Economy in Focus: Serbia

While Serbia’s economy underperformed forecasts in 2022 amid weak investment, the successful implementation of the Ohrid agreement on normalisation with Kosovo would bring an influx of European Union funds and investment.

Home to 6.9 million people, Serbia is the largest economy in the Western Balkans. United Nations sanctions and embargoes on Serbia for its actions during the Yugoslav Wars isolated its economy and accelerated brain drain, but the country experienced rapid growth and wage increases after the overthrow of President Slobodan Milošević in 2000. 

Serbia had a strong rebound from the Covid-19 pandemic—reaching 7.4 per cent growth in 2021—but underperformed the Vienna Institute for International Economic Studies’ (wiiw) forecasts for 2022 and saw just a 2.3 per cent increase in GDP. 

While household consumption was bolstered last year by increases to the minimum wage and public-sector salaries, the government removed or raised the level at which its caps prices on food, electricity, and energy, with inflation subsequently increasing.  

Inflation averaged 11.9 per cent in 2022, among the lowest in the region, but reached 16.2 per cent in March 2023. While unemployment declining, it is still high at ten per cent.  

Serbia currently has a BB+ long term issuer default rating from Fitch

Investment, foreign and domestic 

While public investment fell three per cent in 2022, the government’s public infrastructure investment kept Serbia’s public investment among the highest in Central, Eastern, and South-eastern Europe (CESEE)—comprising 7.2 per cent of GDP.  

Total investment, however, remained around the regional average at just under 23 per cent of GDP and domestic private investment remains low.  

The makeup of Serbia’s foreign direct investment (FDI) inflow varies considerably from its neighbours with China and Russia playing a much more prominent role.  

Despite applying for EU membership in 2009, Serbia has pursued a decidedly different foreign policy from the bloc and has maintained close relations with Russia even as it invaded Ukraine and was sanctioned by the EU. Serbia’s continued ties with Russia created uncertainty that saw FDI from the EU drop to just 33 per cent of total FDI—half of what it had been.  

FDI from Russia—though largely from Russians fleeing conscription—and China have filled the gap left by the drop in EU investment. FDI from Russia increased eightfold to eight per cent of total FDI while Chinese FDI tripled to 32 per cent of total FDI. 

“Serbia has big investment needs, both in industry and in infrastructure,” Dr Branimir Jovanović, author of wiiw’s April forecast for Serbia, tells Emerging Europe.  

“China on the other hand has a lot of money, and a strategy to expand globally, and Serbia is a good opportunity, not just because of economic reasons, but also because of political, as it is geographically close to the EU and has a policy of maintaining good relations to both West and East.” 

Dr Jovanović says there are three main categories of Chinese FDI in Serbia. “First, there are some new Chinese companies who are opening factories (ie, greenfield investment). Five such companies have been announced in 2022 (Haitian International Holdings, Suzhou Yusei Machinery, Tristone Flowtech, Kuka Roboter and Yanfeng Automotive Interiors).” 

“Then, there are the big Chinese investment from the previous years, who are expanding their activity in Serbia—the Bor mine, the Smederevo steel plant, the Huawei Innovations and Development Centre in Belgrade, and the Shandong Linglong tyre factory in Zrenjanin,” he says.  

“The final part refers to the investment related to the infrastructure projects that Serbia is undertaking in partnership with China, such as the Belgrade Metro, the solid waste disposal project for 65 municipalities, and the bypass around Belgrade.”

Opportunities from normalisation 

As the opening for China’s increase in FDI was largely created by political uncertainty over Serbia’s EU future, the implementation of a deal to normalise relations with Kosovo would reduce uncertainty and remove a major obstacle to Serbia’s EU accession. 

In March, the leaders of Serbia and Kosovo agreed to a verbal deal to implement the normalisation of relations in Ohrid, North Macedonia and a Joint Monitoring Committee for the implementation of the deal was established a month later.  

“[EU leaders] told me – you must accept this [normalisation] plan, or you will face the interruption of the process of European integration, the halting and withdrawal of investments and comprehensive economic and political measures that will cause great damage to the Republic of Serbia,” Serbia’s president, Aleksandar Vučić, said in March. “It would be a matter of weeks before the visa-free regime we have with the European Union would be abolished.” 

But the EU is providing carrots as well as sticks for Serbia. 

“If the deal gets implemented fully, it will certainly affect Serbia positively,” Dr Jovanović says. “Not just because of the donor conference that the EU has agreed to organise in that case, which should result in significant infrastructure investment in the country, but also because it will reduce the political uncertainty surrounding Serbia right now.” 

“If the deal gets implemented and relations with Kosovo get normalised, Serbia will get closer to the EU, as the main reason why it is still close to Russia won’t be there anymore – Serbia won’t need Russian support in the Kosovo dispute,” he adds. 

The transfusion of funds and long-term reduction in political uncertainty could provide much-needed help to Serbia. wiiw forecasts meagre GDP growth of 1.5 per cent for Serbia in 2023—the lowest in the Western Balkans—but there is still time for Serbia to surprise.

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