NBS publishes February Inflation Report

The NBS has published today the February 2021 Inflation Report, which contains an analysis of current macroeconomic trends and new projections of inflation and economic activity.

For more than a year, macroeconomic developments in the world and at home have been under a strong impact of the pandemic and will remain so over the projection horizon covered by the February Inflation Report. Although the global economic recovery has been slowed by the renewed spread of the coronavirus and tighter containment measures as of October, the mass vaccination which began in many countries raised expectations that the global economy will be on a sustainable growth trajectory in H2. However, the pandemic still hampers the functioning of the global economy, the new virus strains increase uncertainty, and demand is still under the impact of containment measures and refrainment from consumption. All this makes it difficult to predict the pace of global recovery in the coming period, which reflects on uncertainty in the international commodity and financial markets.

The NBS and the Serbian Government, just like economic policy makers across the world, are monitoring the effects of monetary and fiscal policy measures taken so far, and analysing whether they are optimally combined and appropriate in scope in order to contain the negative effects of the pandemic. Measures also aim to step up economic recovery, without prejudice to price, financial and fiscal stability. The results of these measures and the process of economic recovery are presented in detail in the February Inflation Report.

The most important findings of the Report: :

  • Owing to the measures adopted by the NBS and the Government, production capacities and jobs were preserved, and investment continued despite the pandemic. This ensured the recovery of the key sectors of the economy even during Q3 2020 and provided the basis for stable economic growth in 2021 and the years to come. GDP is estimated to reach the pre-crisis level in Q2 this year, and rise between 5% and 6% at year level.
  • Despite the robust package of economic measures, all economic indicators, primarily the public debt share in GDP, remained within sustainable bounds, which is exceptionally important for the preservation of a favourable outlook for stable economic growth in the medium run.
  • External imbalances were significantly narrowed. In 2020 the current account deficit equalled 4.2% of GDP, down by 37.3% compared to the previous year. For the sixth year in a row, it has been fully covered by the net FDI inflow, which remained solid even in the pandemic. The total FDI inflow to Serbia was EUR 3 bn or EUR 2.9 bn net.
  • For the eighth consecutive year, inflation in Serbia has been kept firmly under control, at a low and stable level. Although our new projection is somewhat higher for this year, due to the electricity price increase and higher prices of petroleum products, which reflect rising global oil prices, we still expect inflation to move in the lower half of the target tolerance band in the coming period.

“Although the course of the pandemic remains uncertain, the economic and health situation should be much more favourable this year compared to last year. With more efficient control of the pandemic at the global level and progress in the mass vaccination process, with Serbia being among the world’s most successful countries in this respect, we expect robust and sustainable economic growth, particularly as of Q2”, said Governor Jorgovanka Tabaković. “By maintaining full macroeconomic and financial stability and getting public finances back on track over the past years, we faced the crisis much better prepared and able to try to minimise the economic fallout from the crisis and preserve the job market with a package of monetary and fiscal measures. Owing to timely and coordinated monetary and fiscal measures, we managed to avoid a fall in total industrial production at year level, and to minimise the fall in fixed investment and goods exports. This was achieved also largely owing to the sectoral and geographic diversification of investment and exports in the past years”, underscored the Governor.

Trends in the real sector in the period from the previous Report

The recovery which began in Q3 continued into Q4, though at a slower pace due to the worsening of the epidemiological situation globally and at home and the tightening of containment measures. According to the SORS estimate, real GDP dropped by 1.3% y-o-y in Q4, or by 1.1% at year level. This result is better than we expected at the start of the pandemic, and reflects primarily the adoption of the timely and robust package of monetary and fiscal stimuli.

Consistent with expectations, a negative contribution to GDP came from a part of the service sector (transport, tourism, catering, recreation and culture), i.e. activities most severely hit by the pandemic. Construction also gave a negative contribution, though to a lesser extent, due chiefly to the high base from last year. In contrast, annual growth was recorded in agriculture, but also in industry which proved resilient amid a global economic downturn owing to past investment and higher diversification of production and exports. On the expenditure side, a decline at year level was registered primarily in household consumption and, to a lesser extent, in fixed investment, albeit less than we initially estimated.

“The continued economic support provided by the NBS and the Government and the preserved production capacities in 2020 will ensure the return to the pre-crisis level of economic activity most probably in Q2 this year. Industrial production, retail trade and exports have already reached their pre-crisis levels. As further progress is achieved in getting the pandemic under control, we expect other service sectors to fully recover as well”, emphasised Governor Tabaković.


The domestic labour market remained broadly unscathed by the crisis owing to the timely and significant economic support, aimed at providing necessary liquidity to enterprises, preserving production capacities and jobs. As suggested by the analysis contained in the Text box Serbia’s labour market amid the coronavirus pandemic, compared to other countries of Central and South East Europe, the employment rate in Serbia was kept at the pre-crisis level and the unemployment rate declined further.


