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INTERVIEW - Serbia's economy to grow more slowly than govt expects in 2022

May 27, 2022, 11:26:20 AMArticle by Branislav Urosevic
May 27 (SeeNews) - Serbia's economic growth will fall behind the government's forecasts this year, the president of the association of Serbian economists and former economy minister Aleksandar Vlahovic told SeeNews.

INTERVIEW - Serbia's economy to grow more slowly than govt expects in 2022
Aleksandar Vlahovic; Source: Serbian Association of Economists

While the impact of COVID-19 on Serbia was less severe compared to some other countries, inflation started to pick up speed in the second half of 2021, given the structure of the country's economy and the countercyclical fiscal stimuli granted to businesses and households, Vlahovic said in an e-mailed interview with SeeNews earlier this week.

"Problems in electricity production due to unprofessional management of the largest state-owned company, significantly disrupted Serbia's basic macroeconomic aggregates even before Russia's aggression against Ukraine," he noted.

Earlier this week, the government affirmed its November forecast for 4.5% economic growth in 2022. Serbia's central bank said last week that gross domestic product will grow by 3.5%-4.5% this year, 0.5 percentage points lower compared to its previous forecast made in February.

The Russian war on Ukraine has further spurred inflation, hampering Serbia's exports to Russia and disrupting supplies of raw materials from both countries, Vlahovic added.

Serbia's consumer prices increased by 9.6% year-on-year in April, after rising by 9.1% the month before, the statistical office said earlier this month.

"After a multi-year period of price stability, starting from the second half of last year, inflation gained momentum. Already at the end of last year, Serbia recorded a price increase of 7%," Vlahovic pointed out, adding that it is now clear that the central bank's projection that inflation will return to the projected target band 1.5%-4.5% by the end of the year will not come true.

Serbia's central bank is in a very delicate situation, as part of inflation is imported and thus cannot be impacted by higher interest rates, Vlahovic noted.

"It is clear that raising the interest rate should be, and already is, the answer to rising inflation. However, such a measure will slow down Serbia's already very fragile growth and, in the event of further deterioration of supply chains and supply in general, there is a serious threat that Serbia's economy is moving towards a state of stagflation, which is a nightmare for economists," he said.

In regard to the inflation outlook, Vlahovic noted that he would consider a single-digit inflation at the end of the year to be a good result.

When it comes to price caps not only on fuel but also on basic foodstuffs, such measures can be justified only if they are meant as a short-term solution to possible market disruptions, he said, adding that keeping price caps for a longer period of time makes no economic sense and paves the way for shortages of these products.

Asked whether Serbia could join the EU sanctions against Russia, Vlahovic said that when it comes to Serbia's exports, the market of Bosnia and Herzegovina is much more important for Serbia than the markets of Russia or China. "This is because Serbia's exports to Bosnia are equal to exports to both of these countries," he said.

Serbia's exports to Russia amounted to $242.8 million in March, while its exports to China came in at $325.8 million, according to national statistics. In regard to Bosnia and Herzegovina, Serbia exported $513.9 million worth of goods and services, which represented 7.4% of its total exports. The country's exports to the European Union amounted to $4.5 billion in March, or 65.1% of the total figure.

A potential imposition of sanctions on Russia will make the supply of natural gas more difficult, considering that Serbia is almost 100% dependent on gas deliveries by Gazprom, said Vlahovic. "Unfortunately, Serbia didn't consider energy diversification in time," he added, noting that Serbia annually consumes about 3.5 billion cubic metres of gas, half of which is used by industry, and the other half by households.

Belgrade is currently negotiating a new price for Russian natural gas shipments with Gazprom. With or without sanctions, the price is sure to be higher than what it is now, he forecast.

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