In early November, Serbia’s Minister of Finance announced that the country’s account holds €5.5 billion in deposits. This is part of the ongoing policy of maintaining high state deposits, a strategy that has been in place for the past two years. However, several key questions arise about this approach: Where do these deposits come from? How much does it cost to finance them? And why is the government holding such large amounts of money in its account for extended periods?
The source of the deposits: Borrowing, not savings
Since 2019, Serbia has consistently run fiscal deficits, meaning that government expenditures have exceeded its income. From 2019 to September 2023, the country accumulated a cumulative fiscal deficit of €7.4 billion. Given this, it is clear that the government’s deposits are not the result of saving or surplus income; instead, they are financed through borrowing.
The cost of maintaining state deposits
Between 2019 and September 2023, Serbia borrowed a total of €15.1 billion to cover these deficits. The current deposits are, therefore, a direct result of this borrowing. But how much is it costing the state to keep these funds in its account?
The average interest rate on government loans last year and this year was 3.8%. With €5.5 billion in deposits, this means the state incurs an annual cost of €209 million to maintain these deposits. However, borrowing rates have been higher in recent years. If we assume an average borrowing rate of 6% for the past two years, the cost of holding €5.5 billion would rise to about €330 million annually.
This means the state is paying between €200 million and €300 million annually in interest to maintain its deposits, which have been kept at around 6% to 7% of Serbia’s GDP this year — approximately 2.5 times the amount of the planned fiscal deficit.
Reasons for expensive borrowing and high deposits
There are several potential reasons for the government’s decision to accumulate deposits through borrowing at relatively high interest rates. One factor is the government’s plans for a high fiscal deficit in the coming year. Before agreeing to a new arrangement with the International Monetary Fund (IMF), Serbia was planning a fiscal deficit of more than 5% of GDP, or over €4.5 billion. However, as part of its deal with the IMF, Serbia agreed to reduce the fiscal deficit to no more than 3% of GDP over the next three years.
This change in fiscal plans led to the postponement of many large-scale investment projects. The government’s decision to accumulate deposits by borrowing during a period of higher interest rates can be seen as a strategy to prepare for potential future financial challenges, particularly as interest rates are expected to decline in the coming years.
Another reason for the government’s borrowing at high rates could be concerns over future borrowing difficulties. Serbia might face challenges accessing loans in the future due to geopolitical tensions or deteriorating relations with key Western creditors. Given the high liquidity in both global and domestic markets, it is believed that the government anticipated potential risks to borrowing capabilities, prompting the accumulation of reserves while borrowing conditions were still favorable.
Conclusion
The accumulation of state deposits by borrowing at high interest rates is primarily a result of planning for a large fiscal deficit in the near future, along with potential geopolitical risks that could impact Serbia’s ability to borrow. While the decision may seem costly in terms of interest payments, it is a strategic move to prepare for financial uncertainties. As Serbia navigates these challenges, the management of its fiscal policy, particularly in relation to deposits and borrowing, will remain a key factor in maintaining financial stability.
