MACROECONOMIC STABILITY AND COMPETITIVENESS OF THE

REPUBLIC OF SERBIA
Radmilo Nikoli, Aleksandra Fedajev, Zvonko Damnjanovi, Dejan Rizni
University of Belgrade, Technical faculty in Bor, Serbia zdamnjanovic@tf.bor.ac.rs
Abstract: Continuous improvement of a national
economys competitiveness in regional and
global surroundings is one of the major
imperatives of the contemporary economies.
Competitiveness is defined as a set of factors,
policies and institutions which determine the
level of a countrys productivity, whereas the
level of productivity determines the sustainable
level of development which an economy can
achieve. The Global Competitiveness Index
GCI
is most often used as indicator of
competitiveness
of
particular
country,
formulated by the members of the World
Economic Forum, who classify competitiveness
factors into three categories: heritage and
natural
resources,
macroeconomic
competitiveness
and
microeconomic
competitiveness. The aim of this paper is to
observe
the
state
of
macroeconomic
competitiveness factors, primarily the level of
macroeconomic stability, based on changes of
macroeconomic indicators in the Republic of
Serbia in the period from 2007 to 2010, and
therefore to indicate competitive position and
comparative advantages of Serbian economy at
the global level.
Key words: macroeconomic stability, foreign
and domestic imbalances, competitiveness.

1. Introduction
In contemporary conditions of doing
business,
issues
of
improving
competitiveness
and
securing
more
favorable national business environment are
getting more and more significance,
especially after world economic crisis. That
particularly refers to inadequately developed
countries, in which the escape from being
economically backward is seen in an
increase of the share in international trade.
In other words, in free and equal marketing
conditions, national competitiveness is a
measure of a countrys ability to produce
goods and services which undergo a test of

international market, at the same time

preserving and long-term increasing the
actual income of the population. A countrys
competitiveness level is based on more
superior productivity of a certain country.
To evaluate the level of competition is
neither easy nor simple, since numerous and
complex factors affect the competitiveness
of an economy. The most often used
indicators of competitiveness are published
in the World Economic Forums Global
Competitiveness Report.
One should keep in mind that
competitiveness is affected by both
macroeconomic and microeconomic factors.
However, in practice it is difficult to
distinguish
microeconomic
from
macroeconomic factors. The success of
enterprises, among other things, depends on
the efficiency of the public institutions, the
quality of the education system, as well as
on the overall macroeconomic stability in
the country where they operate 1. Unlike
microeconomic, macroeconomic factors
indirectly contribute to the level of
productivity of the firms in a country. These
factors create conditions for increasing the
productivity, but have no effect on whether
the company will really take advantage of
any favorable macroeconomic conditions or
not.
Macroeconomic stability in Serbia, as a
country in transition, was primarily
influenced by the delayed and accumulated
transitional problems, political risks,
reduction in aggregate demand, insufficient
foreign direct investments, foreign trade
imbalance and considerable lack of liquidity
in the conditions of the global economic
crisis.

2. Macroeconomic
Republic of Serbia

stability

in

the

An insight into macroeconomic factors of

competitiveness is based on the analysis of
macroeconomic indicators, as well as insight
to actions of macroeconomic policy in the
observed economy. Determining the basic
macroeconomic indicators is based on four
key macroeconomic sectors: real, financial,
public and external sector, whereas, in
framework of macroeconomic policy it must
be followed, above all, actions of monetary,
fiscal and foreign trade policy 2.
Indicators of national production
Indices of physical volume of production
Industry

Agriculture
BDP u mil RSD
GDP in mil of RSD
in current prices

in constant prices
GDP, in 000 USD
Real growth of GDP (in %)
GDP per capita
in RSD

in USD
Structure of GDP per sectors of property
Private sector

Real sector - Indicators which indicate the

state in real sector of economy are:
1. Indicators of national production,
2. Indicators of price increase i.e. inflation
and
3. Indicators of employment and wages.
Among
macroeconomic
aggregates,
indicators of production have by far the
greatest significance. Industrial production
in the Republic of Serbia in the period 20072010, is not at a satisfactory level. The
biggest decline was in 2009, when industrial
production decreased by 12% compared to
the previous year (Table 1).
2007