As expected, the current account deficit narrowed from April, even more than we projected – it stood at 4.2% of GDP in 2020 and was by 37.3% lower compared to previous year. Its narrowing reflects smaller expenditure on FDI receipts, a lower deficit on trade in goods, and a rise in surplus in services trade. The deficit on trade in goods declined on the back of lower imports and rising investment in export-oriented sectors in the past period, which is why goods exports of Serbia fell by only 2.3% in 2020 in an environment when euro area GDP lost around 7%. The recovery of personal consumption and investment is likely to result in somewhat faster growth in imports and a rise in the current account deficit to around 5% of GDP this year. In the years to come, the current account deficit is expected to gradually decline and reach around 4% of GDP, with the pace of the reduction depending primarily on the dynamics of the investment cycle in the coming period.

The pandemic strongly affected capital flows to emerging economies, but nonetheless, capital flows to Serbia remained relatively high. The FDI inflow to Serbia reached EUR 3.0 bn or EUR 2.9 bn net in 2020 and was sufficient to fully cover the current account deficit for the sixth year in a row. Although lower compared to the year before, the FDI inflow to Serbia was, comparatively, the highest in the region, as shown in the analysis in the Text box Capital flows to Serbia and its regional peers during the pandemic.

Another source of substantial capital inflow to Serbia was the issue of eurobonds in the international financial market. The proceeds from the second issue in 2020 (USD 1.2 bn) were for the most part used for the early repayment of a part of debt under bonds issued in 2011, maturing in September this year.


“The high demand for eurobonds and the lowest cost of borrowing achieved so far, increased foreign investment in dinar government securities, coupled with a fall in the country risk premium and the maintained credit rating, all confirm investors’ readiness to invest in Serbia and their confidence in Serbia’s macroeconomic stability and favourable economic growth outlook going forward. A year ago, I reminded the public of our long lasting, committed efforts to have dinar bonds of the Republic of Serbia included in the renowned J.P. Morgan GBI-EM family of indices. At the time, I also expressed hopes that we will manage to achieve this by mid-2021. Our expectations have materialised and our great efforts have produced results – on 11 February, J.P. Morgan announced its decision to include our dinar-denominated bonds in this prestigious family of indices as of 30 June 2021. This has sent yet another powerful signal to international investors that Serbia is a safe and desirable investment destination and that it will remain so in the coming years,” Governor Jorgovanka Tabaković underlined.

GDP projection



This year we expect a more than complete economic recovery from the crisis, with a GDP growth rate between 5% and 6%. Somewhat slower growth in the first quarter due to the new wave of the pandemic and lockdown in many European economies ought to be offset from Q2 onwards. A sound pace of vaccination at home and abroad could bring the annual growth rate close to 6%. We expect growth to be led by domestic demand and exports, for which euro area economic growth is necessary as well. At present, euro area growth is estimated at around 4% in 2021. Growth will also be supported by the timely and adequate response of economic policy makers in Serbia and the resulting favourable terms of financing, preserved production capacities and jobs. In our estimate, the same factors will enable a stable medium-term growth path of around 4% p.a. in the coming years.



Overall, the risks to the 2021 projection are judged to be symmetric and mostly associated with the course of the pandemic and the efficiency in winding it down. The risks relating to international factors are skewed to the downside, due to the renewed spread of the coronavirus since October and the appearance of new strains, as well as tighter containment measures in many European countries, particularly in the euro area. This dampens the economic growth outlook of our important foreign trade partners as well, particularly in the first half of the year. By contrast, the risks associated with domestic factors are tilted to the upside.

“In view of the announced new economic assistance package and the fast pace of vaccination in our country, domestic demand could recover even faster than expected. Vaccination raises hopes, particularly since Serbia is among leading countries in Europe and the world in terms of the number of vaccinated persons per total population,” pointed out the Governor.

The results of the analysis presented in the Text box Impact of human mobility on economic activity indicate that human mobility explains very well the economic activity trends in 2020 and that the speed of economic recovery going forward will largely hinge on the continuation and success in vaccination.

Inflation projection

In the period since the previous Report, inflationary pressures remained low and y-o-y inflation slowed to 1.3% in December, mostly on account of lower prices of unprocessed food – vegetables and fresh meat. Along with energy prices, it was primarily food prices that determined the dynamics of inflation during the year, which averaged 1.6% in 2020. Average core inflation equalled as much, though it sped up moderately towards year-end (to 2.1% y-o-y), reflecting higher demand for products enabling work from home (computers, mobile phones) and medical products.



The relative stability of the exchange rate and anchored inflation expectations have been an important factor behind low and stable core and headline inflation in Serbia. This has been shown empirically in the Text box Core inflation in Serbia – its determinants, indicators and outlook. Model-based projections of core inflation indicate that it will remain low and stable going forward as well.

