Economy: Strong growth, but from low base

By Eric Jansson, FT.com site
Published: Dec 14, 2004

State economists in Belgrade boast that business in Serbia is accelerating at a rate unparalleled in central and eastern Europe. Gross domestic product is forecast to rise 8 per cent in 2004.

However, economists from the International Monetary Fund are more reserved. "We are more comfortable assuming 6 per cent growth," says Harald Hirschofer, the IMF's resident representative in Serbia and Montenegro. Either way, the economy has begun to benefit from reforms imposed since Socialist rule. The financial environment has stabilised and privatisation receipts in 2003 exceeded €1bn. Most came from three deals: €605m from selling controlling stakes in cigarette plants to Philip Morris International and British-American Tobacco; €207m from the sale of Beopetrol, the country's second-largest retailer of oil products, to Lukoil of Russia; and US Steel's $250m takeover of the bankrupt Sartid steelworks.

This foreign investment spurs growth. Wages rose sharply this year for the first time since 2000. Unemployment, still officially 30 per cent, but more realistically below 20 per cent, has begun a tentative descent.

Industrial production, until recently the statistic commonly cited by doomsayers, is rising: the increase looks certain to stay above 6 per cent this year.

Domestic retailers are finding export markets. This should help offset the gaping trade deficit - though exports remain poor, with the debt-to-export ratio still topping 300 per cent.

"However volatile the political scene, on the economic front there is a positive outlook," says Jasna Matic, the government's investment promotion chief. But in many ways the economy continues to underperform. Even at the current pace, two decades will be needed to attain the production and consumer purchasing power of 1989.

"Most people say they were better off in the Milosevic era," says Danica Popovic, a liberal economist at the University of Belgrade.

Prices have settled at levels that many Serbs find uncomfortably high

Policymakers are at pains to persuade voters they are better off than four years ago. This is difficult because prices are high, while the average wage is far below European averages.

Hyperinflation is gone but, with controls taken off most basic consumer goods, prices have settled at levels many Serbs find uncomfortably high. Shops, once undersupplied, now overflow with imported goods but prices are often beyond consumers - hence the rush for credit.

There are three sections of the economy. There is the small market-oriented sector, generating most growth; the large, unreformed socialist system; hidden is the "grey economy", estimated to generate 40 per cent of gross domestic product.

"This is still a socialist economy," says Mrs Popovic, pointing to a large state sector, cushioned from market forces by large subsidies.

Here lies the frontier of the country's economic transition. Liberal economists estimate that if two-thirds of civil servants were sacked, it would function as well or better. Leaders at the central bank, which recently culled its staff, agree. The IMF urges similar moves in the commercial sector.

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Government officials say bankruptcy reforms to be introduced in February will help clear the way for massive restructuring. Likely targets are Zastava, the near-idle car plant in Kragujevac whose initial refinancing and recovery plan has failed, and RTB Bor, the ailing mining concern in eastern Serbia.

There are also state monopolies in fixed-line telecommunications and energy. During a strike at Jat, the state airline, in November economists were astounded to discover that the former flag-carrier which now has only 10 aircraft, employed more than 600 mechanics.

When oil prices rose this autumn, officials kept diesel prices fixed. This led to a month-long shortage.

To the chagrin of policymakers, most of the jobs that have been created are in the grey economy. Value added tax is being introduced on January 1 to legitimise some of the illicit trade. But central bankers warn VAT will push up prices. Inflation, which fell into single digits in 2003, has risen above 10 per cent.

Coupled with the dinar's slide against the euro, this will eat further into consumers' purchasing power.