Serbian Economy Shrinks as Country Responds to COVID-19

The report uses two scenarios in the face of high uncertainty brought on by the pandemic.

The baseline scenario assumes that the COVID-19 pandemic begins to slow soon enough, so that containment measures can be lifted by the end of June and a gradual recovery can begin in the second half of 2020. The downside scenario assumes the outbreak lingers and containment measures can only be lifted at end of August, with a recovery of economic activity only in final quarter of 2020. In this case Serbian economy will shrink by 5.3 percent. Both projections are calculated based on the data available on April 15, 2020.

“Serbian government reacted swiftly to economic challenges induced by COVID 19 crisis with the 5.2 billon Euros program”, says Stephen Ndegwa, World Bank Country Manager in Serbia. “The program addresses employment, small and medium businesses, and liquidity concerns. Country’s economy will bounce back in 2020 if this ambitious program is fully implemented and coupled with addressing long-pending structural reforms. “

Regional growth in the Western Balkans is forecast to be between -3 and -5.6 percent, according to RER.

“The magnitude of the recession depends on the duration of the pandemic in Europe. While the economic impact of the ongoing pandemic in the region is difficult to forecast, there is little doubt that this pandemic is wreaking havoc on lives around the region – taxing health care systems, paralyzing economic activity, and undermining the wellbeing of people,” says Linda Van Gelder, World Bank Country Director for the Western Balkans.

“Over the medium-term, growth is expected to rebound strongly in the region, as economic activity gradually returns to normal, but this also depends on the length and intensity of the current crisis, as well as what steps policymakers take to address this pandemic.”

The recession in all Western Balkan countries will be driven by a significant drop in both domestic and foreign demand during the pandemic. Travel restrictions and social distancing measures have a particularly protracted impact on tourism and services, the latter accounting for around 50 percent of total employment in five countries in the region and 75 percent in Montenegro. Supply-side disruptions and lower demand further affect many manufacturing sectors, while liquidity constraints and acute uncertainty stifle investment.

The main risk for the Western Balkans is that a prolonged pandemic, as well as a deeper recession in the European Union, could make the unfolding economic crisis difficult to handle.

According to the report, quick, bold, and carefully designed mitigation measures can limit the social and economic impact of this crisis. Governments in all six countries have announced fiscal and social measures to support households and businesses during the emergency—ranging from 1 percent to 6.7 percent of GDP. Countries that entered the crisis with larger fiscal and external buffers have more space to finance larger support programs.

The announced short-term measures are necessary and aligned with the policy responses of EU countries. However, more people in the Western Balkans rely on self-employment, part-time work, and incomes from informal activities. These groups are vulnerable to the crisis but difficult to support through conventional measures.

According to the report, additional support – fine-tuned to the local context – may be necessary to support all vulnerable groups in the region. Several Western Balkan countries, for example, announced an expansion of the coverage of existing social transfer programs to support self-employed families and more vulnerable people. Given the uncertain length of this crisis, policymakers everywhere face the same policy dilemma: using all available fiscal space to mitigate the immediate impact can backfire if the crisis endures. Policy responses should therefore be calibrated to mitigate the immediate effects, adjust to new realities that may emerge, and to leave space to prepare the economy for a recovery.

The report focuses on the macroeconomic impact of COVID-19 in the Western Balkan countries, setting the stage for additional analysis. A series of Regular Economic Report notes, looking at the impact on specific economic areas, social sectors, and on poverty and income distribution in the region, will be be published in a follow-up e-launch in May.