For Serbia to reach the magic economic growth rate of five percent, private investments by domestic companies need to be increased. To begin with, it is necessary to determine their actual volume and the optimal measure, given that foreign and state investments have reached their maximum.
According to the calculations of the National Bank of Serbia, private investments represent the difference between total investments and state capital investments. „Given that the share of state capital investments has been around seven percent of GDP in the last few years and is expected to be 7.4 percent in 2024, we estimate that the share of private investments in GDP in 2024 will be around 17 percent,“ the NBS told Bloomberg Adrija.
The NBS expects that FDI inflows into Serbia this year will be around last year's level of 4.6 billion euros (5.6 percent of GDP).
From this, it can be concluded that investments by domestic companies have reached 11.4 percent. „The share of total investments in fixed assets in GDP, which the Statistical Office of the Republic of Serbia publishes as a GDP aggregate, ranged between 23 percent and 24 percent in the period 2021-2023, and our estimate is that in 2024 it will be at the level of 24.3 percent,“ the NBS states.
According to the Millennium Development Goals, countries like Serbia should have at least 25 percent of investments in GDP, which would bring a sustainable GDP growth rate of five percent annually. And if we want to reduce the gap between Serbia and the EU, a growth of even seven percent is needed.
Nemanja Šormaz, Director of the Center for Advanced Economic Studies (CEVES) emphasizes that there is no official state statistics tracking private investments. Based on partial data from the Statistical Office of the Republic of Serbia, the National Bank of Serbia, and the Ministry of Finance, it is possible to make a rough estimate that they range around 7.5 percent of GDP, which is not only lower than the EU average but also half the average of the economies of Central and Eastern Europe during their most intensive growth.
Investments of private domestic companies up to six percent of GDP
On the other hand, even these low domestic private investments are overestimated, considering that they include investments of state-owned companies that operate in the market and are not directly financed from the budget.
„Therefore, when we exclude these companies, we can talk about a real range of domestic private investments between five and six percent of GDP, which is, unfortunately, insufficient for dynamic economic growth and development. Furthermore, due to stagnant revenues and rising costs (input prices and wages) in 2023, companies „saved“ on investments, which further decreased by 15-20 percent. The lack of investments in the long term means that companies lag in innovation, capacity expansion, and automation, creating obstacles to long-term competitiveness and development,“ says Šormaz.
The culprits are partly the state, partly SMEs
In his assessment, such a low level of domestic private investment is a consequence of two key factors – one concerns the state, and the other concerns the SME sector itself.
The first factor is the now well-known story of the unequal treatment of the domestic SME sector and large foreign investors by the state. Primarily on an institutional level, all the obstacles that burden the SME sector, inefficient administration, long waits for permits – are not a problem for large foreign companies.
„The rules of the game for them are very simple and clear, interests are easily represented and defended, which is actually good news – but that is not the case with the domestic small and medium-sized economy,“ says Šormaz.
Tax credit for large companies, but not for small ones
In terms of taxation, Serbia is the only country in Europe that has a tax credit for large companies but not for small and medium-sized enterprises, which effectively discriminates against them.
In terms of support programs, Serbia lacks development institutions (such as a Development Bank) and development financing. Although the Serbian Development Agency has about ten support programs for the SME sector „on paper“ – these are negligible amounts that cannot significantly change the competitiveness of the SME sector.
Subsidies mostly go to foreigners
On the other hand, when it comes to subsidies for attracting investments – whose amounts annually exceed 130 million euros – 90 percent of these funds go to foreign companies, adds Šormaz.
What SMEs could have done, and didn't
Šormaz says that a factor that is often overlooked, and which is very important, is the outdated management style of domestic companies.
„Whether we are talking about the market, human resources, or finances, our companies still do not use their full potential in these areas. For example, they buy for cash, which they previously kept in their accounts for a longer period, and their machines often have a capacity greater than needed. All of this slows down investments and reduces their efficiency. Furthermore, what we see from the research that we conduct at CEVES is that most companies do not rely on banks and loans because, as they say, they do not need external financing,“ states Šormaz.
Source: Bloomberg Adria
