The current year has brought ongoing uncertainty, and I believe that economic growth and the budget as a whole should have been planned more restrictively
President of the Serbian Association of Economists Aleksandar Vlahović considers that successful inoculation is a prerequisite for the resolution of the health crisis, so it is good that the government has paid a lot of attention to the procurement of the necessary contingent of vaccines. In the interview, he also talks about the organization of this year’s Kopaonik Business Forum, as well as economic measures and the impact of Covid-19 on the country’s economic development.
Business Forum will change location this year. Will the Forum actually take place, and if it will, in which kind of format and when?
This year, the Kopaonik Business Forum (KBF) is being held in rather extraordinary circumstances. Serbia, Europe and the whole world have been hit by the COVID-19 pandemic. In such conditions, the Serbian Association of Economists was forced to change the usual date and place of the Forum, and we hope that this year alone, this gathering will be held in Belgrade from May 24 to 27. When we decided to postpone the 28th KBF in the autumn of last year, we sincerely hoped that the epidemiological situation in May would allow the Forum to be held in the traditional face-to-face format.
Unfortunately, come April, it was clear to us that gathering a large number of people in the planned time slot would not be possible, so we decided that this year’s event will be held in the so-called hybrid format. This means that the programme participants will be physically present in the foyer of the Metropol Hotel, while everyone else will be able to watch the Forum live on YouTube. The media will cover the panels and plenary speeches, and I hope that the Forum will get full visibility. Even though one of the main dimensions of this traditional event is lost in the hybrid format (that is direct contact, participants meeting face to face and exchanging their arguments in the lively and dynamic discussion, as well as have the opportunity to present projects and companies), I am confident a large number of topics covered by the programme will be useful to economic policy makers for having a more comprehensive definition of monetary, fiscal and industrial policy in the COVID and post-COVID times. Continuing the usual trend, which has existed for the last ten years, this year’s Forum topics concern the entire region of the Western Balkans, and, consequently, the Forum’s conclusions will greatly help the governments of these countries.
Any failure in agriculture will negatively affect growth this year.
What do you think was the key negative impact of COVID-19 in our country in 2020?
I think it is too early to make a conclusion about the damage caused by the COVID-19 pandemic. This is because the health crisis is not over yet, and in the best case, according to the forecasts of global experts, only in late 2021 or early 2022 we can expect that this plague would be finally subdued. Therefore, we will be able to assess the realistic results of negative effects on the still unfinished economic transition in Serbia, and thus on the economy as a whole, only then.
But if I had to define the key negative impact right now, then I would single out the interrupted continuity of GDP growth. I would like to remind you that only in the last two years have we achieved significant economic growth of 4%, as well as the mentioned continuity, so it is a great pity to break this positive streak, which in the long run, ensures higher living standard. We should add to this the fact that the direction of public debt and the fiscal deficit has changed, which is a direct consequence of the fiscal programme of economic assistance during the pandemic. Provided that we achieve significant growth of 5% this year, which is questionable, it will take us several years to reduce public debt and the fiscal deficit to the level it was in early 2020.
What do you think of the government measures which implementation started in April 2021? Are they balanced out and do some economic sectors need more help?
The shake-up caused by the COVID-19 pandemic led to an economic shock that was both external and internal, affecting supply and demand. Therefore, fiscal policy measures required expansion, i.e. allowing a larger fiscal deficit to relieve the economy. More or less all countries have had this kind of response to the pandemic-induced crisis, with developed countries having much greater parallel support in expansionary monetary policy. This is evidenced by the measures applied by the European Central Bank and the Fed in the United States.
In the first flurry of the crisis, in late March last year, Serbia devised an economic assistance programme that was predominantly based on fiscal incentives, coupled with adequate monetary policy measures. According to the scope of fiscal intervention, Serbia belongs to the group of countries with the most generous economic support. I would like to remind you that the direct budget incentives plus the postponement of the payment of payroll tax and contributions cost the state budget around 8% of GDP. When we add to this the guarantee scheme created in cooperation with commercial banks, in the amount of 2 billion euro, we come to the total amount of the fiscal support programme which is tantamount to 13% of GDP. Having in mind the structure of the Serbian economy and the present overall uncertainty regarding the duration of the crisis, in the beginning, it was justified for the measures to be linear and general. However, the second assistance package, implemented in September, as well as this year’s measures, had to be directed exclusively to the sectors that suffered the most due to the COVID-19 crisis (small and medium-sized enterprises from the HORECA, transport and service sectors). The lack of selectivity is my first complaint. Applying the selective principle would avoid the dilemmas that the government’s Crisis Response Team has had and delaying the decision to close catering facilities at the peak of the infection.
