Serbia: Strong public investment to push up fiscal deficits until 2027 – Fiscal Strategy
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The finance ministry revised up its 2024 GDP growth projection by 0.3pps to 3.8% because of stronger-than-projected growth in Q1, acceleration of the investment cycle and implementation of infrastructure projects, according to the draft medium-term fiscal?strategy?for 2025-2027 published by the finance ministry. The ministry projects GDP growth will accelerate to 4.2% in 2025 and stabilize at 4% until 2027, which matches the latest forecasts of the IMF. The ministry said that the Leap into the Future-Serbia 2027 programme would be the backbone of the economic and social development of the country in the coming period. Given the planned large investments under this programme and preparations for Expo 2027, fiscal deficits will increase, but the public debt will stay on a downward trajectory.
The main goals of the fiscal policy will be maintaining fiscal stability and reducing the debt-to-GDP ratio to about 50%. On the revenue side, the priority will remain further lowering of the tax burden on the economy and fight against tax evasion and grey economy. Fiscal space provided for wage growth will increase moderately and in a controlled manner, considering its share in GDP.
On the downside, the finance ministry says that fiscal rules related to budget deficit and debt would be implemented from 2029, not from 2025 as earlier communicated. This is because of the new investment cycle under the Leap into the Future-Serbia 2027 that foresees significant investment in transport infrastructure, mining, energy, agriculture, healthcare, education, culture, environmental protection, regional development, and others. Note that Serbia plans to invest EUR 17.8bn in 323 projects across the country by 2027 within the development plan.
The special fiscal rules (referring to the share in GDP of the expenditures on pensions and public sector wages) will remain in effect, it added.
MACROECONOMIC?FRAMEWORK
The finance ministry expects the economy to expand by 3.8% this year on the back of domestic demand. Increase of wages in both private and public sectors, hike of the minimum wage by 17.8%, higher employment and hike of pensions would boost private consumption. On the other hand, profitability of the domestic economy in the previous period, continued stable FDI inflow with expected recovery in external demand. Acceleration of implementation of capital infrastructure projects within the program Leap into the future - Serbia 2027 will result in acceleration of fixed investment. The ministry expects a negative contribution of 1.9pps from net exports this year. On the production side, the services sector will drive the economic expansion. Over the medium term, domestic demand will remain a key growth driver.
The finance ministry projects that inflation will average 4.9% in 2024, whereas the CA deficit will increase to 4.1% of GDP. The general government deficit is seen at 2.2% of GDP in 2024 with a temporary increase to 2.5% of GDP in 2025 as a result of strong public investment. The deficit is planned at 2.3% of GDP in 2027. To compare, the previous fiscal strategy envisaged the deficit to be brought down to 1.5% of GDP in 2026. Risks to the macroeconomic projections are associated mainly with the uncertainty over the development of the situation in Ukraine and the Middle East, as well as the impact of new international economic and political relations.
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DEBT MANAGEMENT STRATEGY 2025-27
The Public Debt Management Strategy provides projections for interests and principals repayment until 2027, but does not provide a breakdown between domestic and external debt service. The figures are as follows:
The Fiscal Strategy foresees reduction of central government debt to 49.7% of GDP, while of general government debt, to 50.5% of GDP by the end of 2027. The government acknowledges the risk from relatively unfavourable borrowing conditions on international and domestic financial market and singles it out as one of the factors that necessitate caution in the management of fiscal policy in the medium term. The authorities intend to continue developing the market of dinar government securities, noting the progress in increasing the average maturity of these securities and reducing financing costs based on this type of borrowing, which reduced the exposure to refinancing risk.
FISCAL COUNCIL ASSESSMENT
The independent advisory body?criticized?the delay until 2029 for the implementation of general fiscal rules, estimating that this is bad for the credibility of the economic policy. It noted that the draft fiscal strategy envisages an increase in the deficit and interest expenses, as well as slower stabilization of the public debt compared to previous plans. The Fiscal Council estimated that the planned fiscal deficit of 2.4% of GDP in the medium term is still not dramatically large. In addition, the public debt will continue to decrease to 50.5% of GDP at end-2027, so fiscal and macroeconomic stability should not be endangered by the new policies. The body highlighted that the long-term fiscal stability of the country depends on the control over pensions and public sector wages and welcomed the government's commitment to stick to the special fiscal rules.
As for the planned high public investment, the Fiscal Council noted that the investment plans are not presented clearly and in detail. It does not provide basic information about the expected effects and justification of the largest of the planned projects. The body also pointed to the lack of transparency regarding the procedures under which the projects will be implemented, reminding of the practice all the biggest investment state projects to be implemented according to the so-called special procedures. The Fiscal Council also warned that the expansive fiscal policy is being planned in a period of unfavourable borrowing conditions, which will lead to the growth of interest costs in the budget.
The Fiscal Council estimated that the medium-term projections of public revenues and expenditures are relatively conservative and that the current fiscal trends show that the deficit in 2024 could be lower than 2.2% of GDP. The medium-term projection of public debt is also somewhat conservative. Given expected fiscal deficits and other relevant macroeconomic parameters, the public debt in the medium term could decline somewhat faster than predicted in the Fiscal Strategy, the body said.