of growth in 2023 while investment had a negative contribution. In 2024, growth is expected to accelerate further, with full-year economic growth expected to reach 3.5%. Over the medium term, the economy is projected to grow steadily at around 3-4% annually, supported by increases in consumption and investment, and a continued strong performance of exports. In 2023, poverty reduction continued due to strong economic growth and the incidence of poverty is estimated to have declined to 7.1%, down from 7.5% in 2022.

Last Updated: Apr 19, 2024

Strategy

The World Bank Group program is defined by a joint strategy for Serbia, the Country Partnership Framework (CPF) FY2022-2026, approved in May 2022. The CPF aims to support the country in strengthening its institutions to accelerate economic growth in a fiscally and environmentally sustainable manner and promote more inclusive service delivery.

Key areas of World Bank Group support include maintaining hard-won macroeconomic stability and reforming the public sector, fostering the business environment, competitive markets and regional connectivity and integration, improving institutional capacity to implement and monitor reforms, and strengthening human development. At the same time, this CPF steps up the focus on the implementation of cross-cutting institutional strengthening and policy reforms for greener and more resilient growth both at the budgetary and fiscal levels and through sectoral investments that are green and clean. Similarly, the CPF supports more directly efforts to build institutional capacities for delivering services at the local self-government level.

Key Engagement

The World Bank Group’s program currently provides knowledge, technical assistance and financing in the areas of transport (railways and local roads), real estate management/business environment, R&D and innovation, competitive agriculture, health and capital market development, public sector efficiency and modernization (including the digitalization of selected public services and the modernization of tax administration), green recovery, energy efficiency and early childhood education, as well as two regional projects aimed at facilitating trade and transport in the Western Balkans and connectivity along the Drina and Sava river corridors.

The support to Serbia is presently characterized by the Green Transition Programmatic Development Policy Loan series and a Program for Results lending instrument focused on improving public financial management for service delivery and the green transition. These lending operations leveraged substantial resources from other development partners (around $200 million co-financing from AFD and another $135 million from KfW).  In co-operation with the French Development Agency (AFD), the World Bank is providing $300 million in support for the Local Infrastructure and Institutional Development (LIID) project. This project helps local governments to improve their capacity to manage sustainable infrastructure and increase accessibility to economic and social opportunities in a climate aware manner. LIID is focusing on the transport sector, the second source of greenhouse gas emissions and a significant cause of air and noise pollution in Serbian cities, urban development, and public financial management.

Last Updated: Apr 19, 2024

Recent Economic Developments

Weak GDP growth in Q1 and Q2 2023 (0.9% YoY and 1.6% YoY, respectively) was caused by a decline in investment and consumption. However, in the second half of the year consumption started to increase, leading to an overall positive contribution to GDP growth in 2023. Inflation remained elevated throughout 2023, mainly due to a large increase in food and energy prices. Following its peak in March 2023 (16.2%), inflation moderated to 7.6% by year-end. Higher-than-planned collection of contributions for social insurance, VAT, and corporate income tax led to better-than-expected fiscal results. In 2023 total revenues rose 11.9% in nominal terms compared to 2022 and expenditures increased by 9.8% in nominal terms leading to a decline in the consolidated fiscal deficit by nearly 20% in nominal terms, to an estimated 2.2% of GDP. Public debt continued to decline to around 52.9% of GDP at the end of 2023. The current account deficit narrowed significantly to 2.6% of GDP (down by 56% compared to 2022 in euro terms) as a result of a major decrease in the trade deficit as imports slowed. Foreign currency reserves reached a record high EUR 24.9 billion by year-end.

Economic Outlook

Serbia’s economy is expected to grow 3.5% in 2024 and then grow steadily at around 3-4% annually, supported by increases in consumption and investment, as well as continued strong performance of exports. Foreign direct investment is expected to continue to play a key financing role. Inflation is expected to decline gradually and to return to the National Bank of Serbia target band by mid-2024. The fiscal deficit will continue to decrease and stabilize at around 1.5% of GDP. The banking sector is expected to remain resilient, with nonperforming loans stable at around 3%. The outlook also crucially depends on the domestic reform agenda and its implementation. With limited space for future stimulus packages, structural reforms are needed to accelerate growth which in turn will help to accelerate convergence to EU incomes. In order to resolve the problem of chronically low investment, Serbia primarily needs to remove bottlenecks for private sector investment including those related to governance, competition and the business environment.

Last Updated: Apr 19, 2024