Economic Reform Programme: Ministerial Dialogue between the EU and the Western Balkans and Turkey focuses on common challenges stemming from the ongoing Covid-19 recovery and from Russia’s war of aggression against Ukraine: The participants encourage Serbia to reinforce the medium-term sustainability of public finances, continue reforms to further improve the business environment for investment, green the energy sector, diversify energy supply and the overall energy mix and further increase employment, particularly of young people, women and vulnerable groups as well as strengthen social protection against poverty.
Representatives of the EU Member States, the Western Balkans and Turkey, the European Commission, the European Central Bank, and representatives of the central banks of the Western Balkans and Turkey[1] met today for their annual economic policy dialogue[2] in Brussels. The dialogue aims at preparing the Western Balkans and Turkey for their future participation in the European Semester. This year, the meeting focused on Covid-19 recovery and the common (economic) challenges caused by Russia’s war of aggression against Ukraine. Participants agreed that the economic policy dialogue is of high importance in view of a common interest to define appropriate policy responses to the recent adverse shocks. Looking beyond the current crisis, participants agreed that the economic policy dialogue should continue to play a central role in providing jointly agreed policy guidance to support a medium-term sustainable economic recovery and help the enlargement partners to gradually meet the economic criteria for EU accession. Participants encouraged the Western Balkans and Turkey to foster sustainable economic development via further improvement of their macroeconomic, budgetary and structural policies.
Participants welcomed Serbia’s strong economic rebound in 2021 and discussed ongoing and future challenges. Energy diversification and the green and digital transition were emphasised as key factors in strengthening the economic resilience in the longer term. In light of high uncertainty related to Russia’s war of aggression against Ukraine, including global inflationary pressures and potential tightening of global financial conditions, Serbia is encouraged to stand ready to provide temporary and well-targeted crisis mitigation if needed. In the medium term, further fiscal consolidation and sustainability of public finances will be important to maintain sustainable levels of general government deficit and debt-to-GDP ratio. Structural reforms related to the improved governance of state owned enterprises, increased transparency on fiscal risks and further reforms of revenue administration should further contribute to the medium-term policy credibility and reduce the informal economy.
With regards to specific structural reform areas in terms of boosting competitiveness and long-term and inclusive growth three areas were identified: (I) creating a more favourable business environment for investment; (II) greening Serbia’s energy sector and fully opening the energy market; and (III) increasing employment, in particular of young people, women and vulnerable groups, and social protection against poverty. Remaining issues within these areas include that a certain share of public funds for capital investment continues to be spent without sufficient transparency and proper checks to ensure compliance with public procurement, state aid and technical standards, the need to diversify supply and Serbia’s overall energy mix and to reduce excessive dependence on gas from individual countries, and that vocational education and is not well oriented to labour market needs with low exposure of students to the workplace.
In the light of the above assessment, Serbia and the EU agreed on six recommendations for the year ahead: (1) if needed, use the available fiscal space in the 2022 budget to cushion the potential impact of adverse shocks through targeted support to vulnerable households and firms; (2) Continue tax administration reforms, implement the new SOE ownership and management strategy to improve the governance of SOEs and reduce related fiscal risks; (3) Carefully assess and analyse price developments and stand ready to tighten monetary policy further, if needed, to preserve price stability in the medium term (4) further improve transparency in the adoption and implementation of legislation, ensure a harmonised approach in prioritising and monitoring all investments including public procurement and state aid procedures; (5) Continue to develop and adopt a national long-term energy and climate plan in line with the Green Agenda for the Western Balkans and international commitments, and further increase investments in modernising energy infrastructure and lowering carbon emissions with a view to accelerating the green transition; (6) reduce poverty. Participants emphasised that commitment and strong ownership are the key to a successful implementation of the jointly agreed policy guidance.
Gojko Stanivuković, state secretary of the Ministry of Finance, who was speaking today at the ECOFIN meeting in Brussels said:
„First, I would like to emphasise that the Republic of Serbia stands firmly on its European path and our first and fundamental foreign policy objective and priority is the full membership in the EU. In this respect, the support of the EC and the member states is the of the utmost importance. Bearing in mind the global economic crisis, we can be satisfied with the results so far. In the first quarter of 2022, we recorded an economic growth of 4.3 percent, compared to the projected growth of 3.9 percent, and in the second quarter, the forecasted growth is 3.7 percent, with the prospect of reaching its pre-crisis rate at around 4.5% in 2022 and 2023. Public debt is completely under control, at the level of 52.1 percent (on Friday), which is far below the Maastricht level. Also, our fiscal result in the first quarter was better than planned. According to preliminary data from the beginning of the year until 20th of April, the gross inflow based on FDI amounted to 594.2 million euros. This shows us that foreign investors did not give up on investing in our country, regardless of the global crisis, and we, as a responsible government, will continue to fight for every new factory and every new job. With regards to that, I would like to note that the unemployment rate in 2021 was 11.1%, which is below the pre-pandemic period, and what is especially important, the trend of decreasing unemployment continues, as shown by the latest EC forecast. From the aforementioned indicators, we can see the economic strength of our country and the stability of our public finances, despite the fact that we, like the rest of the world, are faced with numerous challenges and problems. In the coming period, fiscal policy will be focused on perpetuating the reduction of the overall tax burden on labour, which will further relieve the burden on the economy, i.e. increases the competitiveness of the private sector. On the expenditure side, priority will be given to infrastructure and capital projects, as well as pension and wage policies. Our determination is not to shift the burden of the crisis onto the citizens.”
Governor Jorgovanka Tabaković stressed: “Serbia has navigated its economy through the pandemic exceptionally well, with a cumulative real GDP growth of 6.4% in two pandemic years, a rise in FX reserves to a record high level, as well as the record high export of goods and services in 2021, and all of this was supported by a record high inflow of FDI of around 7.5% of GDP. Even in pandemic conditions, we maintained further growth of dinarisation of loans and deposits, and sustained a sound increase in lending activity of around 10%, with NPLs dropping to the lowest level to date, equalling 3.4%. She also pointed out: ”Taking into account the character of inflationary pressures spilling over from the global market, with its gradual approach to tightening monetary conditions since October last year, with the preserved relative stability of the exchange rate and favourable financial conditions in the local market, the NBS continues to support economic activity and credit risk management.” In terms of long-term policies, she noted that Serbia will continue to pursue a responsible economic policy, with diversification of markets and products, sources of investment financing and investment targeted areas, as well as sources of energy supply. A key contribution to all this comes from the strategic decisions of President Aleksandar Vučić, and a rich agenda of structural reforms for the period ahead.”
[1] Montenegro, the Republic of Serbia, the Republic of North Macedonia, the Republic of Albania and the Republic of Turkey are candidate countries for EU accession.
[2] The conclusions of this dialogue are without prejudice to EU Member States´ positions on the status of Kosovo.
