Serbia: Revised 2024 budget targets higher deficit of 2.9% of GDP
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The government proceeded to revision of the 2024 budget to use the fiscal space created by the higher-than-planned revenues and re-distribution of redistribution of unspent funds for the state intervention in energy to boost capital investments and social expenses. The budget deficit target was subsequently revised up to RSD 263bn (2.9% of GDP) from RSD 197bn (2.2% of GDP) envisaged in the original budget, but the authorities reassured this will not endanger the downward trajectory of the public debt nor the fiscal stability. Public investments are projected to be higher by RSD 111bn than the original plan. Most of them will go for infrastructure projects, i.e. the construction of road and railway infrastructure, as well as for the procurement of equipment in the security sector. Capital expenditures are expected to reach 7.9% of GDP in 2024. Part of the increase in social expenses refers to the payment of compensation to women in labour, based on a decision of the Constitutional Court on the method of calculating salary compensation during maternity leave. The effects of this decision have a one-off impact for retroactive payment based on the calculation of this right from 2018, but also a permanent effect based on the increase in rights for future mothers, the government said.
MACROECONOMIC FRAMEWORK
The amended 2024 budget assumes higher GDP growth of 3.8% in 2024, up from the initially projected 3.5%. This matched the latest projections of the NBS and the IMF. The projection seems realistic given the stronger-than-expected economic growth in H1. Domestic demand is considered the key economic driver. Private consumption will benefit from the wage hikes in the private and public sectors; 17.8% hike of minimum wage, higher employment and pension hike. The government expects stronger-than-initially projected growth in fixed investments thanks to the profitability of the domestic economy; stable FDI inflows and acceleration of implementation of capital infrastructure projects within Leap into the Future-Serbia 2027 programme. On the production side, positive contribution is expected from all economic sectors, except for agriculture, which is expected to be a drag due to unfavourable weather conditions during the summer months. The services sector will be the key growth driver.
The government revised down its projections for CPI inflation this year and now sees it at 4.7% on average in 2024. Inflation should continue to decelerate to approach the central target mid-point of 3% next year. CA deficit is projected at higher 4.3% of GDP due to the slightly faster growth of real imports than exports compared to the initial projections. The government expects the CA gap to continue to be covered by FDIs.
FINANCING NEEDS
The amended 2024 budget sets total financing needs at a maximum of RSD 1,013bn, down from RSD 1,102bn in the original budget. The funds required for financing of the budget deficit and debt repayment amount to RSD 976.4bn. If Serbia achieved the maximum borrowing target set in the amended budget, the remainder of RSD 36.6bn could be used for pre-financing liabilities due in the following year. The government upped domestic borrowing to RSD 290bn and lowered Eurobond issuance to RSD 170bn. Borrowing from IFIs and foreign governments is also lowered to RSD 545bn.
We remind that total domestic borrowing reached the equivalent of RSD 133.5bn in H1. The finance ministry has informed that it does not plan to hold auctions of government securities in Q3 because of the successful bond issuance on the domestic market and the successful placement of sustainable bonds issued on international financial markets. This means that the borrowing on the domestic market should step up in the last quarter of the year. Note that in June, Serbia borrowed USD 1.5bn through debut 10Y Sustainability Eurobond.
Recommended by LinkedIn
CORPORATE TAX AND VAT BOOST BUDGET REVENUES
Total revenues are planned at RSD 2,173.3bn, up by 6.5%. Tax revenues are set at RSD 1,864.8bn, (up by RSD 106.2bn), while non-tax revenues - at RSD 275.1bn (up by RSD 28.5bn). The strong upward revision in tax revenues reflects expected higher proceeds from corporate tax and VAT. The largest upward percentage change is in revenues was for profit tax, and in absolute amounts in VAT revenues. The most important factors that triggered the upward revision are:
CAPITAL, SOCIAL EXPENDITURES FUEL BUDGET EXPENDITURES
Total expenditures are set at RSD 2,436.3bn, up by 8.9%. The biggest increase is seen in capital expenditures that are planned to increase by RSD 102.4bn (21.9%) to RSD 569.9bn in 2024. Significant additional funds are foreseen for the army, EXPO Belgrade 2027; construction and reconstruction of the supporting infrastructure at the Nis airport; high-speed road Novi Sad-Ruma; Hungarian-Serbian railway project; construction of Ruma-Sabac-Loznica road; construction of Iverak-Lajkovac expressway; bridge construction - bypass around Novi Sad with access roads; construction of railway line between Zemun polje and the National Stadium; improvement of infrastructure for environmental protection; waste water management in Leskovac. The biggest increase in expenditures on subsidies is seen in agriculture and energy. Stronger spending on employees comes as a result of new employment at certain budget users and additional employment with users on a fixed-term basis and indefinite time; increase in certain coefficients in the education and the increased number of days of state and religious holidays celebrated as non-working days in the calendar year 2024. The revised budget gives a breakdown of the allocations for equipment of the army until 2026. Thus, in 2014, for this purpose are earmarked RSD 48.6bn, in 2025 - the same amount and in 2026 - RSD 81bn. FinMin Sinisa Mali has already said that the revised budget foresees funds for the purchase of the 12 new Rafale fighter jets, whose total cost is EUR 2.7bn.
CONCLUSION
The macroeconomic framework presented in the revised 2024 budget looks plausible given the indicators to date, while the budget execution in January-July indeed confirms that there is room for additional one-off spending by the end of the year. The higher spending on capital projects is welcome, and it is expected to accelerate next year, considering the Leap into the Future-Serbia 2027 programme. The new budget deficit target is higher than the 2.2% gap foreseen in the draft medium-term fiscal strategy for 2025-2027. The strategy also foresees a budget deficit of 2.5% of GDP in 2025 as a result of the strong public investment, but no details of the budget for the next year are available yet. The government has already pledged an 8% hike in wages for public sector employees and a 12% hike for educators and employees in preschool care; 10.9% hike in pensions and a 13.7% hike of minimum wage from Jan 1. The cabinet will also have to provide funds for logistics preparation for the re-introduction of the mandatory military service. The non-taxable income would increase to RSD 28,432 from RSD 25,000. Serbia is just a step away from getting an investment grade, so the government would be cautious in managing expenditures next year and keeping the debt under control. On the positive side, Serbia will likely clinch one more agreement with the IMF after the expiration of the current Stand-By Arrangement, which should help keep the public finances in check and encourage reform implementation.