As Serbia’s economy continues its growth trajectory in 2023, experts have warned that the export sector is under significant pressure. Economists have pointed out that exports will likely contribute negatively to the country’s gross domestic product (GDP) growth, and that the foreign trade deficit is expected to widen considerably. However, political leaders have yet to address this looming issue, focusing instead on public investment and domestic consumption. This trend could further weaken the already struggling export sector, which has faced challenges for many years.
While recent trade agreements with new markets may offer some hope, experts note that it will take several years for these deals to be fully implemented, leaving the export sector with little immediate relief. In Serbia, exporters have long struggled with the fixed dinar exchange rate, which erodes their competitiveness. This issue is exacerbated by the ongoing economic troubles in the European Union (EU), Serbia’s largest trading partner, where a crisis that shows no signs of abating further impacts Serbia’s exports.
According to Predrag Bjelic, a professor of International Trade at the Faculty of Economics, the growth of the foreign trade deficit is once again a concerning trend. He cites the weak structure of Serbian exports as one of the major issues. The fixed dinar exchange rate, along with rising inflation imported from abroad, continues to harm Serbia’s export competitiveness. Bjelic further argues that the National Bank of Serbia (NBS) should focus on tackling inflation rather than solely stabilizing the currency. Despite occasional strengthening of the dinar, the overall impact of these currency fluctuations remains negative, especially given the EU’s importance as Serbia’s primary export market.
In the face of these challenges, Bjelic suggests that direct assistance or subsidies could help Serbian exporters, similar to the aid package recently announced by China to support small and medium-sized enterprises. China’s government is also known for manipulating the exchange rate of the yuan, which further enhances the competitiveness of its exporters.
Serbia’s foreign trade deficit has been on the rise, with the most recent data from the Republic Institute of Statistics (RZS) showing that exports of goods, expressed in euros, reached 24.45 billion euros, a 1.9% increase from the previous year. However, imports of goods surged by 5.7% to 32.2 billion euros. This resulted in a foreign trade deficit that increased by 19.8% compared to the same period last year.
The National Bank of Serbia (NBS) has maintained its GDP growth forecast for 2023 at 3.8%, with predictions for continued economic growth of 4-5% in the coming years. Private consumption, fueled by rising wages and employment, is expected to contribute significantly to this growth. At the same time, investments, especially in infrastructure projects and the EXPO 2027 program, are expected to play a key role in economic expansion. However, as imports are likely to grow faster than exports, net exports are projected to have a negative impact on GDP growth, according to economists from Raiffeisen Bank.
The EU’s economic troubles further complicate Serbia’s outlook. Economists are not expecting a rapid recovery of the EU economy, and the Serbian central bank may have to lower interest rates to help support domestic growth. However, the risk of inflation, particularly due to rising energy prices driven by geopolitical tensions, could hinder this process.
Meanwhile, Serbia’s recent trade agreements with China, Egypt and the UAE have yet to show significant impact on exports. The agreement with China has been beneficial in some respects but comes with certain restrictions that limit Serbia’s full access to the Chinese market. The agreements with Egypt and the UAE are still in progress, with negotiations focusing on the terms that will determine the scope of trade liberalization.
While trade agreements can reduce customs duties, they often come with stringent rules of origin, limiting the extent to which products can benefit from preferential export conditions. For example, Serbia can only export products with at least 50% domestic content under these agreements. In contrast, Serbia’s trade with the EU benefits from the Pan-Euro-Mediterranean Rules of Origin, which allow the country to import raw materials from other countries like North Macedonia and Germany, process them, and then export the finished goods to the EU. Such agreements have helped integrate Serbia into global supply chains.
Bjelic notes that these trade agreements may have certain benefits, but the rules of origin are a significant barrier. Additionally, there may be sectors that are excluded from the agreements, reducing their effectiveness. For instance, some sectors in the agreement with Egypt were not fully negotiated, limiting potential opportunities in these industries.
Bjelic also warns of the long-term risks of an expanding foreign trade deficit. A large and persistent deficit can lead to pressure on the national currency and foreign exchange reserves. If exports continue to underperform and foreign direct investment (FDI) declines due to global geopolitical instability, Serbia may face a serious balance-of-payments issue. In such cases, the country would have to rely on borrowing or other external financing mechanisms, which could further deplete foreign reserves and destabilize the currency.
A sustained foreign trade deficit can trigger an automatic balancing mechanism that devalues the currency to boost exports and restore balance. However, this process could deplete the country’s foreign reserves, making it increasingly difficult to maintain the stability of the dinar in the face of such external imbalances.
In conclusion, while Serbia’s economy continues to grow, the challenges facing its export sector—exacerbated by a growing foreign trade deficit, a fixed exchange rate and an uncertain external environment—pose significant risks. Immediate action, such as providing subsidies or targeted support for exporters, as well as addressing the underlying issues with trade agreements, may be needed to stabilize the situation. Without such measures, Serbia’s foreign trade deficit could continue to worsen, placing additional strain on the country’s currency and overall economic stability.
