Fiscal consolidation and growth in Serbia, 2015-2017: Program, accomplishments and drivers

Despite the encouraging progress in economic and fiscal trends in 2015 and 2016, Serbia is still far from high economic growth and healthy public finances. In this paper, we provide an in-depth analysis of the drivers of the economic recovery and the fiscal deficit decrease in the previous two years. In both cases, the analyses have shown that the observed improvements rest, to a large extent, on short-term and unplanned factors that are easily exhausted. Economic activity was under a significant impact of external growth drivers - a strong drop in oil and food prices, decreased interest rates and faster recovery of the region and the Eurozone. This is why practically all countries in the region, and not just Serbia, exceeded GDP forecasts by about 1 p.p. in 2015 and 2016. The fiscal deficit was decreased primarily through a surprisingly high public revenue collection, while for the most part, the planned savings were not achieved. Fiscal risks, particularly those pertaining to poor business performances of public and state-owned enterprises, practically remain the same in 2017 as they were in 2014. All this indicates that the improved economic and fiscal trends leave no room for complacency, but should be observed as a rare opportunity to implement structural reforms in a somewhat more favourable environment without a direct pressure of an impending crisis. If this opportunity is missed now, the reforms will have to be implemented in a far less favourable environment and will thus be far more difficult.