Is the Serbian dinar “overvalued”?

Last year will go down in economic records as Serbia recorded a deficit of 11 billion euros in external trade, while the dinar/euro exchange rate remained unchanged.

A similar economic absurdity has been clearly visible for the past few years, but last year it grew to surprising proportions. According to the Serbian government, one of its main economic goals – the stability of the domestic currency in relation to convertible currencies – has been achieved. Of course, the dinar’s purchasing power has weakened due to the inflation of 15.9 percent.

As the consumption of poorer citizens has been reduced to buying only the most essential products and as the price growth is significantly higher, it is this segment of the population that has felt the decline in the purchasing power of dinar the most.

Stable dinar

The government, of course, boasts about the stability of the domestic currency. However, the fact that out of around 15 billion euros of citizens’ savings, only 750 million euros are in dinars, which is approximately five percent, shows that the public still lacks confidence in the long-term stability of the domestic currency. For the same reason, real estate in Serbia is sold exclusively in euros.

It is interesting to note that the government manages to maintain the dinar/euro exchange rate, regardless of last year’s minus in external trade which stood at a record 11 billion euros, i.e. four times more than the period before. True, about two billion are extraordinary costs due to the incident in Obrenovac power plant and the abundant import of electricity in the first half of the year, as well as due to extremely high gas prices on the global market. However, the fact remains that the “hole” of nine billion is too big for a poor and technologically underdeveloped country like Serbia.

Excessive fluctuations

As soon as there are no changes in the foreign currency exchange rate, it means that foreign currency is arriving in Serbia with sufficient value. There are standard inflows from remittances from Serbs living abroad, which last year, amounted to 5 billion euros, as well as about 4.4 billion foreign investments. The once almost negligible income from tourism amounted to 1.8 billion last year.

The latest trump card of the current government is the export of IT services worth as much as 2.7 billion euros. All in all, this is enough to overcome the severe deficit in external trade in goods. There is even 1.3 billion left for the increase of foreign exchange reserves, which is still not enough for public investments, so Serbia still has to resort to borrowing substantial amounts of money.

If we look back, in the last six years, Serbia bought 5.4 billion euros more on the market than it sold, and one could naively think that the country is doing well with foreign exchange liquidity. However, the trouble is in the pronounced instability of foreign exchange sources, which are quite volatile. Income from foreign exchange fell sharply, and in the last 12 months, Serbia had to spend 1.5 billion euros from foreign exchange reserves to maintain the exchange rate of its currency.

Also, there is a notably high import, which has been growing year-on-year. Last year, partly due to extremely high energy prices, it amounted to almost 38 percent. Appeals that “money should not be spent on imported products” have not yielded results. It is not surprising that growing imports are due to decreasing domestic production. Even the produced value of the agro complex is continuously decreasing, with the last year’s decline standing at 8 percent. Domestic companies underline the insufficient support of the state and remind that the state subsidizes foreign investments abundantly, but not domestic ones. The consequence is a decline in domestic production even in some traditional sectors, such as agriculture.

Therefore, the answer to the logical question of whether the dinar exchange rate will continue to be stable is not an easy one to give. The dinar exchange rate has been kept at the same level for several years, but many believe that the domestic currency is “overvalued”. The decline in domestic production, the large external trade deficit and the marked volatility of the foreign exchange influx indicate that the current government is more improvising when managing the state’s economy rather than having a well-thought-out development policy. Such a situation hardly inspires hope.

(Biznis i Finansije,, 01.03.2023)

This post is also available in: Italiano

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