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Country Context

The growth of the Serbian economy accelerated in the first half of 2024 leading to an increase in projected GDP growth for the year as whole to 3.8%¡ªhigher than the previously projected figure of 3.5% thanks to a better-than-expected performance of the construction and services sectors in the first half of the year. However, a severe drought that hit Serbia this summer had a significant negative impact on agriculture, which may still cause a downward revision of 2024 GDP projections. On the expenditure side, consumption and investment were the main drivers of growth in the first half of 2024 while net exports had a negative contribution. Consumption started to recover because of the continued increase in incomes as well as a steady decline in inflation. Over the medium term, under the baseline scenario, Serbia¡¯s economy is expected to grow at around 4%. The incidence of poverty declined to an estimated 6.9% in 2022 and is estimated to have stayed unchanged in 2023 as private consumption growth was modest, affected by the high inflation and the phasing out of government support programs, which had fueled the strong post-COVID-19 recovery of 2021.

Last Updated: Oct 22, 2024

Strategy

Å·ÃÀÈÕb´óƬ Group's program for Serbia is guided by the (CPF) for FY2022-2026, approved in May 2022. The CPF aims to support the country in strengthening its institutions to accelerate economic growth in a fiscally and environmentally sustainable manner and promote more inclusive service delivery.

Å·ÃÀÈÕb´óƬ Group supports several critical areas, including maintaining macroeconomic stability and reforming the public sector; fostering a competitive business environment and enhancing regional connectivity; improving institutional capacity for reform implementation and monitoring; and strengthening human development.

At the same time, the CPF emphasizes cross-cutting institutional strengthening and policy reforms to promote greener, more resilient growth, focusing on both fiscal and budgetary measures as well as green sectoral investments. Additionally, it aims to enhance the capacity of local self-governments (LSGs) to deliver services effectively.

Key Engagement

Å·ÃÀÈÕb´óƬ Group¡¯s program currently provides knowledge, technical assistance and financing across various sectors, including transport (railways and local roads); real estate management/business environment; R&D and innovation; competitive agriculture; health; capital market development; public sector efficiency and modernization (including the digitalization of selected public services and the modernization of tax administration); green recovery; energy efficiency and early childhood education. Notably, there are two regional projects facilitating trade and transport in the Western Balkans and enhancing connectivity along the Drina and Sava River corridors.

A significant focus of the World Bank Group¡¯s support is the transformation of Serbia's rail sector into a safe, sustainable, and efficient system. In collaboration with the French Development Agency (AFD), the Multiphase Programmatic Approach (MPA) for Railway Sector Modernization provides a total financing envelope of $400 million. Phase 1 allocates $125 million, while Phase 2 focuses on improving the maintenance of existing railway infrastructure, maintenance facilities, and asset management, with a budget of $130 million.

Å·ÃÀÈÕb´óƬ Group is also supporting the Local Infrastructure and Institutional Development (LIID) project with $300 million. This initiative aims to enhance local governments' capacity to manage sustainable infrastructure and improve access to economic and social opportunities in a climate-conscious manner. The project specifically addresses the transport sector, which is a major source of greenhouse gas emissions and contributes to air and noise pollution in Serbian cities, while also focusing on urban development and public financial management.

Last Updated: Oct 22, 2024

Recent Economic Developments

Strong GDP growth in Q1 and Q2 2024 (4.6 and 4%, YoY) was driven by a recovery of private sector consumption and investment. Net exports made a negative contribution to growth in the first half of the year due to lower-than-expected exports growth, as external demand weakened, and imports remained at a high level. Inflation continued to gradually decline in the first half of 2024, mainly due to a significant decline in food related inflation. The NBS kept the key policy rate unchanged at 6.5% from July 2023 through June 2024 when it was lowered for the first time. Budgetary revenues overperformed significantly in H1 2024 (up 14.1% in nominal terms, YoY), primarily thanks to a higher-than-planned collection of contributions for social insurance, VAT, and excises. Expenditures increased by 15.2% in nominal terms and the consolidated fiscal surplus was lower than in the same period of 2023, while still reaching 0.4% of annual GDP. After a continued decline over 15 months, public debt increased significantly in June 2024 (by 2.1 percentage points) to reach 52.6% of GDP. The current account deficit is expected to increase to 4.1% of GDP in 2024. Foreign currency reserves increased to a record high level of EUR 27.5 billion by June.

Economic Outlook

The Serbian economy is expected to grow at around 4% over the medium-term, driven primarily by consumption and to some extent by investment. There are both up and downside risks. Downside risks relate to the impact of climate change on agriculture and infrastructure. On a positive side, there could be a more significant impact of exports on growth, including recent private sector investment in the automotive sector. Inflation is expected to decline gradually and to stay within the NBS target band. The fiscal deficit is now projected at a higher level than before since the government decided to de facto suspend fiscal rules until 2029, in the context of largescale infrastructure public spending plans. Continued economic growth will keep bringing more Serbians out of poverty. However, the remaining poor are increasingly concentrated among pensioners, the long-term unemployed or those completely out of the labor force. Thus, targeted social assistance or other direct channels will become essential to continue poverty reduction.

Last Updated: Oct 22, 2024