The year 2012 has brought Serbia and other countries of Southeast Europe, risks of negative spill-over effects from the eurozone, the World Bank experts have assessed. They recently presented the economic report pertaining to this region and advising that policy makers should particularly bear in mind the difficult social situation in the region, because these are the countries have the highest unemployment rates in Europe. As for Serbia, a responsible government must be urgently formed. More in our regular feature ECONOMIC REVIEW prepared by Ranka Pavlovic.
In 2012, according to the World Bank experts, Serbia’s economic growth will slow down under the circumstances when Serbia, as well as the entire region, have the highest poverty rates in Europe. The package of economic measures, which the new government will urgently need to implement to prevent a public debt crisis, will be an additional shock for the budget of every citizen of Serbia. The announced increase in VAT may fill the state coffers, but it will significantly affect the standard of living. With the euro-dinar exchange rate daily jumps thus leading to the increase in prices, the proposed freeze for public sector wages and pensions will be a shock for some three million residents and their families, who live on these wages. In Serbia, the average food basket cost exceeds an average wage by some 140 euros. The increase in VAT would result in price increase by a one-off 2%, economists estimate, but still none of them has calculated the "domino effect" of the VAT increase. To protect the most vulnerable citizens of experts proposed that the minimum pension and social assistance be exempt from the freeze.
The fact is that savings slows economic growth, but in the situation where the country risks a debt crisis, it has no alternative. Slovenia has also resorted to harsh measures, and public employees will have 7.5 lower wages. In Croatia, the VAT was increased twice in the last few years and now amounts to 25%, while it is 27% in Hungary. Last year, the gap between the Serbian budget revenues and expenditures was around 5%, while during the first few months of this year only, it has reached 8% of the GDP. The World Bank’s regular economic report for Southeast Europe shows that the eurozone crisis has reflected on poverty in Serbia through reduced remittance flows. Due to the difficult situation in the EU countries, the inflow of remittances has been reduced by about 13%, showing a tendency to decline further.
Local economists agree that the Serbian economy is „unwell“, a reflection of which is the local currency exchange rate. However, they believe that the recommended "cure" is so strong that it can also kill the "patient". Economic logic says that if taxes increase and spending falls, this leads to reduced economic activity. Therefore, the savings must be accompanied by some unconventional measures, which will stimulate investment spending, and therefore economic recovery.
Given the fact that the dinar is rapidly weakening and that changes in the balance of payments cause concerns, the formation of a responsible government is a matter of urgency, unanimously warn local and foreign experts. The new government would have to renew negotiations with the IMF, as it would be a good signal for the inflow of capital, while a further decline in currency and in foreign exchange reserves would be stopped. In this case, it would be possible to restore balance by year-end with acceptable deviation from the parameters agreed in earlier negotiations with the IMF.