Overview

Strategy

The World Bank Group’s (WBG) engagement in Serbia is guided by the February 2019 Performance and Learning Review (PLR). This reaffirmed the overarching goal of the FY16–20 Country Partnership Framework (CPF) to support the creation of a competitive and inclusive economy in Serbia and through this, achieve the country’s integration into the EU. The PLR was adjusted in response to the COVID-19 pandemic, and the CPF was extended for a year. 

Key areas of WBG support in Serbia include: 

• restoring fiscal and macroeconomic stability
• creating conditions for accelerated private sector growth and job creation
• improving infrastructure
• strengthening public sector management and improving public service delivery to citizens
• as a cross-cutting theme, responding to climate change and disaster risks

A Systematic Country Diagnostic Update, completed in April 2020, underscored environmental sustainability and governance as critical to Serbia’s shared prosperity, challenges that have been highlighted by the impact of the pandemic.

The active portfolio reflects these priorities through 12 projects in real estate management, the business environment, competitiveness and jobs, innovative entrepreneurship, health, agriculture, transport, disaster risk management, financial sector reform, public sector modernization (including the digitalization of selected public services and the modernization of tax administration), and early childhood education, as well as two regional projects aimed at facilitating trade and transport in the Western Balkans and connectivity on the Drina and Sava river corridors.

More than four years of intensive dialogue and technical advice, combined with policy-based and results-based lending, have started to yield important and increasingly impressive results in several sectors.  

Key operations have included the Public Enterprise and Public Utilities Development Policy Loan (DPL) series, the Competitiveness and Jobs Project, the Program for Results in support of Public Administration Modernization and Optimization, the State-Owned Financial Institutions Reform Project, the Program for Results in support of Enhancing Infrastructure Efficiency and Sustainability, and the Emergency COVID-19 Response Project in response to the outbreak of COVID-19. In FY21, the Railways Sector Modernization Multiphase Programmatic Approach was added, and the Public Sector Efficiency and Green Recovery DPL is to be considered by the Board on April 29. 

As a result of these efforts, public utilities, for example, are returning to financial health with gradually improving services, and local scientists are linking to enterprises to commercialize their innovations, thus contributing to growth and jobs.  

Next generation reforms are focused on developing a new growth agenda and deepening public sector reforms to promote a post-COVID-19 green recovery and lay the foundations for Serbia’s alignment with the EU Green Deal and progress toward EU accession.  

Last Updated: Apr 07, 2021

Recent Economic Developments

After two years of over 4 percent growth, the Serbian economy entered a recession in 2020 caused by the COVID-19 pandemic. The year began well—GDP in the first quarter was up by 5.2 percent—but growth turned negative in the remainder of the year, as lockdowns introduced to control the spread of COVID took a toll on the economy. Preliminary estimates suggest that GDP fell by 1 percent in 2020 in real terms. The recession could have been deeper if not for the timely and sizable government stimulus package of nearly 13 percent of GDP (of which 4.8 percent of GDP was in the form of loan guarantees and 8 percent of GDP in different revenue and expenditure measures).

The labor market was resilient to the shock caused by the pandemic. The average unemployment rate in 2020 stood at 9 percent (based on the Labor Force Survey), while the employment rate was 49.1 percent. Pandemic-related shocks to the economy mainly affected informal employees, as the number of informally employed declined by 55,500 in 2020. 

The widening deficit led to a rise in the gross financing requirement, which was met through the issuance of Eurobonds and solid activity in the domestic debt market, as well as a number of international bilateral loans. Public debt, which had fallen steadily in 2015–19 to an eight year low of 52.9 percent, stood at 58.2 percent of GDP at the end of December 2020.

Economic Outlook

Recovery from the COVID-19-related recession is expected to start in 2021. Growth will be supported by a recently announced new package of measures to support citizens and the economy amounting to 5.1 percent of GDP. As a result, the economy is expected to rebound by 5 percent in 2021.

Over the medium term, growth is expected to be around 4 percent, driven by consumption, and investment will recover only slowly, which may also slow the impact of growth on labor markets (both employment and wages). This medium-term outlook crucially depends on international developments (including the control of COVID-19), the pace of structural reforms, and political developments. 

Immediate focus is needed on measures to improve the business environment and governance in order to lower the cost of doing business and ensure security and safety, as well as efforts to improve the quality of infrastructure. Regarding the medium- to long-term challenges, the focus should be on demography and climate change. First, an aging and shrinking population will leave Serbia with a smaller available labor force. Labor shortages, combined with skills mismatches, could significantly hurt the competitiveness of the Serbian economy. Second, the impact of climate change, including more frequent and severe droughts and floods, will hit agriculture and food production hard and make the cost of infrastructure maintenance much higher. 

The pace of labor market recovery will be critical to resumed poverty reduction. The new package is expected to support citizens and economic recovery, though poor and vulnerable households, who tend to depend more on self-employment and less secure jobs, may take longer to regain their income level. Poverty is projected to slowly decline to 16.8 percent in 2021.

In the medium term, regional disputes and slow progress in the EU accession process could affect investment sentiment and therefore delay investment projects in infrastructure and other sectors. Labor market challenges limit the scope for robust welfare improvements and could be exacerbated by a significant brain drain. 

Last Updated: Apr 07, 2021