2008

2009

2010

3.7
-8.0

1.1
8.5

-12.1
1.0

3.0
-1.7

2,302
1,282
39,389
6.9

2,723
1,352
48,834
5.5

2,815
1,310
41,649
-3.1

3,034
1,333
38,707
1.5

311,886
5,336

368,817
6,647

381,354
5690

411,203
5233

55

60

60

60
40

Public sector
45
40
40
Table 1- Economic activity in the Republic of Serbia in the period 2007-2010

After that, in 2010, there was a slight

increase in production by 3%. Agricultural
production shows the largest growth in 2008
by 8.5%, but after that the production
significantly decreases, recording negative
growth rate of 1.7% the following year. An
average growth rate of GDP in the Republic
of Serbia in the observed period was merely
3.24%. At the beginning of this period a
slight increase of GDP was recorded, which
was interrupted in 2009 due to the escalation
of the world economic crisis. Afterwards,
the growth of GDP is recorded again, but
this time at the rate of 1.5%, which was
considerably lower than the rates achieved

in the previous period. GDP per capita

recorded a significant growth ending in
2008, and then a decline after that period,
which was a result of the countrys
economic activity decline, on one side, but
also of the depreciation of the dinar against
the euro, on the other side 3
It is significant to emphasize that economic
growth up to 2008 had been based on the
expansion of domestic demand which had
been financed and encouraged by the
considerable inflow of the foreign capital.
However, the world economic crisis caused
a fall in the demand through a decrease of
public and personal consumption and

reduced credits, which together with the

decreased export, due to the lower import
demand in the world economies, in 2009 led
to the fall of GDP by 3.1%. A decline of
foreign capital inflows also has a significant
influence on GDP decrease, as a result of the
investors caution and worsening state in the
world financial markets. The above
mentioned increase in demand was not
followed by a corresponding expansion in
production, primarily in sectors whose
products are intended for export, such as
manufacturing industry. That is why
economic growth should be based on
encouraging the development and increasing
of production especially in these sectors of
industry in the future. Therefore,
competitiveness of domestic production
should be one of the priorities of economic
policy. Besides, according to ownership
sectors, the structure of GDP was changed.
Private sector participation in creating the
GDP increased in 2008 from 55 to 60% and
remained at that level until the end of 2010.
Another important indicator which reflects
the condition in the real sector of economy
is the level of inflation in the country.
Monitoring the flow of inflation rates in the
Republic of Serbia in the observed period, it
can be concluded that price stability in the
period 2007-2010 was not at the satisfactory
level. The average of total inflation rate was

8.44%. Inflation rates varied from year to

year under the influence of various factors,
so that no stable, single-digit inflation rate
was achieved (Table 2).
Table 2 Inflation in the Republic of Serbia
in the period 2007-2010 (in %)
Change of prices
indicator
Total inflation (in %)
Core inflation (in %)
Consumer prices CPI
(in %)
Regulated prices (in %)
Share of regulated prices
in CPI (in %)

2007 2008 2009 2010

10.1 6.8 10.4
7.9 10.8 3.6

8.3
8.6

11.0

8.6

14.3

3.8 18.8 10.3

5.7

5.8

6.6 10.3

5.9

6.0

As from this Table 2 can be seen, in the

period 2007-2010, periods of single-digit
and double-digit inflation alternated.
Double-digit inflation rates in 2007 and
2009 were primarily a result of the increase
of the regulated prices, especially oil,
electricity and food, as well as the increase
of their share in the consumer prices index.
While analyzing macroeconomic situation in
a particular economy, it is necessary to
consider another important segment of the
real sector of economy - the labor market.
Labor market in Serbia in the observed
period is characterized by a high level of
unemployment and the decrease of the real
growth rate of wages (Table 3).

