Rigorous fiscal consolidation drives speedy recovery
Serbia’s economic outlook has changed greatly since Dušan Vujović took over as finance minister in mid-2014. At that time, the country was heading back into recession after a shallow recovery in 2012. The fiscal deficit was running at more than 8% and debt to GDP had jumped to close to 70% from less than 45% four years earlier. An IMF programme had gone off track in late 2011 and international investors were losing confidence in Serbia. Five-year CDS spreads were above 350bp and fiscal liquidity was declining at an alarming rate.
Three and a half years later, the picture is very different. Last year, Serbia’s economy expanded by 2.8%, the highest rate since 2008. A programme of rigorous fiscal consolidation brought the general government deficit down to just 1.3% of GDP for the year, less than half the 4% target set out in the 2016 budget, while the primary budget was in surplus for the first time in more than a decade.
In the first eight months of this year, the government also managed to run a fiscal surplus of more than 1.5% of GDP. As a result, the debt to GDP ratio fell to below 64% from a peak of close to 75% last year and further reductions are expected over the coming years. The recovery was reflected in Serbia’s five-year CDS spread, which was hovering around 130bp in late September.
“These are impressive achievements that substantially and consistently exceeded the expectations of IFIs, economic analysts and rating agencies,” says Vujović .
State budget reforms
The turnaround has been achieved through an ambitious programme of reforms covering both the expenditure and revenue sides of the state budget. Around 22,000 state employees have been laid off since the start of 2015, bringing the public sector wage bill down to below 10% of GDP. Meanwhile, general government revenue has risen to 44% of GDP, the highest level since 2007, according to Moody’s.
The rating agency recognised Serbia’s achievements in March, raising the sovereign rating by one notch to Ba3. Analysts cited policymakers’ “highly successful fiscal consolidation”, wide ranging labour market reforms and improvements to the business environment as the main drivers for the upgrade.
The IMF has also praised the Serbian administration, led by Aleksandar Vučić, for overseeing a remarkable economic recovery. “Serbia has pursued a comprehensive reform agenda encompassing public enterprises and state-owned enterprises, public administration, the financial sector and the business climate,” Fund officials said in September. “Overall progress has been good.”
They also noted that in several areas Serbia has surpassed the targets set by the IMF in early 2015 when it approved a new €1.2bn three-year stand-by arrangement for the country. As finance minister, Vujović played a key role in arranging the facility as well as in driving the overall fiscal consolidation that followed