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Republic of Serbia: 2013 Article IV Consultation

International Monetary Fund. European Dept.
Published Date:
July 2013
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External Competitiveness Assessment1

Serbia faces significant external competitiveness challenges. Deep rooted structural problems and volatile and large real exchange rate appreciation in the past have held back a stronger export recovery from the global crisis. While FDI inflows have been robust during the pre-crisis period, they have mainly been destined for nontradable sectors. Expanding Serbia’s low export base is needed to anchor sustainable growth and to enhance external sustainability. This will crucially depend on the implementation of structural reforms to improve the business environment and restructuring of socially and publicly owned enterprises.

A. Export Performance

1. Serbia’s low export base points to deep rooted competitiveness problems. Serbia’s economic structure has been characterized by a low and undiversified export base,2 with one of the lowest export-import ratios in the region.3 A surge in capital inflows and a credit boom during the 2000s fueled domestic demand and the nontradable sectors at the expense of exports (Selected Issues Paper,“ In Search of an Effective Growth Model”).

Export/Import Ratio


Source: National Bank of Serbia, IMF

2. Though Serbia’s exports expanded notably prior to the global crisis, its export base as percentage of GDP or imports remained broadly unchanged. Serbia’s exports expanded rapidly between 2005 and 2008. Serbia’s market share (measured as exports in percentage of world’s imports) grew by 51 percent compared to its regional peers’ average growth of 18 percent, with such an expansion recorded all across its main trading partners and products (Figure 1). However, these favorable dynamics of Serbia’s competitiveness are partly explained by the low starting base as Serbia embarked on its transition path later than its peers, and by the newly accounted trade with Montenegro, leaving Serbia as a relatively closed economy with exports of goods at about 20 percent of GDP at the onset of the crisis.

Figure 1.Serbia: Recent Trade Developments

Source: UN Comtrade, National Bank of Serbia and IMF staff calculations.

Figure 2.Serbia: Trade, 2008-2012

Sources: Haver; and IMF staff calculations.

B. Competitiveness Pressures

3. Serbia’s real exchange rate has been one of the most volatile in the region. Though exchange rate flexibility is essential for an economy to buffer against external shocks, excessive real exchange movements can cause volatile relative prices, create uncertainty, and shorten investment horizons, thus affecting export performance. Several studies have shown a negative link between real exchange rate uncertainty and export growth, especially relevant for financially-vulnerable firms in countries with low financial sector development.4 High real exchange rate volatility could have undermined the competitiveness of Serbia’s exports, as financial markets are not developed enough to allow firms to hedge against exchange rate risk.

Real Exchange Rate Volatility

(standard deviation of REER annual percentage change)

Source: WEO and IMF staff calculations.

Real Effective Exchange Rate


4. Yet Serbia’s price competitiveness has improved since the onset of the crisis. While a significant real appreciation during 2011 may have held back a stronger export recovery from the global crisis, price competitiveness seems to be in a better position as of end-2012 than before the crisis (with the real exchange rate weaker by nearly 15 percent relative to the pre-crisis peak). Yet a new cycle of real appreciation could hinder the needed recovery in exports to reduce external vulnerabilities (Selected Issues Paper “External Sustainability Assessment”).

CPI-Based Real Effective Exchange Rate 1/

(yoy percentage change)

1/ Positive NEER and REER means appreciation.

Source: WEO and IMF staff calculations.

5. Attracting more FDI inflows to the tradable sector would help raise Serbia’s export potential. Kinoshita (2011) shows that positive effects on external vulnerability from FDI inflows crucially depend on the sectors in which these flows accrue. The stock of FDI to the tradable sectors is positively correlated with export-to-GDP ratios. In contrast, FDI in the nontradable sector is positively associated with domestic demand booms and large trade deficits. Across this sample, Serbia ranks the lowest in having attracted FDI to the tradable sector. FDI into financial intermediation and other services dominated. While in Serbia only about 20 percent of FDI has been destined for the manufacturing sector before the crisis, the average of new EU members was about 36 percent. Additionally, Serbia ranks among the lowest in having attracted greenfield FDI, which is critical to enhance its export capacity. Increasing the share of FDI to the tradable sector and enhancing the incentives to attract more greenfield FDI should be an important priority to reap the export gains from FDI inflows.

FDI Stock in Tradable Sector and Exports

(percent of GDP)

FDI Inflows by branch of activity

(billions of euros)

Source: National Bank of Serbia, Kinoshita (2011), and IMF staff calculations.

Value of Greenfield FDI Projects1/

(Per capita, median, in thousands of US$)

Cumulative Value of Greenfield FDI Projects1/

(Per capita, in thousands of US$)

Source: UNCTAD.

1/ Data refer to estimated amounts of capital investment in greenfield FDI projects.

6. Serbia’s global competitiveness ranks below its regional peers. The World Economic Forum’s Global Competitiveness Index, based on a comprehensive assessment of countries’ competitiveness, ranks Serbia 95th out of 144 countries in 2012–13. Serbia has scored lower than the regional average in each area considered. In particular, Serbia’s competitiveness appears to be hindered by its macroeconomic environment, business sophistication, goods market efficiency, higher education and training, and institutions. Perception of corruption could also be holding back Serbia’s attractiveness to international investors.

Global Competitiveness Indicators (2012-13)

(Score, 1-7, higher is better)

Corruption Perceptions Index

(Score, 0-100, with 0=highly corrupt and 100=highly clean, 2012)

Source: World Economic Forum and Transparency International.

7. Expanding Serbia’s low export base to anchor sustainable growth and external sustainability will crucially depend on reforms to improve competitiveness. As there seems to be some space for real appreciation during the medium-term in line with Balassa-Samuelson effects that could be expected from productivity increases in an emerging economy, as well as from its slow convergence to EU standards, there is urgency to accelerate reforms that tackle competitiveness issues related to non-price factors (Selected Issues Paper,“In Search of an Effective Growth Model”).


    Berman, Nicolas and JeromeHericourt,2010, “Financial Factors and the Margins of Trade: Evidence from Cross-Country Firm-Level Data,”Journal of Development Economics93(2).

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    Grier, Kevin and AaronSmallwood,2007, “Uncertainty and Export Performance: Evidence from 18 Countries,”Journal of Money, Credit and Banking39(4).

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    Hericourt, Jerome and SandraPoncet,2012, “Exchange Rate Volatility, Financial Constraints and Trade: Empirical Evidence from Chinese Firms,”CEPII Discussion Paper 2012–35.

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    Kinoshita, Yuko,2011, “Sectoral Composition of Foreign Direct Investment and External Vulnerability in Eastern Europe,”IMF WP 11/123.

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Prepared by Cesar Serra (SPR).


Crops, food and metal products represent over 40 percent of Serbia’s exports.


Regional comparators include: CEE EU new member states (NMS: Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic and Slovenia) and Southeastern European countries (SEE: Albania, Bosnia and Herzegovina, Croatia and Macedonia).

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