Table 3 Employment and earnings trend in the Republic of Serbia in the period 2007-2010
Employment and earnings
Employment rate (in %)
Unemployment rate(in %)
Average net wages (in RSD)
Average net wages(in USD)
Real rates of the wages growth (in %)
Labor productivity rate

2007
51.5
18.8
27,759
414.25
19.5
8.1

Employment rate records growth in 2007

and 2008, and after that it starts to decline,
so that in 2010 it reaches the level of 47.2%.
The decrease of employment rate is result of
world economic crisis which affected the
total economic activity, and therefore the
labor market, too. Besides, a large number
of employees in the social and public sector
lost their jobs due to restructuring and

2008
53.7
14.4
32,746
587.27
3.9
5.6

2009
50.4
16.9
31,733
470.33
0.2
2.6

2010
47.2
20.0
34,009
436.52
0.7
5.8

privatization of enterprises. In addition, the

whole observed period is characterized by
high, double-digit unemployment rates. It is
the lowest in 2008 being 14.4%. Then, in
2010, the unemployment rate increased to as
much as 20%, thus approaching the
unemployment rate at the beginning of the
period.

Real growth rate of wages in the whole

observed period was positive, but it can be
noticed a trend of slowing down of its
growth, especially since 2008. Namely, the
real growth rate of wages in the period was
the highest in 2007. Then, it reports a
sudden decline in 2008, by as much as
15.6%, and after that, considerably lower
rates of wages growth were achieved. Such
trend of real wages was considerably
influenced by the increase in retail prices, as
well as depreciation of the dinar against the
dollar. Also, wages in the Republic of Serbia
are among the lowest in the region and are
below the average consumer goods basket.
It should be noted that, during 2007, the
labor productivity rate was considerably
below real growth rate of wages. That
should include the fact that real wage

growth by the end of 2009 was above the

real growth of GDP so, as a result of this,
there was a significant increase of aggregate
demand and import, causing inflationary
pressure and generating a current account
deficit, which reflected negatively on the
economy competitiveness.
Financial sector - Since August 2006, The
Central Bank, in its conducting the
monetary policy, shifted from targeting the
exchange rate, as the main instrument of
monetary policy, to targeting the interest
rate, by adopting the Memorandum on
principles of a new monetary policy
framework. The key policy rate in 2007 was
estimated at 10%, after which it was
changing in accordance with economic
activity and inflation projections (Table 4).

Table 4 Monetary indicators in the Republic of Serbia in the period 2007-2010

Monetary and Foreign Exchange
Indicators
Money supply M3, millions of RSD
The rate of national savings
Reference interest rate of National Bank
of Serbia, end of period
Interest rate spread
RSD/USD, end of period
Countrys credit rating

2007

2008

2009

2010

903,871
12.21

992,151
7.68

1,205,570
15.21

1,361,526
14.84

10.00

17.75

9.50

11.50

7.05)
53.73

10.79
62.90

6.46
66.73

7.27
79.3

S&P and Fitch: S&P and Fitch: S&P and Fitch:

BB-/stable
BB-/negative
BB-/stable

The highest level of key policy rate was

achieved in 2008 due to the escalation of the
global economic crisis and, in this regard,
due to the strong inflationary expectations.
The interest rate spread, with some
oscillations, tends to decrease in 2009 and
2010 compared to 2008, which coincides
with the improvement of credit rating of the
Republic of Serbia, but is still high.
With the first signs of recovery, the National
Bank of Serbia began to lead a mild
expansionary monetary policy, gradually
reducing the key policy rate in 2009, so by
the end of the year it was 9.5%. The key
policy rate reduction was achieved thanks to
the favorable balance of payment, a stable
exchange rate and decline in aggregate
demand. After that, the National bank of
Serbia initiated more restrictive monetary
policy by increasing rate of required reserve