I would also like to object to the allocation of a certain sum of money to all adult Serbian citizens, the so-called helicopter money. I cannot think of an economic justification for such a measure. If the goal was to encourage personal consumption and increase demand and thus contribute to economic activity, it is completely wrong, because experience teaches us that this only deepens the external deficit. Of course, it is commendable to directly help the most financially jeopardized part of our population but only in regular conditions, i.e. for the help to be part of the overall social policy, while ad hoc actions must be based on the so-called social cards.
Is it realistic to expect the GDP growth in 2021 to be 6% and what are your projections? What are the biggest challenges this year?
The current year has brought ongoing uncertainty, and I believe that economic growth and the budget as a whole should have been planned more restrictively. The forecasts of international financial institutions are diverse but are all lower than the projected budget growth rate. Given that the crisis caused by COVID-19 is both internal and external, the speed at which the EU countries, especially Germany and Italy, is very important for our future growth. We are witnesses that this recovery is not going as planned from the onset of the crisis. The planned growth of 6% is very optimistic, again having in mind the structure of the Serbian economy and the exceptionally good results we achieved in key branches in 2020 (agriculture and processing industry), or rather the inherited high base. Any failure in agriculture will negatively affect growth this year. If 6% growth is not accomplished, it will increase the fiscal deficit and consequently increase the public debt more than planned in the budget.
If 6% growth is not accomplished, it will increase the fiscal deficit and consequently increase the public debt more than planned in the budget.
This year’s fiscal support to the economy is likely to generate a bigger deficit than planned and this will further push public debt to over 60%. One of the evident risks is reduced private, especially domestic, investments. Therefore, to maintain the project level of economic activity, providing that the fiscal deficit throughout 2021 is above the planned level, we must not cut back on capital investments – especially not on investments in green technologies, sustainable energy sources, digitalization and boosting the capacity of businesses to respond to the challenges of the 4th Industrial Revolution. We need responsible and careful management of public finances, such as the one we had at the beginning of the implementation of the fiscal consolidation programme.
Adjusting to the post-COVID world: New sources of growth under great economic reset’ is the main theme of this year’s Kopaonik Business Forum. In the changed business conditions, what can be a new source of growth for the Serbian economy?
Our main advantage today is the speed and scope of inoculation of the population. One should not expect a quick return to the pre-pandemic state. More precisely, it will not be possible to return to the old ways. I suggest that government activities should aim at improving the quality of institutions, not only those that regulate the market but also institutions that guarantee legal security and the protection of property and creditors’ rights. According to the World Bank report, this has been a serious constraint for many years in terms of attracting large investors from developed countries in Europe and the world, but it is also an obstacle to the stronger development of small and medium-sized domestic enterprises and growth of private domestic investments. This is not just a job for this year alone. Rather, continuous and visible progress is needed in building an economic environment in which there are clear rules of the game, which will encourage individuals and entrepreneurs to save more, invest, introduce innovations, take risks; namely, engage in all activities that generate economic growth and boost employment.
The crisis caused by the COVID-19 pandemic, in addition to huge damage, has also created new opportunities. Serbia will be able to utilize these opportunities only if it has an efficient management system, has completed the economic transition, and has a competitive and transparent state administration system.
What will the world look like after the COVID-19 pandemic?
The disruption of global supply chains will certainly affect the relocation of the capital of large companies from Asia to Europe. The advocates of protectionist policies could become much more prominent, which will lead to a further slowdown in global trade and, consequently, lower global GDP growth. It is likely that, at some point, there will be a “pumping out” of stock market indices, which in some segments, recorded incredible growth during the COVID-induced crisis. Despite the huge monetization, primarily in the United States, but also in the EU, there are no indications that, in the foreseeable future, there will be an increase in the so-called demand-pull inflation. However, cost-pull inflation is already present given the strong rise in commodity prices and increased transport and logistics costs. In general, big changes will take place. I am afraid that the periods of continuous growth without major oscillations and shake-ups are behind us.