“In the next two years, we expect inflation to move within the lower half of the target tolerance band. Slightly higher projected inflation in 2021 relative to the previous projection will be temporary in character, as it reflects primarily the one-off effect of the electricity price increase and the anticipated rise in petroleum product prices resulting from an elevated global oil price. Going forward, we expect no major pressures on inflation as it is reasonable to expect that GDP will rise faster than consumption which, coupled with the base effect for food and energy prices, will result in lower inflation in 2022 than in 2021,” highlighted Governor Tabaković.

Uncertainties surrounding the short-term inflation projection refer primarily to movement in the global oil price and fruit and vegetable prices. In the medium term, the key risks stem from the international environment, and relate primarily to the speed of recovery of the euro area, global prices of primary commodities and capital flows to emerging economies. In part, the risks to the projection are also associated with the pace of recovery of domestic demand and movement in administered prices at home. On the whole, the risks to the inflation projection are judged to be symmetric.

Almost throughout 2020, inflation moved around the lower bound of the target tolerance band, i.e. below the target midpoint from our projection made a year ago and published in the February 2020 Inflation Report. The key reason for such lower inflation outturn is the outbreak of the pandemic.



NBS measures in the period since the previous Report

In the period since the previous Inflation Report, the key policy rate was again trimmed down in December, by 0.25 pp to 1.0%, its lowest level in the inflation targeting regime. At the same time, the NBS decided to narrow its interest rates corridor (from ±1.0 pp to ±0.9 pp relative to the key policy rate).

The Executive Board’s decision to continue with monetary policy accommodation in December was primarily motivated by the estimate that low inflationary pressures allowed for additional support to the domestic economy in conditions of a deteriorating health situation and the slowdown in global economic recovery, notably in the euro area. Afterwards, in the January and February meetings, the Executive Board kept the key policy rate unchanged, having assessed that the comprehensive monetary and fiscal stimuli that have been undertaken will continue to exert a favourable effect on the conditions for financing corporates and households, as well as that optimism is rising in terms of the global economic recovery owing to the large-scale vaccination that has begun.

Against the backdrop of a worsened health situation, as of mid-November, the NBS decided to open two regular lines for securing cheap dinar liquidity to banks and, by extension, to the corporate sector – repo auctions of dinar securities and additional FX swap auctions with a three-month transaction period. Furthermore, in December the Executive Board passed a decision on debt repayment facilities for borrowers experiencing difficulty in settling their obligations due to the pandemic.

“The NBS’s response was timely and comprehensive from the very onset of the pandemic. The key policy rate was trimmed by a total of 1.25 pp during 2020, and additional monetary policy accommodation translated onto lower borrowing costs. This, together with the effects of the moratoria and the Guarantee Scheme, enabled the continuation of growth and the recovery of our economy from the consequences of the pandemic”, Governor Tabaković stressed.

Growth in lending, which amounted to almost 10% annualised for the third year straight, is in line with our projection, and the y-o-y slowdown at the end of the year was anticipated and is attributable to the high base from the prior year, as well as the higher amount of loans maturing as of October, after the second moratorium expired.

Thanks to the macroeconomic and fiscal stability achieved in the prior period, we created space for a strong response of the fiscal policy. Adoption of a comprehensive package of economic aid, with increased costs due to health care measures, temporarily increased the fiscal deficit at the consolidated level in 2020, to 8.0% of GDP, and drove general government public debt up to 57.7% of GDP (56.8% at the central government level). Still, primarily owing to the better than expected performance of revenues, a more favourable result was achieved than the one estimated by the Ministry of Finance in the Fiscal Strategy for 2021 with Projections for 2022 and 2023. The continued growth in government capital expenditures is particularly important, as it contributes to the accelerated realisation of infrastructure projects and growth in production potential.


Favourable financing conditions, along with a strong economic rebound and gradual fiscal adjustment will be the key factors of the stabilisation, and then also of the reduction of the share of Serbia's public debt in GDP. In the text box titled Impact of the pandemic on public debt and decomposition of the change in Serbia’s public debt, we showed that the favourable differential of the interest rate and GDP growth rate is an important success accomplished by Serbia, ensuring stabilisation and subsequently the reduction of public debt in GDP, without imposing too much burden on the economy.

”At this point, one of the key challenges for economic policy makers is to strike an optimal balance between providing short-term support to people’s health and the economy, on the one hand, and ensuring medium-term public finance sustainability, on the other. Careful assessment of the available fiscal space and its optimal use is critical, so as to avoid premature fiscal policy tightening later on. It is in this context that we observe the recently announced new package of government support to businesses and households that will provide for an even faster recovery of the Serbian economy. We think that there is fiscal space for additional measures, as they undermine neither public finance sustainability nor macroeconomic stability”, stressed Governor Tabaković.

The NBS will continue to watch closely the movement and impact of key factors from the domestic and international environment on inflation, financial stability and the speed of economic recovery. It will therefore monitor the implementation of the measures taken so far and analyse whether they are optimally combined and appropriate in scope, in order to provide the necessary support to economic recovery, without threatening price and financial stability. In coordination with the Government, the NBS stands ready to respond as the situation with the pandemic evolves at home and abroad.


Governor's Office