S&P: and Fitch:

BB-/stable

and key policy rate, to curb inflationary

pressures which began in 2010, primarily
due to increase of food prices and the
significant depreciation of the dinar against
the USD. In addition, throughout the period,
the money supply i.e. the monetary
aggregate M3 recorded a constant nominal
growth, primarily due to the increased
foreign currency deposits and significant
exchange rate differentials. Savings in
commercial banks were increased. At the
end of 2010 they were 9,400,100,822 USD,
mainly in foreign currencies. Along with
that, at the beginning of 2011, the country's
credit rating was improved from "BB-" to
"BB", but it is still below the investment
credit rating. This will enable lower cost of
borrowings in the international financial
market but also the prospects for investing
in Serbia.

Until mid-2006, the National Bank of Serbia

had had a policy of managed floating
exchange rate, shifting to floating exchange
rate regime after that. In 2008, it was
achieved the significant appreciation of the
dinar against the dollar which was the result
of significant inflows of foreign direct
investment as well as the increased
borrowing of the companies and commercial
banks. Such exchange rate flows had a
calming effect on inflationary pressures in
the given period. Then, in the period 20092010 there was a significant decrease in the
inflow of foreign capital and, in this regard,

the depreciation of the dinar against the

dollar, which was obviously based on
fluctuation in both the average exchange
rate and the exchange rate at the end of the
year. This caused the increase in imports
simultaneously with the reducing exports,
which led to a significant current account
deficit.
Public sector - Public sector in the Republic
of Serbia is characterized by accelerated
growth of public expenditure in relation to
the government revenues, resulting in
significant increasing of the budget deficit
(Table5).

Table 5 Fiscal indicators in the Republic of Serbia in the period 2007-2010

Fiscal Indicators
Public revenues, millions of RSD
Public expenditure, millions of RSD
Consolidated fiscal result , millions of RSD
Consolidated fiscal result (% of GDP)
Total public debt, USD1) mill.
Public debt (% GDP)
External debt, USD2) mill.
External debt (% GDP)

2007
1,002.0
1,046.8
-44.8
-2.0
13,065.3
31.4
25,230.3
59.5

During the observed period, the budget

deficit increased 3 times. Moreover, its
share in GDP had a tendency to increase
from 2% in 2007 to 4.5% in 2010. It should
be noted that the Republic of Serbia in 2009
exceeded the limit of fiscal deficit growth
by 3% of GDP prescribed in the Maastricht
Treaty. In addition, the share of public
expenditure exceeds 40% of GDP. Until
2008, public debt of the Republic of Serbia
has a trend of decreasing both in absolute
and relative terms, as a share of GDP, and
after that start to growth, so in 2010 reaches
the level of 40.7% of GDP. At the same
time, there is a growth in external debt,
which, at the same year, amounts to 79.6%
of GDP. The achieved level of the budget
deficit and external debt is unsustainable in
the light of economic stability which greatly
affects international competitiveness of
Serbian economy 4, 5.
External sector In the field of foreign trade
the balance is negative. There is a high level
of foreign trade deficit due to significantly
greater import compared to export, but also

2008
1,143.6
1,214.0
-70.4
-2.6
12,221.2
26.3
29,348.2
63.1

2009
1,146.5
1,267.9
-121.4
-4.3
14,189.1
32.9
32,394.8
75.0

2010
1,223.4
1,359.9
-136.5
-4.5
16,244.2
40.7
31,782.9
79.6

due to a faster increase of import compared

to export increase. Such situation is, above
all, a result of low level of economic
competitiveness, insufficient production of
goods for export, inadequate economic
policies and more.
Due to the effects of the world economic
crisis, in 2009 there was a significant
decrease of foreign capital inflow,
depreciation of the dinar, decline in foreign
trade, and therefore a reduction of the
foreign deficit. Export-import coverage ratio
was increased from 45.1% in 2008 to 58.6%
in 2010. The degree of openness of the
economy, as the ratio of the sum of exports
and imports to GDP, is ranged to 75-89% of
GDP. Considering the fact that a degree of
openness for the countries of similar size
typically varies to 50-80%, it can be
concluded that the openness of Serbian
economy in the observed period was at a
high level. But, it should borne in mind that
the structure of foreign trade dominated by
import, so it can be concluded that the

