INTERVIEW – IMF flags business environment as key to Serbia’s sustained growth

Serbia must attract more complex, higher value-added investment, while increasing productivity and private domestic investment, to sustain 4-5% growth and close the gap with higher-income economies, as its old growth model is reaching its limits, Lev Ratnovski, the IMF resident representative for Serbia, told SeeNews.

“Over the past decade, Serbia’s growth model has been very successful. Strong macroeconomic stability, a welcoming environment for investors and competitive labour costs attracted substantial foreign direct investment. The results have been impressive: unemployment more than halved, nominal wages more than doubled, and real wages rose by over 50 per cent,” Ratnovski told SeeNews in an e-mailed interview last month. However, Serbia is no longer a low-cost labour economy, which means the investment quality needs to be enhanced for the country to keep converging to advanced economies, he noted.

For Serbia to transition to higher value-added investment, the business environment needs to be improved, Ratnovski said. He explained that the IMF has identified three high-impact reform areas: commercial justice, including faster and more predictable contract enforcement, and digitalisation of commercial courts; modernisation of labour legislation, including the introduction of electronic labour documentation, and a broader simplification of business regulations.

“Some worry about a ‘middle income trap’, where growth slows after a period of rapid development and convergence with higher income economies stalls, but experience elsewhere shows this outcome is not inevitable. Several CESEE countries—Czechia, Estonia, Slovakia, Poland—have maintained rapid convergence rates over a long period. While EU structural funds played a role, the decisive factors were credible macroeconomic policies, a strong business environment, integration in higher-value supply chains, and effective use of human capital. With a clear reform focus, Serbia is well-positioned to similarly succeed,” Ratnovski said.

Weakened investor confidence, softer growth prospects, and strong fiscal buffers

After expanding by 3.9% in 2024, Serbia’s economic growth slowed down this year to 2% on average in the first three quarters amid domestic political instability and global uncertainty. Investor confidence declined, with net FDI dropping by 53% on the year in the first ten months of 2025, to 1.720 billion euro ($2.018 billion). In addition, U.S. sanctions on Serbia’s Russian-controlled sole oil refiner NIS took effect in October, which led to NIS shutting down its Pancevo refinery, further complicating Serbia’s economic outlook.

Ratnovski told SeeNews that the IMF projects FDI could fall to nearly half their 2024 level, although part of this decline likely reflects one-off effects such as large mining investments. The IMF now estimates growth of just over 2% this year, and around 3% in 2026, compared to projections made a year ago of 4% growth in both 2025 and 2026.

“These projections are subject to downside risks, particularly if political uncertainty persists or the resolution of NIS takes longer than expected. The good news is that Serbia enters this period from a position of strength. Years of responsible macroeconomic management have built ample buffers,” Ratnovski stated, pointing to low debt levels, high foreign exchange reserves, the government’s commitment to keeping the fiscal deficit within 3% of GDP, well-capitalised and liquid banks, low unemployment, and a solid wage growth. “These fundamentals are reflected in financial markets. Despite heightened uncertainty, spreads on Serbia’s government bonds have declined over the past year, in line with regional peers. Strong buffers make the economy more resilient and position Serbia well for a cyclical recovery once current shocks dissipate.”

Keeping budget deficit in check

Asked about how feasible it is to maintain the 3% of GDP fiscal deficit ceiling in the face of projected slower growth, Ratnovski told SeeNews that maintaining fiscal discipline remains both feasible and important as it ensures that public debt stays under control and preserves room to respond to shocks while allowing space for public investment and social spending. Serbia has ambitious forward-looking spending plans, but not all commitments can be pursued at once within sustainable fiscal limits, underscoring the need for clear prioritisation, Ratnovski said, noting that future spending pressures fall into three main areas: infrastructure, human capital, and the energy and green transition.

“Setting priorities across these areas in advance would strengthen budget planning, improve implementation capacity, and reinforce Serbia’s credibility with financial markets,” Ratnovski pointed out.

Risks from NIS

“NIS is critical for Serbia’s energy security. The Pancevo refinery supplies about 80 per cent of domestic refined petroleum consumption, volumes that cannot fully be replaced by imports due to logistical constraints. While Serbia can rely on imports and petroleum reserves for a limited period, this is not a sustainable medium-term solution and creates significant uncertainty and risks for the broader economy,” Ratnovski stated.

Ratnovski added that the situation surrounding NIS points to a wider challenge of reinforcing Serbia’s energy sector to sustain growth and secure long-term energy supply, noting that Serbia here has several important tasks, including speeding up reforms to boost the efficiency and financial performance of state-owned energy companies, strengthening revenue collection from some municipal and republican energy users, and shifting away from lignite toward cleaner energy sources.

The energy sector also requires substantial investment, Ratnovski said. “Going forward, prioritising investment based on expected economic returns and opening the sector to greater private investments in energy would deliver the greatest benefit from available state resources,” he said.

Profit margin limits ‘not a durable solution for inflation’

Looking to contain accelerating inflation, Serbia’s government capped profit margins of large retailers and wholesalers at 20% for a period of six months, starting September 1. Ratnovski told SeeNews that while it is appropriate for Serbian policymakers to take concerns about high consumer prices seriously, administrative measures such as price and margin controls are “not a durable solution to inflation.”

“While such controls may temporarily slow price increases, they do not address the underlying drivers of inflation and tend to lose effectiveness over time, often creating new distortions in the process,” Ratnovski said.

He stated that the key structural factor behind persistently high consumer prices in Serbia is limited competition in retail and wholesale trade, and that policy efforts should therefore focus on strengthening competition, including through facilitating entry of new retail chains and distributors, simplifying costly and arbitrary import procedures, addressing competition concerns through the Commission for the Protection of Competition and local planning policies, and reviewing and curtailing the use of exclusive dealership agreements between producers and Serbian distributors, among others.

“Finally, prolonged reliance on administrative price controls carries risks beyond inflation outcomes. Over time, such measures can reduce product variety and quality. They can also undermine Serbia’s reputation for predictable and market-oriented economic policies, delaying much-needed investment in the consumer trade sector. A carefully managed exit from these measures, paired with stronger competition, would better support price stability and consumer welfare over the medium term,” Ratnovski opined.

As a result of the cap on profit margins, Serbia’s annual consumer price inflation slowed to 2.9% in September from 4.7% in August. It further decelerated to 2.8% in October, and increased at that same annual rate in November.

Last month, the IMF concluded the second review under the non-financing Policy Coordination Instrument (PCI) for Serbia, projecting the country’s inflation to stand at 3% at the end of 2025, at 5% at the end of 2026, and at 3.2% the end of 2027. The IMF also said that it expects Serbia’s GDP to grow by 2.1% this year, by 3% in 2026, and by 4.6% in 2027. Public debt is expected to stand at 45.2% of GDP in 2025, 44.7% in 2026, and 44.4% in 2027, while the fiscal deficit is seen at 3% of GDP in each of 2025, 2026 and 2027.

The IMF approved the 36-month PCI with Serbia in December 2024, following the conclusion of a two-year 2.4 billion euro Stand-By Arrangement (SBA) with the country.

($ = 0.852 euro)

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