increasing openness was achieved primarily

due to the increased import (Table 6).
Table 6 - Foreign trade exchange and the state of balance of payments in the Republic of
Serbia in the period 2007-2010
Indicators of external position of the country
Exports of goods, USD mill.
Imports of goods, USD mill.
Current account balance, USD mill.
Export-import ratio coverage (in %)
Balance of payments, USD mill.
Balance of payment (% GDP)
Degree of openness of the economy
Foreign exchange reserves of National Bank Of Serbia,
USD mill.
Foreign direct investment, net in 000 USD

The overall balance of payments recorded a

negative trend until 2009, when it recorded a
surplus of 3.337 billion dollars. Afterwards,
there is worsening in balance of payment
again, due to the net capital outflows and the
reduced inflow of foreign investments,
which resulted in the current deficit of 1.189
billion dollars in 2010. To increase foreign
trade in the future, it is necessary to increase
economic activity and the export of products
of higher processing level as well as reduce
exports of raw materials and intermediate
products. In order to achieve this goal, it is
primarily necessary to ensure a substantial
inflow of direct foreign investments,
considering that their amount is significantly
reduced in 2009 and 2010. Namely, the
inflow of foreign investments in the period
from 2008 to 2010 is reduced by 54.16%,
i.e. from 2.52 billion as was in 2008 to 1.16
billion dollars in 2010.
3. The achieved level of competitiveness of
the Serbian economy
One of the most commonly used indicators
of
competitiveness
is
the
Global
Competitiveness Index, which is published
each year in the reports of World Economic
Forum. In the report of the World Economic
Forum for 2010, the Republic of Serbia,
according to GCI, occupies the 96th position
among 139 ranked countries, with the total

2007
8,756.4
-18,477.7
-6,931.7
47.92
1,022.3
2.6
84.3

2008
10,957.4
-23,503.2
-10,438.8
47.96
-2,349.9
-5.1
83.9

2009
8,365.1
-15,485.5
-2,858.9
51.96
3,337.0
7.9
75.2

2010
9.808.0
-16,142.7
-2,794.9
59.22
-1,189.0
-3.2
88.3

14,220.5

11,398.0

15,273.2

13,364.7

2,523,220

2,717,551

1,864,753

1,156,762

score of 3.84. Since the number of covered

countries from year to year has been
changing, in order to gain an insight into the
progress of the Serbian economy in the field
of competitiveness, it is necessary to
perceive how the value of GCI was
changing in this period (Table 7).
Table 7 GCI in the Republic of Serbia in
the period 2007-2010
Year
GCI
Values

2007

2008

2009

2010

3,78

3,90

3,77

3,84

It may be noted that the value of GCI in the

observed period varied cyclically and in
accordance with economic trends in
Republic of Serbia. Namely, in 2008 the
value of GCI increased from 3.78 in 2007,
to 3.90 in 2008 i.e. by 3.18%, and just a year
later it fell to 3.77, due to the effects of the
global economic crisis, being almost equal
to its value in 2007. In this way some
progress, which was achieved in 2008, was
neutralized. After that in 2010, the value of
GCI was increased by 1.86% compared to
2009, amounting to 3.84, which is the value
approximately realized in 2008. All this
suggests that in the observed period there
was no significant progress in the field of
competitiveness.
The other countries in the region which are
at the second level of development are

Albania, Bosnia and Herzegovina, Bulgaria,

of efficiency-driven economies in the
FYR Macedonia, Montenegro and Romania.
region, we come to the situation shown in
If we compare the state of competitiveness
the Table 8.
Table 8 Competitiveness of the efficiency-driven economies in the region in 2010
GCI and factors affecting the
GCI
GCI

SRB
96

BIH
102

MNE
49

Institutions
Infrastructure
Macroeconomic environment
Health and primary education

120
93
109
50

126
98
81
89

45
67
37
33

Higher education and training

Goods market efficiency
Labor market efficiency
Financial market development
Technological readiness
Market size

74
125
102
94
80
72

88
127
94
113
85
93

Business sophistication
Innovations

125
88

115
120

Country
MAC
79

ALB
88

ROM
67

BUL
71

80
91
47
69

63
89
101
56

81
92
78
63

114
80
42
58

52
44
39
28
44
129

72
57
71
87
64
106

84
63
63
100
72
103

54
76
76
81
58
43

67
82
58
91
48
63

70
45

96
97

87
121

93
87

95
92

The best rank in the

region
The worst rank in the region
The best rank in the country
The worst rank in the country

If we observe the column containing the

data for the Republic of Serbia, it is evident
that the top ranked sub-index is health and
primary education (50th position) and the
worst are for goods market efficiency and
sophistication of business processes, both at
125 position. In addition, it should be
noticed that also for three very important
sub-indices the rank is lower (being higher
than 100) and these are: institutions (120th
position), macroeconomic stability (109th
position), and labor market efficiency
(102nd position).
4.
The
relationship
between
macroeconomic
stability
and
competitiveness of the Serbian economy
Macroeconomic stability has a large
economic impact on doing business of
domestic companies and thus on the
competitiveness
of
the
economy.
Macroeconomic indicators of Serbian

economy coincides with the trend of the

macroeconomic
stability
sub-indicator
score, which is shown in Table 9.
Table 9 Sub-indices of macroeconomic
stability in the Republic of Serbia in the
period 2007-2010
Year

2007

2008

2009

2010

Macroeconomic
stability

4,61

4,72

3,88

4,05

Based on the data from Table 9 and previous

analysis of macroeconomic stability in
Serbia, it can be concluded that by 2008, in
the period of slight rise of economic
activities in Serbia and improvement of
most
macroeconomic
variables,
macroeconomic stability sub-indicator was
growing. Then, with the worsening of the
economy performance during the global
economic crisis in 2009 this sub-indicator
shows a significant decline. With the index
4.72 in 2008, when it reached its highest
value in the observed period, sub-index of

macroeconomic stability decreased to mere

3.88 in 2009, reaching its lowest level in this
period. After that, with the improvement of
macroeconomic performances, there is a
slight increase in GCI, as it was already
shown in Table 7.
5. Conclusion
The economic reality of the Republic of
Serbia today is characterized, among other
things, by unfavorable macroeconomic
stability and low competitiveness of the
economy. Such a condition is present in a
rather long period. The economic crisis
made the problems more complex and
deepened the already present imbalances
and risks. Despite some progress in certain
segments, the macroeconomic environment
is still not at a high level. Out of 139
covered countries, Serbia, according to the
macroeconomic stability in 2010 was at the
109th position with the score 4.05.
Unfavorable
macroeconomic
stability
substantially contributed to the low level of
economic competitiveness. The Republic of
Serbia, according to the GCI in 2010 takes
the 96th position, out of 139 analyzed
countries, with the total score of 3.84. Also,
out of 16 countries of the Central and
Southeastern Europe, which are in the
process of transition to Serbia, according to
its competitiveness, takes the 15th position,
the penultimate position before Bosnia and
Herzegovina. This state is, besides
macroeconomic
factors,
is
greatly
influenced by the weaknesses in certain
areas such as: goods market efficiency,
business sophistication and especially the
institutional environment expressive
government regulation, weak legal system,
judicial inefficiency, corruption and
insufficient
application
of
antitrust
legislation.
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